There have been a series of articles on this subject and the topic is covered in almost every software manufacturer’s PowerPoint presentation to a new prospect. There are many reasons, including growing revenues, creating business efficiencies, aligning the various departments of a company into a cohesive unit and so on. Lofty goals all.
The truth is that every company has a unique set of circumstances and will require its own way to justify a major project. In general, a good approach is to look at the investment from both a quantitative and qualitative perspective.
Let’s begin with the quantitative. 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 percent reduction is achievable with improved management of raw material, parts, WIP and finished goods. Even if the incremental improvements are only 10 to 15 percent, this still results in significant savings.
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 percent reductions.
An area often overlooked is the direct labor and indirect labor 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 labor savings resulting from modern ERP systems add up quickly. Most industry analysts believe that a ten percent reduction in labor costs is easily achievable.
The last quantitative area to discuss is accounts receivable. With a manufacturer’s ability to product error free and timely invoices, the turns on receivable can be improved around five percent, resulting in a significant improvement in cash flow.
Again, each company is unique. If a company has years of experience in implementing incremental manufacturing operations improvements, it may see savings below industry averages. On the other hand, if the company has been growing and using minimal production support systems, it may see higher than average savings. Some companies may find other areas of the business that willyield significant cost savings. The best advise when developing the economics is to be consistent, be realistic and develop a real world narrative around each savings category.
Stay tuned for Part 2!