What Is ERP in Simple Terms?
Enterprise resource planning (ERP) brings the entirety of your business operations — from sales and marketing to planning and production to inventory and finance — into one seamless experience. By pulling your data into a central system, all the information you need to drive your business is at your fingertips. A smart ERP gives you every data point you need in real time.
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What Is an ERP System?
Enterprise resource planning (ERP), called government resource planning (GRP) in the public sector, has traditionally been a large in-house initiative that aims to streamline both business processes and business information. When implemented properly, it is an integrated system that provides data clarity, flexibility, and operational agility.
The foundation of an ERP solution is a shared database that acts as a central repository of information. All relevant stakeholders access this same repository of data. Reports are then culled from this singular, uniform system to provide transparency, efficiency, and consistency.
Enterprise resource planning plays a key role in computer-integrated manufacturing (CIM), which relies on automated systems, software, sensors and computer-controlled machines to manufacture products. ERP has evolved from pure manufacturing systems to integrate with accounting, human resources, purchasing, ordering, and cost accounting.
The roots of ERP go back to 1913, when an engineer named Ford Whitman Harris saw a need for greater efficiency and developed a production scheduling model called economic order quantity (EOQ). This paper-driven precursor to process planning remained the industry standard until 1964, when Joseph Orlicky developed materials requirements planning (MRP), and toolmaker Black + Decker became the first company to adopt an MRP solution that combined EOQ concepts with a mainframe computer.
Rapid software adoption in the 1980s led to integration capabilities that expanded functionality to include scheduling, bill of materials (BOM), and purchasing functions tied to corporate financial reporting. Encompassing considerably more manufacturing processes, manufacturing and resource planning (MRP II) replaced MRP as the standard for data management and efficiency planning. When the systems expanded beyond manufacturing processes to include human resources and accounting, they were recast as enterprise resource planning.
What is the Difference Between Enterprise Resource Planning and Enterprise Resource Management?
Enterprise resource planning can be confused with other management systems such as enterprise resource management (ERM), enterprise performance management (EPM), and customer relationship management (CRM). Here are the benefits and features of each.
- Enterprise Resource Planning: ERP tracks your resources, materials, and transactions. It provides all the data about how your company operates in real time. Use ERP systems to operate your business.
- Enterprise Resource Management: ERM lets you manage access for all your software systems. Typically this includes the ability for staff to sign in to multiple software systems with a single username and password, as well as let you control who has access to software systems.
- Enterprise Performance Management: EPM software takes the ERP data and helps you monitor and analyze your organization’s performance. Use EPM for planning, forecasting, evaluating, and decision-making. It helps you strategically manage your organization’s overall performance through modeling and analytics.
- Customer Relationship Management: Most ERP solutions include many CRM tools to help you understand your customers better. For example, you can track contacts and the purchase order history of your customers. CRMs, however, typically provide deeper insights into the sales pipeline and funnel, whether it relates to sales or to services for your customers. Many CRMs also help you organize and track your marketing efforts and time spent on converting leads into sales.
Who Is Using Enterprise Resource Solutions?
In today’s competitive climate, every organization needs the ability to gather, store, and analyze data to make better decisions faster. Enterprise resource planning helps you standardize and simplify your data for greater agility, efficiency, and collaboration.
You can implement an ERP system to streamline operational and administrative processes across every industry vertical, including healthcare, manufacturing, retail, government, and technology. ERP works to integrate disjointed processes into one data system that the entire organization can view and act upon. All users — from executives to CIOs to customer service reps — can access the same real-time, up-to-date, and complete user-appropriate data and information.
Increasingly, companies that need to streamline and integrate operational functionality are turning to the nimble ERP solutions available in the current market. Companies need fast responses to the variances in the modern business climate and market forces to succeed and profit.
The business value of an ERP system can be found in its efficiencies and ability to quickly provide clear analytics. Businesses view data intelligence as a commodity that can be leveraged to enhance market share, competitiveness, and profitability. Having the right knowledge, clear reporting, and cross-function integration provides greater opportunities to identify areas for growth and expansion. ERP systems provide companies with the ability to respond to changing operational paradigms, new partnerships, acquisitions, increased supplier lists, decision-making tools, and mechanisms in order to adapt and move forward quickly.
ERP can provide financial management, follow standard accounting practices, generate reports for business uses, and manage transactions. For manufacturers, ERP can manage your supply chain and inventory, ensuring you have the right materials on hand at the right time to fulfill orders. ERP can also provide customer insights, analyzing who is ordering your products or services, how often they order, and what their special requests or needs might be — creating a database of all your customer interactions.
