Managing Information Technology

Case Study III-3 • ERP Purchase Decision at Benton Manufacturing Company, Inc. 453

Year

2001

Costs

Benefits

Net Benefits

20,000,000

–20,000,000

Year

2002

Year

2003

Year

2004

Year

2005

Year

2006

Year

2007

10,000,000

6,000,000

–4,000,000

4,000,000

9,800,000

5,800,000

750,000

11,593,000

10,843,000

750,000

11,593,000

10,843,000

750,000

11,593,000

10,843,000

750,000

11,593,000

10,843,000

IRR = 20%

NPV @ 20% = $156,046.83

EXHIBIT 3 Cost/Benefit Analysis for Benton ERP

the $11,593,000 estimate of total yearly benefits is

conservative.

Meyer explains Exhibit 3:

We based our estimate of total cost of converting to

an ERP on the concept of “cost per seat.” The indus-

try “cost per seat” ranges from $15,000 to $35,000,

which includes hardware, networks, software, con-

sulting, conversion, customization, and the cost of

our people who work on the project. Because we

expect to have to do a good amount of reengineering

and will need a lot of help from outside consultants,

we took $25,000 per seat and multiplied by the num-

ber of PCs we expect to have on the system (1360) to

get the $34 million cost estimate. We also included

$750,000 a year for a maintenance contract. We used

judgement to spread both the costs and the benefits

over the 7 years.

Benefits columns are calculated as follows: The Low
$ column is the Base Cost times the Low percent; the
High $ is the Base Cost times the High percent; and,
the Medium $ is the average of the High $ and Low $
columns.
For each row we considered Benton’s situation
and chose a Low $ or Medium $ figure depending on
our judgement, trying to be conservative. In the
Inventory row we chose the Low $ column because
we had already reduced inventory by 30 percent. In
the Centralized Operations row we chose the Low
$ figure because we think we are already pretty lean.
And in the Incremental Revenue row we chose the
Low $ figure because we are already growing rev-
enues by 6 to 7 percent, and doubt that we will be able
to do much better than that given the industry condi-
tions. Incidentally, in that line we took only 50 percent
of the increased revenue as the benefit because labor
and materials cost is half the revenue. We think that

Industry

Low

Benton

Projected

Inventory

Centralized Operations

Procurement

Logistics

Incremental Revenue

10%

15%

10%

5%

1%

Industry

High

40%

50%

20%

10%

5%

Base

Amount

$7,800

$3,000

$1,750

$68,000

$1,000,000

Low $

$780

$450

$175

$3,400

$5,000

Medium $

$1,950

$975

$263

$5,100

$15,000

High $

$3,150

$1,500

$350

$6,800

$25,000

Total Projected Yearly Benefits

Note: Dollar figures are in thousands.

$780

$450

$263

$5,100

$5,000

$11,593

Estimated Benefits

EXHIBIT 2 Industry-Based Annual Benefits of Benton’s ERP