This is the first of a 3-part series exploring the question many small companies ask themselves: Can we afford ERP?
Small companies often face a dilemma in deciding how to invest for the greatest return. In pure startup mode, businesses must invest in an operational foundation that will directly build the business. “Management by walking around” is common. Reporting is ad hoc, supported by manual processes and spreadsheets. Decision-making is driven more by gut feel than data and hard facts. These methods may be effective in early phases of the business, but once past that crucial startup phase, neglecting to invest in appropriate enterprise business systems can significantly hinder continued growth and profitability. Many stumble along with some combination of spreadsheets and disparate applications thinking an integrated Enterprise Resource Planning (ERP) solution is beyond their reach. In reality though, rather than assuming they can’t afford it, small and growing businesses should instead be asking, “Can we afford not to invest in ERP?”
- You’re not in control: Processes are manual; data is scattered in file cabinets, offline spreadsheets and across desktops. That data is transferred between desks four or five or even six or eight times, adding little value and introducing the risk of errors.
- You’ve no idea how and where to expand: Your business is growing. You want to continue to add new geographies and new market segments. But you have no visibility as to where you made your best profit. Was it in healthcare in the northeast? Was it in commercial business on the west coast? Was it in government contracts?
- You can’t meet customer demand: Your inventory levels are rising, yet you still can’t seem to meet customer requested ship dates. How do you better forecast demand, lean out your inventory, and produce product just-in-time?
- Cash is tight: Whether you need to finance your supply chain costs or invest in growth, credit is still tight. You are handicapped in maintaining a close eye on cash and liquidity.
- You have no IT staff: The closest you have to an Information Technology (IT) staff is that bright kid you hired to manage your internal network, your laptops and phones. Technology is leaving you behind but you’re growing and would rather invest in revenue-generating activities, not overhead.
Downside of No ERP
If any of the scenarios above resonated, the downside of not having ERP is all too obvious. Think about the amount of time you and your subordinates spend each day searching for data that could and should be readily available and literally at your fingertips. Without full and immediate access you run the risk of delaying decisions or, perhaps worse, making decisions based on incomplete or incorrect data. Spreadsheets, the universal management tool, provide a familiar and convenient means of analyzing and manipulating data, but offer no means of creating a detailed and accurate audit trail. Relying exclusively on paper or email trails to provide an auditable system of record is both time consuming and dangerous.
Difficulty in Managing Margins and Profitability
If you are a hard goods product-based business, determining real margin analysis is difficult, if not impossible. Inventory accuracy and accurate lead time projections are critical but difficult to achieve. If your business is service or project-based, not being able to provide an accurate estimate of costs quickly may prevent you from presenting timely estimates and quotes that insure you can compete on price, yet only accept profitable business.
The Need for Interoperability
Desktop-based or legacy applications may seem viable alternatives, particularly if they are ingrained into your current business processes. Most likely they were implemented back when the performance of your business was easily measured based on price, quality and on-time delivery. But today a fourth metric of performance has become the norm and that fourth metric is interoperability within your business network. As a small company, it is likely you are doing business with companies much larger than you, and more demanding.
It is also highly likely, even as a small company you are faced with complexity introduced through international trade and must navigate a tangled web of international requirements and regulations. Legacy applications simply do not provide the same level of international features, or integration and interoperability as an integrated ERP suite.
And as you begin to expand into international markets, you are faced with having to support multiple financial reporting standards, particularly if you want banks to lend you money. Although credit is not as impossible to acquire as it was during the credit crisis, it is still tight, making the need to manage cash flow all that much more critical: collecting as early as possible, paying at the most optimal time, and investing any leftover cash in something that yields the highest possible return with an acceptable level of risk. Forecasting cash available at any given time, however, remains difficult.
Tougher to Achieve Competitive Advantage
So for many small companies today, table stakes have increased. But beyond those table stakes, the global economy is making it tougher and tougher to maintain a competitive advantage. Outperforming a growing field of competitors requires a performance-based culture, supported by strong processes, audit trails and reliable data that is immediately accessible. Neither spreadsheets and manual processes nor non-integrated legacy applications can compete with the added value an integrated ERP solution can bring to the table.
Two more installments will follow. Click here if you would like to download all three parts in one report. Note: registration is required.