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Quantifying Change

Benefits Costs
Acquisition and Installation Ongoing

Financial Evaluation
Benefit/Cost Ratio ROI

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Benefits of an ERP System


How we justify the ERP system that we need to quantify the dollar value of the benefits of an ERP implementation in order to show how the implementation can pay for itself. Time savings that time savings are those benefits that reduce the time required to perform or oversee different operations. Some examples may be Less time required to perform operations (ease of use) Less supervision required of employees (standardization of work flow) Increased productivity productivity benefits are those that increase the efficiency of activities. Some examples may be Improved system process efficiency Time saved by not waiting for help or being idle Time saved searching for and retrieving information Improved quality that quality benefits are those benefits that improve the quality of activities and processes. Some examples may be Fewer data entry errors One-time data entry Reduction of setup errors resulting in business problems/scrap Improved customer service 2-1
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Benefits of an ERP System


Better employee quality of life that employee quality of life benefits are those that improve the way employees feel about themselves and their work. Some examples may be A voiding hiring new or additional employees Better utilization of time Less absenteeism due to stress with system Improved customer service that customer service benefits are those that improve our performance in the eyes of our customers. Some examples include Increased market share Decrease in customer complaints More consistent and reliable delivery performance Decrease in warranty claims Increased sales / market share customer service Reduced inventory and obsolescence that reduced inventory benefits are those that result in a reduction of inventory or a reduction in obsolescence of inventory. 2-2
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Time Frame
Benefits do not come all at once Time frame (e.g., 5 years) Longer term: market share, profitability Short term: inventory turns, lead times

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Potential Time Savings Benefits


Less time required to perform operations
(Hours saved dollars per hour)

Less supervision required of employees


(Hours saved dollars per hour)

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Potential Productivity Benefits


Improved system process efficiency
(Dollar value of additional units, sales, etc.)

Time saved by not waiting for help or being idle


(Hours saved dollars per hour + hours of helpers time saved dollars per hour)

Time saved searching for and retrieving information


(Hours saved dollars per hour)

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Potential Quality Benefits


Fewer data entry errors
(Dollar cost of errors decreased mistake level)

One-time data entry


(Dollar cost of data entry redundant data entry)

Reduction of setup errors resulting in business problems/scrap


(Dollar cost of error decreased number of setup errors)

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Potential Employee Quality of Life Benefits


Avoid hiring new or additional employees
(Recruiting salary and benefits savings)

Better utilization of time


(Hours freed dollars per hour opportunity cost of freed hours)

Less absenteeism due to stress with new system


(Hours of increased productivity dollars per hour + cost of hiring a temporary worker)

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Potential Customer Service Benefits


Increase in market share
(Percent increase in market share dollar value of increase)

Decrease in customer complaints


(Number of complaints dollar cost of complaint)

More consistent and reliable delivery performance


(Reduced late deliveries Dollar cost of late delivery)

Decrease in warranty claims


(Reduced warranty claims dollar cost of claim)
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Potential Benefits of Reduced Inventory


Lower amounts of inventory
(Inventory reduction dollar cost of holding inventory)

Reduced storage space


(square footage saved cost of space)

Time savings of handling inventory


(inventory handling time dollars per hour)

Reduced obsolescence
(Reduced inventory obsolescence dollar cost of items)
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Costs of an ERP System


Identify initial acquisition and installation costs Identify all ongoing costs

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Initial Costs
Acquisition
Needs identification Initial review and selection of software and hardware Purchase cost of software Purchase cost of hardware Consultants

Installation
Project implementation team Initial training Documentation Temporary personnel Consultants Decrease in productivity

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Ongoing Costs
All costs that are going to be incurred on an ongoing basis Fees and Taxes
Software licenses Upgrades Maintenance and support Taxes on fixed assets

Human Resources
Support staff Training Consultants

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Return Formulas
Two common formulas for calculating return are BENEFIT/COST RATIO
Total Dollar Value of Benefits* Benefit/Cost Ratio = Costs of ERP Implementation

RETURN ON INVESTMENT
ROI = Net Dollar Value of Benefits* 100 Costs of ERP Implementation

Time frame of both costs and benefits MUST be the same (e.g., 5 years)
* Net Dollar Value Of Benefits = Total Value of Benefits Costs of Implementation 2-13
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Benefit/Cost Ratio Example


Total Dollar Value of Benefits: $1,200,000 Benefit/Cost Ratio = Costs of ERP Implementation: $864,150
Benefit/Cost Ratio = 1.39

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ROI Formula Example


Example:

Total dollar value of benefits:


Minus Costs of ERP system: Equals Net Dollar Value of Benefits:

$1,200,000
$864,150 $335,850

Net Dollar Value of Benefits: $335,850 100 = 38.9% Costs of ERP System: $864,150 38.9% ROI over 5 years
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Session 2 Summary
Quantify the need for change Identify and quantify benefits Identify initial acquisition and installation costs Recognize ongoing costs Calculate the ROI for an ERP system Write a business case to justify an ERP implementation
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