The ROI of ERP

The ROI of ERP

Make More Money with Less Work, Less Risk, & Less Worry Synopsis

When evaluating the return on investment (ROI) of enterprise resource planning (ERP), it is wise to compare the increased profitability that an ERP solution can deliver against the time and resources required to purchase, configure, and learn it. Today, we’ll explore a handful of common metrics you can use to benchmark your current operational performance, profitability, and efficiency; and we’ll compare those indicators against industry averages provided in the Door and Hardware Institute’s 2014 Financial Report. We’ll also take a look at how distributors who leverage ERP software outperform those averages to give you a reliable idea of the potential profitability gains you can expect if you, too, invest in ERP. With this information, you’ll be well on your way to calculating your ROI on ERP. The Evolution of ERP

Enterprise Resource Planning, as a concept, has been around since the 1960’s. Originally called Material Requirement Planning, MRP systems were primarily developed to automate inventory control and simplify manufacturing planning.

Only very large corporations could afford MRP systems as they often ran upwards of $3 Million dollars create (that’s in 1960’s dollars!). However, the net long-term profitability gains provided by an MRP application justified the investment, and an increasing variety of organizations began to transition to an automated operational environment.

The hundreds of ERP products available today are, by yesterday’s standards, incredibly robust and affordable. Almost every facet of a commercial operation results in an accounting transaction (think inventory, AP, AR, invoicing), so ERP systems have naturally evolved beyond simple inventory management to tie accounting to shop floor management, delivery Whether you scheduling, customer relationship management, retail point of sale, and field realize it or not, service management. Additionally, the widespread adoption of computer you probably automation, combined with advances in hardware and software technology, already run have significantly decreased the cost to write and use sophisticated solutions, making ERP commonplace and a virtual necessity to compete in your business a complex distribution or manufacturing environment. Whether you realize from an ‘ERP’ it or not, you probably already run your business from an ‘ERP’ mindset. For mindset. example: do you track individual purchase or sale transactions in a hand written ledger? Of course not! You most likely use spread sheets, QuickBooks, or even a simple ERP application to log invoice payments or inventory purchases to a general ledger.

Early innovators spent millions of dollars because they knew exactly how an automated platform could provide them a return on their investment. Though the value of ERP has been repeatedly proven since then, it would be unwise for a division 8 distributor today to invest resources in a modern ERP solution without first calculating its potential return for his specific business. Where early pioneers had to estimate how an MRP system would improve profitability, we can use readily available industry financial reports for insight into precisely how ERP-based division 8 businesses perform compared to their non-automated counterparts. Short-term Solutions Vs. Long-term Profitability

Many distributors, even today, are discouraged from leveraging technology to manage their businesses because the initial investment seems too high. Instead, they rely on familiar, seemingly less-expensive, manual solutions to meet demand and grow operations. But, just as it is plain to see that the limitations of a hand-written, manually administrated accounting system would eventually drive a business into the ground, when viewed from a long-term perspective, it becomes clear that relying exclusively on manual processes, and the people to run them, is just as expensive and dangerous.

For instance, when job capacity is maxed out, but the production line needs to increase output; or when the sales team wins more jobs than the project management team can manage, the traditional response is to add another body to the payroll and hope the market can support your bigger footprint down the road. Investing in smart people is a good temporary solution, but what happens when superstars leave and new, less-experienced folks have to learn their job? Or even worse, when the market fluctuates and there isn’t enough work to support a staff of highly experienced industry veterans? Relying too heavily on key personnel and their “tribal knowledge” (the processes unique to them that they take with them when they leave or retire) makes it difficult to scale business in times of rapid industry expansion, and to maintain it in times of industry contraction.

There is always a demand for good help, but when you automate the mundane and time consuming components of your operations – especially those that are prone to costly errors – you turn good help into great help, enable your trusted employees to do more and better work, and reduce the need to increase headcount to grow your operations. When you do hire new employees, you can train them faster and more efficiently on standardized processes (which means you can hire from a less experienced candidate pool), and the contributions they make during their tenure stay with the business after they exit.

