erp cost benefits

© 2006 Prentice Hall, Inc. 5 – 11

Amity Business School

Costs of Implementing a New ERP



Enterprise Resource Planning (Second Edition). Copyright 2008, Alexis Leon. All rights reserved.

ERP Implementation and ROIERP Implementation and ROI• ROI analysis is becoming an important factor in influencing

the organizations’ decision to acquire ERP packages.• A demonstrable return on investment (ROI), is becoming a

must for customers to invest scarce capital and human resources in ERP packages.

• ROI models fall short in their ability to accurately measure the total value of an enterprise software investment are they are focused only on quantifiable (tangible) measures of return.

• The overall payback that enterprise software can offer to a company gives a more complete analysis of return. This analysis takes into account both the tangible and intangible benefits of the ERP systems.

• Intangible benefits include new business opportunities, improved customer and customer goodwill, better relationships with partners, suppliers and other business associates, improved time to market, etc.

• These intangible benefits contribute significantly to the success of a company's enterprise software implementation and use.




PPaayybbaacckk PPaarraammeetteerrss

• The overall payback that enterprise software can offer to a company gives a more complete analysis of return.

• The major key payback parameters are:1. Faster time to market2. Improved business processes3. Improved customer support4. Rapid capitalization of new business opportunities5. Lower implementation costs

• The sum of the parameters described by enterprise payback—tangible as well as intangible—offers a much more complete picture of the value of the software and services provided by a given vendor.




QQuuaannttiiffiiaabbllee BBeenneeffiittss ffrroomm aann EERRPP

1. Reduced inventory costs (by at least 20%)2. Reduced inventory carrying costs (by 25–30%)3. Reduced manpower costs (by 10% or more)4. Reduced material costs (by 5% or more)5. Improved sales (by 10% or more) 6. Improved customer service resulting in savings of

5% or more7. Efficient financial management resulting in

savings of 18% or more




The Intangible Effects of ERP

• ERP provides a framework for working effectively together and devising a consistent plan for action.

• The ERP system improves the efficiency of many departments and functions including:1. Accounting2. Product and Process Design3. Production and Materials Management4. Sales5. MIS Function




Other Factors• Many other factors that should be considered while justifying ERP

investments. • Some of them are quantifiable while others are intangible. The major

factors are:1. Lower implementation costs2. Lower production costs3. Lower business transaction costs4. Lower cost of reporting5. Lower personnel costs6. Lower business process change 7. Lower enhancement costs8. Supporting and enhancing the customer experience9. Supporting and enhancing the partner experience10. Enabling new business opportunities




RRiisskkss ooff EERRPP

• The implementation of ERP systems has been problematic for many organizations.

• The implementation of ERP systems can be a monumental disaster unless the process is handled carefully. Some of the well-known and well-documented failure stories are that of Hershey Foods, Whirlpool, Dow Chemical, Boeing, Dell Computer, Apple Computer, etc.

• Implementing an ERP project involves a certain amount of risk.

• The ERP system cannot be implemented in a totally risk free environment.

• The only thing that differentiates successful and flawed or failed implementations is the way in which the risks were anticipated, handled and mitigated.




MMiinniimmiizziinngg tthhee RRiisskkss……

• Prepare well—Meticulously plan each every step of the implementation.

• Have a contingency plan—There will always be unexpected problems; you should have a plan for those situations.

• Use a proven methodology—A methodology will help ward off risk, but a contingency plan is still absolutely necessary.




RRiisskkss ooff EERRPP

• ERP implementations are notoriously resource intensive, highly complex, time consuming and unpredictable in terms of cost and hence very risky.

• There are really three basic areas where problems can occur—people, processes and technology.

• Of the three risk factors, people issues are the most critical.

• People issues contributed to failed implementations in 69% of the case compared to process issues (18%) and technological issues (13%)




People Issues• People—employees, management, implementation team, consultants and

vendors—are the most crucial factor that decides the success or failure of an ERP system.

• The main people issues are:1. Change management2. Internal staff adequacy3. Project team4. Training5. Employee re-location and re-training6. Staffing (includes turnover)7. Top management support8. Consultants9. Discipline10.Resistance to change




Process Risks• The ERP system will introduce hundreds of new

business processes and will eliminate a lot of existing processes. Managing the implementation of the business processes is a factor that will decide the success of the ERP implementation.

• The main areas of concern are:1. Program Management2. Business Process Reengineering3. Stage Transition4. Benefit Realization




Technological Risks

• Keeping pace with the technological advancements is one of the very important issues that will determine the success of the ERP systems.

• Some of the technological issues are:

1. Software Functionality2. Technological Obsolescence3. Application Portfolio Management4. Enhancement and Upgrades




Implementation Issues• Many ERP implementations fail because they do not consider the various implementation

issues associated with a complex and risky project.

• Some of these issues are:1. Project Size2. Lengthy Implementation Time3. High Initial Investment4. Unreasonable Deadlines5. Insufficient Funding6. Interface7. Organizational Politics8. Scope Creep9. Unexpected Gaps10.Configuration Difficulties




Managing Risks• Ensuring a smooth ERP migration is complex and every

implementation involves a certain level of business and technical risk.

• Managing risk on an ERP project is crucial to its success. A risk is a potential failure point.

• The 5 steps to managing risk are:1. Find potential failure points or risks2. Analyze the potential failure points to determine

the damage they might do3. Assess the probability of the failure occurring4. Based on the first three factors, prioritize the risks5. Mitigate the risks through whatever action is

necessary




BBeenneeffiittss ooff EERRPP

• Installing an ERP system has many advantages—both direct and indirect.

• The direct advantages include improved efficiency, information integration for better decision- making, faster response time to customer queries, etc.

• The indirect benefits include better corporate image, improved customer goodwill, customer satisfaction and so on.

• Some of the benefits are quantitative (tangible) while many others are qualitative (intangible).




Tangible Benefits of ERPTangible Benefits of ERP1. Inventory reduction2. Inventory carrying cost reduction3. Reduction of lead-time4. Personnel reduction5. Cycle time reduction6. Productivity improvements7. Other management improvements8. Financial close cycle reduction9. IT cost reduction10.Procurement cost reduction11.Cash management improvements12.Revenue/profit improvements13.Reduced quality costs14.Improved resource utilization15.Transportation/logistics cost reduction16.Maintenance reduction17.On-time delivery improvements




Intangible Benefits of ERPIntangible Benefits of ERP1. Information visibility2. New and improved business processes3. Customer responsiveness4. Improved supplier performance5. Better customer satisfaction6. Cost reduction7. Integration of business functions 8. Information integration 9. Better analysis and planning capabilities10.Improved information accuracy11.Improved decision-making capability12.Standardization of business processes 13.Flexibility and business agility 14.Globalization of the organization15.Better business performance16.Supply chain integration17.Use of latest technology

erp cost benefits

Documents