Helping you measure the potential savings from ERP in your business

Most manufacturing organisations are well versed in the process of developing an investment model for acquisition of capital equipment.  Often, they have established a minimum Return on investment (ROI) by which the expenditure is judged.  Sometimes referred to as the Internal Rate of Return (IRR). Equal or exceed the IRR and the expenditure is considered justifiable.

 Unfortunately, the same rigour is not always applied to the acquisition and implementation of Management Information Systems.

Start by asking yourself why you are buying an ERP system. Specifically, you are buying an ERP system to overcome a limitation. The limitation ERP helps to overcome is the lack of information needed to make management decisions. ERP Systems don’t take control of your shop floor – they help you take control. ERP Systems don’t take control of your material planning – they help you take control.

Better material planning information so that you can buy additional material to exploit low prices when necessary.  Better information means you can also chose not to buy even if the price is low because you know there is no demand to use the product and buying surplus quantities will tie up money without saving anything.

Once you have identified the limitations you are trying to overcome, calculate the benefits you might achieve. For example, % reduction in WIP from better planning x Cost of Carrying = saving.

The inventory example above is sometimes referred to as a hard benefit.  However, it is important to recognise that an ERP system also delivers soft benefits that contribute substantially to the bottom line but can be harder to estimate.  For example,  you might want a new system that allows you to automatically generate orders from quotes.  In this instance, the hard benefit is the time and labour saving for entering an order.  However the soft benefit is that estimates are more accurate in the new system and as a consequence of this, you have gained a competitive edge. This competitive edge will result in more sales. So, how many more orders might you expect a year.  Even if this is just one more order, how much is that worth to your organisation?

Finally, remember to STAY FOCUSSED on your tar gets.

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