Why is ERP Important? How it Works, Implementation & Important Modules

What is ERP?

Enterprise Resource Planning (ERP) is the integrated management of key business processes, often in real-time, facilitated by software and technology.

ERP is usually referred to as a category of business management software, typically a suite of integrated applications, that an organization can use to collect, store, manage and interpret data from many business activities. 

ERP systems are designed to streamline and automate business activities across different departments and are often used in digital transformation efforts.

ERP vs CRM

Customer Relationship Management (CRM) is software tools designed to manage and analyze interactions and relationships with customers and potential customers throughout the customer lifecycle.

The difference between CRM and ERP is that CRM is a software used by the sales team while ERP is a suite of integrated softwares used by different teams within a company, typically accounting, inventory management, warehouse management, procurement management, customer relationship management, and human resources.

So it can be said that CRM can be a part of ERP while it can exist on its own.

ERP vs SCM

Supply Chain Management (SCM) is the process of managing the flow of goods and services to and from a business, including every step involved in turning raw materials and components into final products and getting them to the ultimate customer.

The difference between SCM and ERP is that SCM is a business process, while ERP is a software that supports the automation of business processes (including SCM).

ERP vs SAP

SAP is a German multinational software company founded in 1972 that develops ERP software. Many consider SAP ERP as a legacy system. In Indonesia, it is commonly used among enterprises, manufacturing companies, and BUMNs. However, many companies are switching to more affordable modern, easy-to-use ERP systems since COVID-19 pandemic due to its high monthly costs. 

Learn more about the difference between legacy systems and modern ERPs.

The difference between SAP and ERP is that SAP is one of the many brands of ERP, while ERP refers to the system itself. However, due SAP’s long-standing presence in Indonesia (SAP has been around in Indonesia since 1997 when no other ERP systems were around at that time), SAP has become a household name synonymous with ERP, especially among the older generations.

History of ERP

1960s: Birth of MRP 

J.I. Case, a manufacturer of tractor and construction machinery, worked with IBM to develop what is believed to be the first MRP system. While they were expensive to create, required a team of experts to maintain and took up a lot of space, early MRP systems enabled businesses to track inventory and production. 

That helped manufacturers manage raw materials procurement and delivery of product to the factory so they could better plan production runs. Although adoption of MRP systems gained traction in the 1970s, the technology remained limited to large companies that had the budgets and resources for in-house development. 

Eventually several large software providers, including Oracle and JD Edwards, set out to make this software accessible to more businesses.

1980s: Birth of MRP II 

The more sophisticated manufacturing resource planning (MRP II) systems that supported manufacturing processes beyond inventory and raw materials procurement first appeared. 

MRP II systems allowed the various departments involved in manufacturing to coordinate, and they had more advanced production scheduling capabilities.

It wasn’t long until other industries realized that manufacturing firms were onto something.

1990s: Birth of ERP

By 1990, research firm Gartner coined the term “enterprise resource planning.” The new name recognized that many businesses—not just manufacturing—were now using this technology to increase the efficiency of their entire operations.

This was when ERP systems took on their current identity: a unified database for information from across the company. ERP systems brought in other business functions, like accounting, sales, engineering and human resources (HR), to serve as a single source of accurate data for all employees.

Back then all ERPs were based on-premise, which means companies need to have the right hardware, server, and IT staff to maintain. Due to the high implementation and maintenance costs, only large enterprises have access to ERP systems.  

One major breakthrough happened in 1998 when NetSuite introduced cloud ERP where companies no longer have to pay for the high implementation and maintenance costs, thus allowing medium-sized businesses to enjoy the benefits of ERP systems.

2000: Birth of ERP II and open source ERP

ERP systems initially focused on automating back office functions that did not directly affect customers and the public. 

However, front office functions such as Customer Relationship Management (CRM), ecommerce and marketing automation, and back-end applications like Supply Chain Management (SCM) and Human Capital Management (HCM) became integrated later, when the internet simplified communication with external parties. 

In 2000, Gartner introduced the idea of ERP II – ERP that integrates with third party software through the internet.

At the same time, many companies had realized the benefits of ERP systems for their businesses, however, the ERP industry was dominated by SAP, Oracle, and Microsoft Dynamics. Therefore, the costs of implementing an ERP system remain relatively high and many small and medium-sized businesses are unable to afford them. 

