How to Choose the Right IMS for Your Ecommerce Business

Scott, good to have you on.

0:46 Scott Scharf

Hey, great to see you, Stephen.

0:47 Stephen Brown

We've known each other, I was thinking about this before this episode, I think we met in 2017 or 18. I think it was 17. So we've known each other a long time, and you are a master of many things, and inventory management is one that I think you have deep knowledge on. Maybe give us a little bit of background about yourself before we get started.

0:53 Scott Scharf

Yeah, 17, I think.

Well, so I'm a long time IT geek, and went all the way up to the global multinational senior product manager route. But I was an entrepreneur at heart, and my wife is an accountant, just like Stephen's is. And we started the first ecommerce accounting firm, Catching Clouds, in 2011. And then had a lovely dinner at a conference somewhere in the country, Boston, Chicago, somewhere, with Brittany and Stephen. And they talked about what they were going to do, and they've launched LedgerGurus.

1:42 Scott Scharf

But I'm a tech geek. Really my focus is just helping entrepreneurs have amazing businesses. So when Catching Clouds, the main deliverables were detailed, accurate financials. But my favorite part of doing Catching Clouds, one of my favorite parts, was coaching the entrepreneurs for these ecommerce businesses and helping them solve business challenges.

So about two years ago I left doing accounting stuff with my wife, and I started doing ecommerce business optimization. And I just really enjoy helping entrepreneurs have amazing businesses. And I just focus on the boring back office stuff. And because of my long-term IT background, I'm really good at evaluating software and putting together project plans and providing perspective. But it's all about helping people make the right decisions for where their businesses are right now and where they're going.

2:47 Stephen Brown

And if you're watching this, you'll see that our nerd force is strong. We both love sci-fi, Legos, our backdrops. Scott and I could probably have a sci-fi podcast if we wanted to. He'd probably go deeper than I would though. His depth, as is the case with inventory management, is much deeper than mine, but we have a mutual appreciation of a lot of the same things.

3:16 What goes wrong with inventory

Stephen Brown

All right. So I want to talk about, this is the finance podcast, and inventory management is often seen as an operational thing. But the reason I wanted to talk about this is, inventory is the biggest asset in most consumer products businesses, bigger than cash a lot of times. It is the core of the business. And it's also oftentimes the biggest mess of a lot of smaller brands and even bigger brands.

3:47 Stephen Brown

So I want to share some stories of what we've seen amongst brands small and big. What are you seeing in terms of inventory management when you talk to a lot of companies?

4:04 Scott Scharf

I see a lot of challenges. Everything from people waiting too long to where they can't scale their business, and they're doing amazing things and running their unique businesses in spreadsheets that adapt to their business. But there's a certain point where it kind of implodes and it actually impedes them. And it takes more and more effort as you either go faster or get bigger or do whatever else.

4:30 Scott Scharf

And then, ecommerce entrepreneurs are amazing, okay? Most of them have kind of entrepreneurial ADD like I do, shiny object, whatever. But they only have so much time to play whack-a-mole with different things. And then they go, I'm going to look at this technology, and they do a bunch of demos and then they pick the wrong one.

And I had a seller that dropped $80,000 for a whole year for Brightpearl. And Brightpearl is good for certain businesses, but it fundamentally didn't support the way they did their business, and after five months they killed it off and had to start all over.

5:05 Scott Scharf

And then there's just a whole range of other challenges. Self implementing, it is not like a mobile app or other things. This is something you want someone with expertise to implement fully and take the time. You want to take the right amount of time and have the right expectations.

What other challenges? Either not connecting it to the accounting, or connecting it to the accounting, are both issues. For the 12 years I ran Catching Clouds, I wouldn't let a single inventory management tool connect directly to Xero. Because they pushed too much information, the wrong information, and corrupted the financials and made it harder to close the financials. Where an air gap gave us, very technical accountants, just same as your team, the ability to control what flowed over and validate things.

6:00 Scott Scharf

Now there are, in the last few years, tools that are better, that can limit and control the data they flow over. But that, I'm going to integrate everything, can make things better faster, but it can also make things worse faster.

And then the one person that knows the tool never documented standard operating procedures or training, and then that person moves on to another job because people do, and then the next person picks it up. Or one person uses it one way, then another person uses it the other way, and then the owner comes in and changes it and does it a different way and nobody talks to each other. And then the data, both in the system for what's in stock is wrong, or the data that flows over to the accounts is untrustworthy or unknown.

6:55 Scott Scharf

And there's just this consistent thread of, it's a pretty serious decision. It's a pretty big investment in the business, and it can make things better. Because an ecommerce business is a fulfillment business. Even if you're drop ship, you need drop ship automation. But you're also an IT business, you can have dozens and dozens of applications in your business. You're a marketing business. And then you're a product business, and all the other things everybody thinks. But you're a fulfillment business, and this is an area to really focus.

