An enterprise resource planning (ERP) implementation project is a massive undertaking for any manufacturing organization, and determining the return on investment (ROI) is crucial to justify the costs and make an informed decision. However, because of the various operational areas that are impacted, calculating the ROI becomes complex. This ebook will explore the following key topics:
- Operational areas manufacturers should focus on when calculating anticipated returns
- Factors that impact the total cost of ownership (TCO)
- Ways to set the stage for greater ROI
- Where the greatest benefits for ROI come from
- Tying costs to value gained from process improvements
Focus Areas for Calculating Returns
When building a business case and calculating the anticipated benefits of an ERP implementation, your business should take a comprehensive view that goes beyond just the immediate cost savings and revenue gains. The operational areas that should be considered when determining the value of an ERP system include both direct, quantitative returns as well as indirect, qualitative returns that can significantly impact the bottom line.
Direct Returns
- Warehouse and Inventory Management
One of the biggest sources of direct return comes from enhanced warehouse and inventory management capabilities provided by ERP systems. Modern ERP solutions offer advanced, real-time inventory tracking and optimization tools including demand forecasting, automated replenishment and warehouse management system (WMS) integration. These capabilities allow your organization to gain tighter control over inventory, enabling you to reduce excess stock, minimize shortages and stockouts, improve order fill rates and optimize turns.
The financial benefits that come along with ERP systems include reduced inventory carrying costs, less waste and obsolescence, lower risk of write-offs, avoidance of emergency transport costs due to stockouts and reduced loss of sales.
- Quality Management and Control
Improving product quality control and optimizing production processes also directly impact your bottom line. ERP systems provide robust quality management modules to define quality metrics, track defects, identify root causes of issues, enforce production standards and manage recalls if required. By reducing defects, rework, scrap and returns, companies can achieve substantial cost savings.
Furthermore, the integrated nature of ERP solutions designed for the manufacturing industry helps optimize production scheduling, capacity planning and shop floor operations to increase efficiency. Together, enhanced quality and production capabilities can boost profits through cost reductions, improved customer satisfaction and faster time-to-market.
- Forecasting and Planning
Accurate demand forecasting and alignment of resources through planning processes is critical for efficient operations management. ERP systems aggregate data from across your business, enabling sophisticated forecasting methods using historical sales trends, seasonality patterns, marketing event impacts and predictive analytics. Reliable forecasts improve decisions around purchasing, production, inventory and workforce planning.
Production and inventory costs can be optimized by aligning them tightly with the demand forecasts. These improved planning capabilities also allow your business to provide better customer service through shorter lead times and consistent on-time deliveries—resulting in higher revenue and margins. Indirect Returns
- Increased Productivity
ERP systems consolidate data into a single source of truth and incorporate process automation to eliminate duplicative manual efforts. Additionally, the integrated system architecture reduces cross-departmental information silos.
Instead of constantly reconciling numbers between different systems and processes, your employees can simply access accurate, real-time data within the ERP software as needed. Moreover, automated workflows and reminders reduce administrative time spent on mundane activities, allowing your workforce to focus on value-added analysis, decision making and strategic initiatives. According to research, companies typically achieve 15-30% improvement in workforce productivity from ERP implementation.1
- Data-driven Management
An ERP solution centralizes enterprise data from across departments, locations and systems into an integrated database accessible through analytical and reporting tools. This gives your managers and executives better visibility into operations, enabling data-driven decision making.
Scenario analysis and predictive modeling capabilities help assess strategic choices, resulting in smarter, faster decisions that amplify your operational benefits. The agility and strategic advantages conferred allow your company to stay ahead of your competitors.
- Improved Employee Morale
The benefits of improved employee satisfaction and retention can be hard to quantify, but they should not be taken for granted. The streamlined operations and access to accurate, real-time data from the ERP system empower your employees and help eliminate previous frustrations caused by bottlenecks and repetitive paperwork.
Integrated information and automated processes reduce cross-functional ambiguities and delays that previously caused workplace frictions. Management has greater insights into employee productivity and can align tasks more tightly to corporate strategy. By improving job satisfaction, ERP implementation leads to higher morale, increased engagement and lower employee turnover, saving substantial recruitment and training costs.
Factors That Impact ERP total Cost of Ownership (TCO)
- Software Licensing Fees
The fees paid to the ERP vendor for accessing their software and modules represent a significant portion of the total implementation cost. ERP systems are available in different pricing models, such as:
- Perpetual licenses: Your organization pays a one-time upfront fee for the software license,
giving you the right to use the ERP system indefinitely. However, for updates and support, you pay an annual maintenance fee. This model is often associated with on-premise ERP systems where it is installed on your hardware.
- Subscription model: Your organization pays a monthly or annual fee to use the ERP
software, and the cost of the subscription can be based on the number of users accessing the software, the volume of transactions, or other factors. This model is associated with cloud-based ERP systems where the software is hosted by the ERP vendor.
- Usage-based pricing: Your organization is charged based on how you use the software. The
basis of this pricing can be on the number of users, transactions or storage space.
