What Is an ERP, and How Does It Work?
We explain what an ERP system is, what it does and how it works.
Put simply, an enterprise resource planning (ERP) system is an application that allows a company to manage all its operations. However it’s often more complicated than that. You only have to take a look at what comes up in Google’s search bar to see that a lot of people are searching for things like “What is ERP?”; “What does ERP stand for? ” and “What ERP systems do” and so on. So we’re going to answer some of these questions here!
If you take a look at Google trends during the last 5 years, ERP related searches have increased 200%, but if you look to the last 2 years, this figure doubles. Business uncertainty in recent times has understandably forced companies to review their strategies and look for the technology needed to support them and make them more agile. Adapting to new environments and ways of working is vital, and ERP systems can help with this.
Executives know about their mission, growth, and business performance. They are aware of their business pains, needs, processes, and they know they need tools to back them up, support the business core, and facilitate access to data in real-time, in order to make informed decisions and face changes while minimising risk.
And here is where ERP solutions can help, even if you might not know what they are called.
ERP vendors and partners are usually so immersed in what we do that we take for granted everyone should know what it is, but not everyone does! So, let’s go back to basics.
Contents
What Is Enterprise Resource Planning (ERP)?
ERP stands for Enterprise Resource Planning, which doesn’t give much away. In summary, ERP is a software that allows companies to run all their core processes end-to-end within the same system. Gartner provide an excellent definition of ERP, which explains it clearly and concisely.
Organisations of all industries use ERP to standardise, streamline and integrate business processes. An ERP system covers all business areas, includingfinance, manufacturing, distribution, sales, procurement, supply chain, projects, services, customer care and more.
Enterprise Resource Planning Explained
So, what does enterprise resource planning involve? Some of the key features of enterprise resource planning include:
- Enterprise-wide integration – Processes are integrated end-to-end across departments and business units. So for example the lead-to-order-to-build-to-cash is completely automated. A new lead becomes qualified and requests a quote, the quote is accepted and converted in a new order which automatically initiates check in product availability and shipment or production process. Once order is shipped, the invoice is sent.
- Real-time operations – As mentioned in the example above, if there is no stock available, a production plant could receive the order to build within seconds.
- A common database – An ERP system is a single source of truth for all business areas to give a 360º view of the business, customers, vendors and transactions.
- Automation – automating repeatable tasks, such as payroll, order processing, invoicing and so on, minimises the time spent, reduces errors, and allows staff to focus on more value-added tasks.
- Real-time data analysis – An ERP system turns data into reports and insights useful for identifying growth opportunities, optimising current operations, reducing costs, better serving customers or capitalising on new market opportunities.
- Modular design – Essential in any modern ERP. You get what you need. Furthermore, as business needs evolve and change, a company can add further functionality by adding modules. For example, if you are a professional service organisation or a software company an Inventory, Supply Chain or Warehouse Management module is of no use, but a billing management or contract management module would be highly beneficial.
- Mobile accessibility – We are in a mobile world and mobility in ERP is a no-brainer. The best ERP platforms (like NetSuite ERP) not only support mobility but deliver usability through their mobile applications, allowing users to access the business anywhere, anytime from any device.
- Scalability and flexibility – As the business grows, so does complexity. Requirements in terms of new modules, users, data-layers and sometimes changes in processes may require a quick implementation, and also changes within the system. ERPs, and more specifically cloud ERP systems, are designed to adapt to changing workloads and processes.
- Third party integrations – Sometimes an strategic move means changes in the business, and facing new challenges requires specific tools and applications. The best ERPs can seamlessly integrate with third-party software.
Read our guide to choosing the best ERP for your business.
What Is an ERP System?
ERP software brings processes together to collaborate and create one fluid system. An ERP system’s main functions include:
- Financial Management – ERP software maintains accurate reporting, ensuring companies meet financial reporting and tax requirements with a single accounting, banking, and payment system. The ERP software stores, monitors, and analyses all financial data, helping reveal insights which can lead to improved cash flow, lower costs, and increased profitability, all while maintaining accurate, timely and transparent financial reporting.
- Integrated CRM – ERPs with integrated CRM features help expand the view of business, optimise marketing and sales efforts, and enable companies automate processes like POs, Accounts Receivable, Accounts Payable and tracking customers from lead to customer through the sales pipeline.
- Human Resources or Human Capital Management (HCM) – ERPs help with streamlining payroll, hiring, performance and even identifying HR problems before they happen.
- Sales and Marketing – ERPs can handle sales workflows, but also taxation rules and tracking shipping. Sales and CRM modules work together to speed up the sales cycle and bring more profit.
