Investment of the year – calculate how much you’ll earn by implementing an ERP system

An ERP (Enterprise Resource Planning) system is often referred to as the backbone of a modern company, and for good reason. Regardless of the industry we operate in, it is thanks to ERP that we can effectively manage resources, processes, and information within the organization. It is important to understand that investing in an ERP system is not a one-time decision, but a process that can significantly impact a company’s operations and growth.

The ability to centralize information is a key aspect of an ERP system, which allows for the collection, organization, and management of data from various departments and functions within a company in a single integrated system. This involves transferring dispersed data and information from various information silos to a single central location that is accessible to all authorized users within the organization.

By centralizing information, we gain a complete, real-time view of our operations. The data is consistent, up-to-date, and easily accessible, which enables faster decision-making. Data redundancy and the associated errors are also eliminated, since all employees use the same, up-to-date version of the information.

Employees from different departments can easily share information and collaborate on joint projects without having to maintain multiple copies of the same data or transfer data between different systems. Centralization can also help improve regulatory compliance and data quality control, as all data is collected, stored, and managed in an organized manner and in accordance with specific standards. This also facilitates auditing and reporting, which is particularly important in highly regulated environments.

It’s also worth noting that ERP systems are now most often hosted in the cloud. The cloud enables easy scaling of resources, allowing companies to adapt to growing demands without having to invest in costly IT infrastructure. Additionally, cloud-based models often offer pay-as-you-go pricing, which allows for more effective cost management and eliminates the need for large upfront investments. Furthermore, updates and maintenance are often easier and less cumbersome in these models, as providers automatically roll out improvements while ensuring the system’s continuous operation.

Of course, this does not mean that the trend toward cloud adoption will apply to all organizations. For various reasons, at least some companies still choose to maintain their systems using the traditional model.

Estimating the costs associated with implementing an ERP system requires a financial analysis and an understanding of the various cost components that affect the total project budget. We begin the process by identifying all potential costs, both direct and indirect.

Direct costs are those that are easily measurable and represent a direct expense related to the project. In this case, these may include the costs of purchasing software (subscriptions or licenses), as well as fees for implementation services provided by the ERP vendor. Added to this are the costs of the hardware platform in a traditional, non-cloud scenario. Often, all of these costs are the easiest to identify and calculate, as they are clearly specified by vendors or can be estimated based on market quotes.

Indirect costs may be more difficult to identify. They may include staff training, technical support, time spent on project management, and other internal resources that will be involved in the implementation process.

Once all potential costs have been identified, the next step is to aggregate and analyze them. This may require gathering data from various sources, including discussions with suppliers, consultations with other companies that have already implemented ERP systems, or an analysis of the company’s historical financial data.

An accurate cost estimate will also help in developing a solid business plan and financial justification for the board of directors, which is crucial for securing the necessary funds to carry out the project.

A very important step in the process of evaluating the cost-effectiveness of implementing an ERP system is, of course, the return on investment. This process aims to assess how long it will take for the investment to begin yielding the expected financial and operational benefits. Forecasting ROI begins with an analysis of implementation costs and the anticipated benefits associated with the new system.

A benefits analysis should include both direct savings, such as reduced operating costs or increased efficiency, and indirect benefits, such as improved customer satisfaction or better regulatory compliance.

Calculating the ROI may also involve developing best-case and worst-case scenarios to understand the potential risks and returns associated with the project.

ROI forecasting is an important tool that helps you understand how an investment in an ERP system can impact a company’s financial and operational performance. It also helps secure the necessary resources and support for the project, which is crucial to its success.

In the coming years, the ERP sector is expected to see the emergence of several important new trends. The first is analytics and business intelligence, which are gaining importance as companies become more data-driven and use these tools to make informed business decisions. Analytics is becoming more widespread, which is increasing the demand for business intelligence and situational awareness.

Business analytics and BI encompass various tools, such as data mining, data visualization, and data tools and infrastructure, which help organizations make decisions​​. In the face of global challenges, business intelligence has become crucial for the survival and growth of companies, enabling them to adapt quickly to changing market conditions. Modern ERP systems offer extensive capabilities in the areas of business intelligence and analytics.

The second major trend, which is quite obvious in today’s business environment, is the integration of artificial intelligence and machine learning into ERP systems. According to Gartner’s analysis, organizations can reduce costs by up to 30% over the next three years by leveraging AI and ML in their ERP systems.

AI and ML can significantly improve the ability of ERP systems to analyze data, automate tasks, and deliver greater value to businesses. For example, by using natural language processing (NLP), ERP systems can better understand and communicate with users by interpreting and responding to voice commands or text queries. ML, in turn, can analyze historical data and identify patterns, enabling ERP systems to build predictive models and make real-time decisions. This, in turn, helps optimize business operations.

AI-based algorithms can also analyze historical inventory data, current market trends, and demand patterns in real time to optimize inventory levels, prevent stockouts, and identify the best suppliers. In addition, financial planning and analysis are improved. AI can help companies improve their financial planning and forecasting processes—ML models can identify trends and patterns in financial data, enabling more accurate forecasting of cash flow, revenue growth, and potential financial risks.

The added value of using AI and ML in ERP systems lies in their enormous potential to increase operational efficiency, reduce manual work, and improve decision-making processes within organizations. The integration of these technologies is crucial for companies that want to remain competitive in a dynamic business environment.

Clearly defined business objectives are important as early as the stage of budgeting funds for implementation.

