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Sales(gross margin 50%) Cost of sales Direct labou r Material lnventorv carrvina oost % capital saving Ek Total Annual Benefit On-going costs (see below) Net benefit
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Em
lmprovement
Annual BenefitEk
40 5 15 2 10% 400
5% 3% 4% 20%
40
1290 108 1182
Net cost (costs below less capital saving ) Payback period (years)
970 0.8
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Onetime Ek Hardware Software Customisina 1 confiaurna Ongoing Ek
40 30
I Data Control
Stock records
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A Cost and Benefit analysis for ERP (enterprise resource planning) system;
temptation to customise the package, there m ay have to be sorne changes which should be allowed for and sorne packages may be cheaper for the software but much more expensive to configure. There will al so be an ongoing maintenanc e cost to insta!! the upgrades along with further customising (typically 15% to 20% per annum ofthe software cost). The programming cost will depend on the size of the company but there could be two man years in the customising and one person on a continuous basis after that. On going
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Bilis of material Routings l::dll!iilti!2D Business Excellence Software lnlemal Project manager Full time oroiect team (4 ) Outside consultancy {BPIC + stw} Miscellaneous ITotal ' cost
30 30 50 100
20
10
5
5 18 1Ql!
Many companies do not go any further than these costs to arrive at the cost of the project. It would, 1 indeed, be possible to change the current planning Monthly cost of delay system for the new planning system without any additional costs. Unfortunately, such implementations fail to achieve any ofthe benefits itemised above. All ofthe benefits come from the second half ofthe investment.
f98,500
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 bilis of material will generally remain accurate, once the process for maintaining the bilis of material has been established, without any significant on-going cost. The same applies to routings. An allowance should be made for externa! education and training in the initial phase. As well as the initial cost of education and training, there will be an on-going cost oftrainingnewrecruits and for adjustingthe process as the business changes. An allowance of25% per annum ofthe 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 Jet 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. Deciding who the team will be can be delayed untillater. Finally there should be a "miscellaneous" allowance of about 10% of the cost so far. This is one cost that is almost always overspent! 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 se en for a while. The final figure to calculate is to divide the net annual benefit by 12. This gives the cost of one month del ay. This is a powerful motivator to get on with the project, get the best people possible onto the task forces and avoid delays. The cost of delay of f98,500 per month in this example puts the costs into perspective. The cost ofthe full time project team, for instance, becomes less of a decision. Afull time project team will considerably speed up the project invariably and pay for their cost many times over. The use of outside consulting help is a significant and cost effective way to speed up the project. One ofthe most common causes of del ay is the decision on which software package to use. The fact is that success or lack of it has almost nothingto do with software. There are sorne basic functionality requirements that are describedin the Software Selection Guide most ofthe better known packages have this functionality now, after that it is clown to support and training. Phi! Robinson www.bpic .co.uk
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