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How to pick the right ERP—Negotiating the purchase and the end game

Oct. 30, 2023
At this stage, multiple software product teams might be vying for your business. What to consider when picking a finalist for your manufacturing operation and what the final steps are.

You’ve identified Enterprise Resource Planning products by determining how aspects of your manufacturing business fit and how implementation would work to keep costs down and gauge the commitment of the software providers who must tailor this complicated system. Now comes the final stage: requesting quotes from the product teams that are suitable and have made the final cut. This stage is all about negotiating and closing the deal.

After the demonstrations are complete and each requirement is formally scored, request a quote from each acceptable product team. Consider these points when negotiating the purchase:

Include implementation costs in your purchase: Tie them together for milestone payments to assure success. Expect the total cost to be several hundred thousand dollars. The total investment for small and medium-size manufacturers will range, all in, from $250,000 to $$650,000.

Total software investment: Software costs are all over the map depending on the complexity of your business. For example, electronic manufacturers and food manufacturers have some of the most rigid reporting and tracking requirements driving software costs up. This is due to the requirements for revision control, lot number control and monitoring of expiration dates.

Implementation costs: Do not focus on software implementation costs. Focus on the experience of the industry experts working on your implementation. Unreasonably low implementation cost will result in excessive “additional charges.” Negotiate any discounts and price considerations on the software line item of the agreement.

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Small to medium-size manufacturers should expect the software implementation costs to average 100% to 200%of the combined software list price plus the hardware investment with the average being $125%. Work for implementation costs to be firm fixed. Avoid time and material charges as these are blank checks. Don’t forget about placing limits on travel. Depending on the location of the implementation team, travel costs could be extreme. Watch for hidden costs like being charged to create an invoice or being charged for unplanned travel time. An East Coast customer should not be penalized for the implementation team’s decision to send someone from the West Coast based on availability.

Please note that software companies value ARR (annual recurring revenue): This is the value of the subscription. Negotiate a long-term agreement of five to seven years with a price escalation cap of less than 3% per year. Once you are an ERP customer, it is much more attractive to remain a customer than to replace the entire ERP system again. You would incur all the costs all over again to invest in another new ERP.

ERP Software selection is difficult. The implementation team is arguably more important than the software. The industry experts assigned to your team need to fully understand where your business is from an operations perspective, and where you plan to take it. Get to know your implementation team before you purchase software. A trait of strong implementation teams is they welcome customer dialogue and inquiries.

Time for implementation

Now that the purchase has been made and the agreements countersigned, there is a lot of work to be done. These steps often are overlooked or deferred, resulting in higher costs and increased errors and delays. ERP implementation is one of the most disruptive projects for a manufacturer. DO NOT overlook these steps when developing your implementation plan.

Define the parameters for your implementation team: Leveraging Microsoft Teams or similar products will drastically reduce the implementation travel costs. It bears noting that there are two very important times for the implementation team to be “on-site” at your location:

  • Kickoff meeting. It’s important that the internal and external teams meet in person. Spend a couple of days together. Start the companywide kickoff meeting with words of encouragement and commitment from the senior executive.
  • Going live. The implementation team should be on-site a few days before for the dress rehearsal and for several days during the parallel run and for several days and after going live. Regardless of the amount of preparation, going live is a stressful time for the manufacturer. Please note that most manufacturing team members have never experienced a project of this magnitude.

Load the software into at least two test environments: One is for the technical team to use and the second is for everyone else to use.

Migrate the data from the previous system: Do this early and often. Technical oversight and dirty data are one of the biggest reasons for delays, and it’s one of the most avoidable barriers to success.

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Start training and keep training: Train everyone. Train the trainers then have the trainers train everyone some more. Your trainers are the superusers. The more comfortable they are with the system, the smoother the implementation and post-implementation process will be.

After the migrated data has been completed successfully and can be duplicated and populated routinely, complete the initial training, and identify inconsistencies in the data: Repair or rebuild the data as needed. Once the data has integrity, back it up and secure it.

Going live, setting up your command center: Staff it with the manufacturers’ project leader and the implementation team’s project leader. This is for diagnostics and work assignments. Regardless of size or complexity, document and prioritize all challenges, including technical, training, confusion, and frustration. Address each issue with compassion. Be mindful that everyone’s business life is in turmoil. This is a stressful time, especially for legacy team members who have done things a certain way for a long time and might struggle with “the new way.”

Morale: Pay close attention to stress indicators in your team. Acknowledge their concerns and address them with compassion. Remember that everyone learns at a different pace and learning increases in difficulty with age. Most of all insist on a positive attitude from your implementation team when working with others.

Set and manage expectations: Acknowledge and address the challenges. Celebrate the successes when they occur. Implementing ERP in a working manufacturing facility is like driving down the road at 70 mph and trying to overhaul the engine and transmission, at the same time, without slowing down.

It is critical that the project be a high priority for the senior executives in the manufacturing company. The internal and external project leaders should meet with the C-suite regularly to communicate successes, failures, and corrective action. It bears note that ERP projects succeed or fail based largely on the collaboration and teamwork of the internal and external implement teams.

This is the third and final part of a series from a veteran of ERP implementation, Carl Livesay, on the dos and don’ts of phasing in new ERP systems. See Part 1 and Part 2 already on Smart Industry.

About the Author

Carl Livesay

Carl Livesay has more than 40 years of senior operations experience with small and medium-size manufacturers. He has led ERP selection processes for more than 30 companies, representing the manufacturer. Carl is a lean practitioner and the general manager for Mercury Plastics in Baltimore.