Enterprise Resource Planning What is ERP (Enterprise Resource Planning)? A Comprehensive Guide By Khaleel Hayes Enterprise Resource Planning 36 comments August 5, 2024 Think of enterprise resource planning, aka ERP, as a pizza. Each slice represents one set of modules that serves a specific company department. Most people like ERP software because it serves more than one industry. However, vendors also make ERP tailored to specific industries and operations. Get our ERP System Requirements Template This guide covers what an ERP is and its history, top benefits, standard features, deployment options, industry trends, cost and purchasing considerations, selecting the right ERP for your business and setting up an implementation plan. Table of Contents: What Is ERP? Benefits Who Uses ERP? Key Features Deployment Trends Cost and Purchasing Considerations Software Selection Tips Implementation Steps Moving Forward What Is ERP? An ERP system is a solution that consists of functions and modules for several company departments or a solution that caters to one area. These departments range from accounting, manufacturing and customer relationship management (CRM) to supply chain management (SCM), product lifecycle management (PLM) and more. ERP stands for enterprise resource planning. But there’s another coinciding part of this ERP definition. ERP can integrate with other solutions to keep your data in one centralized location. This system also automates repetitive tasks so you can focus on high-priority responsibilities. An enterprise resource planning system is a suite of integrated applications for managing, automating and connecting key business processes. Lisa Anderson, Founder and President of LMA Consulting Group, expanded on the centralization point of our ERP meaning: In addition to your comments about using a centralized database to reduce manual labor and simplify workflows, I think it is important to note that having a centralized database and process enables consistency of business processes, and more importantly, reliable levels of service to customers.” History of ERP: A Brief Summary Enterprise resource planning software has existed since the 1960s. Here’s a brief timeline of ERP from its preliminary stages to its existence in the 21st century. 1960s: The ERP methodology evolved into automated systems to manage ERP processes, which began to pop up in the 1960s in response to the growing factory industry. 1972: SAP released its first solution for real-time data processing, effectively pioneering ERP automation. Over the next two decades, technology advanced, and ERP became increasingly popular. 1990s: ERP adoption increased steadily into the twenty-first century. The rise of the Internet required vendors to adapt – and the cloud ERP system came along. Present: Today, cloud computing dominates the enterprise resource planning delivery model. Mobile apps allow users to leverage system capabilities on the go. How ERP Works An enterprise resource planning system generally uses a centralized database for various business processes to reduce manual labor and simplify existing business workflows. An ERP typically contains dashboards where users can review real-time data from across the business to measure productivity and profitability. For example, an SCM solution might receive a customer order and automatically send that information to the distribution center for prompt fulfillment. If you ever noticed that your package return addresses from vendors aren’t always the same, you have likely seen the result of this technology firsthand. Depending on the ERP system you select, the solution may examine inventory levels, shipment times and other factors to decide which distribution center can complete an order in a timely and cost-efficient way. Without an ERP, department data is siloed and experiences company-wide access problems. An enterprise resource planning system enables multiple departments to share and visualize business information in a centralized location. This wealth of information and simplification can assist in the development of business goals and automate tasks to boost employee productivity. Anderson emphasizes: I think it is important to understand how ERP systems work in that a key benefit of an ERP system is the concept of a single source of information or truth. A compelling reason clients upgrade to an ERP system is to not have to work with multiple disparate sets of data; instead, it unites everyone on a single source.” Next on our agenda is an ERP’s benefits. Get our ERP Software Requirements Template Primary Benefits Enterprise resource planning has plenty of advantages and disadvantages. Here are some perks of owning an ERP system: Enhances Business Reporting: Generate several required reports and files to manage orders, KPIs, transactions, profits, losses and more. Boosts Customer Relationships: Leverage standalone CRM software or equipped modules to manage client satisfaction rates, retention and other data to build better relationships for current and prospective consumers. Saves Money: Automation, as aforementioned, expedites repetitive tasks to ensure you focus on other assignments. This newfound focus boosts productivity and revenue while saving time and