The return on investment envisaged provides the justification and the motivation of cost to invest in the ERP. There are the quantifiable advantages as well as the intangible advantages in the decision of investment of ERP. The quantifiable advantages have an impact of basic line on profitability, the turnover of capital, and a potential effect on the current price.
This section discusses the advantages quantifiable and intangible of a system of ERP, which compares the execution closes before and after applying the ERP. Other scenarios are produced by justifying investments of ERP. For example, a company can consider the replacement against the levelling or the re-execution of a software package of ERP.
There are significant costs to successfully apply not a system of ERP. Wages of manufacturers often more for the lack of systems which they would have paid the improved systems. They carry the excessive inventory or provide the service to the poor customers, for example. And the manufacturers can invest in the ERP without gaining the advantages because the systems are partially applied, without success applied, or the use deteriorates with time.
the *This is the part one of an article with four parts reprinted to maximize your system of ERP by Dr. Scott Hamilton. The transition from the theory and realities of the current systems of ERP, maximizing your system of ERP provides practical advices for the manufacture of management in various environments. Drawing on case studies from Dr. Hamilton 'a first hand experiment from S from the consultation with more than thousand companies, it covers common problems and solutions of operation so that the way indeed applies and employs systems of ERP. The book can be ordered on amazon.com. It on extract justification of the investments of ERP is presented in four shares:
* Quantifiable advantages of a system of ERP
* Intangible effects of the ERP
* Costs to apply a system of ERP
* Substitute or giving in application a system of ERP
Reprinted with the permission of the McGraw-Hill.
Quantifiable advantages of a system of ERP
The studies which examined manufacturers about the impact of the systems of ERP on the firm execution indicate that the size and the industry of company do not affect the results. Advantages were indicated for the large ones and small companies, if they make the standard products or facts on order or are in the discrete environments of manufacture or process. This section explains the quantifiable advantages in terms of several fields of improvement.
Typical advantages
The quantifiable advantages most significant comprise reductions of inventory, costs material, and work and overheads, as well as of the improvements of service to the customers and sales.
Reduction of inventory. The practices of planning and establishment of the program improved carry out typically to inventory reductions of 20 percent or to improve them. This once provides not only one reduction of capital (and inventory a great proportion of capital constitutes typically), but also provides the saving continues countable costs of inventory. The cost to carry the inventory includes not only the interest but also the costs of storage, handling, obsolescence, the insurance, the taxes, the damage, and the contracting. With interest rates of 10 percent, the countable costs can be 25 percent to 30 percent.
The systems of ERP carry out to lower inventories because the manufacturers can only make and buy what is necessary. The requests rather than require the not very significant points of order lead plans spread out per time. The deliveries can be coordinated at the real dates of the need; orders for the useless material can be given or countermanded with later. The nomenclatures make sure that matched units are obtained rather not enough that too many a component and others. The changes envisaged of the invoices also prevent the accumulation of inventory of obsolete materials. With few lacks of part and realistic programs, work orders can be treated with the achievement more quickly and inventories of work-in-process can be reduced. The execution of philosophies of JIT can reducing further completion periods of manufacture and the inventories corresponding.
Material reductions of the costs. The matter practices improved of supply carry out to improve of the negotiations of supplier for prices, typically having for result of the reductions of the costs of 5 percent or to improve them. The valid programs let buy people to concentrate on negotiations of supplier and the improvement of quality rather than on accelerating lacks and obtaining the material at the prices of best quality. The systems of ERP provide information of negotiation, such as requirements out of materials projected by statistics for execution for group and supplier for the products. To better give to visibility of suppliers of future conditions the assistance to carry out the effectiveness which can be transmitted as lower material costs.
Reductions of cost of labor. The practices as regards manufacture improved carry out to few lacks and interruptions, and to less of recovery and of overtime. The typical saving of work of the successful ERP is a reduction of 10 percent in costs of labor direct and indirect. By to the minimum reducing urgent work and lacks of parts, less time is necessary for handling and additional dispatching and material installations, ruptures, and the fates or work of slit of advance which were put on side. The supervisors of production have a better visibility of requested work and can adjust the capacity or the responsibilities of meet programs. The supervisors have more time for people of management, direction and formation. The personnel of production has more time to develop better methods and to improve quality and the exit.
Service to the customers and sales improved. The coordination improved of the sales and the production carries out to improve the service to the customers and the increased sales. The improvements of the contacts of customer of management, to make and meet promises of delivery, and a shorter order to embark completion periods, lead to a satisfaction of the customer more raised and repeat orders. The people of sales can concentrate on being sold instead of the checking or making excuses for the late deliveries. In the environments made on ordering of product, of the configurations can be quickly identified and have the price indicated, often by the personnel of sales or even the customer rather than the technical personnel. Catches together, these improvements of service to the customers can lead to few lost sales and real increases sales, in general 10 percent or moreover.