7:30 Scott Scharf

And if you get it wrong, it really can trip you up, and it is significantly harder, I'd probably say 10 times harder, than it was in 2011. In 2011, the first few years were Wild West, you could buy a bunch of inventory and turn it over and it'd sell really fast. And there was less technology support, but it's not the same. You need to be much more focused and aware and have a plan on what you're doing, rather than just winging it. You get started that way and you get going really fast, that's great. But there's a certain point where you need to evolve your business, both keep it simple and evolve the infrastructure that's supporting it.

8:00 Stephen Brown

Yeah, and I would see a lot of the same parallels. Everybody's got their inventory spreadsheet at first. That's almost guaranteed, that somebody at some point has an inventory spreadsheet very quickly. And then that breaks down pretty quickly, and it gets even worse if you have a warehouse.

8:29 Stephen Brown

One of the biggest issues that we've seen around inventory management, if they do have an inventory management system, is they only look at it for operations, and sometimes they don't even look at it for all the operations. So they'll be like, I like it for ordering, or I'm just going to use it for order fulfillment. And then when you get into translating that into financial information, it's like the data is garbage.

There's a bunch of processes around inventory. Ordering, shipping, receiving, fulfilling, or taking stock out for marketing or whatever. There's all these little processes, and if you don't do all of them, your data gets off. And so people are like, why is my cost of goods sold bad? Or why is my inventory bad? Well, if you're not accounting for all of those things, those are operational processes. Those aren't something you can give to the finance and accounting team, they're not in the warehouse.

9:23 Stephen Brown

And so what we've seen over the years is, even when people implement a system, they don't do all those processes. They can get some marginal operational value, but if they're not doing everything around the inventory, the financial value of what's going on is a mess.

9:42 Scott Scharf

Yeah, I agree. There's an extra 10% more effort to do, because most people say, oh, I'm going to create a purchase order and it's six steps. No, it's 12 steps or 18 steps. But that other piece takes 10% longer, and you're not teaching ops people to do accounting. You're just having them check a few more boxes and do a few more very standard steps that shouldn't be automated.

I mean, I'm always looking for automations and zaps and ways to automate and reduce the number of steps of humans jumping in and out of applications or doing any data entry. But if they know that whole process, those extra four steps that somebody does, and you make sure that the owner, or whoever, holds somebody accountable to doing those consistently, your costs are better. Which is the foundation of all the financials and analytics and net profit and all those other things you need to know.

10:30 Scott Scharf

And then the data is available and better for what's in stock, so you don't oversell stuff. And if you don't have accurate costs, you could be pricing your products all wrong. You could think your gross margin is 68% and it's 42%. And then you could be selling at a loss all day long, and you're just not going to make it up on volume.

But then those last couple steps, they go, oh, those are accounting steps, shouldn't the accountant do that? I'm like, no, the accountant's across the country, we're almost all virtual. Even accountants that are in the same building aren't there doing the work. And if that one person takes honestly 30 seconds or two minutes or five seconds more to do a few more steps, it closes the loop. It's data hygiene and all these other backend things.

11:20 Scott Scharf

But if you follow the whole process and just do it and follow it through, then it becomes a habit. And then people consistently do it, and they might go, I don't know why I do these extra four steps. It doesn't matter, as long as they keep doing them. Then the data is better inside that system, then you can get better dashboards and analytics and KPIs for the owner to make a decision on a real-time basis. And then better data flows into accounting.

11:43 Stop before you demo

Stephen Brown

So we could go down that path, but what we really want to go down here is how to select an inventory management system. And I think as we talk about this we'll talk about best practices.

But you've been doing a lot of this with consumer products businesses. So when you're meeting with somebody and helping them choose which inventory management system they should use, walk us through your methodology.

12:10 Scott Scharf

Yeah. The first thing is stop. The very first thing is stop, okay? Don't ask your peers or friends, even if you're part of amazing forums that I'm part of. Don't go demo products. Don't go ask Perplexity to build you a table comparing them, which I love doing all the time now for a whole bunch of stuff. Just stop.

Write down, literally write it down, it can be in a Google Sheet, it can be a Word doc, maybe not on paper. The good things that you want to have happen, the bad things you don't want to have happen, the bad tools you've used in the past or whatever.

12:50 Scott Scharf

And what are your core requirements? It has to support Amazon. But it has to support Amazon and multiple ASINs. But it has to support Amazon and multiple ASINs in Amazon's new virtual bundles that you can do. You've got to go down like that.

And then you have to interview everybody on your team, including your offshore team, and go, what do you need? What are you wasting your time on? What don't we know? And don't worry about technical stuff. Just write down your business requirements. That alone, before you do a demo, will focus your demos.

