Payback 10 to 1. Is it a realistic expectation?

Our rule of thumb is that a well-functioning cloud ERP system will give a month-on-month payback of at least ten times its cost. Do the numbers back this up?

Payback of 10 to 1?

When start-up costs are quite minimal (it’s mostly effort rather than purchases) then the question always arises about why wait? If you are not running an ERP system in your business then each month you are doing nothing is clearly an expensive option.

Example:

Let’s consider a small company with a sales turnover of one million in your currency.

Here is what the income statement might look like in thousands:

Sales 1000

Purchased materials 400

Direct wages 300

Overheads 200

Financial costs 50

Profit 50

Payback of 10 to 1 is typically divided into four areas:

1. Saving in administration
2. Improving process efficiency
3. Improving competitiveness by shortening lead times
4. Managing growth

Let’s consider each of these:

Saving in administration

Administration time can be reduced significantly, particularly around purchase planning and invoice auditing. There is much less time needed to calculate what should be purchased and when and what should be made and when. We have seen some of our small customers switch resources from administration to sales and customer service while still keeping their businesses under control.

Improvements in process efficiency

Manu Online will help you buy materials only in the quantities you need and when you need them. This reduces inventory holding costs improving cashflow and more importantly helps prevent late delivery of sales. Better accuracy can also bring significant savings in buying the right materials and only paying for materials that are received. We have seen at least one case where our customer saved the value of their Manu Online subscription for many years by catching a single fraudulent purchase invoice from a supplier.

Improving competitiveness by shortening lead times

Manu Online helps connect purchasing, production and sales together in real time. Also, by taking into use some of the basic principles of lean manufacturing, we have seen some customers significantly reduce their lead times and achieve growth by out-performing their competitors.

Managing growth

A small company cannot scale or become a big company without a functioning ERP system. The only question is when will this be done, don’t wait until it is too late or too hectic. Because Manu Online is a scalable cloud system, you can start small, put your processes in order early on. As sales volume grows your business will stay under control. As transaction volumes increase you can move to our Enterprise Edition without installing new software. We have seen several of our customers grow from less than 20 people to over one hundred while using Manu Online.

Some numbers (Payback of 10 to 1)



Here is how it might work out in practice:

• An administrative saving of 4 hours per week:
  Annual saving 3120
• Increased margin due to benefits in labour and process efficiency of 3%:
  300,000 / 1.03 = 8,738
• Beating competitors on lead time with orders gives 3% new sales:
  1,000,000 * 3% * 30% margin = 9,000

This gives a total of 20,858. The cost of Manu Online Mini Enterprise Edition is £1980 per year (annual payment). If your calculations are in GBP you can see that the payback is more than ten times the cost of the system.

Compared to using Excel or a cumbersome legacy system, these numbers are reasonable and achievable. Cloud computing now means that there are no upfront costs of hardware or software licences so pay back starts as soon as the system is taken into operation.

Contact us about your manufacturing challenges today.

We work with Xero.