- Business Intelligence – The system analyses the information to find patterns in operations, and predict future trends. Reporting can be shown in dashboards, graphs and other data visualizations.
- Manufacturing – ERP helps optimise production schedules, equipment, and labour to maximise capacity through planning, scheduling, budgeting, forecasting procurement and materials management.
- Inventory Management – ERPs give users control and visibility over stock. Being part of a larger multi-functional ERP system, the inventory module exchanges data with manufacturing, distribution, sales and customer records. This helps avoid late delivery, low stock levels but furthermore allows forecast demand.
- Distribution – The system can manage order fulfilment, tracking and customer support.
- Supply Chain Management (SCM) – Being able to monitor demand, supply, manufacturing status, logistics and distribution in record time is a must in today’s fast-paced, highly competitive marketplace.
- Project management – Companies can no longer afford to estimate project costs and overall performance. An ERP has to be able to create a snapshot of the entire project lifecycle from inception and assigning resources to streamlining delivery efforts, in order to accurately assess project performance and profitability.
How Does an ERP System Work?
If you are looking for a detailed technical description, this is not the place, but we are always happy to have our System Architect discuss it with you. To give a brief summary of how they work, ERP Systems streamline business processes by collecting, storing, managing, and communicating data across all functions of a business.
ERP software combines a number of different reports and metrics across various departments into the same environment, giving a 360º view of what is going on and how resources are being used, whether money, staff, material, or any other resource.
With the available real-time information in a single source of data, companies can more quickly gather insights into how processes can be improved or how resources can be distributed to make a better spend and leave room to growth. No more spreadsheets, compiling information from different business applications; it’s all available and accessible from the ERP interface.
Without an ERP system and proper planning strategy, business management becomes much harder. In addition, the company may be underperforming in ways the management team are not aware of.
A Brief Technical Explanation of ERP
Having said we won’t go into too much technical detail, we’ll give a brief and basic technical overview of how an ERP works here.
Data integration and visualisation enables data maintainability, flexibility, and transparency. Integrated data structures are implemented in an ERP system through a set of business transactions with visual business objects, using additional relationships to form a foundation for simultaneous and forward planning of many components. Various business objects of integrated data structure are visually represented using Scalable Vector Graphics (SVG), an XML based technology. A software component gives the ERP system the capability to display business objects and their linkages.
The Benefits of Enterprise Resource Planning Systems
We cannot talk about the benefits of ERP software without talking about the current challenges a company board faces:
- Accelerating strategy. Customers and operations are changing and so companies need to be able to quickly react to those changes, not only to keep up, but also to be ahead of competitors.
- Risk Management. In this new environment, including unexpected changes, companies are forced to plan new strategies minimising risk.
- Aligning business areas and strategy. The board has to act as a facilitator and integrator.
An ERP system is a catalyst for business innovation and minimises risk, allowing companies simulate different scenarios. It is also a platform for business efficiency, as it accelerates operations, reducing the time required to complete almost every business process and improving efficiency and effectiveness by unifying all in a single suite. The standardisation and simplification it offers result in fewer rigid structures, thereby creating more agile enterprises that can adapt quickly while increasing collaboration.
ERP software assists the CFO tracking, analysing, and reporting critical business data from all departments to make decisions about, for example, capital projects, funding sources, cash management and financial control.
Some of the specific benefits to cloud-based ERPs are:
- Upfront infrastructure and operating costs – Generally, a cloud ERP costs about 30% less than those on-premises.
- Implementation speed – Reducing implementation times directly affects business downtime and time to value. Quick implementation reduces risks and allows strategies to be applied more quickly.
- Scalability – As the business grows, the cloud ERP grows. Scaling internationally is a no brainer as being cloud-based allows the implementation to roll out other subsidiaries in minimum time, while users anywhere can access the information through their internet connection.
- Upgrades – Cloud ERPs are continually updating and usually licenses include upgrades and updates. Updates can take as little as 30 minutes and are often during off hours to avoid business disruption.
- Customisations – As a business grows, it might need more customised functionality. These customisations are maintained when vendor upgrades the system.
- Security, compliance, and disaster recovery – Cloud ERPs generally offer enterprise-grade security and end-to-end encryption.
Why Is ERP Important?
In today’s world information is king. The importance of ERP comes from its ability to deliver the real-time 360º visibility demanded by organizations in their pursuit of improving business performance and finding room for growth. ERP systems are important to businesses because ERP also enables them to streamline processes and increase agility.