13:30 Scott Scharf

And then instead of just going through and letting the vendors do a canned demo, let them do a little overview and show you the highlights and blah, blah, blah, and then say, show me your purchase order process. Show me how I do a stock take. Have them dive all the way down into the weeds and show you. Even if we have to do a whole nother meeting, show me how we do purchase orders.

But if you can write those down and then prioritize them, and maybe even put a priority and say, oh, these are the things, and then make sure you ask about those things. That alone will save you time. Otherwise I see people, and I've talked to them and they've demoed 12 apps with their whole team, so half their time over the last two or three weeks, and they remember the last one they demoed.

14:16 Stephen Brown

Yeah, this is so huge. The challenge here is there are a lot of options. This isn't like your sales platform. Am I going to go Shopify, BigCommerce, WooCommerce? There are some others, and most of the time it's Shopify. There are over a dozen, I don't know how many you've reviewed, Scott.

14:23 Scott Scharf

I've got 60 current ones, which maybe 20 core ones. And my comparison matrix is 300 fields deep.

14:44 Stephen Brown

And you could take those 20 core ones, they're going to be good fits in different situations. And so this is a methodology that I 100% agree with, is understanding what it is that you're buying.

Because for a lot of categories it's really easy to just be like, hey, what's good? And people say, this is good. And the market is generally right. But what we've seen over the years is there's a ton of solutions. And that's partly because we haven't seen real consolidation, but also because every business is very different on this front, and understanding what your needs are really dictates which solutions you should even be evaluating.

15:24 Scott Scharf

Yeah. And you know your business better than anybody else. The founder, you know the ins and outs, you've probably worn every hat in the business.

But before you start the first demo, you need a comparison sheet of all the features, and then product A and product B, and whether you give it a number and a weight. I've got a spreadsheet that does this that I almost never use, but I've got one, if someone's like, I can't decide.

15:55 Scott Scharf

And keep in mind that the wrong product will cost you a ton of money in efficiency and learning curve and everything else. So don't look just at the price. Price can be on there, you want to compare that, but just put them side by side and do the demo and take notes and then get everyone's feedback and talk about it. Just make it a little mini process.

And I'd also say, unless you absolutely can't find something of the core ones, anybody tells you about anything else, then I'd probably avoid it.

16:30 Scott Scharf

Just pick a short number. And this doesn't have to be exhaustive like what I go through. I talk to an existing or new provider almost every week, and I do a deep dive into a specific area, their manufacturing or how they do accounting or how they do drop shipping or what are their new AI features or whatever else. But you just want to focus on those key things that it does for you and your business.

But don't forget the accounting. No matter what, you may not want to talk about accounting, most entrepreneurs don't. Most people didn't marry accountants like we did.

17:00 Scott Scharf

But just pick a few and say, we're going to spend this much time. I'm all for action and going for it, which a lot of entrepreneurs do. But just pause, prepare, block out a certain amount and do it, and either make a decision or add another batch. But just don't keep doing it. There's a certain point where you've got to make a decision.

17:29 Stephen Brown

Yeah. And you referred to a technique. Our first director of operations at LedgerGurus, she had a spreadsheet template that we used for system decisions, like what you described, where you had the requirements and you had a ranking. And it was invaluable.

There was literally only one, when we were rolling out systems, and I lost track of how many we use internally, there was only one where I felt like we made a bad mistake. And that's because it was a company that I knew, and I knew some people over there, and they said, yeah, we're going to get X, Y, and Z, and they didn't.

18:10 Stephen Brown

But when we went objectively off of building our requirements and rating them, we would short select systems, and we still do. We'll short select systems without even having a demo. We'll just go and look at their documentation and stuff, and we'll be like, okay, this one looks like it's got what we need. Because demos and evaluations take time. And so that's a really great methodology just to shorten the amount of time you're spending trying to figure out what you want.

18:37 Budgeting the real cost, and how long it takes

Scott Scharf

Yeah. And then when you get down to a couple, compare them and then build a budget. Because it's not just the SaaS price, and it could be more than you're spending for any other tool other than marketing.

So no matter what, you're going to cannibalize your marketing spend. Because every time you spend less money on marketing, the more profitable and better your business is. Hire your kids or whatever else to do social commerce and just don't burn up money on marketing. Anything you take away makes you a stronger business. So just behind the scenes, that's just general advice.

19:20 Scott Scharf

But it's not just the SaaS cost. So you want to look at the SaaS cost, then what is the support cost? What else do you have to do?

One of my key things in the costs and my recommendations, never expect to self-implement one of these tools. Just don't do it. You are throwing away whatever time you put in and everything else. You are either going to pay for the medium or the full implementation, if the only real option is that vendor does their own implementation. And some of them do that very well and they have very few external consultants. Or the ones that have external partners, you want to pay for one of those external partners.