In addition, developers are always finding new integrations among devices (from desktop to mobile) and among business applications. ERP vendors are constantly looking for the tools and techniques to give businesses an advantage in a data-driven world.
How Does ERP Work?
To accommodate the diverse needs of buyers, vendors offer on-premise, hosted, and cloud-based solutions to meet organizational implementation goals. Most ERP systems are based on a modular platform that vertically integrates elements — from the payroll and staffing requirements of an HR department to procurement and warehousing capacity, sales and marketing, contract lifecycle management (CLM), and administration.
ERP modules are designed for many business processes, such as inventory control and finance, and can be bundled together for your business. The benefit of an ERP solution is that the modules have a consistent look and feel, so everyone from the back office to the front office to the production floor has the same experience. These modules are integrated to ensure you have a shared system of data and workflows, as well as standardized business processes.
One of the numerous goals of an ERP system is to lower operational costs by eliminating redundant systems and tasks, improving workflow, enhancing efficiency, and encouraging cross-functional collaboration and communication. ERP systems also furnish the reports that reveal opportunities for insight, growth, and planning. An ERP system integrates modules into a consistent infrastructure and typically features the following:
- Modules ranging from distribution and supply-chain management to human resources and payroll to project management and finance
- Ability to capture transactional data, using radio frequency identification (RFID) scanners, readers, and tills
- “Clean” data that avoids duplication and offers a standard source for all your business decisions
- Data services that provide interfaces or functionality for your customers, vendors, and staff
- Real-time data and dashboards for key metrics
- Specialized data and analytics that track trends and ROI on your marketing efforts
- Advanced planning and scheduling (APS) systems
- A shared or common database with standardized data
- A consistent look and feel for all modules in the ERP system, reducing training time, and improving staff performance
- A services knowledge base or vendor forum, offering community support among all the customers using a particular ERP system
ERP began as a tool for manufacturing, but has been adopted by industries that provide services as well as finished goods. A strong ERP system combines integration, real-time operational support, and a centralized database. That centralized database will possess modern conveniences such as dashboards, cross-functional operations reporting, and instant views of the organization as an entire, integrated unit. However, a centralized database poses one risk: It can open the company to the threat of losing sensitive information in the event of a security breach.
ERP system solutions, software, and tools fall into several categories, based on their size and the complexity of the businesses they serve:
- Tier I: A single-solution or general ERP. These systems, from the likes of Oracle or SAP, are designed for large organizations that need integration across a global structure, including large federal agencies. These typically adapt to the processes across industries and have the capacity to customize depending on industry requirements. These ERPs handle multiple languages, currencies, alphabets, and accounting regulations.
- Tier II: Industry-specific or vertical ERP. These systems, such as Microsoft Dynamics or Epicor, focus on serving a single industry, such as construction, retail, or grocery. They also serve business units of global companies, as well as state and local governments, but lack some of the global capacity of Tier I solutions.
- Tier III: Midsize ERP. These handle midsize companies that need few global functions.
- Tier IV: Small-business ERP. These systems, such as PeopleSoft, offer one or two business processes, such as accounting, rather than a fully integrated solution. You can add other options as needed, or you can combine vendors to provide the services you need without buying unnecessary modules.
The Leading Enterprise Resource Planning Vendors
According to most industry sources, including Gartner Research, the leaders in ERP solutions are SAP (which developed the first ERP system in 1972) and Oracle. Today, these companies continue to be the two largest providers of ERP solutions offering in-house and cloud-based technology. Gartner’s Peer Insights also cites Microsoft Dynamics, NetSuite, and Sage among the industry leaders, especially for organizations seeking small and medium-sized cloud-based solutions.
Industry-Specific Enterprise Resource Planning Solutions
The trend for developing industry-specific solutions is growing rapidly. Hundreds of ERP solutions are available; many apply generally to all industry verticals, while others possess industry-specific functionality/modules (healthcare, manufacturing, retail, government, or technology). It’s essential to evaluate your processes and determine whether a generic solution will meet your needs prior to selecting a vendor. A Software Advice analysis using Gartner's research methodology found almost 600 ERP software solutions currently available in the marketplace, offering a vast array of choices to fit any organization’s needs.
Countless ERP solutions can meet the needs of all types of organizations, even in niche businesses. Here are some examples of how ERP software can meet market needs:
- Construction: Construction is a complex project, with general contractors scheduling and managing subcontractors and all the materials needed to deliver a project on time and on budget. ERP project management allows contractors to track material delivery, schedule subcontractors, and post costs and billing.
- Production: ERP modules can provide product lifecycle management (PLM), helping you guide a product from beginning to end, especially through design, manufacturing, and service. ERP solutions can synchronize your production process and provide quality control.
