Comparing costs: Poorly controlled margins vs. ERP systems

The state of the Australian economy is worrying for many. For retailers, warehousing and distribution businesses, it’s particularly concerning. A slow-moving economy and poor sales results across the industry mean that controlling internal business costs is more important than ever.

We don’t have much control over the economy. We also don’t have too much control over the cost of goods or customer purchasing habits. But our own costs are something we can control – if we have the right tools.

Obviously, one of the best ways to better control business processes, including margins and costs, is by implementing an ERP. But they also come with a significant cost themselves.

So, is it really a case of spending money to save money? Or are you better to hold onto your money and hope to ride out the slow economy?

You can’t control costs you can’t see

In my time working with warehouse and distribution businesses, I’ve always seen the same thing: When it comes to business costs and margins, you can only control them if you have full visibility of what they are, and why they’re occurring.

Are some staff selling below margin? Is someone giving away too much discount? Are you ordering too much stock? Can you see which customers, products or projects have the best margin business to go after and which you should consider phasing out (or even stopping altogether)?

Without visibility, costs can easily compound.

You might think these are able to be controlled independently. Some stricter rules for the sales team here, a bit more recording and research there. But a lack of visibility comes at a cost greater than just the direct cost of supplies or sales.

Companies that can’t precisely understand, monitor and manage costs and margins can too easily go on to make the wrong financial decisions. These can include:

• Choosing small, short-term costs rather than bigger, more impactful costs
• Using manual, slow systems that are indirectly increasing costs
• Not reporting on performance
• Spending too much time on things that don’t add value to your end-user

When you can’t optimise spending and minimise costs internally, the external factors – like the economy and your competition – will be felt far more.

Is your lack of visibility impacting your margins?

Is the cost of control worth it?

So, lack of control can quickly become expensive. But is it as costly as an ERP system?

Implementing an ERP certainly isn’t something you go into blindly, or on a whim. You’ll want to do your research, determine your needs and be knowledgeable about the choices out there and what they can offer you. There’s no denying, ERP’s require significant investment and commitment.

But what do you get for the investment?

The big thing is visibility. You’ll be able to see all the what’s, why’s and how’s of your costs. But also, the wider picture – not just what’s costing you, but how to reduce that in a way that won’t affect how your business operates.

In the same way that low margins and high costs aren’t the only problems caused by poor visibility, an ERP system gives you more than just the ability to lower supply costs and tighten margins.

• Report on performance and make data-driven decisions towards improvement
• Understand costs and optimise spending
• Invest in the right places, and remove unprofitable processes
• Market and sell better to your customers and improve service offerings

Understanding and controlling your costs and implementing tighter margins are easy enough to understand. But to make them happen, and to make a real impact on your bottom line, you need to get relevant business controls in place and working for you in an automated fashion, via your business software.

ERP systems offer the biggest return on investment

Depending on the size of your operation, the simple act of not following up all quotes can cost a business thousands, if not millions, per year. And that’s just one business process.

Combine that with slow manual processes, low-value procedures, unregulated margins… Suddenly the cost of not putting in an ERP system can outweigh implementation costs in just a couple of months.

ERP systems can go a long way to helping you control your costs, and will continue to bring ROI as you continue to use it.

I’ve covered some of the benefits here, but for a more detailed look at controlling costs through ERP, download the free Controlling Costs and Margins eBook.

I think we’ve all experienced the swings in the economy enough to know that trying to wait it out for a better tomorrow is a risky move, that could start out cheap but end up costing you.

If you’d like to see ERP in action, click here to organise a free demo of HARMONiQ software, the ERP system built specifically for warehousing and distribution businesses.