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Part 1: The Four Key Factors That Effect ERP Costs

Ever wonder why some ERP software costs $300 while some implementations can run into the millions of dollars? The answer is not as simple as it is with other products; more features may not necessarily mean a higher price, higher quality or even a product that will meet your needs. The ERP product must be examined more closely.

Understanding how ERP software solutions are priced will help you make the correct decision for your business. I believe the four key factors when determining the appropriate ERP price are:

1. The View
2. Market Size
3. Degree of Customization
4. IT Requirements

1. The View
This is the first and most important factor in determining the cost of ERP software. The more views the software supports, the more expensive the product and the larger the company the solution is designed to suit. Scalability is also an important consideration.

When you first log into many of the smaller ERP software solutions, you are presented with a view that might feature sales opportunities on the left and cash balances on the right. This is an example of a very wide view. While such a view is relevant for an owner or ERP operator, it is clearly inappropriate for everyone in a 100 person organization. The larger the solution, the more ways it can be segmented to meet the needs of the specific user logging in – at a higher price. As a result of this greater segmentation, large ERP systems are much more role- and process-based than smaller systems.

2. Market Size
The second most important factor is the size of the market for the solution. Solutions designed for a niche market will have higher prices because the potential customer base is smaller. The advantage of such a product is that it is – usually – designed to meet the specific requirements of that particular industry and should contain many of the necessary forms and processes. (A pest control solution might have a field for the type of pest and required protective gear, for example).

A note of caution: These niche ERP solutions are often very limited in critical areas including CRM, purchase orders, accounting, inventory, system admin, and so on. If you do decide to pursue an industry-specific ERP solution, it is extremely important that you also evaluate the presence and capabilities of these other functions. Frequently, the “industry-specific” section is only 10% of the software with the remaining 90% involving common business operations. With this in mind, it is often better – and less expensive – to find a more “general” solution that you can modify to meet your specific needs.

3. Degree of Customization
ERP solutions that cannot be customized should be substantially cheaper than more customizable solutions. Customization requires a team of highly skilled people well versed in both business and technical matters, not only during the initial implementation of the software but on an ongoing basis for support and continued development. While this flexibility is – in many cases – desirable, it comes at the cost of learning, configuration and ongoing support. In general, the greater the human component, the greater the cost of the ERP solution.

4. IT Requirements
This is the least important of the top four key factors when evaluating ERP solutions. While it is true that massively multi-user solutions capable of processing a million transactions a minute will be substantially more expensive than smaller solutions, the most important decision factors should involve those key ERP software facets discussed above that are essential to your company. That selection will in turn drive your technology; it can’t work the other way.

Part 2: Key Rules That Factor in ERP Costs

Understanding how these key factors affect price explains the cost of most ERP solutions.

• A solution designed to support a large number of users with very specific job functions in a niche or custom market is going to be very expensive. Most major corporations and government agencies belong to this group.

• A solution designed for a small number of users with a single, wide view will typically be inexpensive. This market is large and customization of these solutions is limited. The packages you can buy off-the-shelf at big box retailers belong to this category.

The above represent the two opposite ends of the spectrum, but you can apply these rules to your situation:

• As your company grows, so will your need to split up job functions into increasingly granular roles. When determining whether a solution is a good fit, calculate the number of different views you require now and in the near-term and compare that with the number of views supported by the software.

• The smaller your industry, the more difficult and expensive it will be to find ERP solutions that meet your industry’s requirements. Furthermore, you may find that while the solutions designed for your industry are good at the 10% that is unique to your industry, they offer poor performance with regards to the other 90% that is common among businesses as I discussed in the Market Size section above.

• The greater the need to meet your company’s and/or industry’s specific requirements, the greater the potential need for customization.

• The higher the volume of transactions and the more dispersed your workforce, the greater the cost.

Identifying solutions designed for your company’s current and foreseeable size, evaluating the importance of industry and/or company-specific workflow requirements, weighing the need for customization, and considering the IT aspects of deployment should allow you to quickly narrow the list of potential solutions from dozens to just a handful. It will also ensure that you avoid any major incompatibilities between your needs and your chosen solution. It is also more than likely that your short list will contain similarly priced ERP solutions that will illustrate your position in the pricing spectrum and a starting point for your budgeting requirements.

PROJECT MANAGEMENT

• Accurately estimate your true profitability.  Build multi-level estimates to more accurately estimate diverse cost and pricing requirements.
• Prevent important dates and steps from being missed.  Create templates for common workflows and automate production tasks and schedules. Templates can transform estimates into production plans.

TIME AND EXPENSES

• Capture time when it occurs.  Start or stop the clock for a task while you are working on it. Review and submit your day’s time using aACE’s Time-Clock or Time sheets modules.
• Eliminate the administrative overhead of financial staff.  Built in approval processes allow supervisors to approve their subordinate’s time and expenses. Time and expenses — approved!

RATES AND RATE CARDS

• Establish flexible and dynamic rates.  Bill clients fixed prices, fixed mark-ups, a percentage mark-up, or a percentage margin. Volume discounting is also supported.
• Create rate cards for specific clients, client groups, or special circumstances.  The rate cards module supports standard types of rates as well as fixed and percentage discounts.

