The first client ever had was Trail Appliances. In those days, I (Bob de Ridder) was their ERP selection consultant, and after selecting a suitable short-list of candidates, we eventually a selected a winning ERP product.
This led us naturally to the part of the final validation which was to calculate a return on investment (ROI).
I applied the usual formula and proved a good return and so the project was a go!
What became most evident over the next few years (albeit with 20/20 hindsight) was that we had missed the two biggest returns – either of which would have paid for the product many times over.
The First Return (ROI) That Blew Us Away
The first of these two surprises was to do with a retro-rebate commission. One of Trail Appliances suppliers gave a generous retro-rebate at the end of the year, running around $200,000 to $300,000.
This rebate was awarded to Trail Appliances after the year-end sales numbers were closed and was calculated by the supplier using somewhat of a convoluted formula.
Before the ERP software had been implemented there had never been a way for Trail Appliances to pre-calculate, or even validate, the calculation.
After their full first year on their ERP system, Trail Appliances calculated their rebate as $420,000, but did not advise the supplier.
As per usual, the supplier stopped by a few weeks later and excitedly passed across to Trail a rebate cheque for $285,000.
To the suppliers shock, Trail Appliances showed him their calculation. The supplier apologised for any possible mistake and rushed off back to his home base with the new calculations provided by Trail Appliances. After a few more weeks, Trail Appliances received an additional cheque for $135,000 – not bad!
The Second Return (ROI) That We Never Saw Coming
The second ROI surprise was to do with inventory. Trail Appliances was perplexed that they could not seem to reduce their “last year’s models” in inventory, despite the fact that new inventory was typically ordered just as needed.
The receiver at the warehouse at the time had resisted the roll out of a (purchase order) PO receiving system and preferred to unload stock against the supplier’s bill of lading.
Eventually, the receiver was persuaded to receive against Trail’s purchase order (PO), and he quickly noted that the supplier’s trucks had one or two, unordered, “filler” units. Units that had never been ordered initially.
As you may have guessed, these were not new appliances – but old models. This transpired to be reason why Trail Appliances endlessly ran a significant amount of old models in stock.
The supplier apologised, naturally, and the practice was stopped immediately, saving Trail several hundreds of thousands of dollars in unwanted inventory costs.
How Do You Then Calculate Your Return on Investment?
So with your return on investment emerging from so many unseen areas – how do you calculate the return on investment (ROI) beforehand? How can you be sure to consider all elements and effects on your business?
Webopedia defines ROI as “ROI is an accounting formula used to obtain an actual or perceived future value of an expensive or investment.”
As you might have come to the realization through our story, it can be difficult to point to a fully scientific answer that answers the question of what your complete ROI will be an in ERP implementation.
The calculation of ROI requires assumptions in several areas: cost savings, efficiency savings, revenue / market gains, cost of not doing the investment, the opportunity cost (what will not be done if money is spent on ERP?)
Sometime return on investment calculations are used to validate the subliminal desires of senior management.
If our competitors have a good ERP – then so should we. To get into that market we either invest in ERP or hire more people.
In reality the full realization of what the return on investment (ROI) was comes afterwards.
When the ROI is calculated beforehand it is sometimes done to prove the decision that has already been made, but maybe not yet stated.
The Assumption of an ROI in the ERP Commodity Market
This leads us to where the ERP market is going today; ERP as a more of a commodity market.
Many years ago (I’ll date myself here), I had to make a selection for a Word processing software for a large company that I worked for at the time (Mars Confectionery).
After issuing an RFP, and six months of meetings – we selected a Word processing software. But who would do something like that now?
Everyone just buys Microsoft Word for every new office, sales, management or admin employee. ERP will soon be that way too.
You need a decent ERP system, it has to be scalable, flexible, reliable and easy to learn.
Knowing that the true ROI is yet to be determined in your ERP and that an ERP purchase is becoming more of a commodity purchase, how do you then choose?
Rather then focussing on the ROI beforehand, know that your largest ROI will come from areas that you can’t yet consider and rather focus on these factors:
- Which ERP provides the least risk?
- What type of ERP is most flexible in accommodating our long term needs?
- Does the vendor have a clear long term strategy?
- What partner or VAR (value added supplier) provides the most insight into deploying ERP?
- What functionality will your organization actually use?
- Is a vertical ERP solution suitable for your organization or will a mainstream solution suffice?
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