Why, When, and How to Choose ERP

Oct. 31, 2012
A cost to doing nothing Indicators for upgrading

As manufacturing across the Midwest continues to pick up steam, a lot more attention is being paid to an area that cash-strapped companies have neglected for years: enterprise resources planning, or ERP systems.

ERP systems have been around in some form for decades and are valuable for their ability to provide a tightly integrated solution to support all aspects of the business, including sales and operations planning, materials management, production, human resource management and accounting/finance.  But, as the economy began to soften five years ago, most companies became reluctant to invest money in ERP systems — and many of them have simply maintained that strategic outlook.

There's a cost to doing nothing, however. You can get away with it as long as your competition is in the same boat, but as the economy picks up and the competitor down the street starts to invest in ERP and comes up with ways to process and manage information better and faster and is able to serve customers in a more cost effective and responsive way, your business is going to be in trouble if you don't respond in kind.

What we have seen recently is that as business revenues have increased while staffing levels have stayed constant, companies are seeking improvements in operational efficiency and looking to ERP systems to enable these improvements. The reality is that ERP systems have advanced significantly and now are much more robust, flexible, and configurable than systems were five years ago.  Most organizations have been surprised at the improved functionality and user access to needed information across the organization."

The process of selecting and implementing a new ERP system for a middle-market company typically takes from nine to 18 months, depending on the size and complexity of the business.  Costs vary widely, depending on a number of factors that include the functionality required by the business, whether the ERP system is a hosted solution or not, and how much implementation assistance the business requires. 

Ultimately, the price should be viewed as an investment. Although difficult to measure, the manufacturer ought to expect a return on that investment in terms of improved efficiencies and information to support improved decision-making.

The good news is that most middle-market manufacturers can select an off-the-shelf software package that will meet their needs.  More vendors are offering hosted solutions that allow companies to reduce significantly their investment in in-house IT resources to support the system, such as servers, application support personnel, etc. Whether hosted or not, most ERP systems can be accessed securely over the Internet from anywhere in the world - whether a user is on assignment or on vacation.

Time to upgrade

There are some key indicators that it's time for a manufacturer to upgrade or replace its ERP system.  These include when:

•  The ERP package has become obsolete and is no longer supported by its developer

•  The business has changed so substantially that the ERP package no longer really suits its needs

•  The current ERP package was never a good fit from the start and fails to provide the functional requirements needed to serve the business

•  The original provider has been swallowed in a merger or acquisition, and the new parent company has made the decision to drop the ERP platform

Selecting the best possible ERP package is made easier by following these steps:

Start by meeting with the management teamand key users to discuss business information needs.  In the "old days" of software selection, the selection team would define a list of 1,000+ features and functions, then move to select a package from there.  Today, he recommends businesses focus on the "critical few" by identifying the key business information requirements that serve as differentiators when comparing various ERP solutions.

Get input from across the organization.  Remember that good business decisions need to be made collectively.  While IT or finance might have specific needs, it's important to talk with key users and decision makers in all areas of the business. 

Software isn't cheap. Implementation assistance isn't cheap.  Make sure you define clearly what you need to support the business before you begin looking at possible solutions.

Match the software to your business requirements.  There are plenty of off-the-shelf software packages to choose from - be sure to pick one that matches your needs. 

For example, if you are a high-volume repetitive manufacturer, you need advanced repetitive capability in your system.  If you are an automotive supplier, you need to have automotive release accounting.  If you are a job shop with significant engineering content, then you need engineer-to-order capabilities.  You can very quickly start to narrow the field to choose the right package for your business.

Remember to consider more than just the capability of the software.  You need to feel comfortable that the software supplier will be a good business partner.  Do they possess the resources to provide implementation as well as on-going support?  Are they financially sound?  What do their current users say about them?

Get the proper implementation assistance.  Do not rely solely on the software vendor - or your own IT department - to implement a new ERP system.  Companies that try DIY implementation often spend more time, money and energy than originally budgeted, which can frustrate both management and the internal team as well as shortchange the business. 

Changing your ERP system is a huge investment of time and money, so it’s sensible to get help from people who do this all the time. There is a cost, but you'll save money in the long run. 

Train your users.  This step is critical to the success of the new system. I've seen a lot of companies try to cut corners on training and education, which is a huge mistake.  The system is going to be different for different users within the organization.  Companies must invest in adequate training upfront or run the risk of not being able to get what's promised from the system.

Ken Julien is a partner at Plante Moran, PLLC, a Grand Rapids, Mich., accounting and business-consulting firm. His practice concentrates on manufacturing, distribution, construction, and real estate sectors, and he noted that he and his colleagues are advising an increasing number of clients throughout the Midwest on what to choose and when and how to launch a new ERP system.