What are ERP systems? – Meaning, Introduction, and Tips for ERP software implementation
Have you heared of "Enterprise Resource Planning" Systems? Here is everything you need to know
Learn what ERP systems are, how they function, and get tips on implementation. We give you a comprehensive exlanation of Enterprise Resource Planning and explain all the benefits, challenges and opportunities.
In today’s world, data is playing an increasingly central role in steering businesses and organizations. As companies become more integrated with other systems, such as customer service, accounting, and inventory management, they must manage their operations’ increasing complexity. This is where Enterprise Resource Planning (ERP) systems come into play.
ERP systems provide a comprehensive view of all the resources available within an organization so that managers can make informed decisions about how best to use them for maximum efficiency and productivity. Integrating multiple processes into one unified system enables companies to access real-time insights into their operations from any location. This article will explain what ERP systems are, how they work in different business environments, and why you might want to consider one after reading it.
What is an ERP (Enterprise Resource Planning) system?
An Enterprise Resource Planning (ERP) system is a comprehensive software solution that integrates an organization’s various operations and functions. The system provides a single, centralized platform for managing the entire business, from financials to sales, customer relationship management, inventory, warehouses, purchasing, project management, human resources management, and more. ERP systems allow every stakeholder to access real-time data from any location and are usually the basis for data-driven decision-making in companies.
Simple explanation of ERP systems
An ERP (Enterprise Resource Planning) system is something like the central nervous system of a company. Just as the brain integrates and coordinates all the functions of the body, ERP software integrates various business processes into a streamlined system. It is a suite of different applications that manage key operations, including product planning, purchasing, inventory management, finance, human resources and customer relations. Think of the system as a central database that all departments in an organization can access, update, interconnect and share data in real time. This eliminates so-called “data silos” where only certain people have access to data, and promotes better communication, efficiency, and decision-making across the enterprise.
A brief history of ERP Systems
ERP systems have a long-standing history and have evolved dramatically over time. In the 1970s and 1980s, ERP solutions heavily relied on large mainframe computers and were costly to purchase and install. This enormous investment cost for programming and running room-sized servers meant that only the largest companies could afford a central ledger to manage the business electronically.
However, as technology improved, ERP systems became more accessible and less expensive. In the 1990s, client-server-based solutions emerged, allowing companies of all sizes to benefit from the advantages of an ERP system. Furthermore, with the introduction of cloud-based services in the 21st century, the cost of ERP systems has significantly decreased. Smaller companies can now take advantage of features and capabilities previously only available to larger organizations. This wider availability of ERP solutions means that more businesses can experience the benefits of an integrated information system. New solutions based on SaaS, Cloud, or even open source became popular after the 2010s and the rise of software platforms.
Importance of ERP in modern business operations
ERP systems are increasingly becoming more important and integral in modern businesses, as they are essential for managing complex operations, providing real-time insights, and streamlining processes. ERP solutions provide organizations with a comprehensive view of their resources so managers can make informed decisions for maximum efficiency and productivity. ERP systems also allow for greater integration between different departments and teams, helping to ensure that everyone is working together on the same page.
For many businesses, compliance with local taxes or the need to integrate with government systems is another reason they adopt digital or ERP systems because real-time tax integration is only possible when all the data is centrally collected.
The Benefits of ERP Systems for Different Business Environments
ERP systems (Enterprise Resource Planning) benefit businesses in various business environments, from finance and accounting to manufacturing and distribution, marketing, and customer service.
Streamlined Processes and Cost Reduction
One of the most significant advantages of an ERP system is that it enables organizations to streamline processes, eliminating redundant tasks or activities and reducing the manual effort required to manage resources. Additionally, with a centralized platform for sharing data, companies can save on costs associated with having multiple systems in place.
Automation of manual processes
ERP solutions can significantly reduce the amount of manual effort required to manage day-to-day operations. With automated tools and processes, organizations can streamline their workflow, reducing the time spent on mundane tasks and allowing personnel to focus on more strategic initiatives.
Increased operational efficiency
By streamlining processes, eliminating redundant tasks, and providing real-time insights into operations, ERP solutions help organizations to increase their operational efficiency. The advantages can impact customer service, higher sales revenues, and better overall business performance.
Gain actionable insights from data to drive business growth
ERP systems can also provide organizations unprecedented insight into their operations by collecting and analyzing data. This data and insights allow managers to make better decisions about allocating resources and driving business growth. By leveraging the power of data, ERP solutions can help organizations maximize their potential for success.
