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Archive for the ‘SERIES: Justifying ERP Costs (3 posts)’ Category

justifypic3In our previous two posts here and here we looked at some of the very real “hard” costs, or tangible benefits, that are typically derived from a successful ERP implementation.  We even put a few numbers to them.  In today’s concluding post, we’ll look at a few intangible benefits.  These may not result in hard dollar savings, but they are beneficial and often important nonetheless.

As noted earlier, the basis for many of our comments are from a report prepared by Compare Business Products.com.  Based on their research, previous industry research results, and our own experiences over more than twenty years, we feel confident that anyone who applies ERP correctly will receive benefits in line with those cited in our previous posts, and with our comments today.

Improvement in Process Design and Production  Since ERP provides a single, company-wide, unified silo of information about products, orders, customers, etc., it stands to reason that a company will have better control over process design and production.  Changes to products/orders can be managed in real time.  Everyone can be in the same information loop.  Production agility is improved, along with response times and overall visibility.  Additionally, ERP can often support ‘rules’ of configuration, thus improving the speed and flexibility of order building, BOM changes, and product customizations unique to customers.  Your entire team – and possibly even your customers with some additional work – can see for themselves what changes are or are not possible, and often, track their order status as well.  The end result is tighter supply chain integration between factory, customer and supplier.  But perhaps the real end result is improved customer loyalty and retention, and typically, sales too.

Improvement in Accounting Procedures  Here again, the common silo of information means less duplication, in this case, of accounting files and data.  A lot of paper can be eliminated with ERP through electronic document archival.  Accuracy is improved when there is only one set of data to work from.  Order and product costing can be faster and more flexible.  Work in process (WIP) can now be tracked, financial statements are automated and simplified, with greater accuracy, and most reporting can now be done more quickly.  Overall accuracy and timeliness of reporting is improved.  Best of all, a lot of redundant data entry is eliminated, thus saving wasted and unproductive labor.

Improved IT (or “MIS”) Functionality  With information in one place, under one software system, management information systems are improved when it’s no longer required to collate information from different sources.  With today’s newer systems, dashboards can be built to monitor key performance benchmarks, and users can usually drill-down to the source data they need on an ad hoc query basis.

In conclusion… add up all the costs we’ve noted, hard as well as your own estimate of the value of soft cost savings.  Even a fairly small manufacturing concern is going to see very real, six-figure annual cost savings once deployed.  And that’s a reduction in costs that goes on year after year.  And the more you grow, the greater the ratio of savings created by your ERP investment.  No matter how you slice it, when you do the math, the old adage is true of ERP: It doesn’t cost, it pays.

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justifypic2In our previous post we discussed two very real, very important cost benefits that accrue to companies who successfully deploy ERP systems.  The improvements to inventory and receivables are significant, and well documented.  As we noted, the typical $10 million factory can free upwards of a million dollars in newly available cash through inventory and receivables collection improvements.  Those are very real savings.

Those two areas alone are often capable of offsetting the entire cost of your ERP system – and then some.  Next we’ll look at still more areas where benefits accrue to the wise…

Reduction in Material Costs  ERP almost always leads to improved procurement practices.  As your forecasting improves, your order lead times shrink, and you run into fewer stock-outs as well.  Better advance planning of purchasing in turn leads to obtaining better discount breaks, terms and conditions from vendors.  When you improve your forecasting, they can improve theirs, and often you’re rewarded.  Typical figures cited in reductions to material costs for these reasons range around 5%.

Lower Labor Costs  Usually, ERP helps improve manufacturing practices (and helps you grow leaner), and as such you can reduce outages, interruptions, and with them, re-work, overtime and mistakes.  Better demand forecasting can level out production schedules, reduce the stresses of rush jobs and expediting, and optimize tooling and machine setups as you learn to stage your production runs better through improved MRP, scheduling, planning and forecasting.  Estimates are that ERP can reduce overtime and re-work by roughly 10%, while speeding up factory floor flow.

Improved Sales and Customer Service  One key benefit of ERP is improved levels of intra-company communications – a shared silo of information accessible to all users.  This improved coordination leads to shorter production leads and eventually to improved sales as you prove your ability to deliver.  The result is improved customer loyalty which always has a positive effect on sales.  Another benefits lies in ERP’s ability to improve production agility.  With proper planning and MRP, you can better accommodate order changes later in the process, and further improve customer loyalty and satisfaction.  The long-term effect is improved customer retention (and less customer loss), leading to notable increases over sales volumes pre-ERP.  A figure of 10% is often cited as typical here.

In this and our prior post we’ve tried to illustrate some of the proven benefits to ERP we’ve seen over the years, and as noted in a report by Compare Business Products.com.  These are the benefits that yield what we like to call “hard” dollar savings – quantifiable cost reductions (or revenue increases) proven to result from successful ERP deployments.  Collectively, they will return more than your original ERP investment — sometimes surprisingly quickly.

In our next and final post in this series, we’ll take a look at some of the intangible (or “soft”) – yet still very important – cost savings attributable to your ERP investment.  Stay tuned…

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justifypic1A recent article from an outfit that provides a variety of product info and comparisons to businesses, called Compare Business Products in Palo Alto, made some good points recently that reinforce what we’ve long known are the tangible, as well as sometimes intangible, cost savings and benefits that accrue to companies that effectively deploy ERP systems.  Their points are worth noting and highlighting in our post today.

The cost savings that accrue from a good business management system do more than just make you a better, more efficient company.  They actually pay for themselves.  And then some.  Let’s look at a few of the areas where research studies have proven this to be true.

Inventory Reduction  In a typical successful ERP implementation, the study’s authors state, “a 20% inventory reduction becomes a commonly achieved benchmark.”  That’s not just a one-time savings, but a recurring event that is further augmented through lower warehousing costs, less handling and transport, reduced obsolescence, and so on.  Together, the collective savings of improved turns and lowered costs can typically take upwards of 30% out of the costs for inventory related items in the manufacturing or distribution environment.

On the less tangible cost-savings side, let’s not forget the benefits that normally come in the form of stocking the right items, avoiding out-of-stock situations and their negative customer effects, avoiding the buildup of obsolete items, and having fewer part shortages to deal with – all the result of improved planning, MRP and visibility.

Finally, an implementation of something closer to just-in-time stocking will put any firm on track for a leaner experience, and free up funds for more important business needs.

Let’s combine inventory reduction savings with a related improvement typically caused by ERP]…

Improved Receivables (days of receivables ratio)  Research indicates that the number of days between invoice and collection, on average, goes from about 73 days to 60 once ERP has been established.  That’s a fairly significant cash bump, the result usually of improved billing procedures, visibility, aging control and accounting follow-up.

Combining inventory reduction and improved receivables in a $10 million (revenues) factory can lead to some serious cash improvement.  A typical company in this range might have around $3 million in inventory, perhaps $2 million in receivables, and $500,000 in cash available.  A reduction in inventory of even just 25% frees up around $750,000 in newly available cash flow, while an improvement of 13 days in A/R receipts per our average cited above, yields an 18% improvement (reduction in A/R), thus freeing up another $360,000.  Combined, the typical improvement produced by a well-deployed ERP system in a $10 million firm is over one million dollars.

And that’s just the beginning.  In our next post, we’ll look at a few other areas where ERP frees up cash, and creates other savings and benefits, resulting typically not just in a system that pays for itself, but one that can return those costs several times over.  Stay tuned…

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