Cost-Benefit Analysis

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Cost-benefit analysis is a technique used to analyze how well a business decision will turn out. Cost-benefit analysis forces a decision maker to compare all direct and indirect positive and negative effects (benefits and costs) of the proposed decision. Benefits must exceed costs to justify the project or adopt the policy. (Michel, 1999, p. 1) We need to perform a cost-benefit and a payback analysis for the proposed system implementation in order to see whether the benefits will cover the costs of the implementation and how much time it will take before cumulative benefits overtake cumulative costs.

For this we need to determine projected benefits from the SAP R/3 implementation. First, our new system will help increase CVS Caremark’s customer service and as result increase sales. This will especially help with the online purchases. Our system will help the company ship products on time; it will also reduce the time between orders and shipments and costs associated with the expediting shipments. Increase in sales revenue expected from our new system is 7. 3% and amounts to $5,572,000.

Second, we expect that the new system will reduce inventory expenses by $4,200,000. The new system will allow CVS Caremark manage inventory more efficiently, allow better planning and scheduling, which will also reduce inventories. Third, the new system will increase operational efficiency. Based on the data from Cardinal Health’ implementation of the SAP ERP, which allowed the company to save $14. 9 million in operational efficiency (Maximizing Value, 2006, p. 149), we expect that CVS Caremark will have additional $16,560,000 in savings.

Other cost savings are expected to be $17,000,000. These cost savings include savings from streamlined processes, savings “for reduced reimbursements to customers for unresolved discrepancies in products received” (Maximizing Value, 2006, p. 149), improved cash flow, and an increase in labor productivity. Cost-benefit analysis is presented in the Figure #1 below. The discount rate is 10%. The total discounted costs amounted to $103,056,000, and the total discounted benefits were $107,760,270.

The net present value for the project is $4,703,700, and the return on investment is 4. 56%. Payback analysis is another tool that we need to use to determine how much time will lapse before cumulative benefits cover cumulative costs. The payback analysis and break-even point demonstrated on the Figure #2 below. Based on the data presented in the chart, for our proposed project, the payback occurs in the year 2012. In this year, cumulative benefits minus costs are positive and amount to $4,703,700.

Project management-related deliverables: Business case, ERP proposal, project charter, scope statement, WBS, project schedule, cost baseline, organizational chart, responsibility assignment matrix, stakeholder analysis, statement of work, final project presentation, and other documents required to manage the project. Product-related deliverables: Requirements specification will include user requirements specification (URS) and system requirements specification. The URS will determine users’ expectation from the new system. It will list desired functionalities of the new system.

The system requirements specification will describe the new system’s features and include functional and nonfunctional requirements. Software development will include preparing the software requirements specification and creating and debugging the software code. The software requirements specification will describe what the software is expected to do. It will also include information about the operating speed, response time, security, reliability, constraints, and other software parameters. The software requirements specification will also describe the interactions that the users will have with the new system.

(Le Vie, Writing Software Requirements…, 2007). System design will include defining the system configuration and user interface. It will be based the URS and system and software requirements specifications. The system design process will also require end-users’ involvement in order to clearly understand their expectations. User training plan will be used in performing the training and training evaluation. It will include training objectives, recommendations on tools and techniques to be used for training, how the training will be delivered, who needs training, and other information required for conducting user training.

Hardware system definition will include a description of hardware capabilities needed for the system implementation. It will be used by the project team to make sure that the company has the right hardware for the new system implementation. Test plan will describe how the new system will be tested, what tests need to be done, who will do the testing, and who will be responsible for it. It will also include test cases. Test cases will describe how each test should be performed and criteria by which the system performance will be considered successful.

User feedback will be part of the system testing. It will include users’ opinion about the system performance. Project Success Criteria: The new system implementation should take 4 years to complete. The payback period should occur after 3 years. The NPV and ROI should be positive. The project will be considered successful if the implementation time takes a little longer than 4 years, but if it meets all project objectives and stakeholders expectations, and provides the benefits listed in the ERP proposal.

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