This was when Compiere, the first truly viable open source ERP solution was born. Although Compiere was not perfect in any way, and it is no longer available today (in 2005, Consona Corporation purchased Compiere and discontinued advancing the community edition), it gave birth to other open source ERP projects like Odoo. 

2010: Birth of AI and IOT

The 2010s saw the beginning of ERP vendors incorporating advanced technology such as artificial intelligence (AI) and Internet of Things (IoT). 

AI can enhance ERP systems by adding new capabilities, such as advanced analytics and forecasting. 

This can be useful for large manufacturing companies that have lots of data to make predictions and recommendations for various operational activities, such as production planning, inventory management, demand forecasting, and sales performance.

IoT in ERP is the network of physical objects (“things”) that are embedded with sensors, software, and other technologies and connecting them with an ERP system over the internet.

IoT devices connected to ERPs deliver real-time updates on enterprise assets, equipment and products, helping companies detect the root causes of issues and become more responsive. 

This can be useful for healthcare (to control patients off-site), manufacturing (to control production process and machine conditions), agriculture (to control conditions of crops and livestocks), and banking (reduce ATM frauds, track customer spending habits, process automations).

Although AI and IoT sounds very useful, it is hard to implement (need big data, sensors, integrations, etc.) and costs a lot, therefore it only makes sense for large enterprises. In Indonesia, the problem is mainly in the business process, so AI and IoT does not help much for 99% of businesses.

2020: Modern ERP

Modern ERP is a term popularized by Netsuite. Although there is no official definition, we feel that appropriate characteristics of a modern ERP are:

1. Cloud-based: Implementation does not require separate purchase of hardware and server
2. Easy-to-use: Simple UI with UX optimized for each user
3. Ready-to-use: Basic features are available with no need for customization
4. Scalable: Can easily add and customize modules for future needs
5. Flexible: Can be integrated with other software/hardware/platforms easily 
6. Mobile app: Mobile app available for sales, warehouse, leader, hr, and other users

One example of a modern ERP is Impact ERP.

Types of ERP

Based on readiness

• Ready-to-use: Basic features are available out-of-the-box, limited customizability
• Customizable: Highly customizable, limited basic features
• Hybrid: Basic features are available, but customizable

Based on server location

• Cloud-based: Server is located in the cloud with no purchase of hardware and server necessary
• On-premise: Server is located in-office (requires server, server room, IT staffs)
• Hybrid: Certain data and processes are processed on-premise, while others are in the cloud (for security, speed, and mobility reasons)

Based on modules

• Generalist:
  • Modules are generally accounting, inventory management, procurement, sales, and manufacturing order management
  • Great for distribution, retail, and simple manufacturing companies
• Industry-specific:
  • Modules are built specifically for certain industries with specific requirements
  • Some industry examples include oil and gas, mining, and financial services

Based on company size

• Small: Usually generalist modules, cloud-based, limited customizability, and affordable price (under Rp 100 million). 
• Medium: Usually generalist modules, may be cloud-based or on-premise, customizable, but price range from Rp 100 million – 1 billion depending on customization requirements. 
• Enterprise: Usually function-specific or industry-specific, may be cloud-based or on premise, highly customizable, but prices are usually north of Rp 1 billion. 

Based on license

• Subscription: Monthly fee based on number of users depending on license type
• Perpetual: One-time payment for the right to use forever (calculated per user)
• Open-source: Created by community with publicly accessible source code, allowing users to view, modify, and distribute the software freely (depending on open source type). Read also why many companies failed implementing an open-source ERP.

License fees are paid to the company who owns the ERP, not the implementer. Usually there are server and maintenance fees to the implementer in addition to license fees.

Benefits of ERP

1. Business process integration

Many companies in Indonesia have trouble with the lack of communication between different team (sales, warehouse, procurement, accounting, HR, etc.) causing revenue losses, unnecessary spendings, and inefficiencies (product delivery time, accounting team busy doing reconciliations, inventory unavailability when customers want to buy certain products, etc.). ERP reduces the need for the different teams to manually communicate since the data that they need are already available on the system.

