ERP Cost Benefits

2006 Prentice Hall, Inc.
5 1
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Amity Business School
Costs of I mplementing a New
ERP

2006 Prentice Hall, Inc. 5 2
2
Enterprise Resource Planning (Second Edition). Copyright 2008, Alexis Leon. All rights reserved.
ERP I mplementation 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.

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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 market
2. Improved business processes
3. Improved customer support
4. Rapid capitalization of new business opportunities
5. Lower implementation costs
The sum of the parameters described by enterprise
paybacktangible as well as intangibleoffers a much
more complete picture of the value of the software and
services provided by a given vendor.

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1. Reduced inventory costs (by at least 20%)
2. Reduced inventory carrying costs (by 2530%)
3. Reduced manpower costs (by 10% or more)
4. Reduced material costs (by 5% or more)
5. I mproved sales (by 10% or more)
6. I mproved customer service resulting in savings of
5% or more
7. Efficient financial management resulting in
savings of 18% or more

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The I ntangible 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. Accounting
2. Product and Process Design
3. Production and Materials Management
4. Sales
5. MIS Function

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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 costs
2. Lower production costs
3. Lower business transaction costs
4. Lower cost of reporting
5. Lower personnel costs
6. Lower business process change
7. Lower enhancement costs
8. Supporting and enhancing the customer experience
9. Supporting and enhancing the partner experience
10. Enabling new business opportunities

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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.
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Prepare wellMeticulously plan each
every step of the implementation.
Have a contingency planThere will
always be unexpected problems; you
should have a plan for those situations.
Use a proven methodologyA
methodology will help ward off risk, but
a contingency plan is still absolutely
necessary.

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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 occurpeople, 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%)
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People I ssues
Peopleemployees, management, implementation team, consultants and
vendorsare the most crucial factor that decides the success or failure of an
ERP system.

The main people issues are:
1. Change management
2. Internal staff adequacy
3. Project team
4. Training
5. Employee re-location and re-training
6. Staffing (includes turnover)
7. Top management support
8. Consultants
9. Discipline
10. Resistance to change

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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 Management
2. Business Process Reengineering
3. Stage Transition
4. Benefit Realization

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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 Functionality
2. Technological Obsolescence
3. Application Portfolio Management
4. Enhancement and Upgrades

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I mplementation I ssues
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 Size
2. Lengthy Implementation Time
3. High Initial Investment
4. Unreasonable Deadlines
5. Insufficient Funding
6. Interface
7. Organizational Politics
8. Scope Creep
9. Unexpected Gaps
10. Configuration Difficulties

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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 risks
2. Analyze the potential failure points to determine the damage
they might do
3. Assess the probability of the failure occurring
4. Based on the first three factors, prioritize the risks
5. Mitigate the risks through whatever action is necessary

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Installing an ERP system has many
advantagesboth 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).
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Tangible Benefits of ERP
1. Inventory reduction
2. Inventory carrying cost reduction
3. Reduction of lead-time
4. Personnel reduction
5. Cycle time reduction
6. Productivity improvements
7. Other management improvements
8. Financial close cycle reduction
9. IT cost reduction
10.Procurement cost reduction
11.Cash management improvements
12.Revenue/profit improvements
13.Reduced quality costs
14.Improved resource utilization
15.Transportation/logistics cost reduction
16.Maintenance reduction
17.On-time delivery improvements

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I ntangible Benefits of ERP
1. Information visibility
2. New and improved business processes
3. Customer responsiveness
4. Improved supplier performance
5. Better customer satisfaction
6. Cost reduction
7. Integration of business functions
8. Information integration
9. Better analysis and planning capabilities
10. Improved information accuracy
11. Improved decision-making capability
12. Standardization of business processes
13. Flexibility and business agility
14. Globalization of the organization
15. Better business performance
16. Supply chain integration
17. Use of latest technology

ERP Cost Benefits

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2006 Prentice Hall, Inc.

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