Outside of COGS, payroll is the largest line item on the balance sheet, so it makes sense to focus on how an ERP solution can decrease payroll expense to increase net profitability. However, automation can lower a host of other costs too, like vehicle and asset maintenance expenses, collections expenses, and shipping and inventory related expenses. We will examine a number of KPIs relating to many different areas of the business to establish a comprehensive picture of how an ERP solution can drive long-term profitability. Measuring Your Business with KPIs

Many factors affect the stability, profitability, and growth potential of an operation, and in most cases, those factors can be measured and compared across the industry using key performance indicators. No one indicator can provide a complete picture of the health of your operation, and each should be viewed in the context of all the others. Following are XX KPIs that, taken as a whole, can effectively represent your business and provide a basis for comparison against other businesses like yours. Net Sales $

Net sales is total revenue, less the cost of sales returns, allowances, and discounts. This is the primary sales figure reviewed by analysts when they examine the income statement of a business, and is often compared against previous years to establish performance and market trends. In 2014, the typical DHI member firm produced $16.3 MM in net sales, a 44% increase from 5 years ago. How do your sales compare to the average DHI firm’s? Are your sales trending higher, as well?

Typical Firm $16,309,393

My Company $

Gross Margin %

Gross margin is the difference between net sales and cost of goods sold (COGS) divided by net sales, expressed as a percentage. COGS includes materials and direct labor costs, and when they increase, retail pricing usually increases to compensate. The average gross margin among DHI members has widened slightly in the past 5 years, moving from 29.1% to 30.5% which suggests that retail pricing has outpaced wholesale material and labor costs during the recent construction boom.

DHI Average 30.5%

My Company %

Calculation: (net sales – COGS) / net sales Operating Expense %

Operating expenses include all the costs, besides COGS, a distributor incurs to run his business: in other words, everything except materials and direct labor. Division 8 distributors can group operating expenses into payroll expenses, occupancy expenses, and other expenses (depreciation, bad debt, vehicle, insurance, marketing, etc). Outside of leveraging manufacturing innovation or large volume pricing (COGS related expenses), businesses can most effectively scale profits by controlling these operating expenses. The ratio is calculated by dividing total operating expenses (excluding accounting adjustments and interest expenses) by net sales.

In the past 5 years, operating expenses ratios have remained steady, meaning revenue and costs have grown proportionately. This suggests that most distributors are working harder to make more profit, and are not effectively scaling their operations or compounding the benefit of larger sales volume. Scale is the term used to describe the situation where revenue increase outpaces cost increases enough to substantially change profit margin.

DHI Average 27.5%

My Company %

Calculation: total expenses excluding COGS / net sales Profit Margin Percentage

If you have calculated your net sales, gross margin, and operating expense correctly, you can easily calculate your profit margin percentage by subtracting your operating expense percentage from your gross margin percentage. It becomes plain to see that when COGS are relatively fixed, the best opportunity to increase profit margin is to lower operating expense. According to the DHI report, typical distributors operate on a 2.8% profit margin (pre-tax). In other words, the average firm produced $16MM in revenue, but kept only $448,000 of it.

DHI Average 2.8%

My Company %

Calculation: gross margin % – operating expense %

Payroll Expense Percentage

Payroll expense includes salaries, wages, taxes, and benefits for all employees other than those directly involved in the manufacturing process (their wages, benefits, and taxes are included in COGS). Payroll expense is particularly relevant to evaluating the potential benefit of an ERP implementation as one of the primary roles of ERP is to eliminate dependence on the kinds of manual processes that require a large administrative staff. Payroll expense for the typical firm remained steady at 20.4% of revenue from 2010 to 2014, suggesting most distributors substantially grew headcount to drive revenue - resulting in little to no net increase in profit margin.

DHI Average 20.4%

My Company %

Calculation: payroll expense / net sales Inventory (Asset figure)

Inventory is an asset that is intended to be sold within one year through the ordinary course of business, even if it is not immediately ready for sale (as in the case of work-in-progress goods like door and window frames that are in the production process). Inventory includes raw materials, as well as finished goods, and is typically classified as a short term asset. More sophisticated performance indicators provide insight into the relationship between inventory and gross sales, net sales, and accounts payable, but for our purposes it is sufficient to simply state that efficiently run businesses minimize inventory, turn it quickly, and seek to finance it as much as possible through their suppliers. By doing so, a business can effectively generate a greater return on fewer assets, allowing it to drive greater profit with less exposure to risk.

The typical DHI distributor maintains $1.8 MM worth of inventory (representing 28.7 % of its total assets), and with it generates $16.3 MM in sales.

DHI Average $1.8 MM

My Company $ Inventory Turnover Figure

Inventory turnover is an indication of how quickly merchandise dollars move through the business, and is calculated by dividing COGS by average inventory over the course of a year. A higher rate of inventory turnover implies that purchasing is tightly managed. Conversely, a low turnover suggests either a distributor may have a flawed purchasing system that bought too many goods, or that he increased stocks in anticipation of sales that did not occur. The typical DHI member turned inventory over 6.8 times in 2014.

