For many businesses, the primary key performance indicator for any new product, service or process that will be implemented in the business is the return on investment. This metric determines whether it is profitable to commit to any changes to current operations. One area where this is extremely important is enterprise resource planning software. It doesn't matter if it's switching from one platform to the new Microsoft Dynamics NAV 2015, upgrading to it or just installing an ERP system outright for a manufacturer. The benefits have to outweigh the costs of implementing it. However, knowing how to measure ROI can be just as important, for sometimes the benefits aren't obvious.
Identifying costs and benefits
With ROI in any situation, it's relatively easier to determine the costs of an ERP implementation than the money actually saved. That's because the benefits have to be fully realized before they are measured. Companies should at least assess the price tag of the software to start. In cases like Dynamics NAV, finding out how much the modules such as warehouse management systems cost is also an important factor. You should also consider how much it would cost to add third-party modules such as timekeeping software.
There are also other cost issues, as IT Toolbox notes. For example, there may be multiple licenses required, depending on how many employees are actually going to use the software. Maintenance fees are also a major factor. When using the cloud, a business should calculate the subscription fee of the software over the course of a year or two, depending on how often you expect the software to have major updates.
Then, there is the consideration of benefits. The primary reason a company decides to implement ERP software is because it can improve efficiency in that manner. There are also tangibles such as better waste management through inventory control. However, these advantages can only be realized by making changes to specific business processes. Once these are understood, only then can ROI be effectively calculated.
On the basis of time
Of course, ROI can vary based on certain measures, depending on the project. More importantly, however, one measure that isn't looked at is time. Without looking at the timing of payments and when returns are expected, there's a very good chance a company will be adversely affected or vulnerable because of how costs are laid out, according to ERP Focus.
This matters a lot more when it comes to using the cloud. Many of the costs associated with using cloud-based ERP are often at a low monthly rate. However, that rate over time can exceed the upfront cost of an on-premise solution in the same time span. The return on investment can be greatly impacted by this issue, especially when matters such as obsolescence come to bear.
As a result, projects with similar ROI can have different results overall. A company looking to implement a new ERP solution should greatly consider the amount of time it would take to complete all the payments required.
Learn how to define your ERP strategy by downloading the white paper entitled "ERP in Manufacturing: Defining the ERP Strategy" from the DMS website today.