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Identifying Value When Assessing Your ERP Needs

Logic-Data-Team-Mark-Miracle | August 12th, 2022

Over the past six years I have been involved in well over 60 ERP evaluations and upgrade projects, primarily with small to mid-size manufacturers.  It is somewhat disconcerting to see how long many of these evaluation projects take and how many of them eventually turn into a “no-decision”.   Outside of the cost, time and effort involved with implementing or upgrading an ERP, other common factors causing a reluctance to move forward are an apparent lack of urgency and/or executive backing.  Why are urgency and executive buy-in missing from these evaluations?  In my opinion it has to do with the difficulty in quantifying the benefits that a well-implemented ERP solution will have on the organization.

So how can a company go about quantifying the value of a new or upgraded ERP?  At a high level, most of us realize that a well-implemented system will:

  • Increase visibility to accurate, real-time data across the organization for better decision making and collaboration
  • Automate manual processes and eliminate redundancy to increase productivity
  • Improve customer experience through quicker responsiveness and execution

While the above is absolutely true and sounds really good, the difficulty is in attaching a real dollar value to the above benefits.  At this point you might think that it should be the software vendor’s responsibility to provide that value proposition.  Unfortunately, those value propositions are somewhat generic unless the vendor can get specific and transparent input from the client, who is the only one that understands their specific pain and how much it is costing them.  In the end, if you, the customer, understands how your current situation is creating problems, and what the revenue impact of those problems is, you are the only one that can put together a believable ROI.  But how do you do that?

The best way to explain the how is to take a hypothetical, but also somewhat typical, example and walk through the scenario, utilizing some of the most impactful common issues that small to mid-size manufacturers generally face.  Imaginary company ABC is a $50 million-dollar discrete ETO manufacturer of widgets that is embarking on an ERP evaluation from a 10-year-old system for some of the following reasons:

  1. Customer retention: Over the past six months, ABC has lost 3 of their existing customers due to missed promised delivery dates that can be directly traced back to improper scheduling.  ABC has 200 customers with an average revenue value of $250,000 annually, so over the course of a year the potential revenue impact to ABC could be $1.5 million.
  2. Customer acquisition: ABC has an annual revenue growth goal of 10% requiring the acquisition of 20 net new customers annually.  Over the past 3 months, ABC has lost two RFP’s due to an inability to commit to ongoing delivery requirements relating back to the inability to accurately forecast production capacity in a timely manner.  At a potential loss of 8 new customers per year this could have a potential revenue impact of $2 million.
  3. Loss of profitability:  At the beginning of the year, One of ABC’s suppliers raised the price of a component affecting approximately 20% of ABC’s COGS (cost of goods sold) requiring a 5% price increase across ABC’s product line to maintain current gross margin.  This cost increase was not captured by the finance department for 3 months due to lack of visibility into the purchasing function of the organization, resulting in a net revenue impact of approximately $625,000.
  4. Excess/obsolete inventory:  Due to a lack of data visibility between inventory management, purchasing and production, ABC’s recent annual physical inventory audit shows that they are carrying over $500,000 in obsolete inventory which could have been minimized with proper collaboration between departments. 

The above issues are just a few of the common problems that manufacturers face on a continual basis and, arguably, they represent a very simplified scenario.  The point here is that with just 4 common issues, based on a $50 million manufacturer, a reasonable case can be made to identifying over $4 million in revenue and $500,000 in income impact.  Even at a fraction of that amount, the need for an ERP evaluation would certainly be considered a high priority by the executive management team and result in high urgency.

In summary, before deciding to evaluate your current ERP needs, take the time to understand the specific issues that will be rectified through a new or upgraded solution and attach a reasonable dollar value to their resolution.  If that dollar value negatively impacts your annual revenue by more than 5% it is likely that the assessment will receive the executive backing and urgency that it needs.

On an additional note, and as many of you are aware, choosing a new or upgraded ERP does not automatically mean you will realize all the value that you have calculated through compiling your issues. To truly maximize that value, you need to choose the ERP solution that’s right for you, find an implementation partner that understands your business, and spend the necessary time, effort, and money to make sure you implement it correctly.    

For more information on evaluating and implementing ERP, see our full blog page

Infographic summarizing the steps to evaluate your ROI in financial terms when assessing your ERP needs

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