A recent article from an outfit that provides a variety of product info and comparisons to businesses, called Compare Business Products in Palo Alto, made some good points recently that reinforce what we’ve long known are the tangible, as well as sometimes intangible, cost savings and benefits that accrue to companies that effectively deploy ERP systems. Their points are worth noting and highlighting in our post today.
The cost savings that accrue from a good business management system do more than just make you a better, more efficient company. They actually pay for themselves. And then some. Let’s look at a few of the areas where research studies have proven this to be true.
Inventory Reduction In a typical successful ERP implementation, the study’s authors state, “a 20% inventory reduction becomes a commonly achieved benchmark.” That’s not just a one-time savings, but a recurring event that is further augmented through lower warehousing costs, less handling and transport, reduced obsolescence, and so on. Together, the collective savings of improved turns and lowered costs can typically take upwards of 30% out of the costs for inventory related items in the manufacturing or distribution environment.
On the less tangible cost-savings side, let’s not forget the benefits that normally come in the form of stocking the right items, avoiding out-of-stock situations and their negative customer effects, avoiding the buildup of obsolete items, and having fewer part shortages to deal with – all the result of improved planning, MRP and visibility.
Finally, an implementation of something closer to just-in-time stocking will put any firm on track for a leaner experience, and free up funds for more important business needs.
Let’s combine inventory reduction savings with a related improvement typically caused by ERP]…
Improved Receivables (days of receivables ratio) Research indicates that the number of days between invoice and collection, on average, goes from about 73 days to 60 once ERP has been established. That’s a fairly significant cash bump, the result usually of improved billing procedures, visibility, aging control and accounting follow-up.
Combining inventory reduction and improved receivables in a $10 million (revenues) factory can lead to some serious cash improvement. A typical company in this range might have around $3 million in inventory, perhaps $2 million in receivables, and $500,000 in cash available. A reduction in inventory of even just 25% frees up around $750,000 in newly available cash flow, while an improvement of 13 days in A/R receipts per our average cited above, yields an 18% improvement (reduction in A/R), thus freeing up another $360,000. Combined, the typical improvement produced by a well-deployed ERP system in a $10 million firm is over one million dollars.
And that’s just the beginning. In our next post, we’ll look at a few other areas where ERP frees up cash, and creates other savings and benefits, resulting typically not just in a system that pays for itself, but one that can return those costs several times over. Stay tuned…