The ROI can be calculated relatively easily by dividing the project’s net profit by the costs incurred for the project and multiplying by 100%. The principle behind the metric is just as simple: the higher the ROI, the more profitable the investment.

Calculating the ROI requires determining the expected financial benefits of implementing an ERP system. You don’t need a specialized consulting firm for this either. Let’s assume that our company generates 450 mln zł in annual revenue, annual operating costs amount to 420 mln zł, and the company’s equity is 135 mln. The cost of ERP implementation, taking project risks into account, is approximately 6.6 mln zł. The business objective related to ERP implementation is: let’s reduce the company’s operating costs by approximately 2%. What will the ROI for the ERP implementation look like over the next three years?

By comparison, the ROI for the entire company over a three-year period is only 66%. As this simple model shows, an investment in ERP implementation is not only profitable but can also yield greater benefits for the company than increasing production capacity.

Is it possible to assess the return on investment—not in terms of implementation, but in terms of ERP development through the rollout of additional features that are critical to the company—in a manner similar to that described above?

Let’s assume that our model company is already using an ERP system and is now considering expanding the system to include e-business solutions that support communication and collaboration with business partners (including EDI—Electronic Data Interchange).

A company’s ability to communicate via EDI can be the deciding factor in establishing a partnership with another business partner (e.g., a retail chain or e-commerce platform), thereby eliminating our competitors who are unable to meet the technical requirements for collaboration set by the customer.

Our model company’s estimated revenue from sales to an example retail chain is approximately 33 mln zł per year, with an average margin of 15%.

At the same time, implementing EDI will strengthen our position with our existing customers (who are also eager to communicate with suppliers via EDI!), who purchase approximately 105 mln zł worth of goods from us annually. Let’s estimate that just 10% of the profit from these sales comes from the benefits of EDI.

The estimated costs associated with implementing a comprehensive EDI solution enabling communication with multiple partners amounted to 600,000 PLN, with an assumed investment timeframe of one year.

The issue of inventory is most often a source of tension between the finance department—which aims to minimize inventory—and the production department, which wants to ensure that it can fulfill every order from the sales department in the shortest possible time. This issue is important from the perspective of the company’s financial liquidity.

Advanced ERP systems provide a wide range of tools that enable companies to manage inventory levels and dynamically adapt them to the company’s actual needs. How can we assess the economic efficiency of expanding our system with advanced materials management mechanisms?

Let’s assume that the quotes we’ve gathered for implementing such solutions indicate that the costs amount to 1.59 mln zł. The average annual inventory level at our company is approximately 90 mln zł. The benefits we expect from the implementation include a reduction in inventory levels by about 20%, or approximately 18 mln zł.

As a result of this implementation, a company of this size will either reduce its bank borrowing or invest the freed-up funds. For calculation purposes, the cost of bank credit was assumed to be 10% per annum. The time horizon for the investment in question is three years.

As a final example of an investment feasibility analysis, we present issues related to the use of IT tools to support the maintenance industry. This area primarily concerns manufacturing companies, but it is also becoming increasingly relevant to, for example, companies that own their own fleet of vehicles. What benefits can we expect here?

First and foremost is the reduction in production line downtime costs and the associated loss of production. A week-long shutdown at our model company would result in a loss of approximately 1.41 million in operating profit. A breakdown and downtime can also cause delivery delays and, as a result, associated contractual penalties. Let’s assume that such an event results in contractual penalties of 450,000 PLN per year.

Companies strive to minimize the duration of such incidents by maintaining inventories of spare parts. However, it is important to remember that such a reactive strategy for responding to breakdowns does not reduce their frequency. In extreme cases, it leads to maintaining a level of spare parts inventory equivalent to the value of the production line, which—given the value of our model company’s production line at 36 mln zł—represents a significant financial burden.

Implementing maintenance management solutions requires a change in approach to this issue. Most machines and equipment have a service life specified by the manufacturer. Replacing individual parts and components, as well as performing periodic inspections in accordance with the manufacturer’s recommendations, eliminates the vast majority of unplanned downtime. Planning maintenance activities allows for a reduction in spare parts inventory by ordering them in predetermined quantities and at predetermined times.

From a production planning perspective, maintenance planning makes it possible to determine production capacity in advance and assess its impact on the ability to fulfill customer orders.

With this approach, the maintenance and production departments are able to jointly decide whether to schedule inspections earlier or later in order to fulfill as many customer orders as possible, rather than being caught off guard by a breakdown. In addition, this proactive approach to maintenance significantly extends the service life of the equipment in use, reducing the frequency of necessary upgrades.

The estimated benefits to our company from implementing a maintenance management system are as follows: a reduction in spare parts inventory from 24 to 9 mln zł, a 70% reduction in production line downtime, and the avoidance of contractual penalties for late deliveries.

To summarize the entire investment of our model company, let’s assume that we completed the ERP implementation over the course of a year and, after it went live, expanded our ERP to include all three areas described above (e-business, advanced inventory management, and maintenance management).

Let’s adopt a three-year timeframe for the entire project, which in practice means that we realized the benefits of the ERP implementation within two years after its completion and within one year for the other implemented solutions. During this period, the benefits of implementation amounted to: ERP—2 × 8.4 million, EDI solutions—6.525 million, inventory optimization—1.8 million, and maintenance management—2.94 million; with total costs of 9.84 mln.

Let’s therefore calculate the ROI for the entire project as defined above. In addition to determining the ROI, the calculation above also clearly shows that with total implementation costs for the IT solutions amounting to 9.84 mln zł, the total benefits resulting from their use over the next three years will amount to as much as 28.06 mln zł.