Quantifying the benefits of Cloud-based ERP systems prior to implementation
December 16, 2015
By Pat Garrehy Rootstock Software
Dec. 2, 2015 – To be viable, implementation of a new manufacturing ERP system must have a tangible return that exceeds the cost of the software, hardware and human resources required to implement the system. Although everyone performs a cost analysis for the software and hardware, that is where the exercise typically ends. Most companies never perform a cost benefits analysis at any other point during an implementation.
Performing an ERP software implementation without a clear understanding of the benefits in terms of dollars and cents can result in big problems as the project progresses. Unfortunately, when problems occur, there is no obvious link to the lack of defined benefits. Fortunately, the problems that may and do occur can be avoided if the benefits of the ERP implementation are identified at the beginning.
Don’t make excuses for not performing a benefits analysis. These are not reasons to skip performing a benefits analysis.
• “We know our current systems are a mess. We just have to replace them.”
• “The cost side is easy, but we don’t know how to approach performing a benefits analysis.”
• “Management isn’t interested; they told us to just do it.”
• “We already have approval for the new system and the budget to go along with it.”
An integrated ERP system has positive impact across the entire business
Establishing benefits and associating them with the specific implementation costs will allow everyone to understand the impact of the decisions they make. Clearly understood, tangible benefits developed at the very beginning are critical. Benefits act as the basis for establishing meaningful, measurable goals and milestones for the system implementation project.
Milestones merely become tasks to be completed if they do not have tangible benefits associated with them. Tasks without clear benefits always take a backseat to completing other projects, such as finishing a product redesign, buying a piece of capital equipment or talking with the bank to establish a revised line of credit. Without tangible benefits, the implementation of a system to improve operations will never be a mission-critical activity.
Initially, tangible benefits provide concrete justification to management for the resources the project will consume. Nonetheless, it seems that the purchase and implementation of an ERP system is about the only capital project companies undertake where a Return-on-Investment (ROI) calculation is not mandatory.
Yet, knowing the ROI of an ERP system implementation is important because every system project, at some point, will be compared with other capital projects being undertaken in the business. If those other programs or projects have an objective return associated with them, the ERP system implementation will never have its justified priority with management.
New system implementations can be a lengthy process
Clearly defined, tangible benefits focus attention on achieving timely completion. Since the time frame for On Premise ERP implementations can be many months, it is easy for priorities to be changed for any one of a number of reasons. The justification that almost always seems to surface for making such changes is, “We’ve gotten along without the new system up to now. Putting off implementation another couple of months won’t matter.” Without tangible benefits, a system implementation can become a cost cutting exercise. When budgets and resources get squeezed, management starts looking for areas that can be cut back.
Just understanding this is reason enough to also determine the tangible benefits of a Cloud based ERP system. Cloud ERP, by its very nature, simply implements faster. If management understands the dollars and cents of the “lost opportunities” of waiting, a faster ERP implementation would retain its high priority.
With On Premise ERP installations, at some point, the question, “Where can we cut costs and still get the system implemented?” gets asked. By the time this question could be asked with Cloud based ERP software, the system is typically already up and producing.
Milestones established and supported by measurable benefits also establish accountability for results
Individuals accountable for the actual implementation usually have to perform their ongoing job functions during the implementation. When these implementers know that tangible results are expected through the achievement of an implementation milestone, they look at the activities surrounding the implementation in different terms. In general, benefits are typically achieved through reductions in inventory, direct and indirect cost, improved delivery performance and increased visibility. Here are a few examples of how companies have seen significant benefits.
Establishing demand flow procurement and inventory management
The first thing most companies examine is how much inventory reduction they will obtain with an effective ERP system. Industry analysts generally agree that between a 20 to 30 per cent reduction is achievable with improved management of raw material, parts, WIP and finished goods. Even if the incremental improvements are only 10 to 15 per cent, this still results in significant.
An area often overlooked is the direct labour and indirect labour costs in the production area. Direct labor savings flow from improved scheduling that balances workload and minimizes overtime. If a manufacturing firm is currently using a combination of Quickbooks and spreadsheets, they will be shocked on how much time is being spent feeding the spreadsheet system and emailing documents to substitute as a work flow system. Indirect labour savings resulting from modern ERP systems add up quickly. Most industry analysts believe that a 10 per cent reduction in labour costs is easily achievable.
Order entry visibility — establishing valid delivery commitments
Forecasting and scheduling improvements resulting from an effective ERP system will have a positive impact on purchased materials and components. With the ability to provide firmer commitments with predictable lead times to the company’s vendors, purchasing departments can negotiate better terms which can lead to five per cent reductions. There is a great opportunity for increased sales when delivery commitments are consistently kept. In addition, companies save money as missed deliveries usually mean increased indirect costs for expediting and freight, not to mention the management time also consumed.
New product introduction and management of engineering changes
Many companies are forced by market pressure or because of their basic business model to constantly introduce new products into manufacturing. This creates a communications overload between engineering and manufacturing. Today’s Cloud ERP systems have tools that help manage the intense demands new product introductions cause.
Project management tools for establishing milestones, work schedules and budgets can be established for engineering projects. Using these tools, management has the visibility to make sure projects are completed on time and within budget. For some companies that have problems meeting new product introduction goals, this is a potentially big return.
Additionally, implementing engineering changes to existing products can be a big problem for some companies. Poorly implemented engineering changes will lead to large amounts of scrap and obsolete inventory. Field service and reliability costs can become extreme if engineering changes are not managed well.
Integrated tools for managing cause and corrective action
Managing cause, corrective action and defect analysis can be a costly task for a company that does not have tools integrated within its manufacturing system. The quality modules of today’s systems have tools that help identify and track CAR’s and the activities associated with them. The ability to do all of this work and link it in an integrated manner with engineering change provides some companies with important, tangible payback.
Warranty and service
If a company does not have a clear understanding of exactly what it built, support in the field can be a costly nightmare. System tools should exist that allow a company to generate an exact as-built configuration for every product. Identifying the precise components used in any unit in the field becomes a routine matter, as does keeping track of replacement items used on those units through unit serialization.
Other tangible benefits
Each company must look at its specific situation to determine the areas that have the greatest impact for them. The benefits gained through improvements in any one of the areas discussed above more than justifies the cost of the implementation of a new Cloud ERP system.
How do you make sure focus is maintained after the benefits have been established?
Since the Cloud ERP implementation can take a number of months, there is still potential for a loss of focus. To make sure attention stays on the project, take the annualized benefit and divide it by 12. In doing so, the resulting number represents the cost of a one month delay in completion of the implementation. When everyone in the company understands the lost dollars associated with delaying the implementation, schedules and benefits are far more likely to be achieved according to the original plan.
Pat Garrehy is the founder, president, and CEO for Rootstock Software and has an extensive background as a software architect and engineer. With more than 30 years of management, sales and technical experience, Garrehy brings a unique blend of analytical focus and business savvy to the table.
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