Activity-based framework for cost savings through the implementation of an ERP system

Although enterprise resource planning (ERP) has been widely adopted since its first appearance in the early 1990s, there is a lack of research regarding ERP investment justification and performance evaluation. In this paper, based on an activity-based costing (ABC) analysis, we propose a framework to quantify the cost savings that the implementation of an ERP system should achieve in order to make the investment justifiable. Exploiting the ability of ABC to trace costs to activities and products, ERP resource costs and activities are identified and the cost structure of products is analysed. It is also shown that the ABC approach can enhance the visibility of business processes with various activities and cost drivers and provide information about actions to be taken to raise profits by cost savings or increased revenues. Finally, a numerical example is used to demonstrate how an ERP system is utilized on activities and how it affects the cost of products. An extensive analysis follows to address how the results can be used to direct process improvement toward corporate goals.