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Return On Investment (ROI) On ERP Implementation

ERP system implementation can impact your business very broadly, and sometimes in unexpected ways. Not all of these impacts are easily measurable, but an ROI analysis is a helpful starting point...

ERP system implementation can impact your business very broadly, and sometimes in unexpected ways. Not all of these impacts are easily measurable, but an ROI analysis is a helpful starting point. Of course, the situation matters, and you will need to apply your best judgment based on the circumstances.

At Synconics, we recognize that selecting an ERP system is a substantial investment in terms of time and money. Estimating the ROI before selecting and purchasing an ERP system can help lower overall costs.

When a proposal is put forward for implementing an ERP system, two questions are invariably asked:

    How much it is going to cost?

    What is the payback period?

ROI in the context of an ERP project:

Return on investment does not just imply in terms of financial gain. It can be in terms of the growth in productivity, efficiency, or in terms of overall improvement in the performance of the company or even to the extent of better transparency in the operations being carried out by the firm and of course, the satisfaction of the users.

While going for ERP implementation, it is very essential that the return on investment does not just imply in terms of financial gain. Of course yes, there are financial gains in the long run. But, let us see, what the other ways of realizing a significant return on investments are.

Streamlined processes:- Existing processes are streamlined properly due to proper flow in data across departments.

Data Consistency:- Streamlined processes result in consistency of data across the organization as it is centralized. There is no need for every department to store data separately.

Improvements in productivity:- Data consistency removes the burden of impertinent work from staff and managers. This helps them concentrate in their core duties and hence results in improved productivity.

Reduction in redundancy:- Centralized database ensures that the customer order need not be stored in separate departments redundantly. One unique id generated per customer or per order, helps various departments access the same data.

Increased transparency:- As told before, a unique id for every order helps departments know the status of the order well in advance. This results in transparency across the organization and helps individual process manager’s plan in advance.

Key ERP ROI Measurement Parameters:

  • Reduced level of inventory through improved planning and control.
  • Improved production efficiency which minimizes shortages and interruptions.
  • Reduced materials cost through improved procurement and payment protocols.
  • Reduced labor cost through better allocation of staff and reduced overtime.
  • Increased sales revenue, driven by better managed customer relationships.
  • Increased gross margin percentage.
  • Reduced administrative costs.
  • Reduced regulatory compliance costs.

Calculation of ROI:

First step is to determine cost of various components of the project such as consulting fees, license fees, modification and implementation cost, hardware cost etc. Maintenance fees for a pre-determined period (say for three or five years) should be added to arrive at Total Cost of Ownership over the specified period. The estimated expenditure should be time phased over the period, used to calculate TCO.

Next step is the more difficult part which is to estimate expected benefits over a period of time. For estimating these figures, there should be wide consultation and reference to statistics emanating from various survey reports. Benefits will largely occur from the reduction of inventory level, operation cost, labor cost and improved production. Whereas the last three elements will have a direct impact on profit and loss account, the reduction in inventory will cause release of additional cash which can be assigned to a yearly value of saving, based on organization’s standard internal rate of return.

Relationship between time phased cost and benefit will project a time phased ROI, which will be negative at the outset and will turn positive over the payback period.

All the above-mentioned points ensure smooth processes across the organization. Smoother processes improve productivity, which in turn results in timely and consistent delivery. Consistency in operations and delivery will improve the credibility of the organization in the market and help become profitable in the long run.

Therefore, implementation of ERP indirectly impacts the profitability and hence the return on investment can be significantly realized.

IT is not only the successful implementation of ERP is the prime objective of Synconics project management team, but also to help achieve a return on investment (ROI) in the shortest possible time.

1 Comment

  1. Stuart says:

    Great blog! Very informative and helpful to know about how important is an ERP system and the ways in which it will improve the business. Thank you for sharing.

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