2. Business process automation

There are two business processes that are automated: sales to cash and procure to pay. Sales to cash is the process from when a customer makes an order, gets the product delivered, gets an invoice, and pays for it, while procure to pay is the process when a company purchases an inventory to be sold, receives the product, gets billed, and pays for it. E

ach business process requires the involvement of creating an order document (sales order, delivery order, etc) and passing the document to other teams for follow up. An ERP system automates those processes, so when a team creates an order, the other team will automatically get notified of that and can immediately process the order. An order that usually may take 2 weeks can be done in 2 days. This is crucial for companies that have a lot of orders since it affects customer satisfaction.

3. Real-time reports

Since every process is managed by the ERP system real-time, business leaders will get the data real-time, too. This is crucial because business leaders can take immediate action when things go wrong. In addition, in the case of non-performance of certain teams that happen repeatedly (eg. sales team), business leaders can analyze the data to figure out why, thereby making the necessary changes to ensure it doesn’t happen again.

4. Security

An ERP system comes with user access restrictions, allowing only qualified personnel to view, create, edit, or delete certain sensitive data. Changes to data are also recorded, so employees involved with fraudulent activities can get identified quickly (eg. sales team hiding customer orders).

5. Culture

Although this is an indirect benefit of an ERP system, it is a crucial one. When business processes get more efficient (and data), it brings about transformation in the company, which is the first step to having a more sustainable company with self-improvement culture.

We find this to be crucial because then the employees don’t rely too much on the business leaders on every little thing and the business leaders have the time to focus on more impactful long-lasting activities (eg. company growth, analyzing data to find out the reasons why teams are not performing, creating standard operating procedures, performing skill gap analysis, fixing hiring, etc.).

3 challenges in ERP implementation

1. ERP implementation is complex: 75% of ERP implementation ends in failure mainly due to not having a clear goal, lack of planning, broken business processes, resistance to change, and lack of commitment from business leaders. While some can be prevented by choosing the right ERP implementer, most of them happened because business leaders underestimate the complexity of an ERP implementation and they were not ready to commit.
2. ERP implementation requires commitment: ERP basically exists to automate and integrate business processes, so broken business processes need to be fixed before an ERP can be useful. Standard operating procedures (SOP) ideally need to be in place before implementing an ERP, and SOPs ideally evolve as team size and process complexity increases (more business scenarios need to be introduced). Process improvement is a never-ending endeavor for businesses, and it takes a lot of time and effort from business leaders, especially since there will be employees’ resistance to change. That’s why we don’t usually recommend getting an ERP system if the business leaders are not ready to commit to a transformation (or don’t think it’s worth it for whatever reason).
3. Expensive: We find many companies often just want to find an affordable ERP system because they think they are just buying a software. For small businesses with simple processes, this may work because just getting started is better than not getting started at all. However, for medium-sized businesses, this can be a disaster, because it may break their current business processes that, although inefficient, works. For complex or unusual business processes, customizations to the ERP system may be required. ERP customizations take longer than customizations to other business software because there are so many dependencies to other modules (eg. customizations to a product variant will lead to changes in inventory management, procurement, accounting, manufacturing order management, etc.) so it takes proper planning and testing of every module. This is the reason why ERP systems are so expensive and unaffordable to most companies.  

Examples of ERP

1. Impact

Impact is a cloud-based modern ERP software designed ready-to-use for Indonesian companies, yet flexible, customizable, and scalable. It has 4 different versions built for 4 different businesses: wholesale distribution, manufacturing, retail, and small businesses.

The small business version is free to use and mobile-only with zero implementation fee, which is great for companies trying out ERP for the first time (or for students who are considering a career as a Business Analyst).

2. Odoo

Odoo is a cloud-based modern ERP system with 2 editions: Odoo Community and Odoo Enterprise. Odoo Community is the open-source edition while Odoo Enterprise is the licensed version.

The major differences between the two is that Odoo Community doesn’t have an accounting module (among others), mobile version, barcode, and limited MRP features. Odoo is popular in Indonesia because of its affordability and flexibility, however, choosing an Odoo partner can be tricky.

3. SAP

SAP has been enjoying its first mover advantage for many years in Indonesia, with SAP Business One being the most popular among medium-sized companies, and SAP HANA being the most popular among enterprises.

