What is ERP and Why is it Used in a Company?
Definition of Enterprise Resource Planning (ERP)
ERP stands for Enterprise Resource Planning and refers to software and systems used to plan and manage all the core supply chain, manufacturing, services, financial and other processes of an organization. ERP software can be used to automate and simplify individual activities across a business or organization, such as accounting and procurement, project management, customer relationship management, risk management, compliance and supply chain operations.
Individual ERP applications can offer software as a service (SaaS), while a complete suite of ERP applications forms an ERP system that can be used to effectively communicate and bring together business processes to enable a flow of data between the applications, typically through common databases either on-site/on-premise or in the cloud.
ERPs connect every aspect of an enterprise. An ERP software system allows for better performance and project management that helps plan, budget, predict and accurately report on an organization’s financial health and processes.
A Brief History of ERP
The term “ERP” was first used in the 1990s by the Gartner Group, but enterprise resource planning systems have been used in the manufacturing industry for over 100 years and continue to evolve as industry needs change and grow.
- 1913: An engineer named Ford Whitman Harris developed the Economic Order Quantity (EOQ) model, a paper-based manufacturing system for production scheduling.
1964: Toolmaker Black and Decker adopted the first Material Requirements Planning (MRP) solution that combined EOQ with a mainframe computer.
1970s-1980s: Computer technologies evolved and concept software handled business activities outside of manufacturing, including finance, human resources data, and customer relationship management (CRM).
1983: MRP II was developed and featured “modules” and integrated core manufacturing components, and integrated manufacturing tasks into a common shared-data system.
1990s-2000s: Gartner Group coins term “ERP” to differentiate from MRP-only systems. ERP systems expanded to encompass business intelligence while handling other functions such as sales force automation (SFA), marketing automation and eCommerce.
2000-2005: Cloud-based ERP software solutions arrive when ERP software makers create “Internet Enabled” products, providing an alternative to traditional on-premise client-server models.
- Today: Software-as-a-Service (SaaS) and Anything-as-a-Service (XaaS) offer new delivery models for ERP. Remote web-based access for cloud ERP solutions provide mobile solutions, security, and integration with the changing industries and smart technologies, including integrations with the Internet of Things (IoT), Internet of Everything (IoE), and even social media to provide comprehensive solutions for every industry.
How Does an ERP System Work?
The main purpose of an ERP system is to increase organizational efficiency of an organization by managing and improving how company resources are utilized. Improving and/or reducing the number of resources necessary without sacrificing quality and performance are keys to effectively improving business growth and profitability.
ERP systems typically cover all aspects of business operations and commonly provide:
- An integrated system
- Common database
- Real-time operation
- Support for all applications/components
- Common user interface across application/components
- On-premise, cloud hosted, or SaaS deployment
ERP software has the ability to collect and compare metrics across departments and provide a number of different reports based on roles or specific user preferences. The data collected makes finding and reporting on data faster and gives a complete view of business performance with complete insights on how resources are being spent.
ERP synchronizes reporting and automation by reducing the need to maintain separate databases and spreadsheets that would have to be manually merged to generate reports. This combined data collection and reporting offers valuable insight, such as where to cut costs and streamline processes, providing the information to make real-time business decisions.
Types of ERP Systems & ERP Deployment Options
ERP software is considered a type of “enterprise application”, which refers to software designed to satisfy the software needs of an organization and improve business performance. There are many different ERP systems available today that range greatly depending on the size, function, and needs of an organization. Types of ERP systems generally refer to deployment options and include cloud ERP, on-premise ERP and hybrid ERP (some systems in the cloud and some on-premise).
Each ERP solution system is often tailored to support different aspects of a business, meet an organization’s business requirements and have different methods of deployment.
Big Business ERP vs. Small Business ERP
In the past, “big business ERP” addressed large organizations that often deployed onsite/on-premise ERP solutions and had an abundance of resources to dedicate to IT and other support to analyze, customize, upgrade and deploy their software solutions.
The phrase “Small Business ERP” or “SME (small and medium-sized enterprise) ERP” commonly referred to ERP software systems with business management applications typically created to meet the specific needs for a small to mid-sized business.
Today, these phrases are used less frequently as the important factor is not company size but determining if the ERP system is effectively addressing current and future business requirements, no matter the size of the organization.It’s imperative that organizations consider and select ERP systems that eliminate the need for costly customizations, adapt to the rapid pace of business change, address future technologies and meet other identified requirements.
Types of ERP Systems: Cloud vs On-Premise vs Hybrid
There are three main types of ERP systems that function with different deployment model options. The most common types of ERP systems include cloud ERP, on-premise ERP, and hybrid ERP.
- On-Premise ERP software is implemented onsite and maintained in physical office space within an organization, hosted on the company’s own computers and servers for full control, support and ownership of the entire system once implemented.
- Cloud-based ERP software is a web-based solution, known as Software as a Service (SaaS), where an organization accesses and stores data on any device with an internet connection, usually through the purchase of a subscription. Continual support, updates, training, and flexible customizations supported by the software provider.
