ERP – Important Facts

ERP = Enterprise Resources Planning

An ERP software system is a group of modular, integrated applications that represent the business functions that are present in your enterprise.   These applications share a centralized database where information is stored securely.   The applications interact with your staff by automating their business processes and guide the user through its use.  The end result is that decision support data is made available to your employees in real-time.  Good ERP systems covers virtually every element of your business process and performs reasonably well in all areas where they offers functionality.

A good ERP software package is designed to incorporate most if not all of the information your company needs into a single database of information.  ERP systems integrate all your business departments and the processes that move from one area to another. No longer does shipping need to notify accounting when a shipment leaves. Double entry of data is eliminated.  Departments are no longer individual silos of information.

Not All Systems Are Created Equally

There are many different software packages in the marketplace that claim to be ERP systems but don’t let that fool you.  Not all systems are created equally.  Many an ERP system has been born out of systems that are strong in specific areas, such as a strong financial package.  The developer then adds some functionality to it that supports other business areas to some degree.  Often, the new functional areas are not as strong as the foundation on which the system was built.

The implication is that most ERP systems are strong in some areas but have weakness in others.  Under analysis, this turns out to be a very factual statement.  Take any ERP package and will certainly find some areas of strength.  But that is not our problem.  The first problem is the areas of weakness where the system functionality may fall short of the needs of your business.  In some cases, their weaknesses may outweigh their strengths.  Understanding this is important when you’re buying systems.

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It Costs How Much???

Our second problem is that ERP systems are typically expensive.  And there is a VERY wide range of expense levels associated with systems.   Some ERP systems are so expensive that only the largest businesses can afford them.  Typical ERP system costs range from thousands to hundreds of thousands of dollars.  There are ERP systems that run cities and run Walmart.  And then there is that small machine shop you saw yesterday.  They probably have a system too.  Just not the same one as Walmart.

Regardless of the system you are buying your money is spent on the same basic things.  They are as follows:

Hardware costs

When you purchase a new ERP system you may also need to purchase a server to run it on.  You could also choose to run it in the “cloud” but that infers a continual cost more like a rental.  In addition, if you are buying applications like inventory systems you may need touch-screen devices and handheld scanners.  If you are buying a system then there will likely be hardware cost

ERP Software Licensing Cost

Most ERP systems have a cost to license the core software system.   The charge is normally per license and the individual user license cost is based on the total user license count for the overall system.  Most systems license users concurrently but some still license based on the computer being installed.  License cost can be significant for some systems.

ERP Software Application Costs

Now that you’ve got a license for the system you’ll be need some software applications.  That is correct, buying licenses does not get you applications.  The applications are typically broken into functional areas such as finance, inventory or manufacturing but, in some systems, this may be further broken down.  ERP application costs kick in anytime you want to add additional modules to your system.  Some ERP systems impose additional application charges when upgrades occur because new versions of modules must be purchased to support the upgrade.  If it sounds messy… is.  And it’s designed to be that way in an effort to get the client to keep paying.

ERP System Implementation and User Training

Software is certainly important but many an ERP installation has delivered less than stellar results because of poor implementation of the software and insufficient training of the users.  Most systems rely on training methods that heavily involve implementation consultants.  And that can get expensive.  In fact, implementation cost normally exceeds the cost of the software and licensing, often by a factor of two.  The implementation and training can be expensive but not spending enough on it can cause major problems.  But what is the alternative?

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ERP System Payback

ERP systems can help you with a lot of problems.  By making information available in real-time you can ensure that employees won’t spent hours compiling reports from data in multiple systems.  It will simplify processes and allow you to cross train employees so that employee absences no longer shut down areas of your business.  A well implemented ERP system should put an end to those kinds of things. It is not that there aren’t other ways to do what an ERP system can do.  It is that ERP will be much more efficient if you are committed to using it.

It won’t happen by itself.  ERP has to be set up properly and used in a logical way to breed excellent results.  But then again, so does pretty much everything else.  Choose your ERP vendor wisely and allow them to assist you throughout the process and you’ll do it right the first time.

In the end it should be about the pay back you get for the money you pay.   Choosing the ERP system means the chances of having to replace it within 5 years are very small.  And, if you choose the wrong package chances are you will need to replace it much sooner.

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