Over the past three decades enterprise resource planning systems (ERP) have become ubiquitous throughout the manufacturing industries. They have become foundational for most companies looking for an application that enables them to perform basic business operations in the most efficient way. At the other end of the needs spectrum, ERP packages also incorporate a large amount of industry specific business functionalities that ensure the costs of such systems are not as exorbitant as is usually the case in completely custom software packages. In short, the vertical hierarchy of ERP software helps organizations adopt the system faster and too a large extent help provide growing organizations by provide a framework of processes for their business.
One of the distinct advantages of using a robust ERP system is that it is an integrated solution for the entire business. Typically, before implementing an ERP system, a manufacturing business (large or small) will employ multiple and disparate operations software systems that usually don’t communicate with each other very well. Additionally, custom-built applications not only become difficult to manage, but they also pose unique challenges in terms of upgrade or adaptation to the latest technology standards.
By contrast, ERP not only provides a fully integrated solution for all aspects of business it also comes with its framework of upgrades to changing technology. These upgrade paths and software improvements are usually defined, and the upgrades provided, by the ERP vendor.
Generally, assessing the ROI of an ERP software system can be a very detailed—and sometimes arduous—task, and one that many IT managers (and even ERP vendors!) tend to overlook. Sometimes, this is because IT managers don’t know how to properly measure the ROI, or they simply aren’t interested in measuring it at all. For example, in many larger manufacturers, the common sense is that ERP is an essential part of the organization infrastructure cost and therefore there is no reason for assessing ROI—it’s simply a tool absolutely necessary to do business in the first place.
Understanding the ROI of your ERP depends on understanding that a reliable answer will require the that many of the benefits are intangible and gained through such things as the streamlining of processes, improved availability of information, real-time integration of data centers, and other competitive advantages that are often hard to assess.
The various costs of the ERP system itself also need to be considered in the ROI assessment. These costs might include license costs, software costs, and implementation costs for the system, in addition to the costs of training staff. These costs must then be measure against the revenue advantages gained, which might be directly quantifiable based on reduction in cost or improvement in productivity (e.g., reductions in staff, elimination of paper work, and purchasing costs). Finally, other ROI measures should include intangibles such as improved opportunities for future accrual, better time to market for products, increased sales, and/or improvement in manufacturing practices.