DHI Average $1.8 MM

My Company $

Calculation: COGS / inventory

Inventory Supply Period

Closely related to inventory turnover, inventory supply period tells how many days of inventory are on hand, and can be calculated by dividing 365 days by the inventory turnover figure we just calculated. It’s good to have stock on hand to provide optimal service, but a large inventory is capital intensive and problematic for other reasons. The shorter the supply period, the less likely stock will become obsolete and the more quickly capital is available to fund further operations. On average, DHI member distributors keep 54 days of stock on hand.

DHI Average 54 My Company

Calculation: 365 days / inventory turnover figure Average Collection Period

The average collection period is the average time it takes for a distributor to receive payment, in terms of receivables, from customers and clients. Instead of trying to average out the actual duration of every AR item for an entire year across the entire customer base, average collection period can be approximated by dividing the product of 365 days and the average accounts payable balance during a year by the total net credit sales for the same year. Obviously, the faster a distributor collects payment, the more he is able to remain in control of his operations and look to the future with confidence.

DHI Average 69 days

My Company days

Calculation: (365 days x average accounts payable balance) / net total annual credit sales Accounts Payable Payout Period

The number of days it takes a distributor to payoff purchases he makes on credit is called the accounts payable payment (or payout) period, and is most insightful when measured more than once over a period of years to determine a trend. A lengthening payout period could be an indication of a declining financial condition, whereas a decreasing period could reflect improvements in cash flow or an infusion of operating capital. In either case, a single snapshot of the payout period is not as insightful because a single long or short period measurement itself can be a positive or negative indicator. For example: a short period could mean a distributor is effectively managing cash (positive), or it could mean that his suppliers don’t trust him and consider him a credit risk (negative).

The AP payment period is calculated by first adding a year’s beginning accounts payable to that year’s ending accounts payable and dividing the result by two. Then multiply that figure by 365 (days) and divide the product by total COGS for the same year. It sounds complicated, but what you’re really doing is simply dividing your average daily COGS into your average accounts payable.

DHI does not supply detailed APPP data, so we are not determining this KPI for comparison sake, but to use it in a very important KPI called cash cycle.

My Company days Cash Cycle

The total number of days that pass between the purchase of a product (or the raw materials from which a product is constructed) and the collection of that product’s sales invoice is called the cash cycle. It is calculated by subtracting the accounts payable payout period from the combined average collection period and inventory holding period. Cash cycle measures how effectively management converts cash to inventory and back to cash; grouping sales, delivery, and collections altogether to benchmark the overall health of operations. The longer the cash cycle, the riskier and more capital intensive the business. DHI reports that typical firms cycle their cash about every 100 days.

DHI Average 99.2 days

My Company days

Calculation: (average collection period + inventory holding period) - accounts payable period Return on Assets

Expressed as a percentage, return on assets represents the profit generated by the combined value of the cash, inventory, accounts receivable, property, and equipment in a business; and is a simple, effective measurement of a distributor’s ability to survive and prosper. Banks and analysts use ROA to determine investment potential and company valuation, so maintaining a high ROA is very important when planning for a liquidity event or when seeking investment capital. Because it is a simple ratio, there are two distinct ways to improve ROA: first, decrease the total assets in the business by managing cash and inventory better: and/or second, increase net sales while maintaining assets levels. In either case, ROA is affected by improving efficiency – by doing more with less.

ROA is calculated by dividing net profit (pre-tax) by total average assets. An ROA of 10% indicates that for every $1.00 in assets, a distributor produces $.10 of pre-tax profit. DHI reports that in 2014, typical distributors maintained a %7 ROA

DHI Average 7.0%

My Company %

Calculation: net pre-tax profit / total average assets Sales Revenue per Order

In many cases, the processing, filling, delivery and collections expenses incurred to fulfill a customer order are fixed regardless of the size of the order. Distributors who maximize sales per order more readily cover costs and generate profit with the additional gross margin dollars generated on the sale. Sales per order is calculated by dividing net sales by total number of shipped orders, and DHI reports that the average among typical distribution firms in 2014 was $2,340/order.

