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Understanding Return on ERP Investment

On Thursday, 10 Sep 2015
Understanding Return on ERP Investment

Most organizations spend a significant amount on an ERP deployment effort. They involve their IT managers and operational managers into the implementation project. Typically these projects last from 6 to 18 months or even more in case of larger businesses with complexities. The IT heads however, fail to demonstrate the effectiveness of the ERP implementation to their seniors or the CEO of the organization.

So how exactly can you measure the Return on your ERP investments?
How to Measure the degree of success / positive business impact brought in by the ERP?

There is no single answer to these questions. For every ERP Implementation, there will be some tangible as well as intangible benefits. The initial investment may look heavy at times, but it generates returns which will not only aid business growth but also improve the teamwork and morale of the organization.

Every organization has different set of parameters to judge the effectiveness of the implementation. The organization must have a Baseline ready prior to the ERP Implementation. These baseline numbers will help measure the improvements in the performance post-ERP implementation.

However, we can classify these parameters broadly into the following categories –

Process Improvements

ERP implementation is often also a process improvement initiative for the business. Businesses need to identify several Key Performance Indicators or KPIs and prioritize them. Businesses should identify KPIs for each of their business operations like Procurement, Manufacturing, Sales & Distribution, Human Capital, etc. These will be different for different form of business activities. For example, for discrete manufacturing businesses, Job throughput time, Line throughput time, etc. could be the KPIs that are critical. Once these KPIs are selected, they need to be benchmarked against the Industry standards. This will help the business understand if ERP has helped them improve their competitiveness score.
For Example,

  • Improvement in Time
    • Reduction in Cycle Time
    • Improvement in Delivery/ Shipping Time
    • Customer Lead Time
    • Plant Uptime/ Downtime
  • Reduction in Certain Costs
    • Inventory Costs
    • Administrative Costs
    • Operations Costs
    • Labour Costs

These KPIs may be related to Cost, Time, Quality, Compliance, etc. and completely depend on the operational activities critical to the business. Once these KPIs are benchmarked, they can then be compared with the actual performance post-ERP implementation to judge the effectiveness of the deployment on these processes. A significant part of ERP success lies in the continual process improvements and bringing down the Operational Costs & Timelines.

Integrated Information, Better Information Visibility & Reporting

ERP should improve visibility & availability of data across business functions and integrate information. One of the primary jobs of any ERP system is to capture the day-to-day business transactional data. Some of the key parameters to consider ERP success are –

  • Reduced Time to integrate data from different departments
  • Faster Internal Process lead times

ERP implementations should result in easier availability of drill down reports which provide accurate, real-time information in a centralised manner.

Management needs to define the set of reports they need to generate from the ERP systems during the ERP planning phase. Post-implementation of the ERP, these reports aid the management decision making process and help them make better customer & business predictions and accurately formulate the business strategies for the future of the organization.

Better Supplier Relations

Organizational success also depends on the relationship it maintains with the Suppliers. ERP systems should help the business report the performance of their suppliers –

  • Services levels – quality
  • Contract management & payments
  • Response time, etc.

Supplier cost optimization is critical to better bottom line for the business.ERP system should enable the management to filter out unprofitable supplier relations and switch to a better supplier in real-time without any cost leakages.

Customer Experience

Analyzing the key customer satisfaction parameters is vital to business growth and decision making. The end goal of any business is more net new customers and repeat business which will bring sustainable growth. Some of the parameters which can be taken into consideration are –

  • Customer Retention
  • SLA Compliance
  • Issues/ Query Resolution
  • Delivery Time
  • Net promoter score

An effective ERP System should ideally provide the business decision makers with all the above parameters.

The Return on Investment from your ERP deployment is a function of all the parameters and factors listed above. They will definitely reflect in the Sales Revenues or the Cost reductions for the business.

Recovery of the investments in an ERP system is gradual and incremental in nature. But usually in the long run, ERP implementations generate significant annual cost savings by improving the processes and bringing in the ability to do more with less.

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