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9609 · 9.3.3

Enterprise resource planning (ERP) — practice questions

Practice and worked examples for 9609 Enterprise resource planning (ERP). Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Manufacturer uses separate spreadsheets for stock, finance, and production. Frequent stock-outs despite warehouse full. Would ERP help?

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Diagnosis: Information silos — production doesn't see sales forecast; finance doesn't see WIP — classic horizontal communication failure (7.2.3).

ERP benefits: Single truth for inventory, MRP auto-orders materials (9.3.5), finance accruals updated live.

Costs/risks: $500k+ implementation, 12-month disruption, staff retraining — need change manager.

Verdict: Yes if growth continues — cheaper than lost sales; pilot one site first; clean data migration critical.

Worked example 2

A manufacturing firm is considering an ERP system. The initial investment (licensing, hardware, consultants) is $1,200,000. Annual maintenance will be $150,000. The firm predicts the ERP will generate annual savings of $250,000 from reduced inventory holding, $300,000 from automating administrative tasks, and an additional $200,000 in annual profit from fewer lost sales. Calculate the payback period for this investment.

Show solution outline

Step 1: Calculate Total Annual Savings (Gross Benefit) This is the sum of all financial benefits the ERP is expected to generate each year.

  • Inventory Savings: $250,000
  • Administrative Savings: $300,000
  • Additional Profit: $200,000
  • Total Annual Savings = $250,000 + $300,000 + $200,000 = $750,000

Step 2: Calculate Annual Net Cash Flow This is the annual saving minus the ongoing annual costs of the system.

  • Total Annual Savings: $750,000
  • Annual Maintenance Cost: $150,000
  • Annual Net Cash Flow = $750,000 - $150,000 = $600,000

Step 3: Calculate the Payback Period The payback period is the time it takes for the net cash flow to repay the initial investment.

  • Formula: Payback Period = Initial Investment / Annual Net Cash Flow
  • Initial Investment: $1,200,000
  • Annual Net Cash Flow: $600,000
  • Payback Period = $1,200,000 / $600,000 = 2 years

Conclusion: The payback period for the ERP implementation is exactly 2 years. This is a relatively short payback period for such a large-scale IT project, suggesting it is a financially attractive investment. The board should, however, also consider the significant non-financial risks, such as implementation disruption and the need for effective change management, before approving the project.

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