Implementing an Enterprise Resource Planning (ERP) system is a respectable investment for any manufacturing business. While the upfront cost can feel daunting, we assure you the benefits of ERP solutions are well worth it.
But how do you know for sure that your new ERP system is worth the investment?
In this article, we’ll explain how to calculate ROI of ERP implementation. We also include five best practices to ensure you see positive results as quickly and consistently as possible. This article will help you set the best goals, track the right KPIs, and feel confident about implementation.
How to Calculate the ROI of an ERP System
These four steps will help you calculate the ROI of your ERP implementation.
1. Pick the Objectives and KPIs You Want to Track
Your success is dependent on what your business goals are. Therefore, when picking manufacturing KPIs to track the ROI of your new ERP system, you need to be specific about what your objectives are and what KPIs are the most useful for measuring those objectives.
Here is a list of common business objectives and their relevant KPIs:
| Business Objective | KPI |
| Reduce operational costs | Operating expenses |
| Improve inventory management | Inventory turnover rate |
| Increase profit margin | Profit margin |
| Improve production efficiency | Production cycle time |
| Increase sales revenue | Total sales revenue |
| Enhance customer satisfaction | Customer satisfaction score (CSAT) |
| Boost on-time delivery rates | On-time delivery percentage |
| Reduce lead times | Average lead times |
| Improve supplier performance | Supplier defect rate |
| Increase employee productivity | Output per employee |
2. Calculate the Total Cost of Implementation
When we calculate the total cost of implementation, we include direct costs like software licensing fees, hardware purchases, ERP consulting fees, and implementation cost. We then add in indirect costs like employee training, data migration, and on-going support. We do not factor in hardware and additional machinery your company needs to grow with your business.
3. Track Gains Year-over-Year
Once you’ve selected your KPIs, track them year-over-year. Monthly tracking is too granular. Short-term changes in supply and demand can cause ups and downs that don’t offer a realistic overview of your company’s overall performance.
Fortunately, you can use your ERP system to automatically track and report on your selected KPIs and generate quarterly and yearly reports on your ERP ROI.
4. Add the Gains to the Total Value of Investment
Once you have 2, 3, 4 years of data tracked, add these benefits to the total value of your investment. We include only quantifiable improvements like cost reductions and revenue increases. By combining these gains with the initial costs, you can determine the net value added by the ERP implementation.
ROI ERP Calculation Example
Here is an example of ROI ERP calculation in action.
Let’s say your manufacturing business started your ERP implementation journey with a total cost of $500,000. Over the next three years, you gain $200,000 annually thanks to lower operational costs and increased sales. The total gains amount to $600,000. You subtract the initial investment from the total gains and get a net gain of $100,000.
That’s the ROI of your ERP system.
ERP ROI Formula
The formula for calculating ROI is:
- ROI = (Net Gain / The Total Cost of Investment) x 100
So using our example above, that formula would look like this:
- ERP ROI = (100,000 / 500,000) x 100 = 20%
In other words, your business saw a 20% ROI on ERP implementation.
5 Best Practices to Maximize Your ROI of ERP Implementation
There are many actions you can take to maximize your ERP ROI. In our 40 years of experience helping small to medium-sized businesses implement ERP solutions, we’ve learned not to underestimate any of these best practices.
- Don’t go it alone: Hire a reliable ERP consulting firm with a proven track record of success and skip the costly trial-and-error phase of self-implementation.
- Choose the best ERP system: We choose Infor SyteLine CloudSuite Industrial ERP when working with growing manufacturing businesses because it scales with you and is user-friendly. Consider what selection criteria you need to find the best ERP for you.
- Invest in training: Between Infor’s user adoption platform and your ERP consulting service, properly training your workforce on the new ERP system should be at the center of your implementation plan.
- Get buy-in from stakeholders: Wherever there’s change, there is a resistant workforce. It’s important to communicate the benefits of ERP solutions to your stakeholders early and often to make sure that the transition to the new system is smooth.
- Don’t skip on-going support: On-going support is more than installing upgrades. Your ERP consultant will help you track your ERP ROI and continually improve your operations. At Godlan, we walk alongside our clients to ensure their business is consistently growing with the help of ERP.
Let Us Track the ROI of Your ERP Implementation
When you work with Godlan, you have a team of ERP experts dedicated to advancing your business goals. With over 40 years of experience, you can trust us to make sure your ERP implementation is a success. Contact Godlan today to schedule a consultation.