It is a reliable ERP system, especially for complex manufacturing companies, despite being a legacy system.

4. Oracle

Oracle, like SAP, has been in Indonesia since the 1990s. They were strong for companies in service industries. Oracle Fusion Middleware is popular among enterprises in service industries, and Oracle Netsuite is relatively popular among medium-sized companies.

5. Microsoft Dynamics

Microsoft Dynamics has been popular in Indonesia among enterprises within the Microsoft ecosystem (Microsoft servers using Microsoft Windows), especially Dynamics NAV (Navision).

Now the old generations of Dynamics (GP, NAV, SL, and AX) were forked into Dynamics 365 to allow Microsoft to focus on its SaaS suites.

ERP prices

There are 4 pricing components of ERP:

1. License: A recurring fee paid to the software company for the rights to use the software, most commonly charged per user per month
2. Implementation: A one-time fee paid to the ERP implementer for their services to set up, configure, migrate data, training, and provide support.
3. Customization: A one-time fee paid to the ERP implementer for the services to plan, code, and test changes to the base system.
4. Server, maintenance, support: A recurring fee paid to the ERP implementer for server fees, server maintenance, and providing user support (fixing errors, bugs, troubleshooting, etc.)

ERP prices are highly dependent on your industries, modules, business processes, customizations required, and other factors. However, as a general rule, small businesses can expect to pay Rp 100-500 million, medium-sized from Rp 500 million to Rp 1 billion, while enterprises start from Rp 1 billion.

How ERP works

ERP modules

• Sales: Used by sales teams to manage quotations, and sales orders
• Inventory Management System: Used by warehouse teams to track inventory levels and manage incoming and outgoing inventory 
• Warehouse Management System: Used by warehouse teams to manage warehouse processes (positioning of products in warehouse shelf racks, picking, packing, etc.)
• Procurement: Used by procurement teams to manage purchase requisition, request for quotations, quotations, tender processes, and purchase orders
• Accounting: Used by accounting teams to manage invoices, bills, financial reports, bank statement reconciliation, and manual journal adjustments.
• MRP: Used by production teams in a manufacturing company to manage bill of materials, manufacturing orders, materials planning, quality control, and machinery maintenance. 
• Point of sale (POS): Used by store cashiers in retail to input orders and process payments. 
• Customer Relationship Management (CRM): Used by sales teams to manage customers, leads, and pipelines. 
• Human Resources Information System (HRIS): Used by HR teams and employees to track attendance, time offs, expense and reimbursements, and payroll
• Human Capital Management (HCM): Used by HR teams and employees for managing employee onboarding, training, Key Performance Indicators (KPI), Objective and Key Results (OKR), and appraisal. 

ERP works by automating and integrating two core business processes: sales to cash and procure to pay. 

ERP implementation in wholesale distribution

Order to cash

Sales to cash refers to all the steps involved in processing customer orders from the moment a customer places the order to when the payment is received.

1. Sales order: When a customer makes and order, sales order and delivery order are created
2. Delivery order: Warehouse team gets notified of the delivery order and prepare goods
3. Order fulfillment: Warehouse team picks, do quality control, packs, and hand them over to the logistics team for shipment
4. Receipt: When a customer receives the order, the customer signs a receipt.
5. Invoicing: Accounting team gets notified of the receipt and sends an invoice.
6. Payment: When the customer makes payment, the accounting team records them 

Order to cash process involves different teams working together to ensure customers get their goods on time and companies get paid on time. It is really difficult to coordinate the different teams without an automated system since a lot of things can go wrong in the day-to-day operations.

Without an ERP system, sales to cash process may take 1-6 months, however, with an ERP system, it can be shortened to under 1 month. This huge efficiency boost will allow the company to send orders to customers faster (and they will be happier) and give the company better cash flows.

Procure to pay

Procure to pay refers to all steps involved in processing purchase orders from the moment the procurement team places the order to when the bill is paid.

