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Cost And Benefit Analysis


ERP projects are typically significant investments in time, effort and capital ERP project costs will include items such as software, servers, client upgrades, network upgrades, support and maintenance contracts, professional services, IT training, application customization and development, implementation labor and on-going support and administration. Business unit costs are often underestimated and include user training and change


Business benefits are improvements in revenue or development of new revenue opportunities. Operating efficiency benefits are the process improvements that can help the company improve productivity, re-deploy labor resources, avoid purchases or eliminate expenses. Intangible benefits are strategic and important but non-quantifiable in monetary terms such as brand advantage or business

Project risk
It includes everything from schedule and budget overruns, functionality shortcomings, slow adoption and resources risks This all may affect planned costs and benefits.

Tangible Benefits

Inventory reduction Personnel reduction Productivity Improvements Order management improvements Financial close cycle reduction IT cost reduction Procurement cost reduction Maintenance reduction On line delivery improvements

Intangible Benefits

Information visibility Improved processes Customer responsiveness Integration Standardization Flexibility Globalization Business Performance Supply and demand chain

Cost - Benefit

The tangible costs and benefits can be analyzed and presented to the team using five key financial calculations:

ROI = net benefits / costs Risk adjusted ROI = Net present value (NPV) of net benefits / NPV costs. Net Present Value = net cash flow of the project translated into today's dollar terms using a risk adjusted discount rate. Internal Rate of Return = the effective project return, calculated as the discount rate for this project which brings the net present value equation to zero. Payback Period = the period it takes, usually in months, for the project to reach cash flow positive (where cumulative benefits exceed cumulative costs).

Main focus of Business Excellence is Customer Service make for stock company in a competitive situation should be able to estimate the possible extra sales they could capture if they always had their products on the shelf. For other types of business, assemble to order, make to order or engineer to order, the benefits from a Business Excellence project typically come in the form of reduced lead time (a 50% reduction in 12 months is common), and on-time delivery close to 100%.

Case: Benefits

It would not be realistic to believe that all the potential increase in sales could be realized, so the potential benefit from increased sales should be calculated as the gross margin on a proportion of the potential increase we will be taking half of the potential benefit for a Make to stock Company with a 40m p.a. turnover . Sales: Some companies will get increased sales from both the off the shelf and lead time improvements but for most it will be an either/or situation.

Labor : The most basic improvement that Business Excellence companies achieve is a stable, managed master schedule out to the cumulative lead time. When a manufacturing department has stable, reliable schedules so that supervision can spend their time managing and improving their processes instead of chasing material and shuffling priorities, there will be a saving in both direct and indirect labor costs.

Purchase Material Cost:Direct material is frequently a large proportion of the cost of sales. There are many potential savings in this area that arise from improvements in master scheduling. If you give your vendors stable schedules they can achieve the same manufacturing cost savings as you. The greater visibility will enable your suppliers to invest in better equipment and to take on value engineering work with you. Single reliable sources of material, rather than multiple but unchecked sources, opens up the possibility of point of use delivery which saves inventory and administration time. We find that purchasing department can typically achieve a 20% reduction in material costs with as little as 3 months forward visibility of requirements.

Inventory is the last main category of quantifiable savings With inventory there are two types of savings.

The cost of holding inventory, including the cost of the storage space and its overheads, inventory management etc., is an annual cost saving. RM, WIP,FG It is reasonable to take half the potential annual saving in inventory holding cost. In addition there is a one time capital saving which will offset the one time capital cost of the

Case: Costs

Hardware cost varies as per Scope of the project . Thesre will be ongoing cost of H/w upto 20 % There will be a one time capital cost of the software which will vary enormously depending on the complexity of the software and size of the company TIP:Whilst every effort should be made to resist the

temptation to customize the package, there may have to be some changes which should be allowed for and some packages (e.g. SAP R/3 and JDE's EnterpriseOne) may be cheaper for the software but much more expensive to configure. SAP R/3, for instance, may only cost 3,000 for the software per user license but 15,000 per user license for consultants to configure.

There will also be an ongoing maintenance cost to install the upgrades along with further customizing (typically 15% to 20% per annum of the software cost).

Data Control Cost

You have to allow for costs associated with getting

the bill of material and inventory record accuracy above the 98% that is vital to get meaningful data from the system. For inventory records, the cost of cycle counting will be on-going but bills of material will generally remain accurate, once the process for maintaining the bills of material has been established, without any significant on-going cost. The same applies to routings.

Education Cost

As well as the initial cost of education and training, there will be an on-going cost of training new recruits and for adjusting the process as the business changes. An allowance of 25% per annum of the start up training and education cost is a good estimate. Many companies start out with the intention of not having a full time project leader let alone a full time project team. At this stage it is not necessary to decide whether you will have these full time people but the justification should include them. As a rule of thumb, a project team of three people is necessary for companies with up to 300 employees. One more project team member is needed for every 200 employees.

Cost- Benefit

The last stage of the analysis is to bring together the costs of implementing and compare it with the net annual benefits The pay back period can then be calculated and compared with the company norm. It is very unusual if the pay back is not one of the best the company has seen for a while. The final figure to calculate is to divide the net annual benefit by 12. This gives the cost of one month delay