DHI Average $2,340

My Company $

Calculation: net sales / total orders shipped

Sales per Customer $

More customers is always a good thing. However, a distributor who maximizes sales to existing customers doesn’t constantly need to find more of them to maintain revenue, which is even better. Distributors with high sales to customer ratios effectively use delivery vehicles and other operating assets to reduce their dependence on, and cost to acquire, new customers. A word of caution, though: low sales per customer (which is usually a negative indicator) can also mean that a firm is rapidly winning new customers by expanding into fresh markets or territories. To offset the effect that rapid customer acquisition could have on this otherwise insightful KPI, the figures DHI reported for typical member distributors in 2014 only included customers who placed more than a minimum of 6 orders per year.

DHI Average $49,070

My Company $

Calculation: nets sales / total customers (minimum 6 purchases/year) Sales per SKU

High sales per SKU suggests a distributor is efficiently stocking inventory against customer demand. Distributors must identify and keep an adequate supply of popular items while minimizing their supply of unpopular inventory. To calculate sales per SKU, divide total net sales by average total number of SKU in inventory for a given year. A SKU is defined as narrowly as possible – meaning, for instance, otherwise identical items of different color are different SKUs. DHI reports typical distribution firms produced an average of $8,419 per SKU in 2014.

DHI Average $8,419

My Company $

Calculation: net sales / average number of distinct SKUs in inventory over the course of a year Division 8 distribution and manufacturing is a tough business. According to the 2014 DHI Financial Report, annual sales for the typical distributor increased by approximately $2 Million over the preceding 5 years, yet he only pocketed 2.8% of those net sales as profit. His average collection period was almost 70 days, and his return on assets (a key indicator that many feel is the best predictor of future growth) is a modest 7%. However, not every distributor is balancing his business on razor thin margins. A small minority of member firms, those the DHI designates as ‘high-performing’, use ERP software to consistently double industry average profit margins and return on assets. The Division 8 Profitability Gap

When compared to typical firms earning nearly identical net sales volume, performing firms are able to:

• Produce 130% greater operational profit • Spend 12% less on operational expenses • Spend 13% less on payroll (subset of operational expenses) • Sell 39% more per SKU and 53% more per order • Maintain 33% less inventory while selling through it 40% faster. When job capacity • Generate 156% greater return on assets

is maxed out...the Among other things, these metrics suggest that performing firms generate ...performing firms more profit from the same amount of work – they can do more with less, generate more profit which is the primary benefit of operating on an ERP platform. It is interesting to note that COGS represented 69.5% and 69% of total expenses for typical from the same amount and performing firms, respectively; suggesting that it is only by introducing of work – they can do operational efficiencies, and not through price breaks or volume discounts, more with less... that performing firms were able to book substantially greater profits.

The whole point of ERP is to enable businesses to increase profitability, or in other words, to drive greater revenue with fewer resources. Resources can be capital, equipment, personnel, time, or anything that translates directly, or indirectly, to a cost. If the increase in profitability exceeds the cost to implement an ERP system, then it would be wise to make changes as soon as possible. To provide some perspective on the possible gains you could enjoy by transitioning to an industry-tailored ERP solution, compare your KPIs against high performing firms’, as reported in the DHI financial summary for 2014. Net Sales

As stated before, net sales can illustrate performance trends when figures of one year are compared to another. However, when net sales of two disparate groups are similar, like they are for typical and performing firms in 2014, one can compare many other KPIs to derive otherwise hidden insights. The difference in total revenue (minus returns, allowances, and discounts) between typical and high performing firms in 2014 was only a quarter of a percent; so each classification’s performance data can be compared reliably against the other. Additionally, because it is shown that volume is not responsible for profit variation, any business can be compared against performing firms to accurately asses the impact of ERP on its operational costs.

In other words, the percentage change in any KPI, from typical to performing can be applied directly to any typical distributor

A. Typical Firm: $16,309,393

B. Performing Firm: $16,350,236

C. Difference between Typical .25% greater revenue (negligible) and Performing:

D. My Current Net Sales: $______

E. My Net Sales on an $______(1.0025 x line d ) ERP solution: Gross Margin %

Over the last 5 years, COGS has remained relatively constant between typical and performing firms, which suggests we should focus our analysis on other cost areas to account for the substantially greater profits performing firms booked from the same revenue and production costs.

