Business Case Justification

ROI Services

Most companies will complete a capital expense justification (return on investment, or ROI, analysis) before committing to an ERP system. ROI analysis is the process of identifying the expected direct and indirect costs of the project compared to the benefits, both over some reasonable lifetime – typically 5 to 10 years for an ERP system. If the return is sufficient to meet board and lender requirements, the project can be given the green light. Every company’s situation, needs and solutions are different and therefore each company’s costs and benefits will be different.

While perspective vendors will volunteer to do this for “no-charge,” it is most often viewed skeptically. SelectHub provides an independent, unbiased consultant to conduct a thorough cost justification and ROI analysis.

If you have the resources internally, the following list should provide a good starting point for your own ROI calculations.

Purchase and implementation costs
Computer hardware, operating system, database, networking and tools including installation, startup and testing
Application software (ERP) license, installation, tailoring, data conversion/loading
Procedure development, testing and documentation
User training
Vendor and consultation assistance with implementation

Note: Cloud/SaaS systems are priced differently with little or no upfront (capital) cost but higher ongoing (operating) costs. Nevertheless, ROI analysis is still valid as long as the timeframe (expected lifecycle) is appropriate.

Ongoing Costs

Many will be replacements and changes (up or down) from existing costs.

IT departmental costs for utilities, personnel, consultants and support
Software annual licensing/maintenance fees
Continued training for skills enhancement and new employees
Budget for system expansion and enhancement
ERP project justification: return on investment (ROI)

Benefits

Direct benefits fall into two general categories: 1) cost savings and cost avoidance; and 2) increased revenue and profit. However, all benefits from ERP flow from:

Having greater visibility to demand and schedules
Closer management of materials, equipment and personnel
The ability to better manage workflow and production schedules
Greater coordination of resources to efficiently deliver the right products in the right quantities at the right time

Cost Savings and Cost Avoidance

Inventory reduction, including materials, parts, finished goods and work-in-process
Increased productivity and throughput in the plant
Reduced scrap, rework, expediting and wasted materials
Less overtime, expediting, premium freight and additional setups due to last-minute schedule changes

Increased Revenue Opportunities

Increased sales due to better customer service, improved quality, better on-time delivery and shorter lead time
Sales and margin improvements due to faster time-to-market for new products and product variants, cost reductions

Indirect Benefits

These are a little harder to identify and measure, but can be at least as valuable as direct savings and return.

Improved retention and higher productivity from employees who are less frustrated and more effective in their jobs
Less panic, disruption, and chaos in the plant and in the office due to fewer last minute changes and surprises; more stable schedules; less expediting
Smarter moves in the market – pricing decisions, specials, product releases or changes, inventory deployment, to name a few – due to better information and insight into market conditions, customer needs and competitive activity

There are many more factors to consider when developing a complete ROI statement. Just be sure to go through the process and document the results, not only to justify funding the project, but also to provide visibility and motivation to all project participants. This ensures they know the project is worthwhile, important to the survival and success of the company in the coming years, and that there is a benefit for each and every employee, department and functional area throughout the company.

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