Problem Description:

Jim McIntosh, Operations Manager for Lucky Leprechaun Semi$-$Conductor LLC$,$ is considering the

replacement of the company$$s manual purchase order placement system with a new web$-$based

Enterprise Resource Planning $($ERP$)$ system that includes an electronic purchase order module.

Mr$.$ McIntosh estimates the current manual system, including labor, costs $$5\mathrm{.}75/$purchase order for

transmission and processing when annual purchase order volume is under $30,000.$ Should the purchase

order volume equal or exceed $30,000$ in any given year, Mr$.$ McIntosh will have to hire an additional

supervisor to manage and control dispersing work load in the purchasing department. This would raise

the variable cost to $$6\mathrm{.}25/$order$.$ Mr$.$ McIntosh also estimates the rate of errors in PO placement and

transfer to be $12/1,000$ orders.

After extensive review of potential web$-$based ERP platforms, Lucky Leprechaun Semi$-$Conductor LLC

down$-$selected to an ERP platform that costs $$125,000$ upfront to implement and variable costs are

determined to be $$\mathrm{.}50/$order regardless of volume. The web$-$based application could acquire and

maintain purchase order information with an error rate of $3/1,000$ purchase orders.

In addition to the above, an ERP Specialist would be required to be hired to manage and maintain the

system at all times. The ERP Specialist$$s salary is $$40,000$ in the first year and their salary increases $3\%$

each year thereafter.

Purchase Order errors cost $$7\mathrm{.}00$ per occurrence on average to correct in the original manual system.

Purchase Order errors cost $$9\mathrm{.}00$ per occurrence on average to correct in the new ERP web$-$based

system. This is due to the ERP Specialist inspecting the system for flaws periodically.

Additional helpful information:

To determine if the new web$-$based ERP system will pay for itself within the first five years, we must

begin by determining the annual costs associated with the current manual system. Using the below

equation you will be able to calculate the cost for each year as well as the cumulative cost for the

manual system:

$($Purchase Order volume x cost$/$order$)+($errors x cost$/$error$)=$ Annual Cost

After the cumulative total cost of the manual system is calculated, we must then calculate the cost for

the new web$-$based ERP system for the same period, using the below equation:

$($Purchase Order volume x cost$/$order$)+($errors x cost$/$error$)+$ ERP Specialist Salary $=$ Annual Cost

Hint: Don$$t forget the upfront implementation cost when calculating the cumulative web$-$based ERP

system cost.

Questions:

$1)$ If Lucky Leprechaun Semi$-$Conductor LLC expects purchase order volume over the next five

years to be $22,000,25,000,27,000,32,000$ and $38,000$ annually, would a web$-$based ERP

platform pay for itself within the first five years? You must show your calculations to bolster

your answer.

$2)$ What other effects $($besides cost$)$ should Mr$.$ McIntosh consider when considering the

implementation of a web$-$based ERP platform solution?

$3)$ By implementing a web$-$based ERP system, does this create a competitive advantage for Lucky

Leprechaun Semi$-$Conductor LLC$?$ Why, or Why not?