TCO Worked Examples and Selection Checklists
ERP cost for a small manufacturer: a five-year worked example in rupees
An illustrative five-year cost comparison for an Indian component manufacturer: desktop accounting plus spreadsheets, cloud ERP and partner-hosted open-source ERP.
For a small manufacturer, the cheapest software on paper is often not the cheapest way to run the business, because the real cost sits in staff hours spent on spreadsheets, stock errors and month-end reconciliations. In the illustrative example below, a desktop accounting package plus spreadsheets costs about ₹18 lakh over five years, a cloud ERP about ₹45.8 lakh and a partner-hosted open-source ERP about ₹39.3 lakh. The ERP options only make sense if they deliver savings of at least the difference, which is what the ERP payback calculator tests. Every figure is illustrative and should be replaced with your own quotes.
This example applies the method in the 3–5-year ERP TCO guide.
The business
- A precision-components manufacturer in an industrial estate, one plant and one warehouse, one GSTIN.
- Aggregate annual turnover about ₹18 crore, so e-invoicing is mandatory and, being above ₹10 crore, invoices must be reported to the IRP within 30 days.
- 70 employees; payroll currently outsourced.
- Today: desktop accounting with inventory for 4 users, production planning and job work tracked in spreadsheets, stock counted manually each quarter.
- Pain points: stock mismatches, late job-work reconciliation, two people spending most of their day compiling production reports.
- Users needed in an ERP: 18 (accounts 4, stores 4, production 5, purchase 2, sales 2, owner 1).
Option 1: stay on desktop accounting and spreadsheets
| Item (illustrative) | Five-year cost |
|---|---|
| Upgrade to a 10-user desktop licence | ₹1,80,000 |
| Yearly renewal for updates, years 2–5 (₹40,000 a year) | ₹1,60,000 |
| Remote access add-on (₹30,000 a year) | ₹1,50,000 |
| Setup and training | ₹60,000 |
| Extra staff time on spreadsheets and reconciliations: 500 hours a year × ₹500 × 5 | ₹12,50,000 |
| Total | ₹18,00,000 |
Check that the desktop package generates e-invoices and e-way bills directly and keeps an audit trail that cannot be switched off; both are needed by a company of this size.
Option 2: small-business cloud ERP with manufacturing
| Item (illustrative) | Five-year cost |
|---|---|
| Subscription: 18 users × ₹32,000 = ₹5,76,000 in year 1, 5% uplift a year (₹5,76,000 + ₹6,04,800 + ₹6,35,040 + ₹6,66,792 + ₹7,00,132) | ₹31,82,764 |
| Implementation incl. migration, BOMs, job work, training | ₹9,00,000 |
| Project staff time: 500 hours × ₹500 | ₹2,50,000 |
| Ongoing administration: 100 hours a year × ₹500 × 5 | ₹2,50,000 |
| E-invoice and e-way bill connector | Included in plan (check quota) |
| Total | ₹45,82,764 |
Option 3: open-source ERP hosted and supported by a partner
| Item (illustrative) | Five-year cost |
|---|---|
| Licence | ₹0 (community edition) |
| Hosting: ₹1,20,000 a year × 5 | ₹6,00,000 |
| Partner support: ₹2,40,000 in year 1, rising 8% a year | ₹14,07,984 |
| Implementation with more customisation | ₹12,00,000 |
| Project staff time: 700 hours × ₹500 | ₹3,50,000 |
| Ongoing administration: 150 hours a year × ₹500 × 5 | ₹3,75,000 |
| Total | ₹39,32,984 |
Note the shift: there is no licence fee, but the partner contract, hosting and customisation carry the cost. The quality and continuity of that partner become the main risk. Ask who maintains customisations when the open-source version is upgraded.
Comparing the options
| Option 1 | Option 2 | Option 3 | |
|---|---|---|---|
| Five-year cost (illustrative) | ₹18,00,000 | ₹45,82,764 | ₹39,32,984 |
| Extra cost vs Option 1 | – | ₹27,82,764 | ₹21,32,984 |
| Production planning and job work | Spreadsheets | Built in | Built in, customised |
| Stock accuracy | Manual counts | Real-time by location | Real-time by location |
| Vendor dependence | Low | Vendor | Partner |
| Exit effort | Low | Data export per contract | Data in an open database, but customisations need migrating |
Do the savings cover the difference?
Suppose the ERP lets the two report-compilers move to other work (₹6,00,000 a year), cuts stock holding by ₹40 lakh, saving 12% a year in holding cost (₹4,80,000 a year), and reduces scrap and write-offs by ₹2,00,000 a year. Total illustrative saving = ₹12,80,000 a year. Remove the ₹2,50,000 a year of spreadsheet time already counted in Option 1's cost to avoid double-counting: net extra saving ≈ ₹10,30,000 a year, or ₹51,50,000 over five years.
Against Option 2's extra cost of ₹27,82,764, the net five-year benefit would be about ₹23,67,000; against Option 3's ₹21,32,984, about ₹30,17,000. If the savings turn out to be half as large (₹25,75,000 over five years), Option 2 falls just short of covering its extra cost. That is why the savings estimate needs as much scrutiny as the quotes; see ERP ROI and payback.
What to check before choosing
- Manufacturing depth: multi-level BOMs, routing, job work with challans and ITC-04 data, scrap and by-products, costing.
- GST: e-invoicing within the 30-day limit, e-way bills for job-work movements, GSTR-1 export. See the e-invoicing integration guide.
- Payroll: whether to bring payroll in-house in the ERP or keep it outsourced; see the payroll module guide.
- Timeline: a manufacturer's rollout usually runs in phases; see the implementation timeline.
- Contract: uplift cap, data export and partner continuity.
FAQ
Why is internal staff time counted at ₹500 an hour?
It is an illustrative fully loaded cost (salary, PF, ESI, leave and overheads) for clerical and supervisory staff. Use your own figure; it changes the answer significantly.
Should a manufacturer always choose a full ERP?
No. If production is simple (few products, single-level BOMs, no job work), accounting software with inventory and good reporting may be enough, at a fraction of the cost.
Can I start with some modules and add manufacturing later?
Often yes, but price the later modules now and confirm that adding them does not require re-implementing the earlier ones.
Sources
- CBIC GST — e-invoicing, job work and ITC-04 rules
- GST e-invoice portal (NIC IRP) — 30-day reporting limit advisory
- Ministry of Corporate Affairs — audit trail requirement for companies
- Ministry of MSME — Udyam classification and support schemes
