How to Select an ERP System

An enterprise resource planning (ERP) system is an important software tool to operate a business. An ERP system can automate dozens of business processes, and allows a company to scale. As a result, the ERP selection process is critically important, and the new ERP system must address management’s business requirements.

The pandemic has increased the importance of ERP software. Many industries continue to struggle with supply chain management, and the right ERP can improve communication with vendors, and allow management to identify and remove bottlenecks in the supply chain. If your staff is working from home, an ERP solution will help you maintain productivity and provide a great user experience.

There are dozens of ERP vendors, including NetSuite, Oracle, Microsoft, QuickBooks, Intacct, Sage, and SAP, to name a few.

Organizations across industries from manufacturing to retail and service businesses use ERPs. A growing number of businesses use e-commerce, and an ERP should integrate with your e-commerce functionality.

To make an informed decision, you need to clearly define the ERP selection criteria, and understand the implementation process.

Meeting Your Organization’s Needs

The ERP software selection process must be based on the business needs of the end-users. The best ERP helps you complete day-to-day tasks in less time, and those tasks may include procurement, human resources, sales, and production. ERP implementation can also address pain points that are not fully automated, and software solutions can address industry-specific needs.

Change management, however, is difficult, and the ERP project requires buy-in from the entire organization. To gain the support of the organization, consider how your business operates, and the tasks that an ERP system can improve.

Addressing basic business functions

Every business has a current system that is used to make a product or service, deliver the item to customers, and to collect payment. Other functional areas include payroll, human resources, and regulatory due diligence. New technologies must be able to manage these tasks, so that the business is not disrupted when the ERP is implemented.

Say, for example, that a company’s 12 divisions each maintain a bank account, and that each division controller reconciles the bank account and reports the cash balance to the CFO. The ERP must be able to upload the bank statement and credit card statements into the accounting system. 

When you speak with ERP vendors, these key tasks must be on the shortlist of required functions.

Making the case for change

You can measure the ERP’s return on investment based on these factors:

• Time saved on specific tasks
• Number of errors eliminated
• Scalability: Performing more tasks in less time as the company grows

Assume, for example, that an ERP system can fully automate the payroll process by connecting this data electronically:

• Human resource data (pay rates) 
• Timecards (hours worked, overtime hours)
• Tax withholding calculations
• Banking: Paying employees by direct deposit, or by generating checks

You can make the case to company stakeholders that the payroll workflow will be performed more accurately, in less time, and with fewer errors. To make the digital transformation to an ERP, you can explain each function that the ERP will automate (or automate more fully). Use industry experience to clearly explain the benefits to your organization.

Training and IT management

An ERP’s total cost of ownership (TCO) includes the training costs, and the cost to maintain the ERP system. The software vendors must include these costs when they respond to an RPF. Will the system be on-premise, or is the software a cloud ERP system? If you purchase a SaaS product, you won’t have to maintain servers and other hardware. 

Let’s assume that a 30-store clothing retailer considers inventory management to be a critical function. If the system is down, the store locations cannot manage inventory levels, and stores may run out of inventory. If the business purchases an on-premise ERP solution, management must decide if the IT department can maintain the system, or if outside consultants are needed.

Effective training helps employees get up to speed quickly, and use the full capabilities of the ERP. In this example, assume that a wholesaler’s 50-person sales force uses a CRM system to manage customer relationships. If the sales team is assigned effective training modules, the salespeople will use the ERP to its fullest potential.

Evaluating ERP Vendors

Your project management team can take some proactive steps to make the software selection process easier. The ERP decision making process is complex, and the selection team must consider a number of factors. Evaluate each of these factors before you approach software vendors.

Determine the total cost of ownership

The total cost to install and maintain the ERP system can be difficult to estimate. In addition, you’ll incur costs to train your staff before the installation, and each time the ERP is updated. 

The time required to learn the new system means that your staff may be less productive during the transition. If this is the first time your business has used an ERP, you’ll incur more hours to train your staff.

Think about a warehouse that takes in shipments of inventory that are bought using purchase orders (POs). When goods arrive, the warehouse manager compares the items received (number of units, product description) to the data in the purchase order. The manager confirms that the PO items were received by making an entry in the ERP system. 