A. Typical Firm: 30.5%

B. Performing Firm: 31%

C. Difference between Typical 1.6 % greater gross margin (negligible) and Performing:

D. My company now: ___%

E. My Gross Margin on an ___% (1.0164 x line d) ERP Solution:

Operating Expense %

Operating expenses are the sum of all non-production costs, and related to profit: when operating expenses decrease by a dollar, profit increases by the same dollar. Performing firms keep costs to 24.2% of their total revenue, whereas typical firms pay more (27.5%) to output the same volume. Essentially, the data shows that implementing an ERP solution can result in a 12% annual cost reduction. If you plan on keeping the doors open for years to come, the savings are substantial. To illustrate: let’s assume you’re able to keep revenue consistent for 10 years. Multiply your current annual operating expenses (the actual dollar figure) by 12%, then multiply that figure by 10. The result is how much you could save by implementing an ERP solution.

A. Typical Firm: 27.5%

B. Performing Firm: 24.2%

C. Difference between Typical 12 % lower operating costs and Performing:

D. My Current Operating Expenses $______($ figure):

E. 10-Year Savings on an $______(.12 x line d x 10 years) ERP Solution: Profit Margin %

Often, factors other than operational profit (like interest paid and interest collected) affect the net bottom line, leading to a profit margin percentage that is slightly different than the difference between gross margin and operating expense. When all factors are considered, performing firms earn 2.5 times more profit than typical firms producing the same net revenue.

A. Typical Firm: 2.8%

B. Performing Firm: 6.9%

C. Difference between Typical 146 % greater profit margin and Performing:

D. My Current Profit Margin: ___%

E. My Profit Margin on an __% (2.46 x line d) ERP Solution: Payroll Expense %

There are many ways to decrease payroll expenses, some more effective in the long run than others. While there is no single formula that works for every distributor, it is interesting to analyze how performing distributors manage their workforces relative to typical ones.

• Lower larger executive salaries, • Lower all salaries across the board, • Eliminate high-paying executive positions, • Eliminate administrative positions, or • Staff administrative positions with less experienced and cheaper labor.

In 2014, performing firms supported an 8% larger staff, but paid 13% less in total payroll expense. Furthermore, detailed analysis reveals that performing firms paid 20% more in sales commissions and 38% less in administrative wages, meaning they successfully supported larger (or possibly more experienced) sales forces with less experienced service and support people.

One of the chief benefits of an ERP system is its ability to standardize operations, eliminating the need for deep industry expertise, long training programs, and special skills among administrative personnel. Firms who have standardized their processes and use software to guide their employees’ work day see greater productivity, less negative impact from employee attrition, and lower overall employment costs.

A. Typical Firm: 20.4%

B. Performing Firm: 17.8%

C. Difference between Typical 13% smaller payroll expense and Performing:

D. My Current Operating Expenses % ($ figure):

E. 10-Year Savings on an % (.87 x line d) ERP Solution: Inventory

The time-honored adage ‘it takes money to make money’ seems not to apply to performing distributors, who are able to drive over twice the profits, and identical revenues, from 33% less inventory than their typical counterparts. Modern ERP software fundamentally change rules of the game, reordering the relationship between risk and reward, and enabling distributors to produce substantially more with the same, or even less, resources.

A. Typical Firm: $1.8 Million

B. Performing Firm: $1.2 Million

C. Difference between Typical 33% smaller inventory outlay and Performing:

D. My Current Inventory Investment $_____

E. My Inventory Investment on an $_____ (.67 x line d) ERP Solution:

Inventory Turnover Figure

Typically, the faster cash flows through a business, the less of it is needed to keep the business running and growing. Inventory turnover is a fantastic indication of your business’ health and maturity of your purchasing motion (stable, established businesses, regardless of age, operate under sound assumptions and forecasts).

Performing distributors optimize their purchasing and supply operations to keep inventory moving 40% faster than their typical counterparts. Effective use of cash is a key component when seeking investment capital or when marketing your business for sale.

A. Typical Firm: 6.8

B. Performing Firm: 9.5

C. Difference between Typical 40% faster cash flow and Performing:

D. My Current Inventory Turnover

E. My Inventory Turnover on and  (1.4 x line d) ERP Solution: Inventory Supply Period

Like inventory turnover, inventory supply provides insight into purchasing efficiency. The difference, however, is that inventory supply can be used to help plan for growth by giving owners an idea of how much more inventory to buy during an expansion into new territories or market segments. Performing distributors move through inventory faster (as indicated by their turnover figure), and so have an effectively shorter supply on hand.

