Any company utilizing an enterprise resource planning system like Microsoft Dynamics implementation expects a return on investment. However, many companies do not consider this factor when choosing a system. Fully implementing an ERP program requires considerable time and resources and companies need to not only know that the long-term investment will be recovered, they should also be aware how long it will take.
Tracking and measuring the ROI for the ERP means companies can find the point where the initial costs transform into savings. As Compudata noted, it's crucial for companies to maintain an accurate costs and benefits analysis of their system. Once the company can make the determination that the investment has paid for itself and has begun providing savings to the business, executives can begin allocating funds for new procedures or products.
There are two basic measures to calculate the return on an ERP investment: the payback period and the annualized percentage comparison. The first method refers to how long it will take for the cumulative return on the ERP program to match the cumulative cost. If a company forecasts that it will take a considerable amount of time for the system to pay back the initial investment, it becomes a less attractive option.
As opposed to the payback period measurement, the annualized percentage comparison method involves differentiating between the average return of the current program and an alternative competing system. By choosing the optimal annualized percentage, companies can ensure they are making the best choice, even if the cumulative return takes time to materialize.
ERP ROI parameters
There are tangible benefits that warehouse managers can use to track these savings. The improved planning and control provided by a resource planning strategy allows companies to reduce inventory levels. By holding less stock, companies can be more flexible and quicker to adapt to the market's fickle demands. This can improve production efficiency, leading to a decrease in shortages and interruptions. ERP systems refine staff allocation and payment protocols with better timekeeping software, which reduces labor costs.
Another way to establish parameters and measure results is through key performance indicators. Executives must establish criteria that they can utilize to measure ERP success. Setting up agreed-upon standards that helps visualize and track important markers lets businesses get the most out of their resources and identify ways to increase productivity. By meeting these KPIs, companies can ensure they receive a higher return than their initial investment and end up saving money in the long term.
According to a research paper titled, "Key Performance Indicators used in ERP performance measurement applications" by A. Selmeci, et al., ERP KPIs can improve the value and quality of a process, product, tool or employee using the system. Several KPIs exist that warehouse managers can implement:
- Action-based indicators involve triggers for changes in control of an organization.
- Value-based ones include a measurable quantitative value such as a number.
- Goodness or directional touchstones specify whether the system is improving the organization, tool or employee's work.
- Financial benchmarks measure performances and operating indices.
- Process-based or practical standards evaluate business processes.
Measuring results by establishing ROI parameters and KPIs allows businesses to ensure they are saving the most money with their ERP System.
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