20:00 Scott Scharf

These are people that are doing maybe two or three-ish a month, and all they do is sit down with a new seller, either online or go on site to your warehouse. It is more important to pick the right implementer than the right tool. Just flat out. And include that cost.

You are looking at two to five K-ish for the internal implementation. And sometimes free, and sometimes it's worth it, but be concerned about what you pay for. Then you're looking at, non-complex, not manufacturing, probably five to 15K.

20:40 Scott Scharf

A lot of what I do is I give people practical guidelines, that this is going to take X number of months, and here's a transformational budget, here's all the costs in year one, and here's what it'll cost you ongoing in year two. Because I catch sellers that are spending 50 grand for something they should spend five grand for, or something that's critical to their business like this, or building a custom database for product information management or some of these other things, and they should be spending, let's say, 40K on it. They spend 5K and it fails, and 5K and it fails, and they spend 10K and it fails again. And you can't add those failures up. Money goes away.

21:18 Scott Scharf

So you want to take a look at that and budget for that. And then you have to look, do we have to change our other tools, or do other integrations? And even if the tool's perfect, what other tools do you need that you're not using? Or how does it talk to your current base? You want to look at all of those things.

21:45 Scott Scharf

The other thing that I'd highly recommend budgeting for, unless you're a rare ecommerce business that's twiddling their thumbs and you have lots of free time, but everybody's pretty busy doing all the things, and it's why you're implementing new technology, to speed it up.

Expect to hire, I would probably say no matter what size business you are, two offshore resources that will back up your team during the transition. Do not ask your team that's already working 40 hours a week to add another five, 10, 20 hours a week of focused time to change how they're doing things. They're humans, they're used to doing things a certain way, now you're forcing this change. Back them up.

22:30 Scott Scharf

Have one person take over part of people's jobs so they have time to focus on this new thing. Or have somebody help with data entry and maybe running the system, because they're already used to creating a purchase order in this new system while the other people are getting used to it.

That, to me, that's like pay for external implementation and hire it. And keep in mind, when you do this you can throw the fish back when you're done. But I would say if you bring on two or three people, you'll probably keep one to all three of them. Because what you'll realize is that you didn't have enough capacity in your business, and that you've implemented this new tool that allows you to grow your business, and that your current team learns more and adapts, they become more valuable, and you assign some of the lower end work that's still there to these other people. But you want to budget for that. And we're talking hundreds more per month.

23:20 Scott Scharf

External implementation is more important. Including, if they do their own implementation, ask to interview one of their implementers. You may not get that person because they might be busy, but interview the implementer. And if they can't answer your questions about shipping or how to configure a ShipStation, or can't talk the talk, or understand how FBA works and have no idea about FBA reimbursements or whatever else, then go, okay, we're not working with that implementer, introduce us to somebody else.

23:46 Stephen Brown

Let me ask you a question, and then I want to get back onto the process. So what timeframe expectation should a company have around implementing an inventory management system?

24:00 Scott Scharf

You should plan two to three weeks, two to four weeks, to research, demo and make a decision, if you're focused. I understand how busy ecommerce entrepreneurs are. You've got families, you've got lives, you're buying products, stuff gets stuck on boats, everything happens, you're just playing whack-a-mole. So that's two to four hours a week for a couple of weeks, and then make a decision.

24:30 Scott Scharf

It's going to take some focused time. Plan on blocking that time out. And from the time you sign, most companies, if you find the implementer, can start within a week or two. So you're talking about four to six weeks from the time you say go.

Most inventory management, even for million dollar businesses up to whatever, without manufacturing, you're looking at a solid four to six weeks for the base implementation. A lot of the data can be connected and pulled in and you'll go, wow, we're almost there in the first few days in a week, and it's pulling in all the data from Amazon and Shopify and whatever. That's great, that's the first step.

25:10 Scott Scharf

Now you've got to spend a few days going through validating your costs. Then you've got to do an actual physical count one weekend and lock in, here's the current reality. Then you've got to go through purchasing, then you've got to go through ordering, then you've got to go through receiving, and then you've got to go through reporting. It takes time. And then there are going to be changes to how you do things, or integration to things along those lines.

So four to six weeks and you've got the basics and you're using it and people have gone through some basic training and had the time to go through that. Then you're looking at another, without manufacturing, just add an extra four to six weeks if you're doing manufacturing, three to four months.

25:55 Scott Scharf

But I would say usually for a fairly simple business, your own warehouse, you're looking at about a month or so for the initial setup. And then a month where you're hand holding and you're running it in parallel and you're doing two different systems. And this is where you want those VAs or people helping. If you have your own warehouse, bring in somebody else, train them, tell them you're working for two weeks, four weeks or whatever, and they're going to help ship stuff while you're doing things and double checking everything.

