Home Topics Enterprise Resource Planning What is enterprise resource planning (ERP)?
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What is ERP?

Enterprise resource planning (ERP) is a business management software system that is designed to manage and streamline an organization’s functions, processes and workflows with automation and integration.

How does ERP work?

A term coined by Gartner in the 1990s (link resides outside ibm.com), an ERP software system is designed to manage all parts of a business—finance, HR, manufacturing, supply chain, services, procurement, supply chain management, product lifecycle management, project management and more—which makes it an essential part of an organization’s daily operations. ERP software consists of business applications that are all connected and share one common database, therefore decreasing the number of resources necessary to run the business end to end.

The business applications, known as enterprise modules, each focus on a specific business area but work together to meet the company’s needs. Since businesses range in size and needs and no two are alike, modules are not a one-size-fits-all approach. A company can pick and choose which modules are best suited for their business.

The best way an enterprise resource planning system can deliver the most value is when a company takes advantage of modules for each business function. By having a central location for all business data, ERP implementation cuts out the silos that complicate data collection and create data duplication challenges for many businesses. The new system (the ERP model) serves as a single-source-of-truth software solution.

ERP software systems come in three different forms:

- A cloud subscription model (software-as-a-service)

- A licensing model (on premises)

- A hybrid model

Read on for more detail on these three systems and the different modules commonly available with an ERP software management system.

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ERP software system types

There are three types of ERP software systems: onsite systems, cloud-based systems and hybrid systems. They all differ from one another and have their advantages and disadvantages, depending on business needs and ERP approach. Any of these enterprise resource planning software systems can help a company in decision-making and profitability.

Onsite ERP: This software, also referred to as on-premises ERP, is deployed onsite and is mostly controlled in-house, or by the company’s enterprise. A business would choose this option if the business wanted to be in total control of the ERP software and security. If you are to choose this ERP software option, it would require a dedicated IT resource on-premises to handle the technical and application maintenance.

Cloud-based ERP: The cloud-based ERP system, often referred to as software-as-a-service or SaaS, means that a third party is managing the ERP software in the cloud. Using technologies such as artificial intelligence (AI) and machine learning, this flexible option system can provide greater automation efficiencies and allow employees to search through organizational data on any device through the internet. IBM®, Infor, Microsoft, Oracle and SAP offer new ERP solutions.

This is a popular model for ERP software due to its scalability, agility and lower cost. The main disadvantage is the security risk that you take when trusting an ERP vendor. The data for your business is sensitive and requires careful handling.

Hybrid ERP: This system is for companies looking for characteristics of both an onsite and SaaS model to meet their business requirements. In this model, some of the ERP applications and data will be on the cloud and some are on premises. This can sometimes be referred to as a two-tier ERP.

ERP modules and features

ERP systems are based on various different modules that are there to support specific business processes. There are a select number of modules that are foundational to an ERP system and there are third-party applications to access additional features. Some of the most popular modules are listed below and give you deployment options.

Finance and accounting: The finance and accounting module is often most important to many ERP systems. The main purpose of this module is to help businesses understand their financial outlook and analyze the whole business. The main features of this module are tracking accounts payable (AP) and accounts receivable (AR), while also closing the books efficiently and generating financial reports and pricing. This module can automate tasks related to billing and stores crucial financial information for your business, such as vendor payments, cash management and account reconciliation. It also provides clear metrics to a company and can aid in production planning operations.

Procurement: The procurement module, or purchasing module, helps businesses source materials and services they need to manufacture their goods. This module helps automate purchasing, along with tracking and analyzing any incoming quotes. With the procurement module, companies can maintain a list of vendors and tie suppliers to certain items, which can in turn forsters good supplier relationship.

Manufacturing: The manufacturing module, often referred to as a manufacturing execution system, is a vital planning and execution component to ERP software. The module helps manufacturers plan out production and secures everything needed for production. A manufacturing module can update the status of goods-in-progress, along with providing real-time information for items in progress or finished goods. The module also typically includes material requirements planning (MRP) solutions, which was the original manufacturing system of toolmaker Black and Decker.1

Sales: The sales module is responsible for keeping an open line of communication to customers and prospective customers. It can use data-driven insights to increase sales and make targeted decisions and assist with invoicing when it comes to promotions or upselling opportunities. Other features, including supply chain solutions, offer helpful inventory management and order management include dashboards, greater business intelligence and Internet of Things (IoT) technology.

Customer relationship management: The customer relationship management (CRM) module, or service module, helps companies deliver exceptional service. By storing customer information, such as previous calls, emails and purchase history, a business has the data it needs to better serve current and future customers. This module makes it easy for staff to access the required information when a customer comes in and sees that staff create a customer-specifc experience thanks to the data saved from the ERP software.

Human resources management: The human resources module maintains basic capabilities, such as time, attendance and payroll. This module maintains data on all employees and stores documents that pertain to each of those employees, such as a performance review or job description. If a company wants, it can have an entire human capital management (HCM) suite and connect it to ERP to deliver even stronger HR functionality. 

ERP versus financials

While stand-alone accounting software and ERP software do present similarly, the two systems are different. It comes down to what each software system can do and cover. Accounting software typically covers financial reporting, accounts payable and receivable, banking and basic sales revenue information.

Meanwhile, modern ERP software includes a wide range of modules that can reach every aspect of your business. Accounting is just one module in a long list of other features that ERP technology can provide. The ERP software is built for industry-specific requirements and can be molded to fit almost any company’s needs.

Accounting software has other limitations in terms of sales, customer relationship management and real-time data accessibility. The ERP software has modules specific to sales management and isn’t siloed to what accounting software can do. ERP integrates all financial information into one database and can be done in the cloud for easy accessibility.

If your small business is expanding rapidly, it may outgrow traditional accounting software and the business may want to seek out accounting data in one software package, such as ERP. Having all its data centrally located is key for small and big businesses to gain insights and having a multitude of modules available through an ERP software can help you as your business changes.

The benefits of ERP are wide-ranging, with the most prominent being increased productivity, reduced operational cost, flexibility and integrated information. The business intelligence ERP deployment offers is much more substantial than traditional accounting software offerings.

ERP use cases

The need for accurate, real-time data is essential to almost every business, no matter the industry. Here are some businesses that rely on ERP solutions.

Utilities: A utility company is constantly reviewing its capital assets. Therefore, organizing such assets without ERP can be challenging. The ERP software can also help utility companies forecast demand for future services and replace aging assets.

Service companies: Companies such as accounting, tax, engineering and other professional service firms require ERP software that is powerful and delivers real-time data when needed. Professional service businesses can’t afford to experience delays. ERP software helps them stay on schedule and reduce cost and resource utilization.

Wholesalers: For most wholesaler and importer businesses, reducing distribution costs and increasing inventory are two key elements of success. The best way to keep a business in order and running efficiently is through ERP software with modules customized to its needs. With it, wholesalers can get a handle on inventory management, purchasing and general logistics for their business.

Retailers: A lot of purchasing is done online thanks to ecommerce and other sales channels, which have changed the retail landscape substantially in recent years. Retail businesses are dependent on integrated data as they need ERP software to provide self-service options to customers. The ERP solutions can assist with purchase orders and warehouse management. Retailers can also benefit from ERP to boost their customer return rate and improve webite conversions.

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1 MRP, JIT, OPT, FMS? (link resides outside ibm.com), Harvard Business Review, September 1985