{"id":9055,"date":"2015-12-01T07:52:28","date_gmt":"2015-12-01T07:52:28","guid":{"rendered":"https:\/\/ca.syspro.com\/blog\/erp-application-erosion-and-the-cost-curve\/"},"modified":"2021-03-04T14:49:03","modified_gmt":"2021-03-04T14:49:03","slug":"erp-application-erosion-and-the-cost-curve","status":"publish","type":"post","link":"https:\/\/ca.syspro.com\/blog\/owning-or-running-erp\/erp-application-erosion-and-the-cost-curve\/","title":{"rendered":"ERP Application Erosion and the Cost Curve"},"content":{"rendered":"

How many of you remember the cost curve?<\/p>\n

All economics students are taught the cost curve at university \u2013 it\u2019s a very useful tool for planning and optimizing production. To be honest, the cost curve\u2019s message haunted me for weeks until I had my \u2018Eureka!\u2019 moment \u2013 a little too late for the final exam, but not too late to be of value in my job here at SYSPRO.<\/p>\n

As Wikipedia informs us: \u2018…a cost curve is a graph of the costs of production as a function of total quantity produced.\u2019 The typical short-run cost curve is \u2018U\u2019-shaped. As initial output increases the company enjoys economies of scale and the cost of producing each unit goes down. At a later date, cost per unit goes up, typically due to the need for additional labor, and the curve begins to ascend.<\/p>\n

Imagine, for example, a small factory making widgets. At a certain point the company has lowered the cost of each widget and is making money hand over fist. In order to increase production and make even more money, additional workers are hired. But this is where the rot sets in \u2013 not only does additional labor add extra wages to the cost of production, it puts additional strain on almost every stage of the process, from logistics to distribution. The simple fact of having more bodies on the assembly line, elbows bumping against elbows, tends to slow down the average rate of production, thus increasing the cost per unit.<\/p>\n

Application erosion will also drive up the cost curve by lowering the productivity of labor. Imagine a new, under-trained employee who decides that the ERP\u2019s Bill of Materials is out of her comfort zone. At her old job she ran the production floor with a spreadsheet, and that\u2019s what she decides to do now. This is application erosion in action! What used to take three minutes using the ERP is now a full-day job in Excel. Not only does this decrease the value of the ERP, it shortens the desirable downward descent of the cost curve and points it prematurely upwards as your cost per item of output rises.<\/p>\n

If the cost curve argument doesn\u2019t clear things up for you, here\u2019s another way of looking at it. Let\u2019s compare an integrated ERP to a network of different systems:<\/p>\n