What Is Enterprise Resource Planning (ERP)?
Enterprise resource planning (ERP) is a platform companies use to manage and integrate the essential parts of their businesses. Many ERP software applications are critical to companies because they help them implement resource planning by integrating all the processes needed to run their companies with a single system.
An ERP software system can also integrate planning, purchasing inventory, sales, marketing, finance, human resources, and more.
Investopedia / Joules Garcia
Understanding Enterprise Resource Planning (ERP)
You can think of an enterprise resource planning system as the glue that binds together the different computer systems for a large organization. Without an ERP application, each department would have its system optimized for its specific tasks. With ERP software, each department still has its system, but all of the systems can be accessed through one application with one interface.
What Does ERP Do?
ERP applications also allow the different departments to communicate and share information more easily with the rest of the company. It collects information about the activity and state of different divisions, making this information available to other parts, where it can be used productively.
ERP applications can help a corporation become more self-aware by linking information about production, finance, distribution, and human resources together. Because it connects different technologies used by each part of a business, an ERP application can eliminate costly duplicates and incompatible technology. The process often integrates accounts payable, stock control systems, order-monitoring systems, and customer databases into one system.
How Does It Work?
ERP has evolved over the years from traditional software models that made use of physical client servers and manual entry systems to cloud-based software with remote, web-based access. The platform is generally maintained by the company that created it, with client companies renting services provided by the platform.
Businesses select the applications they want to use. Then, the hosting company loads the applications onto the server the client is renting, and both parties begin working to integrate the client's processes and data into the platform.
Once all departments are tied into the system, all data is collected on the server and becomes instantly available to those with permission to use it. Reports can be generated with metrics, graphs, or other visuals and aids a client might need to determine how the business and its departments are performing.
A company could experience cost overruns if its ERP system is not implemented carefully.
Benefits of Enterprise Resource Planning
Businesses employ enterprise resource planning (ERP) for various reasons, such as expanding, reducing costs, and improving operations. The benefits sought and realized between companies may differ; however, some are worth noting.
Improves Accuracy and Productivity
Integrating and automating business processes eliminates redundancies and improves accuracy and productivity. In addition, departments with interconnected processes can synchronize work to achieve faster and better outcomes.
Improves Reporting
Some businesses benefit from enhanced real-time data reporting 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.
Increases Efficiency
ERPs allow businesses to quickly access needed information for clients, vendors, and business partners. This contributes to improved customer and employee satisfaction, quicker response rates, and increased accuracy rates. In addition, associated costs often decrease as the company operates more efficiently.
ERP software also provides total visibility, allowing management to access real-time data for decision-making.
Increases Collaboration
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 and manual tasks are eliminated, allowing employees to allocate their time to more meaningful work.
ERP Weaknesses
An ERP system doesn't always eliminate inefficiencies within a business or improve everything. The company might need to rethink how it's organized or risk ending up with incompatible technology.
ERP systems usually fail to achieve the objectives that influenced their installation because of a company's reluctance to abandon old working processes. Some companies may also be reluctant to let go of old software that worked well in the past. The key is to prevent ERP projects from being split into smaller projects, which can result in cost overruns.
Employing change management principles throughout the ERP life cycle can prevent or reduce failures that compromise full implementation.
ERP Solutions Providers
Some familiar names are leaders in ERP software. Oracle Corp. (ORCL) originally supplied a relational database that integrated with ERP software developed by SAP (SAP) before entering the broader enterprise market in a big way in the early 2000s. Microsoft (MSFT) has long been an industry leader, with many customers using multiple software applications from the company.
As cloud-based solutions have grown in popularity in recent years, the traditional ERP industry leaders have seen challenges from upstarts such as Bizowie and Workwise.
ERP Examples
Fulton & Roark
Men's grooming product maker Fulton & Roark successfully implemented enterprise resource planning to better track inventory and financial data. Like many other businesses, the North Carolina company used spreadsheets to track inventory and accounting software to record financial data.
As the company grew, its processes lagged. Their antiquated inventory tracking system did not account for changing costs, and the accounting software could not record the metrics needed for key financial statements. These breakdowns created manual processes, which further compromised time and resources.
To eliminate unnecessary processes and centralize work, they chose the Oracle NetSuite ERP system. Immediately, Fulton & Rourk was better able to identify accounting errors related to inventory, eliminate costs from employing third parties to evaluate their financial records, and better report financial positions.
Cadbury
Cadbury, a global confectioner and maker of the popular chocolate Cadbury egg, also successfully implemented an ERP system. The company had thousands of systems but could not keep pace with its rapid growth and used ineffective warehouse management systems.
It implemented a system that integrated its thousands of applications, standardized processes, and restructured warehouse management systems—breaking down silos for seamless, integrated coordination of work.
Enterprise resource planning software offers single-system solutions that integrate processes across the business. These applications allow users to interact within a single interface, share information, and enable cross-functional collaboration. They increase productivity, collaboration, and efficiency.
The components of an ERP system depend on the organization's needs. However, there are key features that each ERP should include. Generally, packages include finance, human resource, logistics and manufacturing, supply chain management, and customer relationship management.
Generally there are three deployment options for ERP systems; Cloud-based, on-premise, and a hybrid of the two. Within these options, a business can choose from hundreds of types such as finance, supply chain management, and human resource management.
Which ones are the main applications depends on the business and the industry it operates in. Most companies can benefit from supply chain management, logistics, and financial applications to help them streamline their operations and expenses.
The Bottom Line
Enterprise resource planning (ERP) manages and integrates business processes through a single system. With a better line of sight, companies can better plan and allocate resources. Without ERP, companies tend to operate in silos, with each department using its own disconnected system.
ERP systems promote the free flow of communication and sharing of knowledge across an organization, the integration of systems for improved productivity and efficiencies, and increased synergies across teams and departments. However, moving to an ERP system will be counterproductive if the company's culture does not adjust to the change and the company does not review how the structure of its organization can support it.