Definition of enterprise resource planning (ERP)

Enterprise resource planning (ERP) refers to a type of software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations. A complete ERP suite also includes enterprise performance management, software that helps plan, budget, predict, and report on an organization’s financial results

ERP systems tie together a multitude of business processes and enable the flow of data between them. By collecting an organization’s shared transactional data from multiple sources, ERP systems eliminate data duplication and provide data integrity with a single source of truth.

Today, ERP systems are critical for managing thousands of businesses of all sizes and in all industries. To these companies, ERP is as indispensable as the electricity that keeps the lights on.

History

The Gartner Group first used the acronym ERP in the 1990s to include the capabilities of material requirements planning (MRP), and the later manufacturing resource planning (MRP II), as well as computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole that reflected the evolution of application integration beyond manufacturing.

ERP systems experienced rapid growth in the 1990s. Because of the year 2000 problem many companies took the opportunity to replace their old systems with ERP.

ERP systems initially focused on automating back office functions that did not directly affect customers and the public. Front office functions, such as customer relationship management (CRM), dealt directly with customers, or e-business systems such as e-commerce and e-government—or supplier relationship management (SRM) became integrated later, when the internet simplified communicating with external parties.

"ERP II" was coined in 2000 in an article by Gartner Publications entitled ERP Is Dead—Long Live ERP II. It describes web–based software that provides real–time access to ERP systems to employees and partners (such as suppliers and customers). The ERP II role expands traditional ERP resource optimization and transaction processing.

Rather than just manage buying, selling, etc. ERP II leverages information in the resources under its management to help the enterprise collaborate with other enterprises.

ERP II is more flexible than the first generation ERP. Rather than confine ERP system capabilities within the organization, it goes beyond the corporate walls to interact with other systems.

What is an ERP system?

How can these solutions manage organizations day-to-day business activities, such as accounting, finance, procurement, project management, supply chain, and manufacturing.

ERP systems will also provide transparency into your complete business process by tracking all aspects of production, logistics, and financials. These integrated systems act as a business's central hub for end-to-end workflow and data, allowing a variety of departments to access.

ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

ERP software that’s tailored to meet the needs of an individual business pays major dividends, making these systems a critical tool for companies across industries and of all sizes. Many of the world’s best-known and most successful firms have leaned on ERP for the last quarter century. Now, this software can be configured and priced to meet the needs of all-size businesses.

Put simply, an ERP system helps unify people, core business processes and technology across an organization.

Common ERP modules

Enterprise resource planning systems include a variety of different modules. Each ERP module supports specific business processes – like finance, procurement, or manufacturing – and provides employees in that department with the transactions and insight they need do their jobs. Every module connects to the ERP system, which delivers a single source of truth and accurate, shared data across departments.

1. Finance: The finance and accounting module is the backbone of most ERP systems. In addition to managing the general ledger and automating key financial tasks, it helps businesses track accounts payable (AP) and receivable (AR), close the books efficiently, generate financial reports, comply with revenue recognition standards, mitigate financial risk, and more.


2. Human resources management: Most ERP systems include an HR module that provides core capabilities such as time and attendance and payroll. Add-ons, or even entire human capital management (HCM) suites, can connect to the ERP and deliver more robust HR functionality – everything from workforce analytics to employee experience management.


3. Sourcing and procurement: The sourcing and procurement module helps businesses procure the materials and services they need to manufacture their goods – or the items they want to resell. The module centralises and automates purchasing, including requests for quotes, contract creation, and approvals. It can minimise underbuying and overbuying, improve supplier negotiations with AI-powered analytics, and even seamlessly connect with buyer networks.


4. Sales: The sales module keeps track of communications with prospects and customers – and helps reps use data-driven insights to increase sales and target leads with the right promotions and upsell opportunities. It includes functionality for the order-to-cash process, including order management, contracts, billing, sales performance management, and sales force support.


5. Manufacturing: The manufacturing module is a key planning and execution component of ERP software. It helps companies simplify complex manufacturing processes and ensure production is in line with demand. This module typically includes functionality for material requirements planning (MRP), production scheduling, manufacturing execution, quality management, and more.


6. Logistics and supply chain management: Another key component of ERP systems, the supply chain module tracks the movement of goods and supplies throughout an organisation’s supply chain. The module provides tools for real-time inventory management, warehousing operations, transportation, and logistics – and can help increase supply chain visibility and resilience.


7. Service: In an ERP, the service module helps companies deliver the reliable, personalised service customers have come to expect. The module can include tools for in-house repairs, spare parts, field service management, and service-based revenue streams. It also provides analytics to help service reps and technicians rapidly solve customer issues and improve loyalty.


