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What is ERP, and How Do ERP Systems Work?

People who manage people in modern companies of all sizes need to reconcile different business functions. This includes human resources, supply chain management, customer relationship management (CRM) and manufacturing resource planning, among other operations. It can be overwhelming to manage all these aspects of a business manually or independently.

So it's understandable why systems like enterprise resource planning (ERP) are becoming more and more popular. ERP systems are designed to integrate all business functions, creating easier-to-manage workflows and decision-making processes. This gives organizations more time to focus on their core business. Studies show that ERP systems bring countless benefits to any company.

The study results "indicated that ERP systems (enterprise resource planning) had an impact on the organization's performance". In addition, they note that ERP implementation results in "more accurate, real-time information." In this article, I define ERP systems and how they work. I also look at why managers who want automation and enhanced functionality in back-office, product customization, accounting, CRM, and purchasing might consider enterprise resource planning software.

enterprise resource planning

What is an ERP system or enterprise resource planning?

ERP stands for Enterprise Resource Planning, a business management software. In an article produced for, an executive news site for CIOs and business technologies, columnist Bart Perkins provides a comprehensive definition of an ERP system. He defines it as an "integrated software application system that standardizes, simplifies and integrates business processes across finance, human resources, purchasing, distribution and other departments." In addition, US multinational information technology company Oracle defines ERP as "a type of software that organizations use to manage day-to-day business activities such as accounting, purchasing, project management, risk and compliance management, and supply chain operations."

Oracle adds that to be complete, an ERP (enterprise resource planning) package must include software that aids organizations in planning, business performance management, budgeting, forecasting, and reporting with details of an organization's profits. ERP systems can also be extended with third-party applications to access features such as product lifecycle management, e-procurement, product data management, data mining and other functions. The ERP system is usually extended through interfaces provided by the supplier.

A brief history of enterprise resource planning (ERP)

ERP systems were introduced around 1990, mainly for use by manufacturing companies. The concept stemmed from Material Requirements Planning II (MRP II) developed in 1983, MRP in 1964, and Economic Order Quantity (EOQ), which emerged in 1913. According to enterprise resource planning software provider QAD. The Gartner Group coined the term ERP to distinguish ERP systems from MRP systems in the 1990s. Q.Inc states that during this time, ERP systems began to be developed to include business intelligence "while dealing with other functions such as sales force automation (SFA), marketing automation and e-commerce ".

Due to some of the challenges with on-premise ERP, vendors have started developing cloud ERPs to provide a SaaS ERP system (ERP supplied as a software service by vendors). Some of the shortcomings of the local ERP include, among others, the costs of implementation, licensing and the long duration of execution.

Conversely, SaaS is simple and inexpensive to implement since you'd typically pay a monthly subscription. In addition, users can customize the software according to the specific needs of the industry. This makes the system suitable even for small businesses.

The main features of the enterprise resource planning or ERP system

An enterprise resource planning system has four primary characteristics: modular design, flexible, open and centralized database, and automatic information generation. This software system operates in real-time from a public database that supports all software. This results in a consistent look and feels between modules. The main objective of an ERP software solution is to bring all units together to achieve operational goals quickly. As a result, all business processes are integrated across all business units in a comprehensive approach to streamlining processes and information across the organization.

Perkins provides an excellent example of how ERP uses real-time data to integrate multiple business processes. Use the example of a company that requires customers to order online. As soon as a new order is completed, the ERP automatically checks the price and initiates a credit check if necessary. Check if the product is available and notify the unit that will schedule the delivery. Once the order is delivered, an invoice is sent, and the accounting unit can update its accounts.

Let's take a closer look at the different features of a modern ERP system:

Consistent appearance

The consistent aspect of ERP helps the company to reduce training costs. Perkins notes that early vendors realized that a consistent look and feel helps an organization look more professional. Employees who work in multiple company areas can rely on the same information while working to meet specific customer needs. The integration provided by ERP allows an organization to present a consistent face to the market, whether through accounting software, an order management system or simple spreadsheets.

A common database supports all applications.

One of the significant challenges organizations face is that different departments operate in silos (disjoint units). This can lead to awkward situations where various departments provide customers with conflicting information. An ERP system ensures that a shared database supports all applications. This means that workers from different units can rely on the same database information for their daily activities.

Works in real-time

In the Internet of Things (IoT) age, where devices are constantly connected through technologies such as cutting-edge computing, real-time functionality ensures that every business process can quickly access the information it needs. Edge computing is a system that brings data storage and processing closer to where it will be used. ERP’s real-time feature helps to identify problems quickly and buys business executives time to rectify any issues.

Types of ERP systems

There are three different ERP systems: on-premise software, cloud-based software, and hybrid software. The specific type each organization needs depends primarily on the size of the company, the computing devices available, and the system's ability to meet the needs of the business.

Let's take a closer look at the three types:

Local ERP software

As the name suggests, local enterprise resource planning or ERP software is deployed locally. Therefore, your company mainly checks it after installation. This is the ERP solution you need if you want to have complete control over the security of your ERP system. However, implementing this type of ERP will require having dedicated IT resources on-site to manage application and server maintenance.

Local ERP software offers several benefits, including:

· However, third parties must not manage your confidential data.

· ERP modules can be customized according to specific business needs.

· Provides solid integration options with your other systems.

· Cloud-based ERP system.

This type of ERP system is often referred to as software as a Service (SaaS), implying that a third party manages the service. The flexible design allows your team to store and browse data via any device with an internet connection. Pricing is usually based on a recurring subscription.

The main drawback of this type of ERP is that you have to trust an ERP provider to handle some of your sensitive data. However, it has several advantages. For example, you don't need to make a substantial upfront investment to get the system. Furthermore, no specialized equipment or skills are required before implementing the plan.

Hybrid ERP system

The hybrid ERP system is sometimes called a two-tier ERP system. Allows your business to combine cloud-based and on-premise ERP systems. This is a system you would choose if you want to enjoy the best of both worlds. For example, you can use the experience of ERP vendors without having to allow them to access all of your information.

How does an ERP system work? An enterprise resource planning or ERP system works by decreasing the number of resources needed to manage the business optimally while still ensuring profitability and improving the business. The ERP system differs from a single application in that it allows other business modules in your company to work from a database.

The system collects data from different parts of the company. It puts data in a central location where employees who need it can access it. It dismantles the silos that affect many businesses and ensures that the correct information is available to those who need it. For example, let's say your company's ERP system is almost fully automated. The ERP does the data entry for you in the backend and also exchanges information with other units that need it.

For example, when a shipping order is initiated for the last item in stock, the stock management modules must record this information and notify the affected departments to replenish inventory. The sales team will also be informed not to make promises that they cannot keep.

Need for an ERP system?

Let's look at some of the reasons companies of different sizes can benefit from ERP implementation.

Information sharing: The enterprise resource planning or ERP system can automatically share crucial information between the various departments of your company and, consequently, promotes collaboration through integrated information sharing.

Improved business performance: The integrated system will ensure that departments spend time managing their core businesses rather than getting the information that could help them do it. For example, an ERP system can improve your company's performance in sales forecasting through order tracking, revenue tracking, and purchase order generation.

Easy to manage: With the rapid growth of technology, enterprise resource planning or ERP systems have become easier to manage and use. This is especially true for companies that may not have the skills or resources to integrate their systems. In addition, for large companies, ERP (enterprise resource planning) can reduce the resources needed to run separate systems.

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