26:30 Scott Scharf

At the end of that month, and you want to be just clear, don't hold these things in. One of the biggest problems I see, and the biggest failures for these systems, is people don't speak up and complain. You have to let everybody know at the end of every day, what went well, what did you like? Good, we want to know about that too. What didn't you like? I don't like this UI, it's 82 clicks, it takes me five minutes to do something I could do in 30 seconds before.

You have to be providing that feedback, both to your implementer, and always be in the habit of complaining to the vendor. I don't like this feature, it didn't work, there's something wrong. Speak up, speak up loudly. And just have a way of tracking those.

27:15 Scott Scharf

But at the end of two months, for a general business with your own warehouse, it should be functional. You're going to have another month of getting used to it. And then somewhere usually after two months, three months, then there's an extra step of connecting it to the accounting.

Do not connect it to the accounting until you've gone through all of it. And do not go connect to the accounting without your accountant involved. Because if you corrupt the financials, they're going to charge you to clean them up.

So in general, you're looking at two to three months from the time you start the implementation for it to be live. And then a couple more months until you're feeling like it's really comfortable.

27:48 Scott Scharf

And then you'll identify a few things and you can start doing optimizations. Don't go back, don't be ready to throw the fish back. But within two months you're humming along. Three months, it's cranking. And then you're evolving and getting used to it. And then maybe set a thing at once a quarter or six months to stop and go, what do we think? What do we need to fix? What's missing? We had those things that we kind of put off to the side that we're not doing yet, like demand planning or some other things. Are we ready to add more to it? So that's the general flow.

28:18 Stephen Brown

Yeah. And then one of the biggest issues I've seen with timelines is, there are going to be a lot of requests. You can't just throw this over the wall to an implementer and say, hey, build this. They're going to need a lot of information from usually multiple people within the organization. And usually when those timelines stretch, and I see it all the time, it's when you're not putting time to respond to the implementer, because they need information. And when you don't get that information, that timeline just extends.

28:53 The operations manager, and when you need a system

Scott Scharf

Yeah. And in my projects, while I'm helping them make the decisions and building those requirements and guiding somebody through this stuff, during that collection I'm reviewing costs and cost of goods sold and assembling all that data so I can hand it over to an implementer when they get started. But that is absolutely right, you need to dedicate somebody there.

29:20 Scott Scharf

Another key thing, I don't even think I have it on the list here that we've been going back and forth on.

If you are an ecommerce entrepreneur and you're running your business and you maybe have a couple people in the warehouse that are mostly employees, and you have some contractors and some offshore people doing stuff, you've got to be over a million dollar business. But if you do not have somebody that is an operations manager, and we're not talking a COO, chief operating officer, or a VP or a director that gets paid a stupid amount of money. If you don't have somebody that's an operations manager, and if you speak entrepreneurial operating system, EOS, and integrator, this is one of the key recommendations I make. You need to hire this person either before or while you're implementing this new tool.

30:20 Scott Scharf

Because you need somebody to own it. I don't care if you're a techie, I don't care if you're a developer. This is where you're delegating operational responsibility. You need someone whose main job is to focus on this while you're working on the business. New products, marketing, other external stuff.

So don't think that, oh, I'm really tech savvy. Do you really have an extra five or 10 hours a week to dedicate to this? And then you can get somebody part-time. But yeah, probably in the list, I didn't have it on there, that's another key piece.

31:00 Scott Scharf

If you don't have somebody to own this and run this that's an employee, and there are some amazing offshore resources or whatever else, and you can consider them and you can lock them in longer, but if you don't make that change, it's going to fail.

I've gone into businesses, people that have bought ecommerce businesses that haven't had that person, and I'm like, I could give you the perfect tech stack to grow your business from 10 million to 50 million. If you don't have that person that owns and is responsible for operations, that you delegate this to, that manages that tool, that opens up support tickets, that is the internal person creating process around it and enforcing it and training your internal team, on top of other resources and bringing in outside consultants, it'll fail.

31:52 Stephen Brown

When should a business consider an inventory management system? I think there is a place for the spreadsheets. But when do you say, you really need a system? Do you see it based on the revenue, or how do you usually go through that equation?

32:08 Scott Scharf

I mean, in general, somewhere between one and three million you have enough volume going on. It's really when you start to feel pain. When you as the founder can ask questions about your business and you don't know. What do we have in stock? I don't know. What are our costs or our margins? I don't know.

32:34 Scott Scharf

And then every time you go to do it, it's an all weekend project away from the family or sleep or basketball or fishing or whatever else. When you hit that enough. Even if you're an App Script person or you're doing all kinds of cool stuff and you've got zaps built and all these other things, if you spend another day or weekend or hour cleaning that up and you're feeling the pain, it's when you feel the pain.