- Procurement: While many early ERP systems focused on back-office systems, the next generation of modules integrates with supplier-relationship management (SRM), making it easier for you to work with outside vendors and your customers. Just as you would track inventory for your production and manufacturing, ERP systems allow you to track products and supplies across business lines, as well as monitor vendors and get the best value for the volume of materials you buy.
- Distribution and Transportation: Starting with the distribution center, an ERP system can track the location and inventory of any ship, truck, or delivery, using real-time lookup and check-in. The software can also coordinate the timing of trucks that need to meet ships on the dock to receive timely deliveries, cutting the costs of waiting either in unloading or loading, as well as saving employee time in scheduling deliveries and pickups.
- Manufacturing: Real-time ERP solutions manage the process from the time an order is placed until it is shipped. ERP triggers the production schedule, aligns it with other orders in progress, and adjusts if you encounter any delays. ERP modules are key in supply-chain management (SCM), helping you monitor your stock levels and find items in your warehouse.
The Advantages of Enterprise Resource Planning Solutions
Data is the lifeblood of any organization. It helps you track your revenue, your materials, your resources, and your performance. It helps you identify the areas for growth and reduce your costs. Here are the ways your company can benefit from the data insights that ERP offers:
- Lower Your Operational Costs: ERP systems track your manufacturing production, customer service, purchasing, and more. With real-time data, you can see where operating costs are over or under budget, and how delays or bottlenecks can affect your costs. You’ll also have real-time inventory reports, pricing sheets, and customer data.
- Automate Order Processing: Are you still manually creating, entering, tracking, or fulfilling orders? ERP solutions automate the process, offer e-commerce systems so that customers can order and pay online, and validate billing, order tracking, and payment. You will also be able to configure pricing and track revenue from invoice through payment or cash receipt.
- Improve Project Management and Collaboration: By reducing the number of systems your organization uses to develop and manage products, you can work across departments to ensure key benchmarks, deliverables, and budgets are aligned with the project goals. Everyone will have access to the same data to offer and share business insights.
- Integrate Financial Reporting: Marketing, sales, and finance all work within a single system to track revenue and expense. Accounting no longer has to reconcile reports.
- Standardize Procurement: In large organizations, various cost centers and business units frequently buy resources independently of one another. An ERP system will unify your purchasing, resource, and vendor tracking to save time and money.
- Enhance Government Reporting: For public sector organizations, ERP software will help you fulfill compliance requirements such as accounting and auditing, data security, and supply-chain sourcing.
- Strengthen Security: A strong ERP system offers advanced user access and permission settings, keeping your data under virtual lock and key. Your sensitive information is no longer scattered in individual folders or computer hard drives. And everyone has access to the data they need, without opening up the data they don’t.
- Standardize HR Information: ERP software enables you to automate the lifecycle of any employee, from recruiting to onboarding to training and development. ERP software can include payroll management, performance appraisals, and time tracking.
- Empower Employees: When employees no longer have to work with inefficient systems, they can focus on the work, driving revenue and helping you retain focused, fulfilled staff.
You can use ERP to improve your corporate performance and governance in several ways. Data will show you where your business needs to grow or innovate, as well as help you control or reduce costs and risk. You gain business intelligence (BI) to get a truer vision of your company’s health and standing.
Advantages also include better cross-function communication and reporting, improved customer service management, better and more efficient operational management for procurement, inventory, sales tracking, and streamlined operations. Utilizing BI via predictive analytics allows for effective identification and implementation of new initiatives and opportunities for stability and growth.
According to Anderson, “Although ERP systems have many bottom-line advantages, the most compelling reason to pursue an ERP system is to gain a cross-functional — and even cross-organizational — platform to support scalable business growth.“
The Disadvantages and Challenges of Enterprise Resource Planning Solutions
On the other hand, an ERP solution can be a large and expensive initiative. It requires a lot of time, planning, and money to unify all your systems in one ERP solution. Expenses include the capital and software needed for functionality, as well as the consultants, in-house IT personnel, and administrators to manage the system. Many challenges in implementing an effective ERP system stem from hidden costs resulting from insufficient planning.
Once a business deploys ERP, users can utilize the system and maximize its functions, but there is often a lack of corporate policy to protect the integrity of the data in the ERP systems and the ways in which it is used. The key is to first plan proactively, recognize the elements of operational and cultural change, and assign the appropriate assets and human capital to the project. Oversight in these areas is the main reason for costly delays and financial overruns.
