How to Buy Your Next ERP System

The much decried Year 2000 problem may, a few years hence, be seen as a blessing. For many organizations, it brings to the forefront a nagging suspicion that maybe what’s really needed is an overhaul of how technology is being used to run the business as a whole. The majority of apparel and footwear companies are still evaluating their options.

Even those manufacturers and importers who today choose to solve the problem by converting date fields of existing code, may be deciding to soon upgrade to a system that can contribute significantly more to the bottom line.

One reason is that more advanced functionality and technology can be found in today’s Enterprise Resource Planning (ERP) solutions.

Another is that many small and mid-size companies are using seven- to twelve-year old systems that were developed in-house or written for their industry segment by smaller independent software vendors (ISVs). Today, some of those ISVs are no longer in business. Others cannot afford to make the sizable investment required to keep up with evolving software, support multiple platforms and keep the software current with industry trends.

Whatever the reason, your organization may soon embark on the quest for a better ERP solution.

When that happens, you will be relieved that you clipped this article, for it provides a methodology that will ensure an orderly and thorough search–and a sound conclusion.

Writers are fond of using "steps" as a way to organize their articles, but in this case, "phases" consisting of many steps is more appropriate. Six phases, to be precise:

If you’re committed to your current hardware, you will limit your choice of ERP solutions. If your current system is aging, chances are so is your hardware. It is far better to first find the software that matches your business, and then buy the hardware to run it on.

The answer to the second question is more complex. Some companies are willing to be on the "bleeding edge" of technology, others prefer to play it safe and find a mature solution that runs on a tried and tested platform where everything works together and the systems integration burden is minimal.

Budget and resources are key factors to consider here. Some of the leading edge technology solutions may initially cost less, but usually end up costing more due to complexity and ongoing maintenance costs.

Do you have enough in-house IT expertise or will you need to hire consultants? If you do have in-house expertise, how much of that can be devoted to putting in a new system while at the same time supporting your business?

Other parameters that need to be set are who will make the decision (What will be the roles of the users committee, the IT department and top management?); on what basis the decision will be made (i.e., Cost? Functionality? Vendor vibes? How much retraining?); and when you expect to start/end the implementation.

Often companies proceed through the entire selection process without having considered these factors, only to find that they have to revisit them before making a final decision.

Most organizations assemble an ERP selection team with representatives of each functional area helping define current business processes and desirable improvements. Each individual consults with others in his or her department and passes on their observations.

The team answers such basic questions as: What do they like about the current system that they want to keep? What don’t they like that needs to be fixed or replaced? Where is the industry going in the future? What new functionality or industry issues do they need to plan for during the life of the new system? (For example, Retail Compliance, international sourcing and Euro currency, to name a few.)

The end result is a document of 35-50 pages that illustrates input, output and workflows of all key business processes, both as they are now and how they should be in the future. This is a fairly detailed document that the ERP vendors on your short list will use to prepare their proposals.

Included in the document should be a description of all current and proposed ERP applications. (See Exhibit 1 for typical ERP applications.)

Also included should be a wish list based on needed improvements, future industry trends and corporate direction. Top management plays an essential role in providing the vision of corporate plans/objectives that users may not know.

By consulting your peers, industry experts, trade magazine articles and ads, and even the Internet, you can easily compile a long list of ERP vendors that potentially offer the solutions you need.

Obtain and review each vendor’s product literature, check out their Internet site (these often include customer profiles), then meet by phone or in person to determine, among other things, how well their solution fits your situation, whether they are financially viable (check annual reports and credit reporting agencies), how much they spend on R&D, and whether they have a proven track record in your specific industry.

It is important to dig deep and fully understand to what extent an ERP vendor’s software is running a company. Make sure that the vendor’s installed sites use the applications you’re interested in. Customers running only a general ledger or a human resources application are a different story than those who use multiple applications across departments or functional areas.