And you have to step back. Is this a hobby, or is this really a business? Are you going to build this business? Do you want it to work and support your lifestyle? Do you want it to grow so that you can exit and sell in X number of years?

33:20 Scott Scharf

If you're at those points, either pain, volume, or you have a bunch of people quitting. But if you're feeling pain because you're trying to push humans to do stuff that can be automated where technology is supporting them, it's really that piece. But it's also, really, what do you want with the business? And if you want it to run better and be more profitable, yes, you have to pay for some additional overhead.

But it's really that piece. What are your intentions for the business? If it's going somewhere, if you've crossed a certain line. Or you just hate your current process or your current solution. People come in and they're like, everybody on the team hates this tool. It was implemented poorly, we're not trained on it, it wasn't the right fit.

34:02 Scott Scharf

Then, if you have enough pain, and then you've got a list of all the things everybody hates that you don't want to have happen again, write them all down and there's your list.

34:14 Do you need one if you use a 3PL

Stephen Brown

Another question related to, do I need an IMS. I see a lot of sellers, especially early on, but even as they scale, they have a 3PL. Do I need an inventory management system if I have a 3PL? How would you answer that question?

34:28 Scott Scharf

Yeah. So with the 3PL, there are a couple of things. You want to trust but verify, or don't trust and verify, your 3PL.

We had a seller that we got a report from their 3PL, and they had 50 grand disappear off their balance sheet. It wasn't sold. And when we took the quantity of what was still in stock, it wasn't there.

35:00 Scott Scharf

He ended up buying a whole nother year worth of inventory. This was one of our clients, had one SKU, a really fun game, one SKU. So he bought enough, but he already had enough for the whole year. Three months later, and after paying them, they audited their warehouse and they found a cage with all that inventory. So he almost stocked out, just barely got some product air freighted in to not be out of stock and lose the buy box and all the other challenges.

35:30 Scott Scharf

Well, what if that wasn't just that big chunk where somebody moves stuff into a cage and then they lost track, versus stuff either going out the back door and being stolen, or damaged or whatever else? So the idea is it's there.

And then the other piece is, if you want to track this huge asset you need to have a purchase order process. And have a lightweight, lower cost tool that you create a purchase order in, that you assign indirect costs, shipping costs, to get to a landed cost. Customs, insurance, you need to have that. It'll dynamically keep that accurate landed cost, which is the foundation of all the accurate accounting and pricing and margin. That's so critical.

36:20 Scott Scharf

And then you can receive it. And then you can go, we should have 500 in stock. And then you download the report from the 3PL and they have 450. Or, if it's Amazon, they make up products. You send Amazon a thousand units, they receive 1100. And you're like, I just manufactured a thousand of these unique things and they received more than exist in reality. They're pulling them out of where the socks go. Socks disappear into a dimension, and they found extra of your product, which would be cool if you could make profit on it, but that's not how it works.

37:00 Scott Scharf

So you want to have that to compare, to validate it. Because things happen, everything's going fast, there's going to be a certain amount of loss, damage. And then you can adjust, and then you can tell your accountants about the adjustments, and then your books are there.

Because otherwise, a year of not catching these things, people get very upset at their accountants, where they go, well, your inventory adjustment's $300,000. And they're like, you paid a million dollars for inventory, you have this much in stock, you sold this much, we know what happened. There's this chunk of money, we don't know what happened to it. And the accountants are saying, it's double entry accounting, it's right, it's reality. You need to give us more information for us to fix that.

37:40 Scott Scharf

And if you don't have that, it's there. And there are some tools that are at the lower end that are affordable, let's say under $300 a month, that will give you those basics with a lot of bells and whistles that are solid for people that only have a 3PL. Because it makes your accounting flow better. It lets you compare the reports and keep track of what's going on. It also helps with demand planning, and what should you buy, what do you currently have in stock, the velocity of what it's selling, and a number of other things.

37:54 Stephen Brown

I have a very similar story. Brittany, my wife and business partner in LedgerGurus, and a third partner, we bought a small brand three years ago. It's an Italian organic skincare product called Solé Toscana.

It was like six months after we bought the business, our 3PL reached out to us and said, hey, we found a crate of product. It was back in some corner of the warehouse. But there is an expiration on those products, so it was all expired. Great, right?

38:32 Stephen Brown

So to your point, how much do you trust your 3PL? They're going to make mistakes, stuff's going to happen, and it's a way to provide accountability.

38:35 To ERP or not to ERP, and processes

Stephen Brown

Another question. Let's go around some scenarios. To ERP or not to ERP?