- Deployment Model: Cloud vs. On-premise
Cloud-based ERP solutions are hosted on the vendor's cloud platform and have become popular due to lower upfront investments. In this model, your organization only pays for the computing resources used via a subscription model. The ERP vendor is in charge of hosting and maintaining all hardware and software—however, ongoing subscription and transaction fees can add up over time.
Because on-premise ERP solutions are installed and run on hardware located within your organization's facilities, substantial initial investments in hardware, infrastructure and IT resources are required. However, after setup, your organization only pays for intermittent upgrade and maintenance fees.
For small and mid-sized businesses, the lower startup costs of cloud ERP systems are often preferable. Large enterprises may benefit from greater control and customization with onpremise ERP systems.
"
"Cloud ERP solutions may require less initial setup but can involve hefty licensing fees. On the other hand, on-premise ERP systems have a higher upfront price tag and longer ramp-up times."—Forbes Technology Council2
- Hardware and Infrastructure
On-premise ERP deployments require investments in servers, data storage, networking equipment and other IT infrastructure. As the ERP system scales with your organization, additional computing capacity and redundancy mechanisms—such as backup power— become necessary.
With cloud ERP systems, hardware costs are the vendor's responsibility. But sufficient bandwidth and endpoint devices for your team still represent a notable expense. During TCO calculations, be sure to account for any expanded infrastructure investments driven by your ERP initiative, even with cloud options.
- Implementation and Integration
The costs to deploy, configure, customize and integrate your ERP solution with existing systems can be significant. Key factors driving implementation costs include:
- Scope of organizational processes to integrate into ERP
- Required customization and extensions
- Complexity of existing IT environment
- Data migration approach
- Training and support needs
Using experienced consultants—such as Ultra Consultants—and utilizing implementation best practices can help control these costs. But be realistic about the level of effort required to get the full value from the ERP system.
- Ongoing Maintenance and Support
An ERP system requires maintenance and support expenditures for the duration of its use, including:
- Technical maintenance and troubleshooting
- Regular software updates and patching
- Monitoring and managing upgrades
- User support and training
- Ongoing customization/enhancements
Evaluate whether your in-house IT team can handle these needs cost-effectively. External vendor support and managed services may provide more robust capabilities while relieving the burden of support from your internal team, but at a higher price.
Vendor selection, contracting and software lifecycle management dramatically impact longterm TCO. Seek vendors with a track record of reasonable ongoing costs and backward compatibility between updates.
"Ensuring your ERP software keeps updating as you create your budget and estimate
"
the total cost of ownership is crucial. ERP vendors may not include upgrades in the base software costs, therefore, you need to ask them how frequently you require updates and if they are already a part of the base price."—Olivia Nicole, Medium Magazine3
Ways to Set the Stage for Greater ROI
Setting the stage for your ERP implementation success is crucial to maximize the ROI from the project. Consider the following key points when setting the stage:
- Contract Negotiation
Your contract negotiation during vendor selection lays the groundwork for the success and affordability of your ERP implementation. Scrutinize the fine print to understand all fees and costs, including:
- License purchase and maintenance
- Implementation and integration services
- Training and support
- Customizations
- Data migration
- Cloud hosting fees (if applicable)
Lock in the most favorable terms based on your organization's current and future plans, and negotiate discounts and incentives where possible. The upfront effort will pay dividends by keeping your total costs on budget.
- End User Training / Change Management
Many ERP rollouts stumble due to insufficient end-user training and change management.4 Employees may resist altering their work processes or struggle to use the new system efficiently. To drive adoption, provide role-based training that caters to different learning styles, and supplement with job aids, quick reference guides and post go-live support.
Change management is equally important to address fears, communicate benefits and foster engagement at all levels. Sponsor roadshows, training incentives and feedback channels to smooth the transition. The right training and change management techniques boost user proficiency, productivity and acceptance.
- Continuous Evaluation of Gains Compared to
Expectations Once your ERP system is operational, are you realizing the expected benefits? Establish processes to regularly evaluate performance against predefined targets across operational, financial and other metrics. For example, monitor order processing time, inventory turns, cash flow cycle, manufacturing output, etc.
This helps identify performance gaps and opportunities to derive more value from your ERP investment. You may need end-user refinements, additional training or new system capabilities. Quantifying your ROI demonstrates the business case for sustained improvements.
Where do the Greatest ROI Opportunities Come From?
