ERP is an acronym that stands for enterprise resource planning, but what exactly does it mean? The simplest way to define ERP is to consider all of the core business processes required to run a business: finance, human resources, manufacturing, supply chain, services, procurement, and so on.
At its most basic level, ERP aids in the efficient management of all of these processes in a unified system. It is frequently referred to as the organization's record system.
However, today's ERP systems are far from simple and bear little resemblance to the ERP systems of decades ago. They are now delivered through the cloud and employ cutting-edge technologies such as AI and machine learning to provide intelligent automation, increased efficiency, and instant insight across the enterprise.
Modern ERP software also connects internal operations with business partners and networks all over the world, providing businesses with the collaboration, agility, and speed they require to compete today.
What is ERP?
ERP refers to a type of software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations.
A complete ERP suite also includes enterprise performance management software, which aids in the planning, budgeting, forecasting, and reporting of an organization's financial results.
ERP systems connect a wide range of business processes and allow data to flow between them. ERP systems eliminate data duplication and provide data integrity by collecting an organization's shared transactional data from multiple sources.
ERP systems are now critical for managing thousands of businesses of all sizes and industries. ERP is as essential to these businesses as electricity is to the power grid.
How does an ERP system Work?
The primary goal of an ERP system is to improve organizational efficiency by managing and improving how company resources are utilized. Improving and/or reducing the number of resources required without sacrificing quality or performance are critical components of effectively improving business growth and profitability.
ERP systems typically cover all aspects of business operations and include the following features:
A system that is integrated
A shared database
Operation in Real-Time
All applications and components are supported.
Application/component-wide user interface
Deployment options include on-premise, cloud-hosted, and SaaS.
ERP software can collect and compare metrics across departments and generate a variety of reports based on roles or specific user preferences. The collected data speeds up data discovery and reporting while providing a comprehensive view of business performance and insights into resource allocation.
ERP synchronizes reporting and automation by eliminating the need for separate databases and spreadsheets that must be manually merged to generate reports. This integrated data collection and reporting provides valuable insight, such as where to cut costs and streamline processes, allowing for real-time business decisions.
ERP System Key Components
An ERP system is made up of software components, or modules, each focusing on a specific business process. Certain modules are considered "core" to almost every business and are the first to be deployed:
Basic accounting, invoicing, financial analysis, forecasting, and reporting are all automated by the ERP finance module. It is frequently the primary reason a company switches from standalone accounting software to ERP.
The increasing complexity of business necessitates the use of a centralized system to manage all financial transactions and accounting for multiple business units or product lines.
Human resources (HR), also known as human capital management (HCM), is another core process that businesses use ERP to improve. Basic HCM manages employee records, benefits, and payroll, but it frequently includes talent management functions like recruiting and performance management.
Order management, customer relationship management (CRM), and purchasing are also common ERP modules in most businesses (procurement). Manufacturing and distribution companies typically include a supply chain management (SCM) module to track inventory levels and manage warehouses and transportation across the supply chain.
If their business requirements are complex, they may add a warehouse management system (WMS) and a transportation management system (TMS) to manage these logistics functions, possibly from different software vendors.
Common ERP Module
Enterprise resource planning systems are made up of various modules. Each ERP module supports a specific business process, such as finance, procurement, or manufacturing, and provides employees in that department with the transactions and information they require to do their jobs.
Every module communicates with the ERP system, resulting in a single source of truth and accurate, shared data across departments. The common ERP modules are mentioned below:
Finance: The finance and accounting module is the foundation of the majority of ERP systems. It helps businesses track accounts payable (AP) and accounts receivable (AR), close the books efficiently, generate financial reports, comply with revenue recognition standards, mitigate financial risk, and more, in addition to managing the general ledger and automating key financial tasks.
Human resource management: The majority of ERP systems include an HR module that includes core capabilities like time and attendance and payroll. Add-ons, or even entire human capital management (HCM) suites, can connect to the ERP and provide enhanced HR functionality ranging from workforce analytics to employee experience management.
Sourcing and procurement: The sourcing and procurement module assists businesses in obtaining the materials and services required to manufacture their goods – or the items that they wish to resell.
The module centralizes and automates purchasing processes such as requests for quotes, contract creation, and approvals. With AI-powered analytics, it can reduce underbuying and overbuying, improve supplier negotiations, and even connect with buyer networks seamlessly.
Sales: The sales module tracks interactions with prospects and customers and assists reps in using data-driven insights to increase sales and target leads with the right promotions and upsell opportunities.
It includes order-to-cash functionality such as order management, contracts, billing, sales performance management, and sales force support.
Manufacturing: The manufacturing module is an important component of ERP software for planning and execution. It assists businesses in simplifying complex manufacturing processes and ensuring production is in sync with demand.
This module usually includes material requirements planning (MRP), production scheduling, manufacturing execution, quality management, and other features.
Logistics and supply chain management: The supply chain module, another important component of ERP systems, tracks the movement of goods and supplies throughout an organization's supply chain.
