Traditionally, the return on investment (ROI) of any manufacturing software project is based on the tangible benefits that an organization is bound to experience after installation of the software. However, things are slightly different when determining the ROI of a manufacturing ERP project.
ERP solutions are meant to improve various business processes, usually in the long term. Therefore, it can take time for the benefits of an ERP to be measured or felt in the organization.
Despite this, it’s still possible to calculate ROI before purchasing an ERP solution. In fact, organizations need to factor in ROI in the ERP decision making process. How can the ROI of ERP be calculated?
Calculating ROI of Manufacturing ERP
An ERP system takes various data from multiple business processes and transforms the data into actionable information.
When ERP software is installed, manufacturing plant managers can have accurate data from various processes such as work in progress, accounts receivables, inventory levels, daily sales and other key performance indicators. With this information, fast and accurate decisions can be made and transactions can be tracked as they occur.
To calculate the ROI of ERP software, organizations need to determine the value that the new-found efficiency and capacity will bring to the business. The data provided by ERP software can help manufacturers in production scheduling, cost of goods estimation, purchasing, inventory control and process improvement. The result is more efficient use of fixed assets and decreased cost of variable production.
The real-time information available on an ERP software's dashboard can provide actionable information to manufacturers, enabling them to improve their time-to-market. For example, departmental managers can look at where a job is and if it’s falling behind, initiate measures to fix the problem rather than waiting until the job is complete to try figure out what went wrong.
Since information regarding various processes is being relayed in real-time, crucial decisions can be made faster and accurately. The net effect is speeding up of everything.
Factors Influencing the ROI of ERP
There are a number of factors that can affect the ROI of ERP. Some of these include:
i) Your organization’s objectives
Companies may be looking for a new ERP for different reasons. For example, business processes may have changed, companies may have merged, the existing ERP may not be producing the results anticipated, the licenses of their old systems may be expiring and so on.
However, unless there is a clear definition of the objectives that the management anticipates the ERP to achieve, it will be difficult to prove the benefits of any ERP system.
ii) The company’s strategy
For the impact of ERP to be felt, the operational staff and implementation team need to understand your company’s strategy and take steps to achieve it. If your business strategy is not accepted or well understood down the value chain, it will be difficult to see or measure the impact of ERP.
The implementation team should provide your staff will all the tools they need to deliver. Moreover, the IT maturity of the organization should be examined to determine if the environment is right for implementing a particular ERP system.
iii) Sustainability initiatives
Your company’s sustainability initiatives and waste reduction policies can also determine the ROI of ERP. Before opting for any ERP, organizations should examine what they can achieve with their current resources and plan for the future. The sustainability of the organization’s plan should be able to be monitored and reported on by the ERP system.
iv) Effectiveness of business processes
Companies have a unique way of doing their business processes, and there is always room for improving the various processes. However, if the staff members are too intimately involved in the processes, they may fail to see the possibilities of streamlining and eliminating redundant activities.
Moreover, without executive buy-in and involvement in the project, staff members are not likely to be fully committed to the project. As a result, the ERP may not deliver on the expectations.
The decision to deploy an ERP solution should be driven by relevant process improvement objectives. To determine the ROI of ERP, organizations need to analyze the likely ROI against specific process improvements identified through internal audits.