ERP solutions also provide real-time insights into operations, allowing managers to make informed decisions to maximize efficiency and productivity. With access to current information about sales trends, inventory levels, customer service issues, and more, business leaders can quickly identify areas for improvement and take proactive steps to address them.
Finally, by providing access to comprehensive data about all aspects of their operations, ERP systems empower organizations to make informed decisions about how best to use their resources for maximum efficiency and productivity. This data-driven management approach can lead to improvements in areas such as customer service, marketing, and sales.
Quickly identify areas for improvement within the organization
ERP solutions also give organizations greater visibility into their operations, allowing them to identify areas needing improvement quickly. ERP systems can help managers pinpoint inefficiencies and act accordingly by providing real-time insights into performance. Identifying improvement areas makes it easier for organizations to remain competitive in an ever-changing environment.
Another key benefit of an ERP system is facilitating collaboration between different organizational departments. The entire organization can work together more effectively towards common goals by providing an integrated data-sharing platform.
Improved customer service and satisfaction
ERP systems also provide organizations a more efficient way to manage customer service issues and inquiries. Customer service personnel can respond quickly and accurately to inquiries with access to detailed customer information, such as past orders, shipments, and payment history. Additionally, ERP software is built with tools that enable timely follow-up on any unresolved customer issues.
Improved data accuracy and visibility
ERP systems also help organizations to improve their data accuracy and visibility. By ensuring that all departments use a consistent data set, ERP solutions eliminate discrepancies and make it easy for managers to view the information in real-time. This is highly beneficial for monitoring performance, tracking trends, and identifying areas of improvement.
Enhanced data security
Finally, ERP systems provide enhanced data security by allowing for the setup of access controls that limit which personnel have access to specific data. This helps organizations protect sensitive information and maintain compliance with industry regulations.
Streamlined compliance by reducing human errors
ERP systems can also help organizations streamline compliance by reducing human errors. By automating processes and providing real-time insights into operations, ERP solutions make it easier for managers to identify areas of non-compliance, allowing them to take corrective action before an issue arises.
Easily integrate new technologies into the system
ERP solutions should be flexible and easily integrated with existing technology, such as customer relationship management (CRM) systems, manufacturing machines, or simpler things like accounting software. Open ERP systems that make it easier to incorporate new systems help organizations to stay up-to-date with the latest technologies without making significant changes to their workflow.
How an ERP Works – More than a Database
ERP systems are complex software architectures enabling the seamless integration of various business processes into a single system. ERP systems include software components, databases, middleware, and user interfaces.
- The software components of an ERP system are responsible for managing the various application layers and user interfaces. These components will typically include accounting, inventory management, customer relationship management, and other Modules (many of them are listed in the next section).
- The ERP system’s databases store data from various applications, allowing real-time information sharing between departments, modules, and functionalities. The central ledger (database) helps ensure accurate and consistent data across the organization and complete visibility of everything happening.
- Middleware is used to connect the different components of an ERP system, enabling communication and collaboration between them. Commonly used middleware includes XML, BizTalk, and web services.
- The user interface layer provides a platform for users to interact with the ERP system, allowing them to access data in real-time. User-friendly interfaces allow for fast navigation, saving work and wait times, and the proper data visualization allows better decision-making and improved operational efficiency.
Typical Modules and Features in ERP systems
ERP systems provide a comprehensive view into all aspects of an organization’s business processes, and therefore also, many different integrations, modules, and features exist in different systems. Here are some of the most common modules you find in a modern ERP system:
- Financials: This module includes general ledger, accounts payable, accounts receivable, KPIs and financial reporting.
- Business Intelligence: It enables organizations to gain insights into their data through techniques such as big data analysis tools or predictive analytics algorithms.
- Customer Relationship Management (CRM): It maintains customer relationships by managing interactions like email campaigns, account creation, or order fulfillment.
- Sales & Distribution: This module helps manage sales activities such as order entry processing, pricing calculation, or customer service inquiries.
- Manufacturing: This module includes production planning, scheduling, cost management, and quality control.
- Production Planning and Scheduling: This module helps organizations plan and schedule production activities to optimize resources and meet customer requirements.
- Supply Chain: This module includes inventory management, purchasing, and logistics.
- Human Resources (HRM): This module contains employee information, payroll, benefits administration, and performance management.
- Project Management: It assists in the execution of projects through processes for budgeting, resource allocation, scheduling, or progress tracking.
- Quality Management: Helps organizations streamline operations by ensuring product consistency according to customer specifications or industry standards.
- Warehouse Management System (WMS): Allows companies to track goods within their warehouses using barcoding technology or radio frequency identification (RFID) systems.
