As the owner of a small or medium-sized business, you feel it’s time to invest in an ERP system to gain a complete picture of your company, its processes, cost drivers, and opportunities. But before you spend $25k-50k (for a small business) or $50k-75k (for a medium-sized business), you need to know about the potential ROI.
Everyone cites the ROI of improved inventory management, which runs approximately 20% in improvements in inventory reduction, expedited shipping costs, replenishment spending, stockouts, and more. (To understand the full inventory-related ROI story, read here.)
This post examines the other top sources of ERP ROI from implementing a new ERP system.
According to the journal Trading Economics, the average pay for manufacturing labor in the United States is $21.35 per hour; depending on your location, that number can vary from $17 to $25 per hour. To manufacture well, expect to pay closer to the $25 per hour rate for the skilled labor you’ll require.
Given labor costs, regularly paying overtime eats up your profits; ERP pays big here by allowing you and your managers to plan and schedule production jobs to reduce downtime and improve efficiency. You can expect a 20% reduction in labor costs if you lacked robust job and material tracking and other efficiency measures before your ERP implementation.
Imagine having your major company functions operating from a single system. Everyone has visibility into the data they need to do their job faster and more effectively. Where’s the customer payment? Who approved a 10% product discount for customer X? Did we order the raw materials for next Wednesday’s production run for customer Y? ERP reveals customizable cross-functional data to eliminate overhead budget wasted on the ‘basics,’ and you can expect your administrative costs to drop by 5-10% post-ERP implementation.
Your company likely orders either too much or too little for production runs meant to fulfill an order. But ordering too much equals overly high material costs while ordering too little equals excessive expedited shipping costs. With a modern ERP system, you can automate sophisticated materials requirements forecasting and ordering. Companies that automate forecasting and ordering cut an additional 10-15% off their inventory management cost.
Put it Together for Big ROI from Job Costing
ERP can act as a job costing system, allowing you to calculate exact costs for the materials, labor, and overhead required to produce an item. ERP gives you the hard data you need to determine the job-specific profitability of any item, allowing you to quickly identify the products yielding high margins and those dragging your margins down. Job costing helps you focus the business at a strategic level.
Better job costing also provides ROI at the operational level. Perhaps you have just one manufacturing line available next week but two potential fast-turn orders. Which should you produce? ERP can merge revenue and job costing information to help you make this decision.
For longer-term operational ROI, ERP can provide productivity measurements and results for individual workstations, specific employees, work groups, and more. You can measure who and what make you most profitable – are you incurring higher rates of production scrap when Jim works on machine 2 instead of Ted? Why is machine 3 yielding 10% less of product Z during second shift’s production? Who are the bottom 20% of production workers in terms of performance? Answers to these types of questions will set your targets for promotions, layoffs, and new hiring.
Beyond inventory management, a new ERP implementation provides significant ROI to SMB manufacturers. From labor and admin to materials and job costing, the significance of an ERP’s ROI should justify any investment.