money. Provides Real-time Data and Cloud Security: Obtain real-time data for KPIs, bottlenecks, inventory levels and more. Vendors offer numerous security tactics when you invest in cloud software to safeguard information, such as multi-factor authentication, user access levels, data encryption and more. Boosts Productivity: Increase efficiency by automating tasks and receiving real-time data to detect and address workflow bottlenecks. Expands Collaboration: Leverage an enterprise resource planning system to build internal communication and collaboration with leaders, stakeholders, teammates and more to keep everyone on the same page. Offers Compliances: Maintain local and global industry regulations and compliances, i.e., FDA, ISO and more, to avoid immediate business shutdowns or lawsuits. Get our ERP Requirements Template Who Uses ERP? Small businesses and mega-corporations use ERP to streamline their workflows. Software providers tailor ERPs to meet specific industry needs. Some common industries include: Retail Manufacturing Pharmaceutical Distribution Technology Hospitality Construction Aerospace and Defense Depending on the vendor, you can personalize or configure software as necessary for your workflows. For example, many pharmaceutical companies that use ERP supervise legal regulations through their enterprise resource planning system, allowing them to update their workflow accordingly. Another example of ERP with industry-specific tools is a platform with distribution and manufacturing tools. Utilizing these functionalities means fewer customizations or configurations to get the system running. Thus far, we’ve learned what an ERP is, its history, how it works, its benefits and who uses it. Next, we’re getting more technical with an introduction to ERP system features. Key Features One of ERP’s main selling points is the array of available features across systems. Because the central premise of an ERP is how these various modules interact with one another to generate actionable insights and perform business functions, it’s essential to verify if a vendor includes the primary and specialized features needed to streamline your business operations. Add-on modules can also fuse with your current enterprise resource planning system. Add-ons can determine if you need a new system or additional functionality for specific business needs. Some vendors offer a modular application, meaning you never have to choose a solution with unnecessary “core” capabilities. Anderson raised a point about modularity: . . .the advantage of this modularity and configurability is that it allows smaller companies to step into ERP slowly, yet most ERPs are scalable to grow with their business.” Some standard ERP features range from accounting and CRM to automation and HR. Compare Top Enterprise Resource Planning System Leaders Accounting Reduce the time your accountants spend on tedious tasks, such as manually inputting receipt information from expense reports. With an automated and integrated accounting system, you can automatically send invoices to clients with outstanding balances. This system pulls from customer history to automatically fetch contact information and the amount owed before invoicing the client. An example of an accounting software interface. This module is beneficial because it can look at operating costs to determine profitability and forecast potential revenue growth. You can also merge your ERP with payroll softwareto govern employee payments. Human Resources Maintain candidate applications, employee PTO and bonus allocation, among other tasks, with the ideal HR tools. One ideal way to use HR functions is automatically reimbursing employees for leftover PTO at the end of the year by integrating this system with your accounting program. This function works by automatically looking at excess PTO days for employees across the company, calculating how much is owed and using employee bank account information to submit payments. CRM CRM tools boost customer relationships with your company and ensure a flawless experience. This module can analyze customer browsing and purchasing history to send targeted ads for products they may find interesting. It can also keep customers in the loop about order statuses. A preview of CRM software. Think about the Domino’s Pizza screen that displays where your meal is in the cooking process. Buyers appreciate updates on the status of their purchases, as it indicates legitimacy and customer care. Compare Top ERP Leaders Integration It’s highly likely that your company already uses software in its day-to-day operations, whether it be QuickBooks for accounting or Salesforce for CRM. ERP integration allows you to combine your current software with your new ERP for a holistic approach. When browsing for ERP integration opportunities, notice if potential vendors offer customizable or configurable products. These words can make or break a possible option. Customizable solutions allow you to amend codes to add specific capabilities and features. Configuration offers software personalization without coding. Customization is a more labor-intensive process than implementing configuration requirements. Depending on your IT and development resources, you may prefer a configurable