Because there's, I'll just call one out, NetSuite, who's owned by Oracle, is super aggressive with marketing, and they would make you think that the whole world needs NetSuite.

In fact, I'll tell you a little side story. I was at an event a couple years ago, and I won't name the name of the business, but it was a CFO firm, and the partner said any business over $2 million in revenue needs an ERP. And I was like, really?

39:29 Stephen Brown

So where do ERPs fit in this equation? How should somebody think about it? Because you've got inventory management systems that will add on to an existing accounting software, and then you have the ERP that does everything. How do you evaluate ERP versus more of a federated system?

39:48 Scott Scharf

Yeah. So I lean towards best of breed. A general ledger, QBO or Xero typically, there are actually others now. And an inventory management, and then a separate CRM and the other pieces that all integrate, and then evolve, and that you can pull pieces out if the company gets bought or changes or whatever else.

I helped half a dozen companies move off of NetSuite last year for all the right reasons. My opinion has been, any business below 30 million on NetSuite, it's overkill. And I've had people that were $1.2 million businesses that were just struggling. They couldn't spend any money on marketing or product because it was all going into NetSuite.

40:30 Scott Scharf

I just did a review two weeks ago. For NetSuite, the overhead is 40 grand a year. And for general ledger and an IMS, and not even cheap, lots of, including some manufacturing functionality, 10 grand a year. 25% of the overhead.

So when do I look at it? I collect all the requirements and we look, do you have any specific requirements? There are things that the current IMSs just don't do. But when you make the change, you're changing accounting.

41:10 Scott Scharf

So you're going from QuickBooks or Xero, where there are tools like A2X accounting, which we both love, that will summarize data and post summary data, because Xero and QuickBooks Online aren't built to take in 10,000, 5,000, 200,000 orders. It'll just slow down and it causes a lot of busy work either for yourself or your accountants.

When you go to an ERP, you're now in that model. Every single order shows up as an order to be shipped and as an individual order to be accounted for. Applying payments, and then dealing with all the Amazon fees and everything else. It's a shift in both accounting, and then it's a shift in cost.

41:55 Scott Scharf

Now, whether you're looking at something like Odoo, which is, or Odoo, depending, I hear it both ways, I never pronounce anything right. Avalara, Avalara, whatever. It's open ERP and everyone's like, it's so cheap. Not necessarily. The licensing's cheaper, but it gives you a ton of functionality.

So when you talk about that 300 features on my comparison matrix, when I look at Odoo it's yes to almost 90% of that. And nobody else is anywhere close to meeting all those requirements, as long as you understand what you're getting into. You're changing your accounting.

42:35 Scott Scharf

Odoo's evolved over the last few years. I would avoid it probably three plus years ago, 40% of the functionality was out of the box and you had to pay to have somebody customize 60% of it. In this last three to six months digging into it, about 80 plus percent is out of the box for any ecommerce business and the core functionality. And then you still need to customize it.

But with Odoo you have to be really careful about which, there's a hundred Shopify connectors. There's not one, there are hundreds. And you have to pick the right one.

43:10 Scott Scharf

You have to have a developer. Do not let Odoo implement Odoo. They will hire somebody that was literally digging ditches and put them on your account, almost literally. There are some amazing Odoo partners, I've got a list of them, that will do a wonderful job implementing it and supporting your business.

And then you need a different set of accountants. All of Stephen's peers and our peers at Catching Clouds, none of them do accounting on top of Odoo. It's a different business. And it's at least 100% more expensive per month. So Odoo is an option.

43:42 Stephen Brown

Yeah, you're talking, this is the concept of total cost of ownership, right? And one of the things you bring out that I want to highlight is, you need somebody, because these systems, you implement them, but you still need to update them, and you need a very expensive person who knows how to do that. Probably not full time, but you're going to pay a lot for that person.

I've also found with ERPs, what took like three clicks in a QuickBooks or Xero is going to take 20, 30, it's like click, click, click. So the workflow is just a lot more, because there's more to do, there are more capabilities.

44:18 Scott Scharf

Well, you're combining operations and accounting and they're tightly integrated.

So I've recommended Odoo for a couple of clients. A more complex meat snack company that has their own co-packing plant, and they've gone through another ERP, an ecommerce specific ERP that wasn't flexible enough and didn't have what they needed. And then I have another one that I compared Odoo to another major provider and they looked and they were both close.

44:48 Scott Scharf

And they decided that they could, and I'm looking at a custom solution because these other ones don't have QA, QC, inbound quality control, outbound quality control. I mean, they were very close, the features were there, but fundamentally, and would never be added to the inventory management system.

But what they decided was that they could go with QBO and this platform. And then if they can't either minimize or simplify their processes, they got a partner and a quote to build a custom solution outside of that tool, that they'll pay a one-time fee and then a reasonable maintenance cost, that kind of crosses it without the whole commitment to Odoo.