The systems of ERP also provide the capacity to react to the changes of the request and to diagnose problems of the delivery. Methods of recovery can be taken early, like determining priorities of forwarding, informing of the customers of the changes to the promised delivery dates, or to change the production schedules to satisfy the request.
Improved orders of accountancy. The procedures improved of collection can reduce the number of days of the sums to be received exceptional, providing of this fact the money available cash additional. While being at the base of these improvements be quickly precise creation of invoice directly transactions of forwarding, convenient reports/ratios of customer, and follow through on accounts. The control of solvency during the recording of the orders and the handling improved of the investigations of customer further reduces the number of accounts from problem. The management of the credit and the matter practices improved of sums to receive reduce the days of the sums typically to be received exceptional by 18 percent or improve them.
The commercial credit can also be maximized by benefitting from the discounts of supplier and the money planning cash, and the payment only of these invoices with the set discharges. This can carry out to lower conditions for the money-on-hand.
Advantages of system of ERP on the assessment
The advantages of the processes improved of businesses and the information improved provided by a system of ERP can directly affect the assessment of a manufacturer. To illustrate this impact, a simplified assessment is shown on diagram 3.1 for a typical manufacturer with the annual income of $10 million. The greatest impacts will be on the inventory and the accounts receivable.
In the example, the company has $3 million in the inventory and $2 million in accounts receivable exceptional. Based on former research about the averages of industry for improvements, the execution of a system of ERP can lead to a reduction of inventory of 20 percent and to a reduction of 18 sums to receive percent.
| Running | Typical improvement | Favours | |
| Current assets | |||
| Money cash and other | 500.000 | ||
| Accounts receivable | 2.000.000 | 18% | 356.200 |
| Inventory | 3.000.000 | 20% | 600.000 |
| Fixed immobilization | 3.000.000 | | |
| Total capital | $8.500.000 | $956.200 | |
| Passive exigible | xxx, xxx | ||
| Passive nonexigible | xxx, xxx | ||
| Shareholder 'stockholders' equity of S | xxx, xxx | ||
| Total responsibilities and stockholders' equity | xxx, xxx |
* Reduction of inventory. A reduction of inventory of 20 percent has like consequence $600.000 less inventory. Improved the purchase of the practices (this result in reduced material costs) could lower this number even more.
* Accounts receivable. Accounts - admissible currents represent soixante-treize days of sums to be received exceptional. A reduction of 18 percent (at sixty days of the 'sums to be received) has like consequence $356.200 of additional cash money available for other uses.
Advantages of ERP on the report/ratio of the incomes of results
A report/ratio of the incomes of results simplified and summary for the same manufacturer $10 million is shown on diagram 3.2. For much from manufacturers, the cost of sales extends from 65 to 75 percent of sales (the example will employ 75 percent). Using averages of industry for each principal advantage, the processes improved of businesses and the information system associated almost double income running with pretaxation.
* Reduction of inventory. A reduction of 20 percent of the inventory running of the results $3 million in the continuous advantages of the lower transport costs of inventory. Using a countable cost of 25 percent as consequence $150.000 in the transport costs lower every year, identified here as an element of the overheads.
* Material reductions of the costs. A reduction of 5 percent in material costs because of the practical purchase improved of the results in annual saving of $225.000.
* Reductions of cost of labor. A reduction of 10 percent in costs of labor because of less overtime and of improved productivity has like consequence the annual saving of $100.000.
* Increased sales. The improvements of the service to the customers typically lead to the 10 sales of percent an increase; this is not shown on diagram 3.1.
The annual advantages assembling itself to $475.000 in this example equalizes almost the income running of pretaxation of $500.000.
* Accounts receivable. Accounts - admissible currents represent soixante-treize days of sums to be received exceptional. A reduction of 18 percent (at sixty days of the 'sums to be received) has like consequence $356.200 of additional cash money available for other uses.
Advantages of ERP on the report/ratio of the incomes of results
A report/ratio of the incomes of results simplified and summary for the same manufacturer $10 million is shown on diagram 3.2. For much from manufacturers, the cost of sales extends from 65 to 75 percent of sales (the example will employ 75 percent). Using averages of industry for each principal advantage, the processes improved of businesses and the information system associated almost double income running with pretaxation.
* Reduction of inventory. A reduction of 20 percent of the inventory running of the results $3 million in the continuous advantages of the lower transport costs of inventory. Using a countable cost of 25 percent as consequence $150.000 in the transport costs lower every year, identified here as an element of the overheads.
* Material reductions of the costs. A reduction of 5 percent in material costs because of the practical purchase improved of the results in annual saving of $225.000.