solution over a customizable one or vice versa. One of the reasons that integrations fail in the ERP experience is lacking plans for customization, budget setting and an IT resource allocation strategy. To push for successful integrations, create goals and employ foresight when analyzing solution options. For example, ask yourself, “Can I afford the base enterprise resource planning system and the specific features that I need?” If the answer is no, start looking at lower-cost options, add-on modules or pushing back your timeframe for ERP implementation. Automation As discussed in the benefits section, automating routine tasks saves time and money while boosting productivity. For example, you could own an on-demand bakery. Your ERP can track orders, recipes, inventory and more. This system can also allocate invoices and perform bank reconciliations to ensure transactions are correct and your clients pay for your products promptly. Data Analysis Whether you leverage business intelligence (BI) or business analytics (BA) tools, you can manage all KPIs and performances in real time. You can access reports and dashboards for current numbers if you want to understand on-time delivery rates for all of your baked goods in your on-demand bakery. You can also supervise obstacles on your production floor, supply chain or inventory and rectify them expeditiously. An example of a BI interface. Reporting Whether you invest in simple or enterprise reporting software, you can generate numerous documents for evaluation and to make better business choices, from profit and loss, employee turnover rates, projected vs. actual budgets, etc. Some outstanding features and requirements that this module offer includes: Tables Infographics Formatting Real-time Updates Themes Invoices Metric Reports Sales and Marketing It’s not a walk in the park to maintain sales or marketing departments. You have to manage numerous email and other promotional campaigns. You also want to know if you’re reaching the right audience and if they’re interacting with your ads. Marketing automation (MA) software is one way to supervise these and other marketing strategies. A preview of MA software. Some ideal requirements to look for in this solution are: Landing Pages Lead Management Campaign Management Lead Scoring Email Marking CRM Integration SCM Lastly, SCM software allows you to supervise every aspect of your supply chain. You can also rate vendors to determine if they’re the right fit for your company. Suppose you’re running your bakery and notice some products don’t make it to customers on time, or that you have missing goods on certain routes. In this case, you can review supply chain analytics to gauge if certain distributors are stealing your merchandise. Some ideal requirements to consider when buying this add-on are: Warehouse Management Transportation Management Collaboration Order Processing Inventory Management Next, we’re going to explain ERP deployment. Deployment is another critical factor when selecting an ERP; you should review your requirements to decide which method is best. Get our ERP Requirements Template Deployment Obtain on-premise, cloud or hybrid deployment for your enterprise resource planning system. Some vendors offer all three options, but many are shifting to cloud-based systems only. This shift is in response to ERP trends because there’s an ever-increasing demand for cloud, and SaaS, ERP. On-premise ERP You can install this deployment option directly onto company servers and hardware. On-premise also means you must host and maintain your ERP with updates and maintenance as necessary. On-premise may be your best option if you have a few locations or a single space. Cloud-based ERP Vendors host this deployment option on the web via third-party servers, allowing you to access the solution anytime via a reliable internet connection. Typically, a cloud-based vendor distributes updates and handles system maintenance. There are a variety of cloud-based deployment and hosting options available. SaaS (software-as-a-service) ERP: A subscription-based option, meaning you pay a monthly fee depending on the number of users you have. Private Cloud: Hosted on your on-site data center or via a third-party service provider. Public Cloud: Managed by third-party cloud service providers and delivered through the Internet. A cloud ERP carries several advantages. First and foremost, users can access the system anytime on any mobile device while on the go, and it doesn’t require complex infrastructures. Cloud vendors periodically distribute updates and maintenance fixes, so the system is always up-to-date. As a result, cloud ERP users save time and money with these easy-to-use systems. Shelly Gore, CEO and co-founder of A Bigger View, advocated cloud deployment. An ideal cloud ERP solution only requires an internet connection and a web browser. This not only increases an organization’s effectiveness by enabling employees to work remote, it also facilitates remote support of their system.” Gore explained enormous cloud deployment benefits. Companies can hire the best consultants from anywhere in the world to support their operations, which can in turn be anywhere. My team currently supports corporations in 24 U.S. states