The module includes tools for real-time inventory management, warehousing operations, transportation, and logistics – all of which can improve supply chain visibility and resilience.
Service: The service module in an ERP enables businesses to provide the dependable, personalized service that customers have come to expect.
Tools for in-house repairs, spare parts, field service management, and service-based revenue streams can all be included in the module. It also provides analytics to assist service representatives and technicians in quickly resolving customer issues and increasing loyalty.
R&D and engineering: ERP systems with a lot of features include an R&D and engineering module. This module includes tools for product design and development, product lifecycle management (PLM), product compliance, and more—allowing businesses to create innovations quickly and affordably.
Enterprise asset management (EAM): Robust ERP systems can include an EAM module, which assists asset-intensive businesses in minimizing downtime and keeping their machines and equipment running at peak efficiency.
This module includes functionality for predictive maintenance, scheduling, asset operations, and planning, environmental health and safety (EHS), and more.
Also Read | Dimensions of Enterprise Risk Management (ERM)
Benefits of ERP Systems
Today's ERP solutions have extensive feature sets that provide numerous benefits to businesses. While the greatest value of this technology will differ depending on the firm, the following are key universal benefits ERP provides:
ERP providers understand that your system contains critical, sensitive data and take the necessary precautions to keep it secure. As the volume and scale of cyberattacks increase, this vigilance is more important than ever.
Cloud ERP software, in particular, employs cutting-edge security protocols to ensure that your business is not the victim of a damaging attack.
Reporting and Analytics
Data is only useful if businesses can analyze and understand it, which an ERP can help with. Leading solutions include powerful reporting and analytics tools that enable users to not only track KPIs but also display any metrics or comparisons they can think of.
Because an ERP is comprehensive, it can assist a company in understanding how a change or problem with a process in one department affects the rest of the company.
ERPs can uncover significant trends and provide extensive business insights because they can access real-time data from across the organization. Organizational leaders can now make better decisions because they have easy access to all relevant data.
Perhaps the most important benefit of ERP systems is that they can save your company money in a variety of ways. Automating many simple, repetitive tasks reduces errors and the need to hire new employees at the same rate as your company grows.
Cross-company visibility makes it easier to identify inefficiencies that drive up costs and lead to better resource deployment, from labor to inventory to equipment. Furthermore, with cloud ERP, businesses may quickly see incremental value from the software, above what they are spending.
When employees work together, they are more effective. ERP solutions make it simple to share information among teams, such as purchase orders, contracts, and customer-support records. It breaks down departmental barriers by providing employees with real-time data on related business functions.
The ideal ERP system will be scalable and adaptable enough to meet your company's needs today and in the future. Cloud systems, in particular, adapt to minor and major operational changes as the amount of data captured by the organization grows and the demand for access grows.
Regulatory Compliance and Data Security
Financial reporting standards, as well as governmental and industry-specific data security regulations, change frequently, and an ERP can help your company stay safe and compliant. An ERP provides an audit trail by tracking each transaction's lifecycle, including adherence to required approval workflows.
Automation can also help businesses reduce the likelihood of errors and related compliance issues. ERP software generates financial reports that meet standards and regulations, and SaaS applications are well-suited to assist businesses with PCI-DSS compliance.
ERP technology reduces risk in a variety of ways. Financial controls can be strengthened and fraud reduced by granular access control and defined approval workflows.
Furthermore, more accurate data prevents errors that could result in lost sales or fines. Finally, being able to see the status of the entire operation allows employees to respond quickly to risks posed by business disruptions.
Also Read | Challenges Faced in Ecommerce ERP Integration
Example of ERP system
Fulton & Roark, a manufacturer of men's grooming products, successfully implemented enterprise resource planning to improve inventory and financial data tracking. Like many other businesses, the North Carolina company used spreadsheets to track inventory and accounting software to record financial data.
As the company expanded, so did its processes. Their antiquated inventory tracking system did not account for changing costs, and their accounting software could not record key financial statement metrics.
These breakdowns resulted in manual processes, which hampered time and resources even more. They chose the Oracle Netsuite ERP system to eliminate unnecessary processes and centralize work. Cadbury, the world's largest confectionery and maker of the popular chocolate Cadbury egg, has also successfully implemented an ERP system.
Trying its hand at enterprise resource planning for the second time, it implemented a system that integrated thousands of applications, standardized processes across 16 locations, and restructured warehouse management systems, to name a few.
Numerous case studies demonstrate the importance of properly executed enterprise resource planning. The system should be tailored to the company's needs and objectives.
ERP software can integrate all of a company's processes. ERP systems have evolved, and many are now web-based applications that users can access from anywhere. ERP systems have become standard equipment for businesses seeking to maximize resource utilization.
They can assist leaders in reallocating human and financial capital, as well as in developing more efficient core business processes that save money without sacrificing quality or performance. If an ERP system is not implemented properly, it can be ineffective.