PAYMENTS AND COLLECTIONS

• Track invoices easily.  Record conversations regarding invoices using aACE’s activity tools. Update each invoice’s tracking status and expected date of payment.
• Know when a payment is received.  aACE can send the project manager a notice when a payment is received from a client, eliminating the need for managers to constantly check in with the A/R staff regarding when work can begin.

PRODUCTS AND PRICING

• Bill of Materials and Options.  Managers can configure both bill of materials and options for assembly items. Bill of material components typically remain hidden during order entry and represent the implicit aspect of production. The options interface allows managers to specify different and custom configurations for user selection during order entry.
• Fulfillment Budget and Schedule.  Items in aACE can be assigned to a task group (Bill of Operations). A task group is a specific set of steps that need to be taken during the production process. Each task contains information about the labor category, duration, budget, and assignment.

• Create robust pricing and commission models.  aACE supports fixed prices, mark-up and margin percentages, specific client discounts, group discounts, and volume pricing. Commissions can be fixed amounts, a percentage of the price, a percentage of the margin, and can change depending on the volume of units sold.
• Automatically update product costs and cost-based prices.  Managers can configure aACE to automatically update the estimated cost for an item based on purchasing activity within a selected number of days. This process automatically updates margin and mark-up based prices and eliminates the need to manage estimated costs.
• Establish margin controls and notifications.  Managers can configure aACE to automatically send a notification if an item is sold with a margin less than a selected percentage. Know if your margin is being squeezed by increasing vendor prices or overly aggressive sales personnel.

PROCUREMENT

• Reorder management made easy.  aACE auto-generates purchase orders when an item’s balance falls below the reorder threshold. The process chooses the preferred vendor, sets a quantity that will restore the item’s balance to its target balance, and sends a notification to the procurement group with a link back to the newly created purchase orders.
• Procurement Planning.  Production managers can select substitutes, keep the preferred vendor or choose from alternative vendors for an order. Purchase orders can be generated at the point when components are required in the production process.
• Receiving.  Managers are automatically sent a notification when goods are received by the receiving department. Notifications can be sent within aACE, as emails, or text messages.
• Ensure goods are properly delivered.  Procurement managers can set the tracking status of the purchase order, record conversations, and scheduled follow ups in order to ensure that the product is properly delivered.
• Know your vendors.  aACE automatically creates vendor/product associations based on purchasing activity. Product managers can enter the product code, procurement lead time, and MSRP for each vendor.

INVENTORY

• Auto-Apply.  Bill of material components can be flagged to auto-apply the inventory costs when inventoried item selection is either impractical or impossible. Similarly, inventoried items procured for a specific job can be auto-applied upon receipt if the goods are moved directly to the machine.
• Operator Entry.  The aACE task interface allows operators to record inventory usage throughout the production process.
• Back flush Entry.  aACE supports back-flush entry for assembly items, allowing job managers to simply enter exceptions at the end of the production process.
• Mobile Inventory Counting.  Count inventory with an iPad and a laser barcode scanner.

ORDER ENTRY

• Order Entry.  Build each production item in a hierarchical view selecting components from the options interface or from the master list. Costs include fixed and variable material costs, fulfillment (labor) costs, and component/sub costs.
• Margin Pricing and Progress Billing.  Price production items based on a margin that takes into account the full cost of the inputs, including bill of material components, optional components, and fulfillment labor costs. Progress billing allows for the billing of orders in percentage or fixed-dollar installments.

 

 

ORDER MANAGEMENT

• Regain lost sales through alternatives and suggestive selling. The aACE order entry interface provides links for alternative products and upgrades. Alternative products might include generic or premium versions. Upgrades might include complimentary items, service agreements, or warranties.
• Accept payment at point-of-sale.  aACE’s payment dialog supports cash payments, fully PCI-compliant credit card processing, a “bill me” option for clients with extended payment terms, and the ability to apply account credits.
• Know available inventory and easily manage back orders.  Order entry personnel can see available inventory balances and quickly investigate existing demand and anticipated shipments. Items can be flagged as back-ordered at point-of-sale or via the pick process. Receipt of back-ordered goods will auto-generated the necessary outgoing shipments.
• Pick, Pack, and Ship.  aACE features robust processes for managing the pick, pack, and ship process. Our Shipping Log module supports incoming shipments (receiving), outgoing shipments, and both incoming and outgoing returns.
• Auto-generate purchase orders for drop-shipped items.  The process sends a notification to the procurement group with a link back to the newly created purchase orders. Order entry personnel can also manage the procurement process directly from the sales order if applicable.

JOBS AND TASKS

• Manage projects by deliverable or phase.  Create jobs to manage specific aspects of a project. A job can be a deliverable, a phase, and have as many tasks as required.
• Delegate and schedule tasks.  Manage your own tasks as well as those you have assigned. Use resource forecasting to balance workloads.

 

 

ASSEMBLIES AND JOBS

• Assemblies.  aACE supports both single and multi-level assemblies. Each assembly is assigned a job number when an order is opened. The ID of the job reflects its position in the work breakdown structure (WBS).

• Job Management and Tracking. Tracking information in the job communicates the current stage of production based on the currently incomplete task. Use of color coding immediately indicates whether a job is pending, on schedule, or past due.
• Job and Task Scheduling.  Preferences allow managers to determine whether the deepest assembly is scheduled first or last. The duration of each job is a function of the associated task group. Anchor settings within the task group and department start/stop times determine the schedule for each task.