- Asset Lifecycle Management: Provides companies with tools to effectively manage the entire lifecycle of their assets, from acquisition to disposal.
- Document/Content Manager: Allows organizations to store and manage documents, such as contracts or invoices, in a secure location.
- Enterprise Service Automation: This module helps streamline providing services to customers by automating tasks such as problem resolution or customer feedback management.
- Risk and Compliance: This module allows organizations to manage and mitigate risk associated with their operations by providing tools for risk assessment and compliance management.
- Knowledge Management: This module helps organizations store and share knowledge between employees, helping them increase productivity.
- Marketing Automation: Allows companies to track and manage marketing campaigns, such as email or social media campaigns.
- Dashboards and Reports: Provides visual analytics (Business Analytics) for users to understand their data better.
ERP Implementation – Things to consider
An ERP implementation is a complex process that typically includes planning, analysis, design, development, testing, deployment, and maintenance. But here are some of the most important considerations and tips on what to consider before you buy, when choosing an ERP system, and after implementing an ERP system.
Here the full article: Choosing the right ERP solution – A Guide to start your ERP Journey
Before you buy an ERP
- Understand Your Business’s Needs: Ensure you thoroughly understand your business requirements and needs before choosing an ERP system.
- Have a Clear Vision & Goals: Define what you want to get out of implementing an ERP system, including short-term objectives and long-term goals, so you know where to start and how it will benefit your organization.
- Get Buy-In From All Stakeholders: Ensure that everyone involved in the implementation process is on board with the project, from executives to users, so there are no surprises along the way.
- Establish Realistic Timeline & Expectations: Set realistic expectations for completion timeframes when planning for deployment; otherwise, delays can lead to frustration and cost overruns due to scope creep or scope change requests later on during implementation phases if deadlines are not met initially.
Choosing the Right ERP System
- Evaluate the ERP System’s Capabilities: Make sure your chosen ERP system can meet the business requirements and needs you defined at the beginning. Don’t fall for 1000 features you will never use; focus on your goals.
- Look at User Experience: Consider how the platform will be used by users, including user experience when navigating through the system and reporting capabilities.
- Determine Integration Capabilities: Understand how the ERP system will integrate with other systems in your organization
- Compare Pricing and Licensing Options: Analyze the cost of implementing an ERP system, including licensing and maintenance costs. ERP system costs greatly vary, so comparing can pay off in the long term.
- Consider Scalability: Choose an ERP system with features and modules that can easily be scaled up or down to accommodate growth or changes in your business processes. Scalability also means an ERP system should offer easy customization and expansion.
- Consider Different Deployment Models (On-Premises, Cloud, Managed Cloud, or SaaS): Determine which deployment option best meets your organization’s needs, especially as SaaS can become very costly and often also internal costs for on-premise deployment can be immense. Make a Total Cost of Ownership (TCO) calculation for 5 to 7 years to see the actual costs of different implementations.
- Test Drive The Solution With A Free Demo or Trial: Many ERP vendors offer free demos and trials of their system, so you can test-drive the solution and ensure it meets your needs and the set-out business requirements.
- Take Support Into Account: Ensure a support team is available to help you with any issues or questions that may arise during the implementation or post-implementation process.
After an ERP implementation
- Train Users: Provide adequate and ongoing training for users to familiarize themselves with the ERP system so they can use it effectively
- Monitor System Performance: Regularly monitor the performance of the ERP system and make sure everything is running smoothly
- Adjust Settings & Customizations as Needed: Make any necessary adjustments or customizations based on user feedback
- Update Software & Integrations: Keep your software up-to-date and ensure that all integrations remain current
- Ensure Disaster Recovery Plan Is in Place: Create a disaster recovery plan that outlines steps to be taken if there are system outages or data losses due to human error or hardware failures
- Track Key Metrics: Monitor key metrics and indicators over time to determine whether goals have been met, such as improved efficiency levels and cost savings
- Optimize Processes & Streamline Business Solutions: Continually optimize processes within the ERP system and streamline business solutions to maximize productivity
Times, when ERP systems were only accessible to large size corporations are past. Nowadays, implementing an ERP system can help businesses of all sizes improve their operations and better control their organization, even with budgets not in the millions.
Choose an ERP system that fits your needs through proper research and preparation. Take all factors into account, such as: user experience, integration capabilities, pricing and licensing options, scalability, deployment models, support availability, and other factors such as user training, post-implementation and monitoring key metrics over time. The appropriate preparation ensures organizations receive the maximum value from their chosen solution.
Author: Dr. Andreas Maier, CEO SIX Management Systems and CodeCoda