What Is Enterprise Resource Planning
(ERP)?
At its core, ERP is an application that automates business processes and
provides insights and internal controls, drawing on a central database that
collects inputs from departments including accounting, manufacturing, supply
chain management, sales, marketing and human resources (HR).
Every business must complete work that requires numerous stakeholders with
various responsibilities. But that’s a struggle when the information needed to
execute processes and make key decisions is spread across disconnected
systems. Whether data is held in basic business management software or
spreadsheets, employees have a hard time finding what they need and may
lack access to it entirely. For example, the accounting and FP&A teams could
each have different spreadsheets with different figures for expense tracking.
These disparate data sources make it very challenging to keep everyone on
the same page and hinders collaboration and efficiency, especially as an
organization grows. Staff waste time hunting for documents and potentially
duplicating work because there is no one place to look for up-to-date
information on all aspects of the business relevant to them. This also makes it
difficult to see the full cause and effect of developments affecting your
business.
An ERP system solves this problem by compiling information in a central
database to grant managers and employees cross-departmental visibility. It
also eliminates the problems that come with conflicting sources of data and
empowers them to analyze various scenarios, discover process improvements
and generate major efficiency gains. That translates to cost savings and better
productivity as people spend less time digging for needed data.
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.
Video: What Is ERP?
Key Takeaways
ERP is critical business software that collects information from various
departments in a common database, enabling leaders to monitor the pulse of
a company using a single vision of reality.
ERP systems unify critical business functions like finance, manufacturing,
inventory and order management, customer communication, sales and
marketing, project management and human resources. One major feature is
detailed analytics and reporting on each department.
ERP can generate major time and financial savings by providing organization-
wide visibility that spotlights inefficient manual processes and reveals
opportunities for growth.
There are several deployment models for ERP software, including on-
premises, cloud and hybrid. While cloud ERP has become extremely popular
in recent years, the best approach for any given company depends on its
needs.
Businesses should make sure they understand the capabilities,
implementation models, integration requirements and total cost of ownership
of a short list of software providers before picking a winner.
ERP Explained
Enterprise resource planning — a moniker coined by research firm Gartner in
1990 — can be a confusing concept because ERP is not a standalone
application. While ERP is a category of business software, ERP systems
comprise various modules, each addressing a specific business requirement.
For example, products-based companies typically have modules for
accounting, inventory and order management, customer relationship
management (CRM) and, if they produce or assemble products,
manufacturing. Services businesses may turn to modules for accounting,
project management, professional services automation and CRM.
Each module pulls information from and pushes information into the central
database that is a key component of an ERP system. This common data
repository provides visibility into all departments and thus allows leaders to
evaluate and compare the business performance of different areas and
understand the full impact of decisions. It also powers other ERP benefits, like
process automation, improved internal controls and smarter business
intelligence.
There are two primary approaches to building out an ERP system. The first is
to purchase software that can handle each of these core business functions
like accounting, sales, inventory and manufacturing from different vendors.
These solutions are then integrated with a central database (the ERP). The
second is to buy all the modules you need from the ERP vendor and avoid
integrations since the applications are already designed to work together.
Getting most or all of the ERP modules you need from one vendor is the best
option for the large majority of businesses thanks to its simplicity. Integrating
these disparate systems is often complicated and requires a sizable IT staff or
an IT services partner, so it doesn’t make sense for most small and midsize
organizations. Once these integrations are set up, they necessitate ongoing
maintenance.
A unified platform, on the other hand, offers native integrations between
modules and a common user interface as users move between them. This
makes for an easier ERP implementation. Information easily flows between
modules to give decision-makers a comprehensive view of the company.
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.
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.
How Does an ERP System Work?
ERP systems work by using a defined, standard data structure. Information
entered by one department is immediately available to authorized users
across the business. This uniform structure helps keep everyone on the same
page. For example, say a local food distribution chain has multiple locations
that often share stock and personnel. As quality, sales and employee data
from these sites is fed into the ERP system, it’s formatted to indicate which
location it comes from.
Real-time data is then woven into business processes and workflows across
departments. Leaders can see if one location is doing significantly better at
avoiding spoilage than a sister site a few towns over and work to figure out
why, while operations can make sure staffing levels align with traffic patterns.
Finance can compare sales to rents to help executives decide whether to
consolidate.
ERP systems deliver the most value when a company has modules for each
major business function and ensures timely, accurate data entry. And, the
more stakeholders have access, the better.
