As corporate budgets continue to get tighter, executives need more compelling reasons to approve large budget items. ERP systems are no small investment so the decision to implement a new system is usually supported by a careful analysis of cost, payback period and expected benefits. Before a kicking off a project of this magnitude, every executive needs to know: what’s the expected ROI?
The good news is that this question isn’t too difficult to answer. While quantifying intangible benefits can be tricky, ERP ROI can be calculated simply by dividing monetary gain minus the cost of the investment by the total cost of ownership (TCO). An ROI analysis coupled with an analysis of intangible benefits and key performance indicators can build a strong business case for an ERP implementation.
Following is a list of tangible benefits to look for when estimating ERP ROI:
- Reduced inventory levels through improved planning and forecasting
- Reduced materials costs through improved accounts payable practices
- Reduced labor costs through improved allocation and efficiency
- Minimized interruption and shortages through improved production and scheduling
There are also many intangible benefits that can be realized through an ERP implementation:
- Improved customer service through on-time shipments and shorter order-to-shipment cycles
- Improved accounting practices through shorter sales cycles
- Improved legal and regulatory compliance
- Streamlined and integrated business processes through standardization across departments
Together, an ROI analysis and an analysis of expected business benefits can convince executives to invest in new ERP software. A successful ERP implementation is worth the time and effort it takes to develop a convincing business case.