Calculating ROI: Just One Step Toward Effective ERP Selection

It’s quite common for the manufacturers we work to ask the following questions:

• We know we need a new ERP system but how long is it going to take to recoup our investment? 
• What’s the best way to calculate the payback period?
  
• What’s our expected ROI if we implement a new ERP solution?

ROI is a Hot Topic

The issue of ROI as related to ERP implementation is certainly a hot topic.

A previous guest blog post from the ERP vendor Abas USA focused on that very topic.  Entitled “ERP and ROI – Theoretically Speaking” this ERP vendor made the case that for a variety of reasons, calculating meaningful 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.

Cost vs. Benefit

One of the most important phases of an ERP selection project is conducting a thorough “cost benefit” analysis to build a solid business case for anticipated ROI.  This analysis is useful to measure performance of the system, and consists of metrics tracking the tangible and intangible benefits of ERP.

At its most fundamental, ROI is achieved by the benefit (return) of an investment divided by the cost of the investment; the result is expressed as a percentage or a ratio.

It’s wise for manufacturers to track both direct and indirect benefits that are anticipated from a new ERP system.  The anticipated return must consider process improvements including a more streamlined ordering process, reduction of physical inventory counts, improved production quality, better scheduling and more.

Other savings should come from access to real-time information for more accurate materials planning, integrated databases, streamlined information reporting, dashboard reporting and other uses of real-time data.

One Step of Many

There is no question that a careful assessment of ROI is critical for effective ERP implementation.

Yet the step of calculating an ROI is only one of seven key steps a company should take when undergoing an ERP selection project.

Download the informative white paper “7 Steps for Organizing an ERP Project” to see further recommendations.