When a company uses business systems from multiple vendors, integrations
are generally possible to make data automatically flow into the ERP. This real-
time data can then be used throughout the ERP instance to benefit any
process or workflow.
ERP Modules
There are ERP modules available to help with almost every core business function, from finance
to supply chain to HR.
An ERP comprises a number of different modules — bundles of features
tailored for various aspects of the business, including back- and front-office
roles. This goes well beyond financials and other fundamental functions like
supply chain management and customer communication. Here’s a quick
breakdown of the most widely used ERP modules:
Finance. A finance module, the foundation of just about every ERP system,
manages the general ledger and all financial data. It tracks every transaction,
including accounts payable (AP) and accounts receivable (AR), and handles
reconciliations and financial reporting.
Procurement. The procurement module manages purchasing, whether raw
materials or finished goods. It can automate requests for quotes and purchase
orders and, when linked to demand planning, minimize overbuying and
underbuying.
Manufacturing. Manufacturing can be complicated, and this module helps
companies coordinate all the steps that go into making products. The module
can ensure production is in line with demand and monitor the number of in-
progress and finished items.
Inventory management. An inventory management module shows current
inventory levels down to the SKU level and updates those numbers in real
time. It also measures key inventory-related metrics. Any products-based
company needs this module to optimize stock on-hand based on current and
forecasted demand.
Order management. This application monitors and prioritizes customer
orders from all channels as they come in and tracks their progress through
delivery. An order management module can speed fulfillment and delivery
times and improve the customer experience.
Warehouse management. A warehouse management module directs
warehouse activities like receiving, picking, packing and shipping. It can
generate time and cost savings in the warehouse by identifying more efficient
ways to execute these tasks.
Customer relationship management (CRM). CRM is a popular module for
businesses in a wide range of industries. It tracks all communications with
clients, assists with lead management and can enhance customer service and
boost sales.
Professional services automation (PSA). Services businesses often utilize
a professional services automation (PSA) module to plan and track projects,
including the time and resources spent on them. It can simplify client billing
and encourage collaboration among staff members working on a project.
Workforce management (WFM). A workforce management (WFM) module
keeps track of attendance and hours worked, and some can also manage
payroll. This tool can record absenteeism and productivity by department,
team and individual employee.
Human resources management (HRM). A human resources management
(HRM) or human capital management (HCM) module is similar to a workforce
management module. It keeps employee records with detailed information,
like available PTO and performance reviews, and can tease out workforce
trends in various departments or demographics.
Ecommerce. An ecommerce module allows retailers and brands to manage
the back- and front-ends of their online stores. They can change the site look
and feel and add and update product pages with this application.
Marketing automation. This module manages marketing efforts across all
digital channels — email, web, social — and enables organizations to
optimize and personalize their messaging. A marketing automation tool can
boost leads, sales and customer loyalty.
How Can ERP Improve or Help a Business?
ERP enables companies to identify areas of the business with room for
improvement or opportunities for expansion. User uptake is key: The more
employees with access, the more likely teams will spot problems, whether a
spike in demand for a certain product, late shipments from a supplier or an
impending cash flow crunch. Employees can then proactively mitigate the
issue to the extent possible.
Executives are generally focused on outcomes — using information to
achieve objectives, like increasing efficiency, reducing costs and responding
to changing consumer needs or market conditions.
For business units, ERP software can automate many error-prone tasks, like
account reconciliations, customer billing and order processing, and provide
the information teams need to operate more efficiently.
But the real beauty of ERP is that it can give both a 10,000-foot view of the
company’s health and detailed insights into a specific process or KPI by not
only storing and organizing data, but identifying patterns and flagging
anomalies that require investigation. Try that with a spreadsheet.
Other business upsides:
Access to data from anywhere: Employees no longer need to shuffle
through piles of papers or files scattered across a desktop. With cloud-based
ERP, a warehouse manager can log in from a mobile device while on the
shop floor, or a salesperson can check inventory while at a customer site.
Information is always up-to-date: Because the ERP system is continually
receiving information from various departments, it’s updated immediately as
inventory is pulled, a payment is posted or emails are sent to customers. This
provides a major advantage because decision-makers are basing their
choices on up-to-the-minute data.
Business decisions based on the same data: With a common database, all
decision-makers are on the same page. There are no duplicate or conflicting
sources of information, and companies have the ability schedule and
distribute dynamic reports automatically. Need more depth? Underlying data
can be accessed simply by clicking the report.
