Managing Software: Identify options if fatal flaws develop in ERP software
After food companies start to implement an Enterprise Resource Planning (ERP) system, they may discover that the software doesn’t provide all of the functionality their business requires. These shortfalls can be characterized as “fatal flaws.” If a company uncovers a fatal flaw in their ERP software, they have three choices: keep their paper-based/labor-intensive system, develop in-house software, or look for niche software to “bolt on” to their ERP. One area where niche software may address ERP fatal flaws is in the back office functions relating to pricing, trade promotion, and trade receivables.
In the food industry, pricing is a complex set of business processes that often go beyond the scope of normal ERP functionality. Generally, food manufacturers have a national invoice price for each SKU. The net that is ultimately received for a product is reduced from the national invoice price and involves three factors: “invoice deviations” which are list price concessions that appear on the invoice; “after-invoice deviations” which are rebates set up as invoices from distributors, retailers, or foodservice end users for promotional programs tied to product sales; and “trade promotion payments” tied to direct marketing expenses like retail slotting allowances.
All reductions in the net price have to be planned, approved, and tracked to determine their impact on sales. After-invoice deviations and trade promotion commitments must also be accrued as liabilities to ensure that they are reflected in financial reporting. The issue of “deduction management” comes up because the back office process actually involves two payment streams – one from the customer to the manufacturer for product sales and the other from the manufacturer to the customer for promotional activities. Often, the customer deducts their claim for promotional activities directly from the manufacturer’s product sales invoice.
For Harold Rosemann, CFO of Cookietree Bakeries in Salt Lake City, UT, tracking promotion planning to sales results is a critical issue. Rosemann told Food Engineering he needs to know how his promotional spending is impacting his sales results, but he also needs to keep ahead of short paid invoices. For requirements like this, software vendors must have both promotional planning and deduction management functionality. It is this combination of functional depth that is often difficult to find outside of niche vendors.
Software solutionsSoftware vendors are attacking the back office issues in different fashions. As expected, niche software solutions are more focused on industry and segment-specific issues. General ERP vendors all provide pricing management functionality but may not address industry specific issues. Process industry ERP vendors have more experience with specific industry issues and may include more detailed functionality by industry, but may have specific strengths in particular market segments where they have existing clients.
Niche vendors utilize industry-specific functionality to compete with global vendors. Alex Ring, president of the Synectics Group in Orefield, Pennsylvania, a provider of trade promotion management (TPM) software observes that, “Generic software does not meet the unique needs of the food industry. Food is different than hardware, and within food, retail and foodservice are different.”
Jim Stromvig, information services manager at NORPAC, a Salem, Oregon, frozen food manufacturer, has found that niche software vendors can provide “functionality that is an improvement over the paper processes, but most will require you to make some modification to your existing business practices.”