Almost as important as integrating systems is to identify any independent businesses that should not be included in the solution. If you include truly independent lines, you can create functionality, add unnecessary processes, and face unnecessary dependencies in your data gathering and reporting to fit the ERP rather finding a system that meets your business needs. Be sure that you buy the right ERP system, or combination of systems, that serve your business and strategy.
No system will align perfectly with your business right out of the box. Your business is unique, and your solution should fit your business. You will need some level of customization to integrate your systems with the ERP modules and may use third-party vendors to fit your particular needs. Be sure you have identified core business processes that require a minimal amount of customization and support. Too much development will cost you time and money in the long run.
Another widely recognized roadblock to ERP success is failing to provide sufficient training and education. As with all organizational or cultural change, supplying the tools to understand, comfort, and familiarize staff with the benefits and logistics of the new process is critical to gaining buy-in. And the time you spend on training takes away resources from the day-to-day operation of your business.
The most cited reasons for unsuccessful ERP implementation are the failures to do the following:
- Adequately identify your needs
- Understand the processes that need to change
- Assign the right team or resources
- Overcome resistance about changing systems
- Resolve disputes among departments about sharing sensitive data
- Install processes to ensure proper governance over the way data is gathered and entered into modules
If you are changing ERP solutions, be aware that the switching costs can boost the vendor's negotiating power, resulting in increased cost for support, maintenance, and upgrades.
McTall says the most common challenge his organization encounters is “difficulty in staying the course after we’ve defined the requirements. At GovSense, we leverage Smartsheet to help our customers organize, manage, and rank their requirements. Having a single source of truth throughout the project helps mitigate the risks.”
Is Your Company Ready for ERP? An Implementation Checklist
According to “A Framework for Applying CSFs to ERP Software Selection,” a study conducted by Rekha Gupta and S. Kazim Naqvi, “ERP implementation is believed to be a high-risk investment process, as it requires substantial financial commitments and has an inherent high-failure probability.” Organizations that carefully plan their search, purchase, and implementation of an ERP solution are able to minimize many of the most common risks mentioned above. Utilizing the McKinsey 7s model, a 2011 framework for assessing ERP readiness calls for the following actions when planning an ERP implementation:
- Strategy: Align the goals of the ERP system with the overall business strategy.
- Structure: Identify the decision makers and elements of coordination and alignment.
- Systems: Analyze the needs of IT, usable/important data, and business processes.
- Style/Culture: Make the appropriate changes in alignment or business culture to adopt ERP.
- Staff: Select the right project team and provide support.
- Skills: Provide the training and education to acquire or improve the necessary skill sets.
- Shared Values: Adopt the elements to assure buy-in, including overall business commitment.
Once you decide to proceed with implementing or improving an ERP solution, consider the following actions:
- Assigning an executive sponsor to lead the implementation of the ERP solution and provide oversight and direction, as well as remove any obstacles
- Developing a dedicated team of IT and non-IT professionals to lead the initiative
- Analyzing the current system and areas that need improvement
- Identifying the best deployment option for your business (SaaS/cloud vs. on-premise)
- Investigating industry options, vetting vendors, and obtaining references
- Planning the costs realistically (hardware, software, change management, staffing, and training)
- Creating a training protocol for ongoing education and user buy-in
- Planning for the data transfer (what information to import to the new system and why)
- Preparing a reasonable and actionable time frame before going live
Many of these considerations are dependent on the size of your business, the business units requiring support, and industry vertical. Factors such as general or industry-specific solution, and cloud, SaaS, or on-premise deployment will all be a large part of the decision-making process.
For example, you'll need to think about how you want data from the plant floor to be shared throughout your system. You have several options for data integration:
- Direct integration connects the equipment on the plant floor with other vendors' equipment and products.
- Database integration connects plant floor data to other systems through staging tables in your database.
- Enterprise appliance transaction modules (EATM) communicate with the plant-floor equipment and your ERP system through web services, software interfaces, or a staging table. These are typically an off-the-shelf solution.
- Custom integration solutions can be tailored to your specific business, but can cost more or require more maintenance.
Enterprise Resource Planning Best Practices
Much of your readiness assessment will vary based on your industry vertical. Industry- focused ERP software vendors place best practices procedures and reporting in many of the modules. Part of due diligence is identifying the reporting needed for function areas, such as quality and regulation. Many ERP solutions have financial and compliance reporting functions that are germane to a certain industry. The right system can assist and provide data to support issues of proper data storage and security, financial reporting, and ISO support, as well as the banking considerations of IFRS, Basel II, and Sarbanes-Oxley. Regulations and industry standards are part of the ERP software, which automates your need to monitor and review compliance in your business.
