Get the ERP System for your China Operation Right
Tips to Pick out the Suitable System and Capable Supplier
For international firms operating in China, particularly in the manufacturing sector, Enterprise Resource Planning systems (ERP) are regarded as indispensable tools for controlling business processes and visualising their operations. However, successfully implementing these systems in China, where such sophisticated software is not yet a part of most company's' culture requires an understanding of the challenges involved.
While management applications have been integrated into western business culture over several decades,in China these systems have only been introduced much more recently. Stories of failed implementation of management systems are often heard where managers have expended significant funds and time and internal resources only to meet with poor results.
In order to gain the control and agility that an ERP system can provide, managers need to work with ERP providers to become more aware of their own business processes, and how these processes can be controlled and improved through an ERP implementation.
Get the Right System
ERP systems are off-the-shelf applications which have pre-defined structures and functions,and these structures can vary between different ERP offerings. Therefore, finding a good match between the functional requirements of your business and the available features of the system can be critical. It is strongly recommended that managers conduct in-depth evaluations of the different products available before making any decision.
Know Your Own Processes
Choosing the right ERP product first requires that you have a clear definition of your business and management requirements. Some companies in China operate on a model very similar to what is used in their overseas headquarters, where ERP systems have typically been integrated into the company's processes for many years. In such circumstances, the definition of the business requirements and the corresponding ERP features can be borrowed from the company's headquarters and used to assess the functional capabilities of the systems available in China.
If the company doesn't have a set of requirements and processes that can be borrowed from another office, then managers evaluating potential ERP systems must conduct their own in-depth investigation into the requirements of their China operations. These business requirements can then be translated into functional requirements of the ERP system.
Following a clear definition of the business requirements, potential suppliers should be contacted for product demonstrations. All of the various ERP systems available have their own strengths and weaknesses, and no single system is right for every company's requirements.
In performing this evaluation, managers should be careful to assign appropriate weights to their various requirements according to the importance of the requirement to their company. Once these priorities have been clarified, it should be possible to assign a suitability score to the various ERP systems being evaluated and choose the one that most closely fits your company requirements.
Tip: When evaluating the suitability of ERP features, be sure to have suppliers provide a live demonstration, rather than just allow them to provide you with yes or no answers.
Chinese GAAP and Accounting Regulations
The Chinese version of GAAP --- PRC Generally Accepted Accounting Principles --- is quite different from international accounting and financial reporting standards. When choosing an ERP system, managers need to be aware that there are Chinese specific regulations imposed on accounting and book-keeping, and these need to be addressed by the ERP system. Some of the critical issues related to finding an ERP system that works for international companies that need to work under Chinese tax laws are Value Added Tax, government tax invoices (fapiao) and the ability to do reporting and maintain charts of account that meet the demands of both local and international standards.
Value Added Tax
VAT is a tax system levied on the added value derived from a company's production, sales, or services. Managers need to make sure that the ERP they choose includes features to calculate the Input VAT on purchase invoices and the Output VAT on sales invoices, as well as the ability to book these amounts into the corresponding account code so that the actual VAT payable is automatically calculated.
VAT payment in China is controlled through a system of government invoices commonly known as fapiaos. PRC tax law stipulates that all fapiaos must be printed out from the government's Jinshui taxation control system. When selecting an ERP, company executives should check whether the system comes with an interface to integrate sales invoices with the Jinshui system.
Dual Booking and Reporting Under PRC Rules and IFRS/US GAAP
In order to meet the requirements of local PRC tax authorities and their overseas headquarters, international companies operating in China often need to prepare two sets of financial reports, one for local use and the other for sharing with their head offices. The difference between rules in the PRC and IFRS usually require maintaining different Charts of Account (CoA) and different bookkeeping principles. Managers need to check whether the ERP system can operate under these two different accounting principles simultaneously. If this is not possible, then 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 the company relies on internationally.
Selecting an Implementation Consultant
ERP systems are not like Microsoft Office – something you can use skillfully after reading the user manual or attending a simple training course. ERP implementation in an organization is a highly sophisticated process, and should be addressed as a project. The consultants from the system vendor need to work together with the customer to identify and define functions and the data blueprint, to translate the blueprint into a product configuration and to train users how to operate the system in their daily work environment.
Managers who have been involved in implementing management control systems in China will recognise the importance of working with a professional consultant in determining whether the project is ultimately 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 consultant qualifications which ERP customers should look for.
The most important skills an implementation consultant should have is an in-depth understanding of the ERP systems functions.
Only through experiences of multiple projects, does a consultant accumulate enough industry knowledge for him or her to quickly and precisely capture your requirements and to accurately translate them into system configurations. 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.
If the project manager or other key users of the system cannot speak Chinese, then the consultant's language skills become an important consideration. Sometimes, a vendor would propose to send one functional consultant with product knowledge together with an English interpreter with no ERP experience, however, in practice interpreting such a complex system through a third person is seldom effective.
When implementing a project, consultants should thoroughly document daily discussions, particularly any directions provided to the customer team regarding project tasks. If the consultant only provides verbal instructions, then there will not be clear guidelines for the customer project team to follow once they are required to work independently. Moreover, without such documentation there would be no criteria to measure the project results.
Tip: Always insist on interviewing the consultant to be assigned by the vendor, and write his/her name into the contract specified their availability for the project.
Checking Client References
Ideally, if other customers report satisfaction with a vendor on projects similar to yours then it is very probable that this same vendor can achieve the same level of success with your project.
However, in China, there is an additional “guanxi” element in references that ERP customers need to be aware of. In some cases by developing specially maintained long-term relationships between vendors and their customer interface personnel, even if the client company is not completely satisfied with the application or the service then positive results may still be reported.
One way to make the information obtained from reference checking more objective is to ask the referring 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 appropriate for your operations and management.
Eberhard Hoffmann, is General Manager of ABiC information systems (Shanghai) Co.,Ltd. An ERP consulting company focusing on delivering Kingdee K/3 ERP system to foreign enterprises. Mr Hoffman has 30 years of experiences in both ERP applications and project management. To find out more about implementing ERP systems in China, you may visit www.abic-is.com, or contact Mr Hoffmann by email at firstname.lastname@example.org.