45:30 Scott Scharf

And I've only found a couple of US accountants, there are only a handful of solid US implementation partners. Most of them are people in the US and then they have an international team, which totally is fine.

So it just depends, and it's a mindset and it's a commitment to change the business. Overall, when it comes to these, my question is, both of these companies either have complex meat packing, drying, other functions going on, or their own manufacturing. But my view is always, how can you simplify your business? So instead of doing manufacturing, can you have your factory in whatever country send you finished goods and they do everything? What can you do to simplify your business?

46:20 Scott Scharf

And if you truly get to the point where you have a Canadian entity and a UK entity and all these other things, and you're going to look at all this expansion to your business, and you're getting to that point, my recommendation, at your 20, 30 million, sell.

Sell. It is a whole new business. If you go from a business that's growing, growing, growing, and you need an ERP, you've now increased your overhead. So unless you have an extra 10 or 20% margin that you wouldn't rather put in your bank account, you've increased the overhead of your business for complexity, to get from 30 million to 70 million. But it's a different business.

47:00 Scott Scharf

And then you don't realize all the overhead. You might outsource the accounting for a while, then you hire a couple of bookkeepers, then you hire your controller, then you hire your CFO. And all of a sudden that margin's kind of going away and you're relearning all of it. It's like starting a business over with this whole new set of technology.

My recommendation is, get it to that point. If you can't simplify your business, or you really need to have multiple entities because of liability, because you're doing baby food or something, I would take a pause, sell the business, go to something else. Let somebody else who already has NetSuite, has these ERPs, has these bigger systems, pull it in as another brand. And then you go back down, take your core set and your best people, and do another business.

47:31 Stephen Brown

Anything we've missed? Obviously we could go way deeper here, but at a high level, anything else we've missed in terms of selecting an inventory management system?

47:38 Scott Scharf

Yeah. While you're doing it, you have to implement documented, checklist-based standard operating procedures. You can't just take this thing that has 50 extra steps, because it should, and expect people to do it consistently.

You don't have to document everything you have today and get it all locked down before you implement this new tool. But as you implement it, you need to go through the training with your external implementer and document the steps and build them.

48:20 Scott Scharf

And then for your purchase order, you don't just have a Google doc or a Loom video off somewhere that people watched once, because three days later they'll be doing it differently. You have to have a checklist. It can be in Process Street, it can be in Monday, it can be in ClickUp, it can be in Notion. You need to have something that has, these are the steps, that makes a human click on the step.

It also tells you, if you have those checklists, as the owner you can go see, how many open PO checklists do I have? I have 10 open purchase order checklists. I only have one open unpaid for, unreceived purchase order. Somebody's not doing the work. It's not micromanaging. And then you don't even have to talk to everybody for three hours every day going, did you do your job, did you do all the things? But it will enforce consistency, it will enforce standardization.

49:10 Scott Scharf

And then honestly, just you as the founder, you've hired someone to do a job. Well, guess what? They're going to be sick, they're going to go on vacation, they're going to quit, and you're going to have to put somebody else in, and you're going to have to do that job for a day or a week or a month. And it's been six months since you did that job, and you're like, I know I built it and I went through it six months ago, what were all the steps? It just makes it so much easier for humans to step in and cover for each other.

49:40 Scott Scharf

And then once you have it documented, not only is it consistent, not only do you do the extra steps for the accounting, then you can start automating those steps.

And so it's just this piece. It's like a huge commitment. If people want to stair step their business, it's not only the optimal tech stack and a good team, it's a framework like entrepreneurial operating systems. You have a business framework on how you run your business, and then the process, which is part of EOS, to make the business function consistently. Otherwise you won't get anywhere near, you can get less than 50% of the value of investing in this tool that could do amazing things for your business, because you're not getting the full value.

50:16 Stephen Brown

That's a good place to remind people that this is an opportunity not only to get better technology but better processes. And I always tell people, it's a function of people, process and technology. If you're just looking at technology to solve all your problems, you're wasting money. You have to look at those other two factors to get the full value out of the technology.

50:48 Stephen Brown

Awesome. Anything else we missed for a wrap up? I mean, there's obviously a lot more details, but at a high level I think we've covered the key points.

If somebody wanted to connect with you, Scott, what's the best way for somebody to connect with you?

50:59 Scott Scharf

Yeah, you can go right to my website, scharftech.com, or you can email me, scott at scharftech.com. Ask for help. Really, if you're an entrepreneur, you don't have time to focus on this and do well, hire somebody to help you.

51:19 Stephen Brown

Thanks for joining us today, Scott. And happy listening to those who listened to the end.

51:26 Scott Scharf

Sounds great.