ROI with ERP

ROI with ERP

This is a common question that arises with many Small Medium Businesses. How do you know what the ROI will be? Are the ROI calculators provided by some ERP vendors accurate?

Small manufacturers processes vary from business to business depending on the type of manufacturing being performed. So a generic calculator will not capture the uniqueness of your business or processes. In a large manufacturer such as an automobile manufacturer (like GM) it is more appropriate. Larger business have the resources to allocate to determine ROI, there are thousands people who interact with the ERP system. In a smaller business it could be 100 or fewer people interacting. The smaller business’s are focused on a small manufacturing sector, it could be supplying tooling or supplying parts to the bigger automotive manufacturer. Most small business do not have the resources to perform detailed ROI calculations.

If you are new to ERP systems, to calculate the ROI will be very different from a business that has an established ERP systems. Here are some functions that will be of benefit to your business by introducing an ERP system:

Reduced level of inventory through improved planning, purchasing and control.
Improved production efficiency which minimizes shortages and interruptions.
Reduced materials cost through improved procurement and payment protocols.
Reduced labor cost through better allocation of staff and reduced overtime.
Increased sales revenue, driven by better managed customer relationships.
Reduced regulatory compliance costs.
Provide business wide reports, job costing, WIP to name a few.

These functions automate many of the manual processes which reside in the business. Many small manufacturing business do not perform an ROI as they don’t know where to begin.

Lets look at purchasing as an example. If items are being purchase for production tooling and it takes several months to build the tool, it doesn’t make sense to purchase all the material at the start of the project. It is better to purchase material as required, such that spending is regulated and inventory is kept to a minimum. This process can be done manually or it can be automated by an ERP system. If several large complex tool builds are going on at the same time it will take a lot more resources to perform this task manually than automating it in an ERP System.

It is possible to calculate the ROI but it will take some effort and the person performing that calculation needs to be familiar with the manual purchasing process to determine how much effort it will take. The ERP vendor will be able to demonstrate the automated method and the time savings could be calculated. This would be a time-consuming exercise and will vary by the type of manufacturing performed. It is possible that by the end of the exercise it will be determined than 1 person can perform the purchasing using an ERP system and 2 people are required to perform the task manually. This would be a savings of resources which can directly relate to money saved and be applied to an ROI by implementing an ERP system.

This could be done for each business function to show savings. This exercise will take several weeks to perform, hence the reason many small businesses don’t invest in the effort. A detailed demonstration will show them the time savings.

For a small business it is very important to have all the key people involved in the ERP purchasing process as they will be able to see the benefits.

A good practice is to state why you want an ERP system. What is the business problem you are trying to solve. Then by implementing an ERP system you are solving a business problem or limitation. Thus improving the overall functionality of the business. It is easier to show ROI in this case.

Perhaps looking at it from a different perspective, every month you delay putting in or evaluating an ERP system is leaving real money on the table. Without a system to automate business process, automate report generation, drive revenue, and reduce operating cost, is wasteful. Personally I could not imagine not having an ERP system to manage business operations.

Dave Collings
Founder at Do IT Lean
www.doitlean.ca

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