ERP helps board members make informed decisions using business intelligence to gather more accurate and actionable insights; makes individual operations and departments to work faster; automates specific processes allowing staff dedicate time to more productive activities; improves customer relationships, making it faster and more efficient, and thus improving customer satisfaction.
Some other reasons to invest in an ERP are:
Standardisation. Using disparate systems can lead to errors, difficulties in data transfer, consuming processes, and security gaps.
Better accounting and financial reporting. Keeping track not only of incoming and outgoing transactions, but also visibility of the business and how each area impacts finances. As business grow the complexity of transactions grows. With an ERP, businesses can close the books in less than 10 days, have consolidated view across subsidiaries in real-time and have tight control of all financials across the organization.
The History of ERP
Let’s start from the end. It is a fact the more information that feeds into the ERP system, the easier it is to identify and solve issues and capitalize opportunities.
ERP systems started in the 60s and were originally developed for the manufacturing industry, with materials requirements planning (MRP) that enabled businesses to track inventory and production. It all started with J.L. Case, a manufacturer that worked with IBM to develop it. In the 1970s MRPs gained traction but was only available to large companies with enough budget and resources. The 80s marked a milestone with more sophisticated solutions to support processes beyond raw materials and inventory and allowing coordination with various departments. Gartner coined the term enterprise resource planning in the 90s when because of its benefits technology evolved and expanded and was adopted by other industries and is now applied in almost any sector imaginable. From service providers, retailers, wholesalers, software industry and more.
In 1998 NetSuite launched the first cloud ERP, widely seen as an improvement over on-premises systems as business could access critical business data online and meaning companies didn’t have to spend in purchasing and maintaining hardware. 2000 meant a significant advance, when systems were enabled to pull data from other sources, including front and back-end applications to feed the ERP system.
Types of Enterprise Resource Planning Systems
The different types of ERP systems can be categorised by either industry or implementation.
Types of ERP System by Industry
Over the years ERP systems have grown. As mentioned before one of the key features of top ERPs is modularity. That is the reason why ERP can be modified according to the needs of every industry, delivering a “customised” suite for its specific needs. The more modules the system has the more operations it covers and automates. An ERP system for a warehouse or manufacturing business, for example would have very different requirements to one for an IT company, and ERP modules allow for that.
Types of ERP System by Implementation
ERP systems can be on-premises, cloud-based or hybrid.
On-premises ERP systems are installed locally in the company’s hardware and servers. This means they will need an IT team to maintain the system, which will costa significant amount of time and money. Upgrades require a huge effort to deploy across users’ computers and re-implement customisations and integrations. Despite the high upfront cost and difficulty in up grading, some companies still prefer this type because of a feeling of being more secure.
Cloud ERP systems have different subtypes:
Multi-tenant, also called SaaS, or Software-as-a-Service – is a single version of the ERP software and infrastructure serving multiple organisations
Single-tenant SaaS – ERP software that serves only one organisation
Public cloud – multiple organisations share cloud computing services. Examples include AWS, Google Cloud, Microsoft Azure or Oracle Cloud
Private cloud – the service is cloud-based, but not shared with any other organisation. A company’s s ERP software and data are managed centrally by the ERP vendor and are accessed using a web browser. Effort is substantially simplified and overall cost significantly lower. Other advantages are deployment speed; running on the latest version whilst maintaining your enhancements and customisations; accessibility and performance is better than for on-premises systems, but also provides security as they usually meet the highest standards and have systems in place to avoid data breaches and losses, with 24/7 monitoring tools, controls and policies.
Meanwhile Hybrid ERPs are a combination of private or public cloud and on-premises ERP solutions. Hybrid is often a good fit for organisations with an existing on-premises ERP looking to integrate their systems into web-based services.
Are ERP Systems Expensive?
Enterprise Resource Planning software can be expensive when compared to other alternative solutions (such as an accounting application, for example). However, spend in digital transformation should be considered a major and positive technology investment to drive change and improvements, rather than a cost. In terms of actual spend, ERP cost varies depending on the implementation type, number of users, modules, and level of customisations
The importance of an ERP software can be summarised as it being the most helpful tool for companies’ day-to-day management. Companies have a vision and a mission. Their aim is to achieve those and thus they need the business to smoothly perform, but they also need to plan, set goals, and capitalize opportunities.
To do so, it is vital that they have a picture of performance, and this means data. As we previously mentioned, information is king and ERP systems are the best tool to provide that information across all business functions. They are crucial for supporting thought leaders and business transformation, helping companies make informed decisions, minimising risks, automating processes, and increasing agility.