ERP: The Virtuous Circle of Benefits

When companies invest in ERP, very often the decision-making is, more often than not, driven by the need to move away from a legacy system rather than driving towards a solution that will deliver significant financial advantage. The thoughts in this article are designed to draw attention to the scope of opportunities for ‘measurable’ Return on Investment for a business introducing a Modern ERP solution to its operations. 

Introduction   

Many modern businesses are fully aware of ERP and the accepted view that the fully integrated nature of software is a positive force to harness. Business owners, spending hundreds of thousands of pounds, expect that people’s jobs will be made easier and that their decision-making will be better, resulting in universal business improvement. All this is true, but only by understanding the true potential of ERP, properly implemented and coordinated, will senior management be able to realise a strong ROI. As companies gain a better understanding of the potential benefits, an extra dimension of implementation priorities becomes added to the decision-making.  

In considering these savings and improvements, the assumption of the business model here is for a Distributor or Manufacturer where a physical product is being managed. Whilst ERP can be applied to Service and Financial Management organisations, looking at companies with a tangible product allows us to explore the full scope of advantages.  

The business improvement opportunities can be expressed in the form of these following items. The percentage improvement figures shown are ones that are typically enjoyed by companies using ERP. 

  • Increase in Sales and Better Customer Service  
  • Reduction in Inventory 
  • Reduction in Aged Debt 
  • Reduction in Product Costs and COGS 
  • Higher Profits 
  • Reduced Personnel, Attracting More Talented Personnel  

 

Increase in Sales [10-15% increase], Better Customer Service  

The key source of ERP benefits is derived from the integrated, single source nature of operational data. This data not only provides the foundation for product information such as pricing, item margins and stock availability, but also the means of being more responsive to the customer by utilising information that is readily available to the sales team. This means that when interacting with a customer, the sales team is better equipped to provide quotes, manage opportunities and invoke automated, customer-specific pricing. In light of all of this information being readily available, throughout the business, we can see that the delivery promising process becomes easier and more reliable. The speed of accessing this data is a vital component to increasing sales. The customer feels that they’re being better-served, and that the salesperson has control and authority over the information being presented and, from this, an improved buying experience can be enjoyed. This leaves the customer more satisfied and, crucially, far more likely to return to order more goods.  In view of the enhanced information available to the salesperson, not only can they be more responsive, but they are freed up from having to perform repetitive or tedious tasks such as retrieving information from disparate sources. Checking on delivery information in a traditional manner is no longer necessary. All of this is available from within the ERP system, and this delivers an invaluable commodity to the sales team in time savings. Having more time available means that the team can not only be more proactive and focus more on developing better Customer Relations but also introduce more consultation into the sales process and hence achieve a greater chance of improving sales performance. 

This, balanced with the higher level of responsiveness, offers the opportunity to achieve more sales, not just in terms of volume but also in value. Buyers often place a premium on good customer service and a propensity often emerges for fewer discount requests to be made on the understanding that the transaction will be efficiently executed and consequently more satisfactory. Up-selling can also figure in modern systems usage, again adding greater profit to the customer engagement opportunity. This in turn, leads to a higher likelihood of returning customers who will more often make repeat-purchase decisions if served accurately and in a timely manner.  

Inventory Reduction [10-15%] 

Although the positive impact on stock holding from an ERP system may be more pronounced in a manufacturing environment, due to multiple build levels and complexity of material, a distributor will also enjoy the returns of fully integrated software. In both disciplines, a greater trust in and acceptance of data is achieved over older, non-ERP systems. Functionality for stock movement transactions being reconciled with associated orders cuts down on errors and improves accuracy. Visibility over allocations and time-phased, earmarking of goods to be shipped is very useful in calculating stock availability for customer delivery promising and stock re-ordering.  Re-ordering based solely on Safety Stock principles can be minimised and avoidance of excessive buying ‘just-in-case’ can become the norm. 

In manufacturing, the benefits of MRP are well known in that materials are brought into the operations at the right time in order to synchronise with the bigger delivery plan. Again, this means that having the right product, in the right place, at the right time is a vital element of achieving an optimum level of stock. In addition, modern forecasting tools for stock and sales usage are available to work within Modern ERP systems.  

Forecasting 

Whether a business’ products are subject to seasonality or general industry fluctuations, modern Forecasting tools are highly sophisticated and assist by auto-suggesting the correct algorithm for a finished product based on ‘best-fit’ principles. The availability of this software means that even companies with significant variability in sales demand can derive benefits in improving their stock turns and customer service levels.  Accuracy in this area naturally contributes to better Sales Performance where customer promising is dependent on optimised stock availability. 

