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Get the ERP System for your China Operation Right

Tips to Pick out the Suitable System and Capable Supplier
The foreign management team assigned to China subsidiary is given the responsibility to operate and control the business, to a certain productive and performance level meeting headquarter expectations. For experienced managers, ERP system is regarded as indispensable tool to better control the business process and to visualize the operational status of key functional areas.
Management applications tend to be recognized as a mature industry in the western business world. But in China, many issues of local characteristics confront foreign managers as pitfalls in which they are liable to get trapped. Failure stories of implementation are often heard where managers have paid huge money, time and internal resources just to learn significant lessons. This article specifically examines issues relevant to the selection of ERP product and vendor, and provides valuable advices on how to avoid un-expected results.

Functionalities evaluation

ERP systems are off-the-shelf applications coming with pre-defined structure and functionalities. Therefore, a good match between functional requirements of the business and the available features of the system can be critical. It is strongly recommended that managers should conduct in-depth evaluation of the products from alternative suppliers before making any decision. This is to ensure that what is bought suits well the business requirements.
A sensible approach to do product evaluation starts with a definition of the business and management requirements. Some companies run on an operation model in China very similar as in headquarter where normally an ERP system have been in mature and smooth use for many years. In such circumstances, the definition of the business requirements and the corresponding ERP features can be borrowed from HQ and used to assess the functional capabilities of the candidate systems to be used in China. If there is no such benchmark for reference, managers must by themselves conduct in-depth investigation into and careful diagnosis of the China operations, and then translate them into functional requirements of the ERP system. Furthermore, in order to be focused on the most important, it is also wise to differentiate between those critical requirements which are imperative to manage the business and those nice-to-have features.
Following a clear definition of the business requirements, candidate suppliers should be called in to give product demonstrations, so as to reveal the mapping degree between the defined business requirements and the functionalities of different ERP packages. Normally, different products may have different strengths and weaknesses, and it is not possible for one single system to prevail in all functional dimensions. The next step is to perform gap analysis by giving different weights to all the listed requirements and to score candidate products as per requirement. After summarization, the one with the highest total score may stand out as best suited for your business.
Tips: when evaluating the availability and fitness of ERP features, do ask suppliers to demonstrate with the live system, rather than ask questions and request them to respond simply by ‘Yes’ or ’No’.

Chinese GAAP and accounting regulations

Chinese GAAP --- PRC Generally Accepted Accounting Principles ---is quite different from international accounting and financial reporting standards. And there are Chinese specific regulations imposed on accounting and book keeping practices, which need to be well addressed by the ERP system. Managers tend to pay more attention to the enterprise’s global accounting requirements. However, whether the ERP system can fulfill the local imperatives should also be given serious considerations. Some of the most critical issues are introduced as follows.
-          Value Added Tax: VAT is a TAX system levied on business on the added value derived from their production, selling merchandise or providing service. Managers need to make sure that the ERP system has standard features to calculate the Input VAT on purchase invoice and the Output VAT on sales invoice and book them into corresponding account code so that the actual VAT payable is automatically calculated.
-          Fapiao: In order to control that all VAT’s payable are paid duly, the PRC tax law stipulates that all VAT invoice (Fapiao) must be printed out from the government taxation control system, i.e. Jinshui system. Managers should check whether the ERP system comes with the interface to seamlessly link the sales invoice to Jinshui system.
-          Dual booking and reporting by PRC GAAP and IFRS/US GAAP, etc.: A foreign company often needs to prepare 2 sets of financial reports, one for PRC reporting and the other for global reporting. The difference between PRC GAAP and IFRS may lie in different Chart of Account (CoA) and different bookkeeping principles. Managers need to check whether the ERP system can work on two different accounting principles simultaneously. Otherwise, the system should provide mechanisms to accommodate two sets of CoA and facilitate the booking of adjusting accounting entries to satisfy IFRS, US GAAP or whatever global accounting principles.

Interview with the implementation consultant

ERP system is not like Microsoft Office, something you can use skillfully after reading the user manual or attending some training course. ERP implementation in an organization is a highly sophisticated process, and should be addressed as a project. The consultants from vendor need to work together with the customer to identify and define functional and data blueprint, to translate the blueprint into product configurations and to get users trained to operate the system in daily work environment.
Past stories of ERP implementation in China points to the fact that professional consultant is one of the key factors determining whether the project becomes a success or failure. Unfortunately, evaluation of the skills and capabilities of the consultant is usually overlooked in the vendor selection process. Here is a check-list of the qualifications of the vendor consultant which managers must seriously assess.
-          Familiarity of the product: It is obvious that the consultant should have in-depth understanding of product functionalities.
-          Past project experiences: Only through experiences of multiple projects, does a consultant accumulate enough industrial knowledge for him to quickly and precisely capture your requirements and to accurately translate them into system configurations. Furthermore, an experienced consultant can also predict both functionally and technically what problems could potentially occur and put in place mechanisms to prevent these problems from hindering your project.
-          English skills: If the project manager and some functional key users of the customer cannot speak Chinese, then it would be better to have a consultant who can speak English. If there is no communication, there is nothing. An experienced consultant with good English proficiency is a very scarce resource in China. Sometimes, a vendor would propose to send one functional consultant with product knowledge together with an English interpreter with no ERP experience. This arrangement should never be accepted as it is only naïve to expect that an outsider of ERP industry can translate accurately in such a professional field.
-          Project documentation: Documentation in a project is used to record daily discussions, as well as to provide clear directions on how project tasks should be performed by customer team. Insufficient documentation of workshop discussions can cause hidden miscommunications. As a consequence, un-settled issues may jump out later after lots of work has been carried out which can only be abandoned and re-performed. On the other hand, if the consultant only assigns works by verbal instructions, there may be unclear guidelines for customer project team to follow. Moreover, there would be no criteria to measure the work results and no proof to trace the responsibility for delayed or defective work.
In summary, it would be highly beneficial to have a qualified and reliable consultant guide you to implement the selected ERP system in your organization. The advice is that managers should always insist on interviewing the consultant to be assigned by the vendor, and write his/her name into the contract with defined availability devoted to your project. 

Reference checking

The logic behind reference checking is that if the vendor can do well in previous projects for customers with an operation similar to yours, it is very probable that this same vendor can also help achieve the same level of success with your project.
One thing that may make reference checking tricky is that in China, vendor and customer tend to develop a good relationship, in other words ‘guanxi’, by working together for a long time or/and because this relationship is specially maintained, even if the customer is not completely satisfied with the application or the service. This happens more often between Chinese for cultural reasons. It is in the interest of the vendor to ask the reference customer to convey only those positive experiences to the visiting customer, so that the communication may be distorted and cannot reflect the actual situation. Obviously under such circumstances, what you see with your eyes and what you heard with your ears may also lead to wrong decision.
One way to make the information obtained from reference checking more objective is to ask to visit foreignreference customers and to talk with the foreign managers who were involved in the implementation and who are the users of the system. Normally, foreign companies are more advanced in management and more demanding on ERP applications. Success in a foreign project warrants to a much larger extent the capabilities of the vendor than success in a Chinese local company may do. On the other hand, foreigners tend to be more objective and straightforward in sharing their experiences by telling both the pleasant and the unpleasant.
Another way is to try to ask the reference customer to explain in detail on how the software addresses some operational or management issues common to both their business and yours. Their answer will give you hints on whether the system is actually supportive to their operation and management.