The warehouse manager will experience a learning curve when first using the ERP system, and this learning process will slow down approvals of shipments. Eventually, the manager will learn the system and approvals will speed up.

Think carefully about these issues, and prepare a set of questions to address the total cost of ownership.

A scalable ERP

An ERP is a long-term solution, and you need to use the ERP for years to earn a reasonable return on your investment. The ERP must be able to meet your needs as the business scales. 

Say, for example, that you currently process 3,000 invoices a month. Can the ERP process 5,000 or 10,000 invoices monthly? Is the system well-designed, and can you process more work in less time as your scale? Address this issue with each vendor.

Over time, your business may add multiple subsidiaries, and operate in multiple locations. An ERP system should be able to serve a complex organization.    

Industry-specific requirements

Most industries have operational and accounting issues that are unique, and an ERP should have specific functionality to manage these requirements.

Retailers, for example, use point-of-sale (POS) systems at physical store locations. When a sporting goods store sells a baseball glove for $80, the POS system performs these tasks:

• Reduces the inventory (asset) account for the cost of the glove (assume a $60 cost)
• Increases cost of goods sold (an expense account) by $60
• Increase cash (if cash is paid), or increases accounts receivable for a credit card or debit card purchase
• Generates a receipt for the customer

The system must be linked to the POS system, accounting system, company bank account, a credit card processor, and to the operations department (which handles inventory purchases). If a retailer with 50 locations is processing thousands of purchases and customer returns per day, the ERP system must address all of these issues.

Do your homework, and find out if each ERP vendor can manage your specific industry needs.

Once you address each of these factors, you can request demos from vendors that meet all of your criteria. You also need a written plan to prepare for an ERP implementation.

Preparing for Implementation

Get a firm understanding of each business process by reviewing and updating your procedures manual, and document where all of your important data is stored.

Updating the procedures manual

You need everyone in the organization to review the procedures manual and make updates before implementing an ERP system. The manual documents all of the tasks that an ERP system should address.

A procedures manual documents all of the routine processes that a business must complete each month. Ideally, management should maintain a procedure manual on the cloud, and make it easily accessible to the entire organization. When a procedure changes, the manual should be updated.

Account receivable collections are important, in order to generate sufficient cash inflows to operate. A business must have a formal process for collections, which might include automated emails regarding invoices that are older than 30 days, or auto-reminders to the accounting department when an invoice is 45 days old. An auto-reminder can trigger a phone call to follow up on collections.

The ERP needs to have functionality to operate the accounts receivable collection process. Ideally, the ERP can speed up processes, or simplify tasks for your organization.

Identifying data sources

To implement an ERP system, you need to clearly define and locate all of your data. The accuracy of your master data is critical, and everyone must agree that a particular data source is accurate. Here are some examples:

Accounting data

Select a month-end (or year-end) date to transfer accounting data. All accounts must be reconciled, and all accounting adjustments must be posted before data is uploaded to the ERP.

Original records

Some data must be supported by original records, such as contracts and other agreements. For example:

• A loan agreement provides the interest rate charged on the loan, and the current loan balance
• The bank balance is supported by the bank statement, which is used in the reconciliation
• The cost recorded for a machine purchase can be verified using the sales agreement, and the check used to pay for the purchase

Even if you don’t provide the documents to the ERP, you need to locate them, in order to support your financial data.

Once you’ve selected an ERP vendor and organized your records, you can transition to the new system.

Transitioning to the ERP

Communication is the key to a successful transition, and the project team must clearly explain timelines and tasks to the organization. Before implementation, management will determine who is responsible for managing the ERP, and how the staff will be trained. Businesses may use a combination of outside consultants and internal IT resources.

Employees need confidence that they will receive the training and support they need to operate in the ERP system. Provide your staff with written materials, video, and live training sessions, and ensure that all employees know how to contact customer support. Your goal is to create a great user experience.

There are some tasks that most ERP systems do not fully automate, and Stampli’s AP Automation solution can fill in the gaps in your AP process.

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