I have posted before about some of the issues involved when selecting an ERP system and the importance of implementing the correct ERP system. Friday, I was having coffee with my friend, Steve Ragow, who was the CFO of an automotive parts company during a period of significant growth. He related to me their experiences with ERP systems. It is such an excellent example that I thought I would share it as an example of the cost in not selecting the correct ERP system and the benefits when you do get the correct system and the process to select the appropriate system.
Before Steve arrived the company had grown from $5 million in revenue to almost $40 million and had gone through 3 ERP systems and the owner was preparing to purchase the 4th ERP system. On each of the previous purchases and on the purchase the owner was preparing to make, he was only looking at where the company was currently positioned and at what he had been emotionally convinced was the best system for the company. As we discussed here before, that is a very short sighted process to use for making such a large investment. As we all know changing ERP systems is not easy, it is very disruptive to a company. And when done without much forethought results in minimal increased value at best and utter failure at worst.
Steve worked with the owner to identify the key problems the company was facing and define how the new ERP system was going to correct those specific problems. As Steve expected, the system they were planning to purchase did not address the problems they were experiencing which were:
- Excessive warranty returns
- Shipping problems and late customer deliveries
- Less than 100% customer order fulfillment
- Over 50% of receivables that was over 120 days.
These issues resulted in an annual loss of between $4 and $4.5 million.
Based on this, Steve guided the owner of the company through an evaluation methodology which focused on business process, policy, procedures and organization first and the ERP system as a tool second. The company spent several months performing a complete review and redesign of business processes, procedures and policy to address the key problems that were eating into profit and stunting the company’s growth.
Next, Steve focused on the ERP system. Based on the requirements defined, he drafted an RFP to ERP vendors that focused solely on the key requirements. All responding vendors were mandated to follow a scripted demo that showed how their product would address the key business requirements of the company. After addressing the requirements, the vendors could also highlight functionality that their product possessed that might be relevant to the company and represent a competitive advantage for the vendor. After each vendor demo, the selection team completed a detailed evaluation of the presentation and the ERP system they had just seen. This evaluation methodology eliminates much of the emotion and personal reaction from the product review, thus enabling the company to purchase the system that fit their needs the best.
The company implemented a new system with add-on functionality such as integration with shipping systems and warehouse scanning devices that was not even considered in the original plan. The implementation was completed in 7 months and was flawless. Since the implementation of the new business processes, procedure, policies and system the company has grown to more than $90 million in revenue.
This is a success story that many CEO and CFOs wish they had. Every CEO and CFO can have this kind of success and ROI when they follow this type of methodology.
By resisting the urge to purchase the first system that comes along and following a methodology that addresses the business first and the technology as a tool - you too can experience this type of success!
If you are thinking about a new ERP or any other system and like to have the success this company had, contact Lynda Roth at 818-709-6583 or email@example.com