ACCOUNTING

ACC 444 Fall 2018: Assignment #3 – Garverick

ACC 444 Fall 2018: Assignment #3 – Garverick

Business Case Analysis of an ERP System

Carter Electronics, a distributor of semiconductors and electrical components, is considering implementing an ERP system. This project will represent a huge investment for Carter and thus a business case must be developed in order to gain approval for the project. With the help of knowledgeable process owners, a group of individuals who will likely be on the project team, and IT staff, the managerial accountants put together the following total cost of ownership and benefits over a 5 year horizon (the time estimated that the system will be used until a major upgrade). Carter’s cost of capital is 6%

ESTIMATED TCO
Item One Time Recurring Comments
Technology
Hardware and infrastructure upgrades $500,000 Costs for

servers/network/wiring/redundancy

ERP software contract value $2,000,000 Expected negotiated net price
Recurring software maintenance –level 3 support $360,000 18% of software contract value (low end of maintenance)
Database and Identity and

Access Management Software

$225,000 Estimated for MS SQL Server and any of the top 5 IAM systems, which are priced similarly

Data
Inventory master data accuracy and BOM master data $350,000 This data is in 2 different systems currently. Deemed to have major data duplication issues. Need scrubbing and restructuring into new format.
All other master data scrubbing $200,000 Scrubbing customer, vendor, employee
Writing interface programs $275,000 Multiple legacy systems will remain (e.g., fixed assets)
Recurring data maintenance $140,000 2 full time persons for master data maintenance (ongoing 5 years)
Writing data conversion programs $300,000 Convert data to ERP format and migrate
People
Internal Project Team $2,100,000 $180,000 Six full-time equivalent people; Center of Excellence – two full time people for 5 years
Change Management

(consultants)

$500,000 $100,000 Includes costs for communication, education, training; ongoing 2 years
Project management (consultants) $1,600,000 Integrated project plan, budget etc.
Configuration/customization of ERP software (consultants) $1,700,000 Adapting the software to use in the company/filling gaps
Contingency – 15% 15% 15% buffer on all one-time costs to avoid surprises.

ESTIMATED BENEFITS
Item Current Level % Improvement Annual Benefits Comments
Sales $75,000,000 5% $3,750,000 Improvement in gross sales due to improved product availability and better service.
Direct Labor

Productivity

$15,000,000 10% $1,500,000 Reductions in idle time, overtime, and other HR- related issues related to inefficiency of workforce.
6 Fewer

Employees

Needed

Average loaded

$50,000 annual salary

$300,000 Reductions in

clerical/data entry

support and warehouse

staff

Purchasing costs $1,000,000 20% $200,000 Better planning and information = reduced total purchase costs.
Inventory
Item Current Levels % Improvement Annual Benefits Comments
Raw Material and

WIP

$17,000,000 4% $680,000 Annual saving from better forecasting and also implementation of vendor managed inventory
Finished Goods $9,000,000 17% $1,530,000 Annual saving from better forecasting and also implementation of demand management module
Premium freight $800,000 50% $400,000 Produce and ship on-time reduces shipment cost

1) You are an analyst for Carter’s ERP project selection team. Write a 1-2 page (single spaced) professional business memorandum to the steering committee (headed by me, Dr.JEO) stating the business case for purchasing the ERP system(also see 1(e) above; you should have at least one “Appendix A” in addition to the 1-2 pages of memorandum text). Use at least one of the four business case rationales that we discussed in CH 5 for purchasing the ERP system. Make sure that you reference key #’s from your TCO analysis and have a persuasive, evidence-based memorandum justifying your need for and recommendation to purchase (or not) an ERP system.

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