It is also important to make sure that they have a good support infrastructure, both for implementation and for ongoing coverage.

While you don’t share your requirements document to everyone on the long list, vendors will ask for a ballpark budget, time frame and applications wish list in order to evaluate whether there’s a fit.

At this point, you’re ready to pare down that list to three or four serious contenders.

Armed with your information, immediately eliminate all vendors who are not financially stable, who do not have a proven track record in your industry, and who cannot prove that their software has been independently certified as being Year 2000 compliant.

Ask yourself which vendors know your business and are committed to your industry. Also, can the vendor support your operations on a global basis?

Finally, pick those you feel comfortable with based on your interactions so far.

Once you’ve selected the vendors who will populate your short list, send them your requirements document and ask them to prepare a detailed proposal , product demonstration, pro forma contract, and of course, price.

At this point the vendors are committing serious effort and time to your company, so be prepared to have each one come and meet with your key people. The better they understand how your business works at this stage, the more their proposal will be on target.

Every vendor will structure the proposal somewhat differently, so it’s helpful to prepare an analysis worksheet that can be used by every person who will be involved in the decision. It serves as a checklist of what’s important, so that at the end you can compare apples to apples.

As you watch the demos, consider whether the vendor has taken the time and effort to apply their solution to your situation. You’ll be making a large investment with them over the next few years, so it is not unrealistic to expect to see a demonstration using your customers and products, and illustrating your workflows. For instance, you may gather some information on your BOM, costing or a style master to see how your data flows through the vendors’ applications.

At this point, in addition to the obvious selection criteria – functionality, flexibility, requirements fit, user reaction, comfort with the vendor, price –you must also consider whether modifications will be needed, who does them, how and at what cost. A big question is how modifications will affect future new releases and your maintenance contract.

This is also the time to evaluate how well each vendor’s technology plans suit you. Where are they going, and what steps are they taking to protect your investment?

Evaluate how each vendor handles implementation and support. Without those, the best solution can’t work.

Finally, visit customer reference sites to see for yourself how the system works in real life, and to hear the user’s perspective on their implementation and ongoing support.

Meanwhile, your CFO can be evaluating purchase vs. lease options and the vendor’s contract, while your CIO compares costs (including hardware & systems software, applications software, and services).

The outcome of all this intense scrutiny is to choose your preferred ERP vendor and perhaps one alternate.

Meet with your preferred vendor(s) once again to finalize the proposal. It is very common for a few adjustments to be made to software and services as a result of a refined understanding gained from the steps taken so far.

Interestingly, the preferred choice often comes down to "chemistry": how well your people and their people have gotten along. This is hardly a frivolous consideration, since you’ll be spending a lot of time together, and the confidence factor is crucial.

Now it’s time for your top management to get to know each other, and for serious negotiations to begin.

Top management visits can be formal or informal. Their purpose is to reassure management that the decision was made with due diligence, and that the corporate cultures don’t clash.

If you approach negotiations with a win/win attitude, you should find the process rather painless.

Everyone wants a deal, and you’ll have the most bargaining power if hardware and an expanded maintenance plan are included. Paying with cash rather than leasing may also give you more bargaining power, although leasing can have a tax advantage and it may make your balance sheet look better. Many vendors will somewhat discount your maintenance fee when you pay for several years up front. Be aware that the services component (for consulting and modifications) is least negotiable these days since experienced personnel are scarce and at a premium.

Negotiations also include the implementation schedule, and perhaps built-in incentives and penalties.

You’re now in the home stretch. Expect several activities to happen very quickly as terms, prices, contracts and the team from both parties congeal.

Finally, the big day arrives, the contract is signed and you embark on another great adventure: taking your ERP system–and your business–to a new level.

General Ledger, A/P, A/R, integration/consolidation, cash management, multi-currency, multi-language, fixed assets

Purchasing, production scheduling, production process control, material requirements planning, master production scheduling, capacity planning, product definition, WIP tracking