ERP and ROI – Theoretically Speaking

The process of calculating a Return on Investment (ROI) of an ERP system, in theory, starts with identifying the quantifiable savings returned to a manufacturer after implementing (or upgrading) the ERP software.  We say “in theory” because for a variety of reasons, calculating viable ROI measurements is a challenge for most small to medium sized manufacturers.  This is mainly because the costs of the new or upgraded ERP system are easy to identify.  The savings, in hard dollars, are not.

This is understandable.  Most small to medium manufacturers are running at full throttle managing operations, production, supply chain, ordering, inventory and other key areas.  Taking the time to strategically calculate those metrics that factor into the “return” part of ROI often involve effort in analyzing indirect savings, which typically do not appear on the bottom line. Instead, these indirect, but still quantifiable benefits, are the savings that come from operating more efficiently or from expenses avoided.

Given these very real challenges, we’ve seen that the best performing manufacturers take the time and effort to track both direct and indirect benefits as part of ROI calculations.  These companies keep front and center the annual total savings they achieve since implementation.  They then divide the average total savings, typically over three years, by the initial cost.

Three ROI Conversation Starters

After working with many ERP implementation projects over the years, here are a few conversation starters to get the ROI discussion going:

1. Consider process improvements: ROI must involve a look at the process improvements ERP supports, including a more streamlined ordering process, reduction of physical inventory counts, improved production quality, better scheduling and more.
2. Focus on savings resulting from access to real-time information: ROI must look beyond hard savings like reduced inventories, cycle times,  etc. and recognize those benefits achieved from more accurate materials planning, integrated databases, streamlined information reporting, dashboard reporting and other uses of real-time data.
3. Don’t forget to look at “soft savings”: The highest performing manufacturers assess the economic impact of other “soft savings” intangibles such as the dollars achieved from customer satisfaction, enhanced supply chain communication, improved decision-making quality, delivery performance, etc

While not an exhaustive list by any means, these “conversation starters” help put the focus on ROI metrics that track reduction in operational costs, improved utilization of resources, reduction in waste, and other key metrics.

Once these conversations get started, theoretically speaking, a meaningful ROI calculation won’t be far behind.

Written by Alan Salton, President of abas-USA

ABAS is a leading provider of cost-effective ERP solutions for midmarket manufacturers and distributors. abas Business Software is an ERP and eBusiness application designed specifically for manufacturers in the Assemble-to-Order, Make-to-Order and Engineer-to-Order environment. Learn more about their ERP solutions at www.abas-usa.com.