* Reductions of cost of labor. A reduction of 10 percent in costs of labor because of less overtime and of improved productivity has like consequence the annual saving of $100.000.
* Increased sales. The improvements of the service to the customers typically lead to the 10 sales of percent an increase; this is not shown on diagram 3.1.
The annual advantages assembling itself to $475.000 in this example equalizes almost the income running of pretaxation of $500.000.
| Running | Typical improvement | Favours | ||||||||||
| Sales | $10.000.000 | 10% | ||||||||||
| Cost of sales | 7.500.000 | |||||||||||
| 5% | $225.000 | ||||||||||
| 10% | $100.000 | |||||||||||
| Overheads | 2.000.000 | $150.000 | ||||||||||
| Income of pretaxation | $ 500.000 | $475.000 | ||||||||||
The analysis of ration provides another manner of looking at the impact of a system of ERP. Three reports/ratios illustrate the effect---two referred to the liquidity and one to the execution of operation.
* Inventory turnover (cost of sales/inventory). The low inventory turnover can indicate the possible obstruction of stocks and obsolescence. It can also indicate major problems of too false kind of inventory which can create shortages of inventory necessary for the production and the sales. The high turnover indicates a better liquidity and an inventory management higher and a sale. Being given the example the company $10 million, the number running of turns of inventory is 2.5. With a reduction of inventory of 20 percent, the number of inventory turns of the increases to 3.1.
* Days of the sums to be received (365 * 1 (sales/sums to be received)). This report/ratio expresses average time in days that the sums to be received are exceptional. It is a measurement of the management of the credit and collections. Generally, more the number of exceptional days is large, more the probability of the delinquencies in the accounts receivable is large. The lower the number of days is, the more the availability of money cash is large. With a reduction of 18 percent of the sums to be received, the admissible current days of soixante-treize days can be reduced to sixty. This means that $356.200 is available for other goals.
* Output of the credit (benefit before taxes/capital totals). This report/ratio measures the effectiveness of management by using the available resources with him. Several calculations are necessary to determine the output of the credit. In this example, the output of the credit can be improved from 5.9 to 12.9 by applying indeed a system of ERP.
The performance evaluation based on the indicial analysis can also employ comparisons between a 's to have the company and the similar companies in terms of size and industry. The annual studies of report/ratio provide comparative reports/ratios for this purpose. This use of comparative indicial analysis will employ same the three reports/ratios for the inventory turnover, admissible day, and output of the credit. To carry out the analysis, you identify the reports/ratios of median and higher quartile for companies in same industry. Those correspond harshly to the average and good execution. By comparing the ratios with your company 'execution current of S, you can calculate how much best your company should carry out to be competing. The same analysis can be carried out using BenchmarkReport.com Web site.
Using the report/ratio of turns of inventory for the example the manufacturer $10 million, supposes that the annual studies of report/ratio indicate that the median and higher quartile are four and six turns for other companies in same industry. The average execution of four turns of inventory translates into inventory envisaged of $1.875 million ($7.5 million divided by four). If the company of example had this report/ratio, it would have had $1.125 million less in the inventory. With countable costs of inventory to 25 percent, this would produce the $281.250 every year saving.
For the admissible report/ratio of days, suppose the annual studies of report/ratio indicate that these sixty and fifty days are the median and higher quartile. The admissible days in the example the manufacturer $10 million is currently of soixante-treize days; an improvement at sixty days would reduce sums to be received from $356.200 (using a rate of sales of newspaper of $27.400 and one thirteen days reduction). This means that the money cash is available for other goals.
Note that the output of the credit the report/ratio is 5.9 for the company of example. By assuming the annual studies of report/ratio indicate that the output of the credit is ten and fifteen for companies in same industry with the median and higher quartiles, improving the output of the credit at the equivalent levels benefit or the turnover of increased capital would mean.
The ERP carries out on the stock exchange of actions
If integration and the information improved of the results of a system of ERP in a better assessment and increased benefit, these improvements carry out the stock exchange of actions of the company. Although the stock exchange of actions is affected by a series of factors, the typical effect of the benefit and improved reports/ratios of assessment can be estimated. Using the example already described of the manufacturer $10 million and typical advantages, and to assume 100.000 outstanding shares and an existing stock exchange of actions of $30.00 per share, the stock exchange of actions shows the effects of an effective ERP, like diagram 3.3 shows. With a multiplying price/of incomes of six, the stock exchange of actions of the company of example could be climbed $30 up to $58.80 per share.
Diagram 3.3 calculating the potential current appreciation
| Before ERP | After ERP | |
| Before benefit of taxes | $500.000.00 | $980.000.00 |
| Earnings per share | $ 5.00 | $9.80 |
| Cours des actions of actions current | $30.00 | 6 * 9.80 = $58.80 |
| Multiplier | 6 | 6 |
No comments:
Post a Comment