ERP Explained: What is ERP and How Does It Work?
What Is ERP?
Enterprise Resource Planning is software used to streamline virtually every aspect of business operations. Also known as ERP, it integrates different processes and parts of your business to ensure they run as efficiently as possible.
How Does an ERP System Work?
ERP systems help organizations streamline processes on business intelligence, inventory and order management, financials and accounting, human resources, and customer relationship management (CRM), thus providing a holistic view of the business from a single information architecture.
Depending on how the software was set up, the workflow could either be a manual or automated process. If it's more of a manual process, employees need to enter the required data. If it's more automated, the ERP system takes care of the data itself.
ERP systems are beneficial for both large organizations and small- and medium-sized enterprises (SMEs).
ERP software is capable of managing a business and improving productivity through:
- Business Intelligence: Provides user-friendly reporting and analysis tools that contribute to smart and rational decisions
- Inventory and Order Management: Organizes processes related to manufacturing, purchase, inventory, and sales orders
- Financials and Accounting: Keeps track of cash flows, accounting, and assets
- Human Resources: Streamlines processes on benefits, payroll, and other onboarding tools.
- Customer Relationship Management: Enhances customer service and creates opportunities for different sales strategies
Features of ERP Systems
ERP systems are incredible assets to businesses, mainly due to a few key features: a central, shared database, automated reporting, and real-time information.
The basic and most important feature of an ERP system is its shared database.
Because it integrates different parts of the business, the system needs to have a comprehensive data structure that can be easily accessed by different teams.
It has to display similar and recent data as it is critical in business decisions. For example, the sales and accounting departments should be able to see the same figures. These figures must also be in line with those of inventory management. Likewise, figures in financial and cash flows should also match up with the data on payrolls and other human resources processes.
Another important feature of an ERP system is its synchronized and automated reporting tools.
Instead of different teams having separate databases, spreadsheets, and records, an ERP system centralizes all that data into one main reservoir.
This makes it easier to access data and make business decisions since there is no need to consolidate datasets and systems from multiple departments. Processes related to sales orders and human resources are directly accrued to financials and accounting.
An ERP system also provides portals and dashboards to track business performance based on specific metrics and KPIs.
ERP systems always have up-to-date information. As the software collects data, it immediately stores it in any relevant areas.
For example, if a sale is made on an eCommerce website, that information goes straight to finance, inventory, and sales so they can all see exactly how specific products are performing.
This is a huge benefit for businesses of any size, as it allows managers to base decisions off of real-time information, instead of looking at dated numbers from the previous month or quarter.
Getting Started with an ERP System
For your business to have an efficient ERP system, you first have to understand all the business processes that you want to improve.
This is essential in helping you customize ERP software systems to cater to your business needs. Currently, ERP software has three different forms: generic, pre-configured, and installed:
- Generic – In essence, ERP software is generic and can be used by different industries. As such, it has to be configured for your business before it can be used.
- Pre-Configured – Other ERP software have pre-configured templates that were developed from more comprehensive software. These templates are designed for specific industries (e.g. retail, automotive) or companies of different sizes (SMEs and large corporations).
- Installed – After a generic or pre-configured package has been designed for the requirements of a particular organization, the ERP software then becomes ready for operational installation.
Benefits of ERP System
To further illustrate the benefits and business impact of ERP systems:
- An ERP system helps mitigate regulatory risks as it integrates compliance information of all business functions
- An ERP system allows companies to identify problems and make smarter business decisions through its real-time information on all aspects of the business
- An ERP system automates business functions related to procurement and payment, order and delivery, and cash processes.
- An ERP system provides relevant customer service through its billing and customer relationship processes
How to Choose an ERP system
Whether you are a large business or a small- and medium-sized enterprise (SME), choosing an ERP system requires careful deliberation.
- Create a comprehensive list of requirements for an ERP system
- Carefully study the requirements of your project and business. See the business processes and system requirements that you need so that your vendors can also provide details in their proposals. Consult other stakeholders to make sure that their needs are also met by the ERP system.
- Get references and reviews
- To help you decide which ERP system to adopt, ask your vendor for references. Understand the experiences of their other customers as this will guide your decision.
- Consider the level of customization needed
- Because customization has a financial implication, you have to prioritize particular requirements over others and see which ones can be implemented at a later time.
- Consider changes in your organization
- As your new ERP system improves processes in your business, it is also important to manage its impact on the culture of your company.
History of ERP
The concept of ERP dates back to the year 1960. Software engineers saw the need to create a management system that improved manufacturing processes by keeping track of materials used on different processes. This inspired the Material Requirements Planning (MRP) systems in the 1970s that streamlined production processes and calculated materials needed.
This then evolved into MRPII in the 1980s, which included features on sales planning, scheduling, and capacity management. Although it has improved manufacturing planning for organizations, improvements still had to be made with tracking profitability and customer satisfaction, since they also have a big impact on the enterprise. In the 1990s, software also included other organizational processes, such as finance and human resources. This led to the Enterprise Resource Planning system available today.
The ERP systems today had integrations on advanced Business Intelligence (BI) functions, sales automation processes, and other complex and relevant functions. As the systems get more advanced, they become fit for a wider range of industries like distribution and e-commerce.
Given the advancement in ERP systems, businesses, including smaller ones, have seen the value of the system in their processes. Because cloud-based, software-as-a-service providers have created ERP products that are easier to install and navigate, organizations can now choose which system best suits them. Also, executives and founders can make smarter decisions for the growth of their business through the real-time reporting and business intelligence functions of ERP systems.
Ready to Implement an ERP System?
While there are many different ERP systems on the market, our favorite is NetSuite. NetSuite's ERP capabilities include everything we covered above and much more. We've built a team of NetSuite-certified consultants who are here to show you how to leverage cloud software to grow your business. Contact us today to get started!