8. R&D and engineering: Feature-rich ERP systems include an R&D and engineering module. This module provides tools for product design and development, product lifecycle management (PLM), product compliance, and more – so companies can quickly and cost-effectively create new innovations.


9. Enterprise asset management: Robust ERP systems can include an EAM module – which helps asset-intensive businesses minimise downtime and keep their machines and equipment running at peak efficiency. This module includes functionality for predictive maintenance, scheduling, asset operations and planning, environment, health and safety (EHS), and more.

The business value of ERP

It’s impossible to ignore the impact of ERP in today’s business world. As enterprise data and processes are corralled into ERP systems, businesses can align separate departments and improve workflows, resulting in significant bottom-line savings. Examples of specific business benefits include:

• Improved business insight from real-time information generated by reports
• Lower operational costs through streamlined business processes and best practices
• Enhanced collaboration from users sharing data in contracts, requisitions, and purchase orders
• Improved efficiency through a common user experience across many business functions and well-defined business processes
• Consistent infrastructure from the back office to the front office, with all business activities having the same look and feel
• Higher user-adoption rates from a common user experience and design
• Reduced risk through improved data integrity and financial controls
• Lower management and operational costs through uniform and integrated systems

Important : A company could experience cost overruns if its ERP system is not implemented carefully.

How Does an ERP System Work?

The main purpose of an ERP system is to increase organizational efficiency of an organization by managing and improving how company resources are utilized. Improving and/or reducing the number of resources necessary without sacrificing quality and performance are keys to effectively improving business growth and profitability.

ERP systems typically cover all aspects of business operations and commonly provide:

• An integrated system
• Common database
• Real-time operation
• Support for all applications/components
• Common user interface across application/components
• On-premise, cloud hosted, or SaaS deployment

ERP software has the ability to collect and compare metrics across departments and provide a number of different reports based on roles or specific user preferences. The data collected makes finding and reporting on data faster and gives a complete view of business performance with complete insights on how resources are being spent.

ERP synchronizes reporting and automation by reducing the need to maintain separate databases and spreadsheets that would have to be manually merged to generate reports. This combined data collection and reporting offers valuable insight, such as where to cut costs and streamline processes, providing the information to make real-time business decisions.

Why Is ERP Important for Businesses?

ERP systems have become table stakes for businesses looking to use resources wisely. They can help leaders reallocate human and financial capital or build more efficient core business processes that save money without sacrificing on quality or performance.

Think of an ERP system as the brain of your company's technology system. In the human body, the brain controls all areas of your body by telling them what to do and ensuring they all work together. The human body is unable to function without a brain, and a retail company cannot function without a proper ERP system.

It integrates all facets of a business including product development, manufacturing, marketing and sales. By synchronizing all of these areas, businesses are able to gain visibility, increase productivity and operational efficiency, reduce costs and enhance competitiveness.

An ERP is also an asset when it comes to planning and coordination. Employees can see current available inventory and customer orders in detail, then compare supplier purchase orders and forecasted future demand. If necessary, they can make adjustments to head off problems. ERP software improves communication and collaboration as well because workers can check on the status of other departments to guide their own decisions.

As a comprehensive source of data, an ERP system also provides a host of reports and analytics that can be difference-makers for the business. Turning a vast trove of information into charts and graphs that clearly illustrate trends and help model possible results is an ERP capability executives find invaluable.

Benefits of Enterprise Resource Planning (ERP)

Businesses employ enterprise resource planning (ERP) for various reasons, such as expanding business, reducing costs, and improving operations. The benefits sought and realized by one company may be different from another; however, there are some worth noting.

Integrating and automating business processes eliminates redundancies, improves accuracy, and improves productivity. Departments with interconnected processes can now synchronize work to achieve faster and better outcomes.

Some businesses benefit from enhanced reporting of real-time data from a single source system. Accurate and complete reporting help companies adequately plan, budget, forecast, and communicate the state of operations to the organization and interested parties, such as shareholders.

ERPs allow businesses to quickly access needed information for clients, vendors, and business partners, contributing to improved customer and employee satisfaction, quicker response rates, and increased accuracy rates. Associated costs often decrease as the company operates more efficiently.

Departments are better able to collaborate and share knowledge; a newly synergized workforce can improve productivity and employee satisfaction as employees are better able to see how each functional group contributes to the mission and vision of the company. Also, menial, manual tasks are eliminated, allowing employees to allocate their time to more meaningful work.