1. Purchase requisition: Sales or warehouse team makes a request for procurement team to purchase goods
2. Request for quotation: Procurement team contacts several suppliers and make requests for quotations
3. Purchase order: Suppliers send quotations, procurement team chooses the one with the most favorable terms, and sends purchase order to the supplier
4. Receiving order: When a purchase order is created, an inventory receiving order is created, and the warehouse team gets notified
5. Billing: The supplier sends goods, warehouse team verifies the goods with the receiving order, signs a receipt, and the supplier sends an bill
6. Payment: Accounting team receives the bill, verifies with the purchase order and the receipt, make payment, and make the accounting record

Common problems that happen when companies don’t have an ERP system are:

1. Procurement team purchases the wrong goods (either slow-moving and hard to sell or those that already fills the warehouse, leaving no space for more crucial products)
2. Procurement team purchases goods from non-performing suppliers (unfavorable terms or those who sends bad quality goods or those who are often late)
3. Bad inventory planning (especially those with multiple warehouses)
4. Inefficient warehouse operations (requiring more warehouse staffs and high operational costs)
5. Unhappy customers (goods are delivered late, wrong goods are delivered, goods delivered are of low quality, etc.)

ERP in manufacturing company

Production process involves the following activities:

1. Production planning: The planning process of production targets, required resources and overall schedule, together with all the steps involved in production and their dependencies.
2. Materials requirement planning: The process and system for calculating the materials and components needed to manufacture a product. 
3. Manufacturing : The process of executing manufacturing orders according to bill of materials (BoM)
4. Quality control: The inspection of produced goods to identify defects 
5. Machinery maintenance: The process of keeping track of machinery performances, and ensuring regular service, repair, and replacement of worn parts

Production process involves different teams working together to ensure raw materials needed are available on time, the production process is efficient (low Cost of Goods Manufactured through minimizing wastage and overhead costs), and manufactured goods are of high quality. 

It is really difficult to coordinate the different teams without an automated system, since one mistake by one person can affect the whole process (eg. if the purchasing manager doesn’t buy raw materials on time, the whole factory can’t produce anything).

Therefore an ERP system with an MRP module is really crucial for manufacturing companies.

ERP in retail businesses

In retail, the key to operational efficiency is in the stores and the supply chain (warehouse and logistics), especially in retail with multiple stores. Each store has different product demands, and to be able to maximize revenue, retailers need to know what products should be available (fast-moving vs slow-moving) and at what quantity for each store. This sounds easy, but in reality, inventory management and planning is a nightmare. 

In addition, promotions and loyalty programs, if done correctly (but unfortunately often not the case), can boost revenue (as well as clear out slow-moving goods to give space for faster-moving goods with better margins).

Moreover, store management and human resources for retail are really time-consuming, since there are a lot of unexpected day-to-day operational dramas. 

Most retailers just get POS software since they are affordable. However, there are a few things only an ERP software can do:

1. Integration with inventory and warehouse management: Inventory data in an ERP software is real-time and includes inventories in the different warehouses, so if a certain stores have low inventory level of certain products, the nearest warehouse can get notified and restock. The warehouse management can also ensure stocks are delivered as fast as possible. This is crucial to avoid revenue loss of the stores, especially when multiple stores are involved.
2. Integration with HRIS and HCM: Employees in stores often work in shifts, and their payrolls are based on attendance. HRIS and HCM helps in keeping track of their attendance, payrolls, and shift planning. For example, Impact’s HRIS has location tracking and face recognition capabilities to ensure employees are really in the allocated stores (a lot of retail employees trick HR software by asking someone else to check in).
3. Integration with accounting: Hundreds or thousands of transactions happen every day in each retail store. For a retailer with only a POS, the accounting team has to do a lot of reconciliations. Oftentimes, there can be more than 10 accounting staffs whose jobs are just reconciliations (and their works have to be rechecked because there are always human errors). With an ERP software, the journal entries have been recorded accurately and real-time for most of the transactions, so the accounting team can focus on more impactful things (like performing profitability analysis, cash flows analysis, etc.)
4. Integration with marketplaces and online stores: Ever since COVID-19 pandemic, many retailers have started selling their products online, mainly from Tokopedia, Shopee and each retailer’s own website. From an operational perspective, selling online is different than selling offline because product delivery speed, customer response times, and product returns handling are crucial. Those are some things offline retailers are mostly not accustomed to, and things a POS system is not designed to do. In addition, we’ve noticed fraud cases for orders where products are out-of-stock in the store and the cashier promises to deliver, but the cashier don’t input the transaction in the POS, instead keep the money to himself and makes an order online to be sent to the real customer (since the prices are generally cheaper online and the cashier can keep the difference for himself). 

