What is Enterprise Resource Planning (ERP)?

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Definition:

Enterprise Resource Planning (ERP) is a system or software that is designed to integrate a business’s processes, facilitate data sharing between departments, and streamline its management.

🤔 Understanding Enterprise Resource Planning (ERP)

An Enterprise Resource Planning (ERP) system is typically a piece of software that helps unify an organization’s different processes and departments. It facilitates communication and information sharing between different departments, so that order fulfillment, for instance, can quickly and easily get up-to-date information from sales, for example, and start preparing new orders for delivery. ERP software can also automate certain processes so that they’re finished more quickly, and employees can spend their time on different tasks. Consequently, it helps organizations run more efficiently and cut costs. Traditionally, ERP software was housed with on-premise servers, but modern-day solutions are often based in the cloud and can be accessed via the web.

Example

SAP SE provides a software ERP solution that gives all departments in a company access to a single source of data, automates core processes, and helps management make decisions based on the data the software aggregates. It has software for procurement, manufacturing, service, sales, finance, and HR. SAP offers on-premise and cloud-based versions of its ERP software. Another major supplier of ERP software is Oracle.

Takeaway

Enterprise Resource Planning (ERP) is kind of like urban planning...

When you plan a city, you need to make sure all the facilities are connected to each other and have easy access to all the important city information. Without planning, the police department might have no way of communicating with the fire department, and multiple garbage trucks could end up going to the same house every day, not knowing others already came. Similarly, ERP connects distant departments, facilitates the efficient transfer of information between them, and makes sure all the important data is easily accessible to all.

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What is Enterprise Resource Planning (ERP)?

Enterprise Resource Planning (ERP) is a term created in 1990 by the Gartner Group to describe systems that centralize a business’s core data, automate its business processes, and help it operate more efficiently.

ERP technology began as a combination of material requirements planning (MRP), manufacturer resource planning (MRP II), and computer-integrated manufacturing (CIM). These three systems are generally used for inventory management and manufacturing processes.

ERP started out with a focus on supply chain management (how raw materials are transformed into deliverable products) and material requirements planning (manufacturing and inventory planning). Today, it has expanded to encompass financial management systems, business intelligence (BI), and customer relationship management (CRM).

In other words, ERP started out managing back-office business functions like manufacturing and inventory and expanded into front-office business functions like customer service and sales.

Technically, the term simply refers to planning and managing a business’s resources and core business processes. But even though ERP could technically be carried out with paper and pencil, nowadays it usually refers to a software or cloud-based system.

You can think of an ERP as a software system that helps manage, coordinate, and streamline a business’s departments and their functions by helping them communicate with each other.

What is an ERP system?

An ERP system is a system that:

  1. Centralizes an organization’s data
  2. Automates certain business functions
  3. Facilitates the flow of information between different departments

At the heart of every ERP lies a centralized database that’s accessible by every department and is updated in real-time. This helps streamline the flow of information from one department to another, cutting costs and labor time along the way.

With a centralized database, individual departments don’t have to spend time merging their own separate databases and spreadsheets with ones from other departments — An often lengthy process that can require teams of trained professionals just to ensure the integrity of the data is conserved during the merging process.

For example, let’s imagine a customer calls up a business to ask if a product is in stock. Without an ERP, the sales department would have to put the customer on hold and call inventory to check if it’s available.

By the time the sales department gets back to the customer, they may have already hung up. With an ERP, all inventory updates would be immediately visible to the sales department, so they wouldn’t need to put the customer on hold and lose the sale.

In a large enterprise (and even a small business), there are tons of small inefficiencies, hangups, and backups like these that can lose a business money. An ERP seeks to eliminate them, saving businesses time and money, and ensuring greater customer satisfaction in the process.

However, an ERP system typically isn’t one singular piece of software; it’s made of several modules that serve their own functions and communicate with each other.

Generally, ERP systems include modules that cover:

  • Procurement/Supplier Relationship Management (SRM): Acquiring goods or raw materials from an external source
  • Production/Product Lifecycle Management (PLM): Turning those goods into finished products and disposing of them when they’ve run their course
  • Distribution/Supply Chain Management (SCM): Managing goods and products as they make their way through warehouses and are distributed to customers
  • Accounting/Risk Management and Compliance: Managing financial operations and ensuring regulatory compliance
  • Human resources: Managing employees, contractors, and other laborers
  • Corporate governance and performance: Managing and streamlining corporate laws and structures
  • Customer service/Customer relationship management (CRM): Managing relationships between a business and its customers
  • Sales: Managing the sales process from order placement to shipping to invoicing

Each individual ERP provider will often have different modules that it bundles with its software. For example, ERPs designed for small and medium-sized enterprises/businesses (SMEs/SMBs) may only include modules for sales, human resources, customer service, and accounting, but skip over the ones geared toward manufacturing, such as SRM, PLM, and SCM.

