Business

How To Calculate ROI Of Manufacturing ERP Software

January 19, 2023
Ankita Sharma

Manufacturing Enterprise Resource Planning (ERP) software is the cornerstone of manufacturing companies as it allows them to automate manual processes. Also, it decreases the workforce’s dependency, enabling them to focus on issues that require creativity and intelligence. Plus, there are other advantages of using a manufacturing ERP software to efficiently deal with vendors, suppliers, and distributors and manage marketing, sales, logistics, and various other critical business functions. Moreover, ERP for the manufacturing industry provides crucial business information that helps drive profitability and make efficient decisions.

This article will focus on how you can calculate the ROI of the manufacturing ERP software so that your investments are well spent.

1. Get a comprehensive understanding of ERP ROI value.

ROI on manufacturing ERP software will help you validate your investments. The company needs to know its financial health, and ROI is a critical parameter to judge this. The following three steps tell how ERP ROI value is calculated:

a. Add the anticipated return from the manufacturing ERP software.

b. Subtract the anticipated costs.

c. Divide the result by the anticipated cost.

The result is expressed as a percentage value. The higher the value, the better the investment. But remember that calculating the anticipated costs and returns isn’t always possible. Also, various departments may have varying definitions for expenses and revenues. Thus, the finance department must reconcile the financial data and check for redundancies.

2. Estimate manufacturing ERP software costs accurately.

Costs related to software licenses and hardware purchases are easy to count. But other factors are challenging to measure. The following points list the 5 cost areas that you should consider.

a. Initial costs

A manufacturing company has multiple departments — manufacturing, marketing, sales, finance, warehouse, logistics, and vendor relations. Thus, instead of just calculating manufacturing-related costs, you need to consider other core areas as well.

b. Consultancy costs

Calling ERP consultants to handle manufacturing ERP software requires a well-formed contract that considers all the applicable service charges. Remember that consultants might also drain substantial internal resources such as your employees’ time. Therefore, define a contract that lays down the scope of work and person-hour requirements to account for the costs.

c. SaaS subscription

If you don’t have an in-house technical team to manage the manufacturing ERP software, you need to outsource it to a third party. This third party vendor will charge a monthly subscription to handle your ERP software.

d. User costs

While the manufacturing ERP software is being implemented, the employees may not feel comfortable using it. You need to invest in training costs so that your workforce is comfortable using the ERP software.

e. Maintenance costs

ERP for the manufacturing industry requires constant upgrades to attain modern functionalities. It involves software/hardware upgrades and maintenance 24/7 from the vendor’s side. Thus, it’s necessary to negotiate the contract with the vendor and look for discounts.

3. Measure the impact of the manufacturing ERP software across each department.

The ERP for the manufacturing industry will provide you multiple benefits across each department. It would be best if you considered what impact it would have on your costs and revenues. For example, consider the logistics department. Suppose before the implementation of the manufacturing ERP software, you ordered 100 metal rods daily. But after the implementation, you began ordering 1000 metal rods. Check how did it benefit you? Did the cost per item drop? Or did the shipping cost decrease? After evaluating the costs and revenues across each department, you can calculate the ROI better.

4. Gain a comprehensive outlook of the data.

Once you have collected the financial data from each department, it’s time to reconcile it and make sense out of it. This step requires a team of financial analysts who can maintain flaw-free accounts, forecast costs, and return objectively. Moreover, they should also monitor potential departmental biases and reconcile them at the earliest.

Conclusion

ERP for the manufacturing industry will help automate all your business processes, thereby maximizing your profits, reducing/eliminating operational expenses, and most importantly, allowing your workforce to deal with problems that require human ingenuity. Before implementing a full-fledged manufacturing ERP software, it’s essential to estimate the ROI. This step will help you make an informed decision that will substantially increase your profitability.

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Author Bio:

Nishant likes to read and write on technologies that form the bedrock of modern-day and age like web apps, machine learning, data science, AI, and robotics. His expertise in content marketing has helped grow countless business opportunities. Nishant works for Sage Software Solutions Pvt. Ltd., a leading provider of CRM and ERP systems to small and mid-sized businesses in India.