Best Practices for Implementing Your ERP Solution
When you’re ready to implement your ERP solution, one key to success is how well you migrate the data into your new system. Plan for success by identifying which data will need to move, determining and establishing a timeframe for migration (including when you will "freeze" the data and not allow more to be included in systems you will be shutting down), creating templates for migrating key data, establishing the key business accounts for those who will need immediate access to the data, and designating policies and procedures for archiving the data.
The Evolution of Enterprise Resource Planning
Gartner’s “postmodern ERP,” which recognizes that a one-suite solution may not always be in a company’s best interest, effectively articulates the continuing evolution of ERP, building on Forrester’s prediction that SaaS-based ERP adoption would rise 21 percent annually through 2015. In the same year, a survey by the Aberdeen Group found that about 90 percent of companies have implemented ERP.
A departure from a single-vendor approach, postmodern ERP advocates a multitiered plan that can solve many pertinent issues by integrating disparate systems and scaling for growth. This approach is especially useful for companies or divisions with remote teams or that are in the midst of corporate mergers and acquisitions. The key to postmodern ERP is striking the right balance between components, software, hardware, and modules, all while managing the complexity that can come with integrations.
The Future of Enterprise Resource Planning
The traditional ERP implementation was large, complex, and primarily accessible to enterprise-sized organizations. But the size of these legacy systems also meant that businesses struggled to keep them updated.
According to an article by Ron Gill, “Why Cloud Computing Matters to Finance,” “About two-thirds of midsized businesses are running old versions of their enterprise resource planning system. In some cases, it’s software that’s three or more versions old. This is the legacy of decades of on-premise (in-house) software deployments, incremental releases that never seemed worth the pain of a major upgrade migration project, and the fear of losing critical customization.” The article outlines the costs and inefficiencies of the continuous repair of large, complex, out-of-date systems.
Traditional ERP systems are installed on a company’s computers and servers, usually for a one-time license fee, with additional costs for upgrades, support, and training. These on-premise, or on-prem, systems, are typically considered a capital expenditure because of the up-front costs.
Cloud-based software works differently. The software is hosted on the ERP vendor’s servers and businesses access the data through a web browser and, increasingly, through mobile apps on phones and tablets. These ERP solutions can be installed quickly since they don’t require expensive hardware purchases, and pricing is based on a monthly or annual subscription, with additional fees for support, training, and updates. Many businesses initially were concerned about data being stored outside their own servers, but improved security and other benefits are speeding the adoption of cloud systems.
Projections for cloud-based ERP solutions are between $25-30 billion over the next five years, according to “State of Enterprise Resource Planning Security in the Cloud,” a 2018 report by Cloud Security Alliance.
Different types of cloud systems store and provide access to your data and ERP solution.
- Software as a service (SaaS) hosts your software and applications, providing all the maintenance and upgrades, which you access through a subscription
- Infrastructure as a service (IaaS) is more like a cloud-based data center, offering servers, storage, and networking.
- Platform as a service (PaaS) provides virtual environments for developing, testing, and managing applications, without the need for related infrastructure such as servers and databases.
Some providers offer a hybrid, or two-tier, ERP approach. Some applications are on-premise, and some live in the cloud. Companies can maintain their legacy ERP system while giving individual business lines access to nimble cloud solutions, gaining the overall benefits of ERP while distributing their effort across platforms.
As technology continues to evolve, more people have the power of computing in smaller devices. Mobile ERP apps give everyone access to real-time business data (such as sales, manufacturing updates, and customer tracking) in their phone or tablet. Social tools integrate sharing with ERP solutions. The Internet of Things (IoT) makes access to data faster, better, and universal among your company.
ERP providers have adapted their offerings to meet the demands for agility and mobility. As SaaS and subscription-based cloud technologies find greater acceptance, many small and medium-sized companies can take advantage of cost savings by eliminating expensive hardware expenditures, complex licensing, and maintenance.
McTall echoes the demand for cloud ERP solutions: “Cloud ERP enables organizations to manage IT costs, optimize operational efficiency, streamline order management and procurement processes, eliminate manually intensive, spreadsheet-based reporting, and improve employee productivity, while shifting ERP expenses to OpEx rather than CapEx.”
Today’s ERP systems are shedding their reputation for costly, time-consuming, and rigid deployments, while continuing to solve and improve upon key business functions like data integrity and process efficiencies. As the world moves through the era of digital transformation, businesses continue to recognize the need to leverage data to maintain or achieve a competitive advantage. Current ERP systems provide visibility, coordination, integration, and versatility. Future systems will offer the enhanced functionality, flexibility, reporting, and centralized data vital to meet the competitive demands of business.
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