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By Zack Good • October 25, 2019

Why ERP is a Cost-Cutting Tool

There are many reasons why businesses invest in an enterprise resource planning system (ERP). An ERP system helps connects all aspects of a business to a centralized source of truth. It assists with efficiency and adds operational visibility. It improves processes and workflows with automation and standardization. But one of the most important reasons that businesses use ERP is the cost savings.

Cost savings is one of the original value propositions for ERP, which grew out of material resource planning software that helped manufacturers reduce waste. While helping manufacturers more tightly manage material resources is still a central feature of ERP, over the past few decades ERP has come to encompass a lot more—and help more than just manufacturers cut costs.

Here are seven way that ERP can serve as a cost-cutting tool.

  1. Exception Alerts

Unexpected costs often emerge from process exceptions and operational breakdowns that accumulate over time and frequently go unnoticed. These little variances and inefficiencies add up.

ERP systems call attention to exceptions and process breakdowns as soon as they occur through automated triggers and exception alerts that flag when there are unexpected costs or process variance. Management can only make appropriate adjustments when exceptions are visible, and ERP calls attention to these exceptions.

  1. Improved Accuracy

Nothing wrong with spreadsheets and manual data entry. Except these spreadsheets are often not truly integrated with other areas of operations, and manual data entry is prone to missed entries and inaccuracies from human error.

ERP greatly improves accuracy, which leads to more efficient planning and better cost control. With ERP, data flows automatically into the system, avoiding manual data entry. All business data also is linked and accessible within a single system (given appropriate access rights), enabling businesses to accurately track operations and make fine-grained adjustments that just aren’t possible with manual systems and less complete software solutions.

  1. Reduced IT spend

Much of the cost of IT operations is routine upkeep. Hardware and software must be updated, integrations and customization need to be maintained, systems expanded as a business grows. This is a significant component of IT operations at the average company.

Cloud-based ERP, which is the standard today, eliminates much of this IT administration by offloading almost all of the IT maintenance to the ERP vendor. By using the cloud, hardware purchase and maintenance is reduced, software is always current, and system scalability is as easy as choosing to use more resources. IT spend can be reduced or allocated to more strategic projects.

  1. Better Inventory Control

Inventory represents a major expense for most businesses, and both tracking stock and optimizing inventory is a key way that many businesses intelligently cut costs.

ERP is the preeminent tool for monitoring, controlling and managing inventory. With an ERP system, businesses get real-time visibility on current inventory levels, current and forecasted depletion patterns, and even the warehouse location of every item in inventory. Automatic reorders and inventory optimization also can help reduce inventory costs.

  1. Increased Automation

One of the original ways that businesses can cut costs is through automation and better employee utilization. More efficient employees and better processes are a potent cost-cutting tool.

ERP plays a significant role in better utilizing employees but serving as the foundation for automated operations. With all aspects of a business run through a single software solution, automating key processes and improving employee utilization is a lot easier and more complete.

Companies such as shoe manufacturer, Rothy’s, use ERP to run a lean operation by having end-to-end automation that takes orders, handles inventory, updates financial systems and handles shipping and logistics without any human intervention. This was only possible after the company put an ERP system in place.

  1. Precise Supply Chain Management

For many businesses, operations are a complex relationship with suppliers, distributors and customers. Pricing changes, shipping disruptions and stock shortages along this chain can cut into profits and add costs.

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With ERP, however, businesses can more precisely manage and automate supply-chain operations because ERP can connect in real-time with supplier systems, marketplaces and POS systems for both fine-tuning supply chain logistics and adjusting to changes in real-time. Secondary suppliers and additional costs can be factored in and acted upon automatically, current available resources can be checked automatically, and reorders can be placed and adjusted more precisely for cost reductions.

  1. Optimized Employee Management

Without enterprise software in place, employee information sits in multiple systems and the relationship between production needs, scheduling and demand are loose at best.

When all company data sits in a single system, however, businesses can optimize employee utilization and schedule more accurately by matching employee counts with operational needs and flagging underutilization. Analytics can also help spot areas for staff reductions or better utilization. This staff optimization can have a significant impact on costs.

These are just a few of the ways that ERP systems help businesses cut costs.

For more on why ERP is essential software for business, and where your company should get started, check out our vender-neutral guide, Understanding Cloud ERP for Non-IT Executives.