You may not need an ERP system

At Expo West this year, when I asked prospective customers what they were most concerned about, I was somewhat surprised to hear them discuss the difficulties they are having with their Enterprise Resource Planning (ERP) system. Having run a CPG manufacturer for seven years where I performed system selection and implementation, as well as production, sales, accounting, and IT, I have spent much time evaluating and integrating different systems.

As the graphic shows, a true ERP system contains the general accounting system, such as QuickBooks or Xero does, but also contains many other functions that the business needs. These are often sold as module addons, and can include Inventory, Production, Purchasing, Materials Resource Planning (MRP), a customer relationship management (CRM) system, and Human Resources. The attractiveness of buying an ERP system is that all the functions that the company needs come in one integrated package, with a consistent theme and user interface.

The downsides of an ERP system are the price, and the risk that the system once implemented may not meet the company’s needs. Let’s discuss these. If you don’t care about these topics, you can skip to the The Alternative section. These comments are written from the point of view of a CPG company that is manufacturing its own products or using a co-manufacturer.

True ERP Systems Very large companies choose systems such as Microsoft Dynamics 365 (AX), Oracle Cloudsuite, or SAP S4/HANA. These are appropriate if you run a global organization with thousands of employees and billions in revenue.

At the midsize level, from $50 million to $1 billion in revenue, systems such as Netsuite, Odoo, Sage, or Acumatica are appropriate.

Below $50 million in revenue, none of these systems are appropriate. The reason is price and the difficulty and risk of evaluating and implementing the systems. Let’s drill down a bit more.

Price of ERP Systems A good benchmark is that the cost for your systems to perform the functions we are talking about (General Ledger, AR, AP, CRM, Inventory, Manufacturing, HR) should cost between 0.1% and 0.5% of your revenue. A full Netsuite implementation will cost more than $100,000 per year. The initial implementation may be another $100,000. Unless your revenue is more than $50 million, you run the risk of exceeding your budget in the first year. Acumatica costs about half what Netsuite costs, and Odoo is even less. However, these systems are still expensive for small businesses. Odoo requires extensive systems work to set up, and the interface is not polished.

Once you have implemented the ERP system, you are locked into that provider. Any discounts you negotiated for the first contract period will no longer apply, and you are at the mercy of the software provider.

Complexity and Risk ERP systems are so complex that you will need a consulting firm to evaluate which system is appropriate for you. You will also have to pay them to implement the system and to train your employees to use it. At the end of the day, if you or the consultant has chosen the wrong system, you will have paid a lot of money for something that doesn’t work for your business. This is called ERP failure, and it is a real risk. It can result in lawsuits against the consultants and the software providers.

The Alternative

The alternative is to buy the pieces of the ERP systems that you need from different vendors and integrate them as needed. Third Stage Consulting calls this a point solution or a Best of Breed Solution. In the past, it was difficult to connect systems, but this has become easier using products such as Zapier, Make.com, Azure Logic Apps, and Azure Power Automate. Palantir or Snowflake are used on the high end, perhaps indicating some dissatisfaction with monolithic systems among large companies as well.

There are several benefits to a best-of-breed solution. Most obviously, the system grows organically by bolting (some might say duct-taping) on a new piece to your existing working solution. So the risk is low. If the bolt-on doesn’t work, you can simply swap in a competitive solution. For instance, if you were using SAP Concur for expense reporting, you could switch to Expensify or Zoho.

Another benefit to the best of breed solution is price. Sometimes these bolt-on pieces are inexpensive, or even free. An example is Hubspot, which offers a generous free CRM solution.

A best-of-breed solution may also be more capable than a full ERP system. Although full ERP systems claim to do everything, they may lag behind a vendor who specializes in one area. For instance, Netsuite may offer Financial Planning and Analysis (FP & A), but it might not be as powerful as a pure FP & A solution from Causal or another FP & A provider. Indeed, the inability of full ERP systems to handle a specific business requirement is a major cause of ERP failure.

Inventory QuickBooks online’s lack of a production capability is its most glaring shortcoming and is often the first thing a small CPG company must deal with. Please note that I am a Certified Advanced QuickBooks Online ProAdvisor. If you are using QuickBooks or Xero, there are many compatible systems that can handle your inventory and production needs. Brandow Consulting specializes in these types of systems. Here is a good overview. These systems can track lots for inputs and outputs of the manufacturing process. The downside of these systems is that they must be kept in sync with QuickBooks. In particular, the total inventory value must be the same in QuickBooks and in the inventory system.

The choice of which inventory system to use depends on your needs. A consultant’s role is to understand your business processes and recommend the software that meets your needs for the least cost. Please do not use a spreadsheet to keep track of your inventory. Some of these inventory solutions cost less than $1,000 per year. I am an affiliate for SOS Inventory, a very capable and cost-effective solution.

Conclusion A best-of-breed solution that combines systems from different vendors can often provide the functionality a small business needs at an affordable price. Many of the vendors offer free trials, so you can try their products with no risk. Reviews can be found on G2.com. For the inventory piece in particular, I recommend that you seek the advice of a consultant who has a deep knowledge of the landscape and is willing to take the time to understand your exact requirements.