The Return on Investment (ROI) for a small- to mid-sized manufacturing business implementing an Enterprise Resource Planning (ERP) application, such as Epicor ERP, can be significant for a host of reasons. By improving costing, scheduling, shop floor control, supply chain planning, finance, and management reporting, an ERP system can provide several benefits that positively impact the bottom line. Today, we are going to review several of the key ones.
Benefits of an ERP system
Cost reduction: An ERP system can reduce costs in multiple ways, including material costs and manufacturing labour costs. As regards material costs, it can refine procurement practices through more accurate forecasting. Orders can be placed in time and expensive emergency purchases can be avoided. As a result, purchasers can get better terms and conditions from suppliers. With the Epicor ERP supplier portal, suppliers can get accurate, current information on your purchasing requirements, helping them better plan their production and extend savings to you.
As for manufacturing labour costs, with an ERP system work schedules can be optimized, resulting in fewer outages and interruptions. This reduces re-work and overtime. Better forecasting of demand and improved workflow also reduces the number of rush jobs, which often result in time-consuming, labour-intensive changes to machine set-ups. An ERP system improves factory throughput, lowering production costs and enhancing quality.
While cost reduction is important, your challenges may actually be growth control which requires the adoption of best practices to safely scale and expand your business with less waste. Doubling the size or sales of your company while more than doubling the costs is not a smart business move. In fact when left unchecked it can run you out of business.
Enhanced efficiency: An ERP system integrates business processes, such as inventory management, order processing, manufacturing, and financial management. By streamlining these processes and eliminating manual tasks, an ERP app can increase operational efficiency, reduce errors, and save time, generating cost savings. Explore how the industry best practices can create greater visibility, a smoother operating environment and more well prepared work force that is engaged rather than being paid for low level redundant data entry that does not reveal the insights to that support strong management decision making.
Inventory management: An ERP system optimizes inventory levels by providing insights into demand trends, supplier performance, and production schedules. This prevents overstocking or stockouts, minimizes carrying costs, and reduces the need for emergency orders, improving cash flow.
Accurate costing: An ERP system enables accurate cost tracking, ensuring products are priced appropriately to maintain profitability. Understanding where you are making and losing money is a built in advantage to ERP and understanding ouw certain costs are trending and their impact on your bottom line is important and may spawn other opportunities such as outsourcing and working with suppliers and staff to drive waste out of your business model and products.
Financial management: An ERP system centralizes financial data and provides tools for financial tracking, budgeting, and reporting. By having a clear overview of financial operations, businesses can identify cost-saving opportunities, analyze expenditures, and optimize spending through informed decision-making.
Management reporting: An ERP system offer a wide range of management reports that provide access to real-time data for making data-driven decisions and identifying areas for improvement. Below are some common types of management reports an ERP system typically provides:
- Financial reports: Balance sheet, income statement (profit and loss), cash flow statement, general ledger, and trial balance
- Inventory reports: Stock status, re-order point analysis, ABC analysis, inventory turnover
- Sales and consumer reports: Sales analysis, customer order history, and aging reports
- Production and manufacturing reports: Work order status, bill of materials, and capacity utilization
- Human resources reports: Employee performance, payroll reports, and leave and attendance
- Supply chain and procurement reports: Supplier performance, purchase order status, and demand forecasting
- Project management reports: Project progress and resource allocation
- Compliance and regulatory reports: Tax reports and regulatory compliance
- Business Intelligence: Spot trends, focus on what is important by department and drive continuous improvement by having management on the same page and together observing the cause and effect of the valuable data that you can collect automatically as part of your ERP business system.
The goal of such reports is to provide management with actionable insights for informed decision-making and strategic planning.
Improved customer service: Efficient processes lead to shorter order fulfillment cycles, enhancing customer satisfaction and potentially leading to repeat business.
Compliance and risk management: An ERP system can aid in compliance with regulatory requirements, reducing the risk of penalties or legal issues. If you cannot trace your products back to the source and manage the recall of challenged product quality you be ignoring a great risk to your business.
How to calculate the ROI of an ERP implementation
Each business is unique, but for all of them calculating the ROI of an ERP implementation involves comparing the benefits gained from the implementation against the costs incurred. Below is an outline of the steps involved in doing this.
- Initial Investment: Sum up all costs associated with purchasing and implementing the ERP system, including software licensing, hardware, customization, consulting, training, and any other relevant expenses.
- Ongoing costs: Consider ongoing expenses like maintenance, support, upgrades, and personnel dedicated to managing the ERP system.
Identify and quantify the various benefits the ERP system brings to your organization, such as those outlined above in the section titled “Benefits of implementing an ERP system”.
Assign monetary values
Assign monetary values to both the costs and benefits identified. This involves working with various departments within your organization to estimate the potential time and cost savings that the ERP system will deliver. For benefits that are harder to quantify directly, consider using proxy metrics. For example, if the ERP system is expected to reduce the time spent on order processing, estimate how much time can be saved and translate that into labor cost savings.
Decide on the timeframe over which you want to measure ROI. Common periods are annually or over several years, but it should align with your organization’s business cycle and ERP implementation timeline.
Formula for calculating the ROI of an ERP implementation
ROI = Net benefits – Costs / Costs x 100
Net benefits = total benefits – total costs
This formula provides a percentage value that represents the return on investment as a ratio of net benefits (benefits minus costs) to the initial costs of the ERP implementation. The result is typically multiplied by 100 to express the ROI as a percentage.
Consider applying a discount rate to account for the time value of money. This adjusts the future benefits and costs to present value. The discount rate represents the minimum acceptable rate of return or cost of capital for your organization.
An ERP implementation can have various assumptions and variables. Perform a sensitivity analysis by testing different scenarios and assumptions to see how they affect the ROI. This helps you understand the potential range of outcomes.
ROI calculations should not be a one-time activity. Monitor the actual benefits and costs as the ERP system is implemented and used. Compare the actual outcomes with the projected ones and adjust your calculations accordingly.
Keep in mind that the accuracy of your ROI calculation depends on the quality of data collected and the thoroughness of your analysis. An ERP system can have a significant impact on various aspects of an organization, so a well-executed ROI analysis can provide valuable insights into the success of the ERP implementation. Contact Six S Partners for a more in depth assessment and tool to help you value your business operations and gain insights into where your unique payback is.
Epicor ERP drives value throughout manufacturing enterprises, thereby offering major returns on your investment. Click here to contact Six S Partners to learn more about ROI for Epicor ERP.