In fact, many ERP systems are designed from the ground up for a particular organization or industry, so there’s a lot of variance as to what will be offered by any ERP system. Most ERP systems can be tailor-made to fulfill an organization’s specific needs.

What are the types of ERP?

Generally, ERPs come in one of two forms: on-premise solutions and cloud ERPs.

On-premise solutions are the more traditional type of ERP. Usually, an on-premise ERP consists of an on-site server that’s managed by an IT department. All the departments connect to that server and share their data over it. This type of solution is more expensive because of the equipment and specialized, on-site labor that’s required to keep it running smoothly.

On-premise solutions are sometimes lumped together with industry-specific solutions because they are often designed from the ground up for a specific business.

Cloud ERPs use an ERP provider’s existing IT infrastructure to deliver the ERP as a service — It’s a SaaS (software as a service) business model. This keeps startup costs and maintenance costs low, but gives less control over the system — if your system goes down, you’ll largely need to rely on the provider’s IT squad to fix it. Your own IT team won’t be able to do much.

Each type of system has its own advantages and disadvantages. Overall, the differences are similar to owning vs. renting a house. With an on-premise ERP, you own everything, but if a pipe breaks, you’ll need to fix it yourself. With a cloud ERP, you have the convenience of a “landlord” who will fix any problems for you, but you can't do anything on your own.

Cloud-based solutions have made ERP more affordable for businesses of all sizes, thanks to their lower upfront and maintenance costs. However, there are also other scaled-down on-premise ERP solutions aimed at SMBs (small and medium-sized businesses), like Microsoft’s Dynamics 365 Business Central, which is available as both a cloud and an on-premise solution.

How does an ERP work?

ERP software runs either on an on-premise server or on a cloud system. In an on-premise system, different departments communicate with each other through an intranet system. That means that it’s not accessible from the outside and generally only workers on the physical premises can access it.

In short, the ERP sets up a centralized database that then pushes and pulls information from the different ERP modules like SRM (Supplier Relationship Management), CRM (Customer relationship management), PLM (Product Lifecycle Management), etc. The system must be monitored by on-site IT professionals.

Cloud systems, on the other hand, do not require physical, on-site hardware, and can be accessed from the internet. This can make it easier for workers to stay productive even when they’re working remotely. Consequently, this may be an ideal system for companies that are spread over lots of different regions or work largely remotely.

Individual users and departments can usually access information through dashboards that give them insight into productivity and efficiency. This information then informs their own individual decisions and ensures they are in sync with the rest of the organization.

For example, an ERP can prevent two different departments from placing an order for the same materials. By seeing what’s happening at other departments in real-time, an individual employee can avoid making these types of errors.

In other words, an ERP prevents an organization’s departments from running asynchronously by constantly synchronizing data from across the company. Asynchronicity can lead to data being entered multiple times, departments having multiple entries for the same customer with information from varying points from the customer relationship, etc.

Imagine if the sales department contacted one customer and input their information into the system, but then that customer called customer service and noted a change to their address. Without an ERP, sales would have no way of knowing about that address change until customer service contacted them.

Sometimes, this can be a significant problem: imagine that the customer called customer service right before sales sent out their product, but sales didn’t get the address update until after they already sent out the product. With an ERP, that information would have been updated and viewable immediately, and an error could have been avoided.

What are the benefits of an ERP? What are the drawbacks?

Like all major investments, ERP software can help businesses grow, but it can also bring certain disadvantages.

Some benefits of ERP systems are:

  • Better information sharing and business performance: ERPs help different departments coordinate their efforts and share information more easily. This leads to more streamlined communication between departments and, in many cases, more efficient processes that cut costs.
  • More visibility for analysts: ERPs help executives and analysts more easily identify where problems are occurring and then stop them in their tracks. By having all of the organization’s data in one place, it’s easier to pinpoint issues and errors.
  • Better customer relations: Customers are extremely picky. They expect businesses to run extremely efficiently, and when they don’t, that can hurt the customer relationship. ERPs help everything stay organized, which ultimately leads to a better experience for the customer.

However, ERPs aren’t all milk and honey. Here are some disadvantages:

  • Expensive: The hardest part about setting up an ERP is the cost. ERPs are by no means cheap. Rather, they can cost a ton to set up (especially on-site ERPs), and once they’re built, they can require salaried IT employees to keep running.
  • Disrupt current processes: Although this is temporary, it’s worth noting that any time a new system is implemented, employees are going to need to learn new processes. That means training may be necessary (which can be costly), and business may slow as employees make sense of their new tools.

What is the top ERP software?

There is no one best ERP software. Each ERP vendor has its own unique offerings that suit different types of businesses.

Some top ERP offerings include:

  • SAP ERP
  • Oracle ERP
  • Microsoft Dynamics
  • Odoo
  • abas ERP
  • Workday

But to determine the best software for you, you will need to consider the size of your business, your industry, employee locations (i.e., are they in multiple offices or countries), your budget, whether you want an on-premise or cloud-based solution, and more.

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