- “Hybrid” ERP software refers to a combined implementation of cloud-based and on-premise ERP system solutions. The combination of hosting and deployment services vary by provider. These models can provide ERP users the flexibility to migrate between delivery models, or integrate benefits not available existing implementation.
Different ERP vendors support different deployment model options. Combinations of options, often referred to as “hybrid” deployment may offer a combination of hosting and deployment services. These models can provide ERP users flexibility migrate between delivery models, or integrate benefits not available existing implementation.
What Industries Can ERP Be Used For?
ERP software can be used in any industry to help a business become more efficient. It provides an effective communication tool that can manage information between internal and external departments, assist with daily activities to manage projects, track adherence to guidelines, and handle day-to-day intricacies that come with running a business.
Due to ERP roots in manufacturing, there are robust Industry-specific ERP systems that cater to the various manufacturing industries. ERP software systems are very diverse and are key parts of many industries, including but not limited to:
Industrial Machinery and Components
Construction and Home Improvement
Electronics and Technology
Aerospace and Defense
Healthcare, Pharmaceutical and Life Sciences
Agribusiness, Farming and Agriculture
Food and Beverage
Healthcare and Hospitality
Clothing, Consumer Goods and Retail
Over time, ERP systems have grown to include support for other applications and “ERP modules" that support day-to-day business function. In many ERP systems, these common functional areas are grouped into ERP modules, including but not limited to:
- Financial Accounting
- Management Accounting
- Human Resources
- Order Processing
- Supply Chain Management
- Project Management
- Customer Relationship Management (CRM)
- Data Services
When Does Your Business Need ERP?
Business development often focuses on goals that coincide with a company’s short-term and long-term growth, as well as analyzing potential business challenges. Conducting a regular analysis of systems and processes helps identify when a business may need to integrate an ERP system.
An ERP solution should be taken into consideration when existing business systems and processes are:
- No longer function or function inefficiently (throttling/bottlenecking)
No longer support the growth of the company
Lack current security requirements to mitigate risk
Identifying broken processes is important for growth and finding areas of improvement. Here are a few examples of opportunities that may signal a process is no longer supporting company growth:
- Use/Relying heavily on separate databases/spreadsheets/programs that require manual processes for data management and fall out of sync regularly
Information and analytics are difficult to access and/or out of date
Day-to-day processes are difficult or overly time consuming, such as paper-based accounting, financial reporting, etc.
Sales and customer experience are suffering due to inaccurate or incomplete data and cause poor reputation for reliability and services
Inefficient/complex/complicated IT processes. Current systems have bad scalability, fragmented systems legacy solutions.
IT time is spent fixing/patching legacy systems to try and keep up with growth
Does not support new and advanced technologies like IoT, artificial intelligence, etc.
Once broken processes are identified, businesses can take the next steps to overcome these business challenges and support business growth.
How Can ERP Help Improve and Grow a Business?
ERP systems are used to help businesses of all sizes overcome challenges—from small businesses to massive enterprises. Early business practices may no longer keep up with growing demand and require more efficient business tools, like ERP, to effectively manage a business’ systems and resources.
ERP software systems provide many benefits to the health and growth of a business.
The Benefits and Business Value of ERP
- Cost savings and improved ROI efficiency. Increased productivity and efficiency as a result from the integration and automation that ERP software provides
- Improve business insight. Improve decision making with a single aggregated source of truth and real-time data
- Manage Regulatory Compliance. Manage and monitor compliance with regulatory standards, and even set up alerts for non-compliance
- Mitigate and reduce risk. Automate core business operations, manual tasks, and reporting. Reduce human errors, and free up employee time and resources
- Enhance collaboration. Break down communication barriers for efficient collaboration and coordination to improve job efficiency.
Improve supply chain and distribution network reliability. Use demand-driven MRP to forecast supply and demand and prepare for fluxes in orders and supply chain
- Scalability. Consistent infrastructure for streamlined operations can grow as your business grows
- Optimize customer and partner management. service, customer relationship management, as well as partner and supplier management with insight from seamless shared information
How to Select an ERP System
Picking and deploying an ERP system can be a daunting task with many software solutions to choose from. When selecting an ERP system, it is important that the software meets the needs and goals of your company while having the support required to implement an ERP system.
Here is a quick checklist to review when first comparing between ERP Systems to help narrow down your options.
Checklist for Selecting an ERP System
Does the ERP software/vendor that is being considered:
- Meet your system requirements?
- Meet/align with company goals?
- Integrate/compatible with current existing systems?
- Have partner Network/Availability for local support?
- Offer training/support options?
- Have references and recommendations from customers?
- Continuously improve and develop to utilize new technology and adapt to challenges?
Once the ERP options have been narrowed down to solutions that are most compatible with your current systems and goals, it can be helpful to review the benefits and features of the systems with key decision makers of the organization. Having the insight and support of these decision makers can boost adoption and support of an ERP implementation throughout the organization.
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