A. Typical Firm: 54 days

B. Performing Firm: 40 days

C. Difference between Typical 14% shorter and Performing:

D. My Current Inventory Supply days

E. My Inventory Supply on and days (0.86 x line d) ERP Solution:

Average Collection Period

Effectively collecting on AR begins long before an invoice is issued. Appropriately setting and meeting (or exceeding) customer’s expectations in every phase of customer interaction sets a precedent for how they are to behave when it comes time to pay. Additionally, well managed processes can help to identify potential problems before they get out of hand. Performing firms collect against invoices over a week faster that typical ones, yet they don’t discount prices to encourage faster response, nor is there an indication that they service faster paying customers. This suggests that customers are willing and able to pay, but typical distributors aren’t organized enough to speed the process up on their end.

A. Typical Firm: 69 days

B. Performing Firm: 61 days

C. Difference between Typical 12% shorter and Performing:

D. My Current Inventory Supply days

E. My Inventory Supply on and days (.88 x line d) ERP Solution: Cash Cycle

Performing firms turned inventory 40% faster and collected against AR 12% faster to yield an overall cash cycle that is 23% shorter than their typical counterparts. Faster cash flow means less risk and more latitude to grow your business or adapt to market challenges. An ERP solution can accelerate cash flow by automating the manual bottlenecks and the eliminating human errors that derail inventory turnover and collections.

A. Typical Firm: 99 days

B. Performing Firm: 76 days

C. Difference between Typical 23% faster cash cycle and Performing:

D. My Current Cash Cycle: ___ days

E. My Cash Cycle on and ___ days (77% x line d) ERP Solution:

Return on Assets

ROA is the primary indicator of superior performance, as it accounts for all the areas of the business, from inventory and production management, to staffing and collections. In fact, the DHI used ROA figures to initially identify and then segregate firms into the ‘performing distributors’ category. In 2014, typical distributors generated a 7% return on the assets they invested into their businesses, whereas performing firms more than doubled that with a 17.9% return. When one considers that net sales between the different categories were similar, it becomes plain to see the overall impact an ERP solution can have on an a business.

A. Typical Firm: 7.0%

B. Performing Firm: 17.9%

C. Difference between Typical 156% greater return on assets and Performing:

D. My Current ROA: ___ %

E. My ROA on and ERP Solution: ___ % (2.56 x line d) Return on Asset

Performing distributors generate 53% more sales per order, 8% more sales per customer, and 39% more sales per SKU then typical distributors because they can identify popular items and effectively stock only the quantities necessary to meet each customer’s demand. An ERP platform that records and reports detailed inventory data, as well as data on your customers’ behavior, will enable you to identify sales patterns to similarly manage your inventory. Sales Revenue per Order

A. Typical Firm: $2,340

B. Performing Firm: $3,584

C. Difference between Typical 53% greater sales per order and Performing:

D. My Current Sales Per Order: $____

E. My Sales Per Order on and ERP $____ (1.53 x line d) Solution:

Sales per Customer

A. Typical Firm: $49,070

B. Performing Firm: $53,025

C. Difference between Typical 8% greater sales per customer and Performing:

D. My Current Sales Per Customer: $____

E. My Sales Per Customer on and $____ (1.08 x line d) ERP Solution:

Sales per SKU

A. Typical Firm: $8,419

B. Performing Firm: $11,688

C. Difference between Typical 39% greater sales per SKU and Performing:

D. My Current Sales Per SKU: $____

E. My Sales Per SKU on and ERP $____ (1.39 x line d) Solution: Leveraging ERP to Close the Gap

There have been some genuinely positive trends in the door and hardware industry over the past 5 years. Typical distributors saw profit margins improve from 1.4% in 2010 to 2.8% in 2014, and performing firms saw profits increase from 4.3% in 2010 to 7.1% in 2012. The fact that performing firms were able to capitalize more quickly on the current boom (both types roughly doubled their margins, but performers did it less than half the time) is an indication of the valuable role ERP can play in growing a business and adapting to changing market conditions.

It is one thing to conclude from a data set that ERP-based shops can leverage automation and reporting to lower costs and extract more profits from the same amount of work, but quite another to determine if the difference in profits warrants implementing a new ERP solution for your business. For that, you must compare the potential increase to your bottom line that can come from an ERP solution against the cost of that solution. If you’ve followed along with the KPI explanations and treated them as exercises, you’re well on your way to determining for yourself how, and where an ERP solution will most positively impact your operations.

A word to the wise: not all ERP solutions are equal. Your greatest ROI will come from an ERP system that optimizes the balance between cost and capability. If you haven’t already, we suggest you take a look at our publication, The ABC’s of ERP: An Introduction to ERP Solutions for the Division 8 Industry. In it we explore the different kinds of ERP solutions available today, and how each is suited for the particular nuances and intricacies of division 8 manufacturing and distribution.