What Is ERP (Enterprise Resource Planning) Part 1

Growing companies eventually reach a point where spreadsheets no longer cut it. That’s where enterprise resource planning software comes in: ERP systems collect and organize key business information and help organizations run lean, efficient operations, even as they expand.

Most business professionals have heard the term “ERP,” but they may not know exactly what enterprise resource planning systems can do for their teams. We’ll explain exactly what ERP is, how it works, what it can do for your business, how to choose the right solution and much more.

Read on for answers to just about any questions you might have about enterprise resource planning.

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.

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.

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.