ERP implementation

ERP implementation process

1. Discovery: Obtaining understanding of current workflows and issues, as well as identifying process inefficiencies
2. Planning: Defining system requirements, performing gap analysis, setting up a project team, laying out project plan and target dates
3. Design: Designing new and more efficient workflows, and preparing the necessary documentations 
4. Development: Configuring and customizing (if necessary) the software to support the redesigned processes, including integrations with other software/hardware/platforms and installations of hardware (for on-premise). Preparing user training materials is also done in conjunction.
5. Testing: Testing of configured and customized system on a dummy database by implementer as well as the company installing the ERP system (user acceptance testing)
6. Training: User training to get all teams (accounting, warehouse, sales, procurement) get used to all the standard processes 
7. Go-live: This includes preparing a server and database, ERP system installation, data migration, and going live. This is usually done on Friday nights or weekends so that companies can start using the new system effectively on Monday.
8. Support: Support team helps users 1-6 months after go-live where there may be errors caused by users’ incorrect inputs (happens a lot), bugs, unconsidered scenarios, etc. 

ERP implementation failures

50-75% of ERP implementation projects fail to meet their objectives. Considering the amount of money companies spend on ERP implementation, this is seriously a waste of resources. 

There are many reasons for ERP implementation failures, however the top 3 are:

1. Lack of clarity in business goals 
2. Lack of a detailed project plan
3. Lack of top management involvement

Lack of clarity in business goals

About 42% of organizations report a lack of clarity in business goals as an issue during their ERP implementation.

When we ask companies we’ve met why they are looking for an ERP system, their answers were generally “we just want to upgrade from excel/accounting software”. Most of them can’t even explain their own pain points, let alone setting business goals.

As a result, they just look for the most affordable ERP software and go with the most affordable ERP implementer. Also, since they don’t have clear goals, they will try to get the most out of their new systems (eg. asking for unnecessary customizations) which don’t add value to their business. This often causes a huge mess (they end up abandoning the new system and go with the old system), and all the time, effort, and money going down the drain. 

For these companies, ERP implementation is simply “buying another software” and they are not prepared to redesign business processes, change standard operating procedures, re-training employees, changing company culture, and so on. 

We try to avoid these companies since their ERP implementation will most likely end up in failures and they will eventually blame the ERP implementer.

Lack of a detailed project plan

Around 26% of ERP implementations fail due to a lack of a detailed project plan. A detailed project plan is the responsibility of the ERP implementer (assuming the information needed is fully provided by the company). Therefore, choosing the right ERP vendor who has industry knowledge, understands business processes, best practices, and accounting (since every transaction will have an impact to accounting), and not just IT knowledge, is so crucial.

Lack of top management involvement

Lack of top management involvement is reported as a main factor in 45% of failed ERP implementations. In order to understand this point, let’s take a step back.

The goal of an ERP system is to automate and integrate the different processes and teams for efficiency purposes. For companies who implement an ERP system for the first time, it involves a huge change to the company. 

It requires identifying all the different pain points of all the teams that cause inefficiencies, discussing with the team to find practical solutions to those inefficiencies, and basically changing the way they work. 

The messy part is, the change of one team will affect other teams since the processes are interrelated. 

Therefore, companies need to be ready to make major changes since this requires heavy commitment (time, effort, and money). For example, companies may have to restructure their organization, removing unnecessary positions, changing employee job descriptions, changing warehouse layout, changing supplier selection process, and changing employee goals, KPI, and appraisals. 

This is a digital transformation process which definitely requires top management involvement to resolve employees’ resistance to change (especially the not so open minded ones who have been around for a long time).

Most companies are already comfortable with the way they work and they look for an ERP system to make their companies slightly more efficient without changing anything major. 

However, when this happens in real-life, we sometimes think that it will be much better if they just continue using the old system, because they are totally missing the benefits of having an ERP system.

ERP best practices

When is the right time to implement an ERP system?

