Strategy, Legal & Operations

Conducting a cost-benefit analysis for your ERP system

Supply Chain Management: Looking Beyond Cost When Evaluating Efficiency

Enterprise Resource Planning (ERP) is an extremely attractive proposition for businesses looking to consolidate management information and disperse it throughout the company, but in order to integrate new technologies, an economic case has to be made to justify the investment.

A survey conducted by the Aberdeen Group found that nine out of ten manufacturing firms said they had implemented ERP solutions in a bid to improve resource planning, drive efficiencies and boost organizational growth. A Panorama Consulting study showed almost nine out of ten (86%) of firms using ERP are satisfied with the results of their initiative, highlighting the appetite for new technologies which streamline corporate tasks.

But before implementing ERP across their organization, business leaders need to establish an economic case for investment. Both capital and operational expenditure must be compared to the expected return on investment (ROI) in any key business purchase.

Where the projected ROI exceeds the total cost of ownership (TCO), introducing a new ERP system should have a positive impact on profitability, but there are several considerations to be made before one can arrive at that conclusion.

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Considering costs

Businesses need to consider acquisition expenses and the costs associated with deploying ERP across the workforce. Capital resources may also have to be utilized in order to fit the solution to new business models, and if there are existing systems in place, integration work will have to be carried out in order to synch the technologies. Converting files and consolidating management information will invariably occur, but phasing out old procedures and legacy solutions may also incur costs and involve time-consuming data migration.

Once installed, there are testing costs to consider which are routinely carried out to ensure the user is benefiting from full functionality. Periodic ERP reviews and upgrades may be required over time and developing the team in order to adapt to new procedures is likely to require financial support. Unforeseen expenditure should also be accounted for as part of risk management best practice.

Considering the benefits of ERP

ERP purchases should be considered a long-term purchase, and so it is important to consider the benefits it will bring to the business.

The use of ERP solutions and streamlined resource management processes helps simplify procedures, reducing re-work and manual handling costs. Decision makers are afforded more information and can monitor performance in individual departments and across the organization as a whole, which supports effective decision-making processes.

On the floor, automation of manual tasks increases the speed of the delivery and reduces human error. Key workers can then focus on value adding tasks, with reliability ensured thanks to all-encompassing systems which flag up inaccuracies and errors.

The most commonly cited advantage of using ERP systems is that it gets all areas of the business moving together as one. ERP systems make it simpler to record and report data across a range of tangibles, making monitoring business processes easier and troubleshooting instantaneous. With clear data in the hands of decision-makers, organizations can set realistic expectations in terms of timescales and costs.

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Setting the level of expectation

ERP systems won’t change business performance overnight, and they are in many ways an enabler of change, rather than the remedy. It makes sense to be conservative when projecting the economic benefits of new ERP systems and processes, as unrealistic goals can significantly impact the perceived success of the implementation.

Working out a ‘worst case’ cost scenario, along with a ‘likely’ estimate, is advisable for businesses, but establishing a sound business case for investment in ERP is equally as important, particularly in a tough economic climate with budgets remaining constrained. This gives project goals a strategic context, making it easier for executives to decide whether to opt for ERP.

Achieving maximum value from ERP

If business processes are constantly reviewed and updated, the ROI from implementing ERP systems is obvious. By carrying out regular process reviews, using both quantitative data and direct feedback from personnel involved in resource planning, ROI should ultimately exceed the TCO, delivering value to the business.