Areas where a new ERP system can have the greatest ROI opportunities for your organization can be grouped into four major categories:
- Revenue Growth
One of the biggest potential impacts of an ERP system is enabling faster revenue growth. Advanced enterprise systems streamline your organizational processes across order management, pricing, customer service and support, making it easier to acquire new customers and drive more business from the existing ones. The key drivers for revenue growth include:
- Improved customer interaction efficiency
- Effective customer analytics
- Faster time to market with new offerings
- Optimized pricing and discounts
- Operating Margin
ERP systems significantly lower operating costs and increase profit margins via:
- Reduced general and administrative expenses through workflow automation
- Improved labor productivity in variable cost areas, such as manufacturing and order
fulfillment
- More efficient development cycles and production processes
- Lower logistics costs through supply chain optimization
- Reduced purchasing costs through consolidated spending
- Optimized inventory management to cut carrying costs
- Asset Efficiency
Gaining more output from existing assets is another area where ERP systems excel. Integration and reporting provide transparency into asset utilization. Business intelligence helps managers optimize asset usage. Key asset efficiency benefits include:
- Improved asset visibility for better utilization
- Data-driven management and governance
- Enhanced execution through workflow automation to improve throughput
- Proactive maintenance to extend asset lifetime
- Expectations and Company Strengths
Expectations is the final value group, and this value group is made up of company strengths. To ensure that ROI is calculated accurately, you must consider your expectations and align them with the projected benefits of the ERP project. Leveraging the strengths of your company— such as brand reputation, market presence and technological capabilities—enhances your potential ROI. VALUE GROUPS VALUE CATEGORIES
Revenue growth Sales volume
Selling General & Administrative (SG&A)
Cost of Goods Sold Operating margin (COGS)
Income Taxes
Property, Plant and Equipment (PP&E)
Asset efficiency Inventory
Payable and Receivables
Expectations Company strengths VALUE DRIVERS
- Acquire new customers
- Retain and grow new customers
- Leverage income generating assets
- Strengthen pricing
- Improve customer interaction efficiency
- Improve corporate shared service efficiency
- Variable cost productivity
- Fixed cost productivity
- Improve development and production efficiency
- Improve logistics and service position efficiency
- Purchase price deflation
- Improve income tax efficiency
- ●Improve PP&E efficiency
- ●Improve inventory efficiency
- Improve payable and receivables efficiency
- Improve managerial and governance effectiveness
- Improve execution capabilities
TCO (Total Cost of Ownership)
A full ERP deployment incurs costs beyond the software licensing fees, including hardware, integration, customization, training, support and maintenance over the lifetime of the system. Ignoring these additional expenditures risks severely underestimating the total cost and overestimating the return on investment (ROI) of the ERP project.
Breaking Down the Modules ERP systems consist of integrated modules designed to centralize data and processes across key functional areas—such as finance, human resources (HR), operations, inventory, manufacturing, sales and more. The number and type of modules deployed impact the overall software and implementation costs. Analyzing your current workflows and identifying which modules are crucial to improving your critical processes (vs. nice-to-have modules) are critical for your organization to avoid paying for unnecessary capabilities.
Examining the Tiers ERP solutions are segmented into tiers based on feature sets, complexity and suitable company size. Entry-level systems cater to small businesses with basic functionality, while enterprise-level ERPs have robust capabilities suited for large multinational corporations. The tier selected dramatically affects both upfront and ongoing costs. While a top-tier option provides comprehensive features, the fullest capabilities may be overkill for your organization if you just need core functionalities. Mid-size ERP solutions with intermediate features are often the best fit for many mid sized firms.
Potential ERP Software Total Cost of Ownership The table below highlights a sample total cost of ownership of an ERP system:
Tier 1 Purpose Built Tier 2 Capable Major Tier 1 Addressto Address Flow of Addressing ing Mid-Market Mfg. w/ Purchased Mid-Market FGs ERP Software Subscription Bolt-Ons / MODs Subscription (Annual)
Bolt-Ons (one-time)
IT Infrastructure
Implementation Services (External & Internal) Hardware (Estimates)
Additional Staffing
Software Subscription Sub-Total
Year One (All In)
Five Year TCO Five Year TCO Five Year TCO
Total Cost of Ownership
Only Year 2
Only Year 3
Only Year 4
Only Year 5
Summing it Up
To make an informed decision and justify your ERP investment, calculating the ROI is crucial. Considering both the anticipated returns and total cost of ownership allows your organization to accurately assess the potential benefits and costs associated with implementing your new ERP software.
Focusing on contract negotiation, end user training and continuous evaluation gains enables your organization to set the stage for greater ROI from the project. Following best practices— such as identifying value groups, understanding TCO and linking costs to value gains—ensures your organization achieves a more accurate and comprehensive calculation of expected ROI.
About Ultra Consultants The journey to a successful software implementation can be difficult. Ultra Consultants leads your organization through the complex process, helps you realize the significant benefits of modern enterprise technologies and gives you the tools to achieve your business goals.
As an independent ERP consultant firm, Ultra's mission is to help manufacturers and distributors achieve the full advantage of technology tools and processes. Our goal is to maximize the ROI of your investment. For more information and additional resources on how to bring our expertise right to your doorstep, visit us at ultraconsultants.com.
References
- https://www.sciencedirect.com/topics/computer-science/enterprise-resource-planning-system
- https://www.forbes.com/sites/forbestechcouncil/2022/06/29/build-versus-buy-thinking-beyond-total-cost-of-
ownership/?sh=7f5eb66f3a72
- https://medium.com/@olivianicole642/6-critical-factors-that-affect-erp-implementation-costs-b2297c3ac484
- https://ultraconsultants.com/erp-software-blog/how-to-fix-erp-failures/