Getting this element of the business right is absolutely crucial in ensuring that money is spent in the right part of operations. Consequently, money is used as effectively as possible and this ensures maximum profit for the business. 

Reduction in Unit Cost of Goods [5-10%] 

 In deploying Forecasting and Demand Planning tools, there is an opportunity to develop a stronger relationship with key suppliers. In being able to predict usage better, enhanced supplier negotiations become more feasible. By negotiating call-off agreements, the business can not only expect lower unit costs but also a reduction in stock holding where the onus is placed on suppliers to hold materials and products. In the light of materials and goods arriving only at the right time, warehouse capacity is optimised, and overheads for leased premises, as well as personnel effort and costs, are reduced. In manufacturing, a significant improvement in WIP and general Cost of Goods Sold (COGS) can be achieved. This once more releases cash into operations and makes re-investment possible in various other key functions in the organisation.  

Reduction in Aged Debt [10-25%]  

Visibility has been the recurring theme of the benefits already discussed here and ensuring that customers are inhibited from taking financial advantage is a key aim. Any organisation naturally wants to sell its goods, however, if sales are made to slow-payers which in turn adversely impacts sales performance and service levels for better-paying customers, then this can lead to adverse accounting positions and credit levels should be placed under better control. Insufficient visibility to be able to control overdue debt in the business can restrict flow of cash.  Alerting the sales account manager to ‘over credit’ customers in the sales process is useful here. Payment discussions at the point of ‘new order’ acceptance can be harmoniously resolved even though the instinct is to proceed with a further sale regardless. From accurate reporting, email correspondence with customers who have excessive aged debt is better supported through Modern ERP systems. Dunning Letters and reminders act as prompts to facilitate debt resolution with the customer. The control point is thus returning more available cash to the business.   

Reduced Personnel, Attracting More Talent and Forward-Thinkers 

A key goal of all software, from office products to sophisticated ERP, is to simplify work practices. Software can automate a vast range of core processes and operations, from Warehouse Management to Manufacturing, and benefits arise from modern systemisation techniques.  A lower dependency on human effort and a greater focus on time savings will result in a reduction in staff – ‘pro rata’ output and turnover. 

As more sophisticated ERP workflows evolve and where there is a significant reduction in labour-intensive, repetitive tasks such as report creation for performance visibility, more time for business development and personnel management is created. This positive state naturally supports the ability to recruit better qualified and more experienced staff.  Candidate employees, set on success and ‘making a difference’ within the business, come to expect better systems that will support initiatives striving for greater efficiency.  

 Although it can be argued that this might push up salaries, as staff begin to command higher remuneration, there is a greater likelihood of a positive impact where the superior qualities of new management outweigh any potential salary-based erosion of profits. This once again contributes to the virtuous cycle of profit being generated and made available for re-investment in the business. 

 Employee Empowerment 

With the correct level of process automation, a business deploying Modern ERP will lead to greater levels of Employee Empowerment, individual job satisfaction and staff retention. A well-managed implementation will lead to better user-ownership which, in turn, translates into greater productivity. Individuals, empowered by greater autonomy will grow in confidence and creativity, both contributing to growth in the business. 

R & D, Brand Improvement  

A business consistently returning higher profits is able to invest in its product improvement through better R and D. By advancing the capability or appeal of products being sold, the business can be more competitive and ‘gain an edge’ in the marketplace. Wider advertising from surplus funds simplifies the sales process through higher brand and product awareness. 

Conclusion 

The core appeal of most of the benefits mentioned here is that they are measurable. Moreover, the significant aspect of the planning of an ERP implementation is to consider the timing and sequencing of software introduction in key functions. This is not only in terms of measuring the performance and results of the implementation, but, at the early stages of the project, considering the individual ROI of each element and setting the priorities in the light of this.    

If there is an uncertainty around launching certain sub tasks, and where a resource constraint exists, then consideration should be made to the measurable return to the business of that project activity. For example, by comparing respective benefits of an inventory-reducing process over work in a less rewarding function then the implementation team can be clear about defining project sequences and associated effort. By adopting the principles of this ‘priority logic’, a clearer viewpoint from management can be gained.  

As shown, in the diagram above, a natural looping benefit emerges. A company is able to invest in more materials to manufacture their product or purchase more goods for resale, which in turn creates more profit. This therefore offers a virtuous circle of benefit. More surplus cash means that more stock can be made and product resold. This interconnected flow of available funds is in complete contrast with businesses that are constrained by excess stocks and inefficient processes that can be seen to inhibit growth.   

David Ralphs
David Ralphs