The short answer is: when it can increase net profit and when company leaders can commit (because there may be other more urgent things that can increase net profit that leaders can focus on).

How to set a budget for an ERP system

1. Identify pain points: Speak with your teams and find out their difficulties in achieving their team goals. Come up with practical solutions, categorize them into either technology, data, process, or people. 
2. Create impact-effort matrix: Identify solutions that bring the most impact with the least amount of effort. Remember that impact is calculated based on company goals, not based on team goals. Oftentimes, companies find out that they have been wasting time on activities that don’t align with company goals, and what they need is to cut down on those.
3. Quantify benefits: Identify inefficient processes that can be automated. Decide if automation through an ERP system is really necessary to optimize those processes.
4. Perform break-even analysis: Calculate financial benefits (additional revenue and cost savings) if those processes are optimized. If you don’t know the additional revenue that it will bring, just focus on the cost savings. The easiest way to do this is to estimate the monthly salary of the team multiplied by the percentage of efficiency the ERP system will bring.
5. Set a budget: Once you know how much your net profit will increase by implementing an ERP system, decide on a break even point. In how many months or years do you want your increase in net profit to fully recoup the cost of the ERP system. By multiplying the increase in net profit by the number of months, you get your budget.

Also read: 4 Steps to Calculate your ERP Return on Investment

How to choose an ERP system

1. You are buying a solution to your business pain points, not features.

ERP is quite different from other business software because it’s the automation and integration that you are looking for. If you think team integration and process automation is not necessary for you, don’t get an ERP system. Just get accounting, crm, or hr software separately. They are much cheaper.

2. The quality of the ERP consultant is more important than the ERP system itself.

The majority of ERP implementation failures are not due to the ERP system, but the lack of planning and top management involvement. Don’t choose an ERP system based on brand or hearsay. When you hear someone with bad experience badmouthing a certain ERP system, it is most probably because they choose the wrong implementer (most often with freelancers or IT consultants who don’t understand accounting and business processes).

3. Start with an affordable ERP system.

Most often, the actual cost of implementing an ERP system ends up more than the initial assessment, so it’s better to start from ERP systems that cost half of your actual budget. Starting with Odoo vendors or a local ERP vendor is a good start. Go with the more expensive ERP software only when you know the affordable ones are not a good fit for you (only if you know you need certain features and the cost to customize those features are more than getting another more expensive ERP software.

4. Don’t customize too early.

If you are getting an ERP system for the first time, we always recommend businesses to implement the system without any customization in advance. This is because during your implementation process, companies often realize they have to change their business processes. When this happens, oftentimes their earlier concerns are already solved so there is no need to customize, or they realize there are more important features to customize.

How to choose an ERP vendor

We’ve heard a lot of stories where companies try to cut costs by hiring internal software developers or freelancers because they think those are cheaper. Majority of them ended up in failures (freelancers disappear with bugs unfixed, internal software developers are unclear of what to build while companies blame them thinking it’s their jobs, etc.) and they ended up starting all over again with professional ERP implementers. It took them years longer and a lot of money going down the drain.

This is how we recommend you to filter your ERP vendors:

1. Contact 3-5 ERP vendors

Start with the most affordable ERP system like Odoo or Impact. Find out who they are (visit their websites) and contact them to learn more about their ERP software. They may already have the customizations you are looking for without you paying for it. 

2. Assess their understanding

Assess if they understand your pain points and are able to convince you that they can solve your pain points. A good ERP implementer can tell you exactly how from the point of view of software, business process, and accounting. You should avoid those who tell you that their ERP can do whatever you need without explaining how. Most often, they themselves don’t really understand what you are talking about.

3. Ask them for similar past clients

Although this is not a bad way to do an initial assessment, it does not guarantee future success, either. Similar past clients can have different pain points, and you don’t really know if their implementation is a success or a failure. But there is no harm in asking.

4. Look at their employees on LinkedIn

Understanding how consulting companies hire their employees can oftentimes tell you about how much they value their customers’ success.

5. Trust your instincts

It is much better to choose the more expensive ERP vendor that is more likely to bring you ERP implementation success, than to choose the cheaper option but they end up in a mess and you end up paying 2-3 times the price.