Return on Investment: Justifying Your ERP Project

Posted by James on September 6, 2016 at 12:43 PM
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While every company's needs and solutions vary regarding Enterprise Resource Planning, most companies will complete a capital expense justification before committing to an ERP system. This is the return on investment (ROI) process that identifies the expected direct and indirect costs of the project compared to the anticipated benefits. A project of this magnitude is usually approved only if the return can be proven to meet specific lender and board requirements.

It is important to complete the calculation for a reasonable life-cycle forecast of costs and benefits - including purchase, implementation, and on-going - of five to seven years. The following list of areas provides a solid starting point for your ROI calculations (and for a intensely thorough examination of the process, see Mark Jeffery's approach to ROI for business management).

Costs: Purchase and Implementation

  • computer hardware, operating system, database software, networking equipment, and tools (be sure to include installation, start-up, and testing costs for these items)
  • ERP software licensing, installation, configuration, and data conversion (include vendor consultation and implementation assistance in these costs)
  • process development, testing, and documentation
  • training

(Note that in Software-as-a-Service (SaaS) implementations, up-front (capital) costs are minimized, but on-going (subscription and/or operating) costs are typically higher. Nevertheless, ROI analysis is valid with an appropriately adjusted expected life-cycle.)

Costs: On-going (many of these will be adjustments to existing costs)

  • IT departmental costs for personnel, consultants, utilities, and support
  • annual licensing and maintenance fees for software
  • training for new employees and continuing skills enhancement for existing employees
  • budget for future system expansion and customization

Direct Benefits: Cost Saving and Cost Avoidance

  • static inventory reduction, including materials, parts, finished good, and work-in-process items
  • increased manufacturing throughput and general productivity
  • reduced quantities of scrap and wasted materials
  • less rework leading to decreases in expediting, overtime, and premium freight
  • fewer last-minute set-ups due to sudden, unforeseen schedule changes

Direct Benefits: Increased Revenue Opportunities

  • increased sales thanks to better-informed customer service personnel
  • shorter lead times and better on-time delivery leading to improved quality and enhanced customer satisfaction
  • margin improvements due to efficient distribution and a quicker time to market for new products

Indirect Benefits (potential)

  • improved retention and higher productivity from employees who feel more effective and thus experience increased job satisfaction
  • less disruption and frustration in the distribution and manufacturing facilities when attempting to accommodate last-minute changes, enabling a more stable environment
  • increasingly strategic market actions (e.g. pricing decisions, campaigns, product/variant releases, inventory deployment) as a consequence of better insight into market conditions, customer needs, and competitor activity

For a simple check, try out Acumatica's ROI Calculator. Of course, there are numerous additional factors to consider when developing a complete ROI statement. While there are as many ways to execute a ROI analysis as there are companies who perform them, your Trusted Technology Advisor can help you with cost estimates and suggest benefits as experienced by other, similar customers. The best ones will also talk with you about the sometimes hidden costs within this process. Let us know how we can help!

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If you've already gone through an ROI analysis process for ERP system planning, we'd love to hear from you. Consider sharing your thoughts and ideas with others by leaving a comment.

Topics: ERP

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