and three international countries. Our team is, in turn, distributed over nine states and two countries. In the past, with on-premise solutions, this was impossible.” ReportLinker predicts the global cloud ERP market will reach $66.87 billion in 2027. Hybrid ERP This merge of cloud and on-premise deployments offers a combination of hosting services, allowing you to dictate your own ERP experience. Whether you want to access data on the go from your phone or tablet or host the system on your HQ servers, you can find the option that best meets your company’s needs. Compare Top ERP Leaders Trends Some hesitate when investing in technological trends. They’re afraid they can’t understand specific trends or the machinery doesn’t align with their business needs. Remember that investing in all new technology isn’t wise. Like an ERP system, not all trends will meet your criteria. It’s best to find mechanisms that coordinate with your practices. Here are a few trends to consider: Personalization The idea of “what is ERP system?” has changed since its first iteration in the 1960s. In the beginning, ERP served the manufacturing industry with material requirements planning (MRP) software. Then, the solution evolved into a one-size-fits-all platform with modules for accounting, CRM, distribution, SCM and more. This all-in-one model was ideal for enterprises but not for small, mid-sized or companies that serve specific practices. Soon, vendors started offering numerous solutions that you can customize as needed to fit your objectives. Like Burger King, you want a have-it-your-way solution, not a cookie-cutter platform that only broadly covers each department. Artificial Intelligence (AI) Believe it or not, AI exists in our everyday lives. When you ask Google, Siri or Alexa to tell you the weather, order a pizza or give or give you directions to the nearest grocery store, AI listens and provides the ideal response. If you can leverage AI in your home, why not implement it in your ERP or business machinery? This trend already dominates accounting and manufacturing by automating routine tasks, i.e., sending invoices, balancing general ledgers, performing bank reconciliations and more. ReportLinker expects the global AI market to reach $341.4 billion in 2027. Mobility Accessing your ERP on phones, tablets and other devices helps you stay in the loop of production rates, profits, vital KPIs, issues and additional critical information. As long as you have a strong internet connection, you can check your numbers as you travel to different company locations or perform business negotiations across global regions. 3D Printing Lastly, 3D printing enables manufacturers to create exclusive products or workpieces in hours or days instead of months, boosting productivity tenfold. You also reduce waste. Fortune Business Insights forecasts the global 3D printing market will reach $83.90 billion by 2029. Compare Top ERP Leaders Cost and Purchasing Considerations Many factors and considerations affect an ERP’s cost, such as the number of users, deployment options, company sizes and more. How Many Users Do You Want? Who intends to use your enterprise resource planning platform? Are you leaving it up to your IT personnel, or do you plan on letting your department leaders use it too? The more users, the higher the price. Developing a user target range will help you know which solution you’re searching for and how much it will amount to your total cost of ownership (TCO). Do You Need Add-ons or a Brand-new System? This question can make or break your ERP system selection process. Ask yourself: If your refrigerator’s ice maker stopped working and you couldn’t fix it, would you replace the entire fridge, or would you get a new ice maker? Depends. If your current ERP system tackles manufacturing, SCM, CRM and accounting, but you’re lacking PLM tools, you’d likely look for PLM modules that integrate with your current system. If your current ERP is an outdated legacy system or the vendor no longer provides updates, you’d likely want to invest in a brand-new system. How Big Is Your Company? Are you a family-generation corner shop or a global enterprise with several locations? Are you looking to grow in the next five to 10 years, or do you want to downsize? ERPs no longer exclusively follow a one-size-fits-all infrastructure. You can ask vendors if their software caters to small or mid-sized companies. There are scalable solutions that grow as our company adds more employees and machinery. Which Deployment Option Is Best for You? As aforementioned, you can choose an on-premise, cloud or hybrid deployment model. Typically, on-premise solutions are more expensive, while cloud solutions offer subscription plans. Hybrid options can be pricey, depending on the vendor. Knowing your deployment can affect your TCO positively. How Big Is Your Budget? How much are you willing to spend on an ERP? Shopping for a new system is similar to buying an appliance or vehicle. You may have to invest considerably, but it’ll be worthwhile in the long run. Some solutions can cost anywhere from a few hundred to $100,000, depending on the vendor, modules, implementation process and more. Software Selection Tips If you Google ERP software selection tips, you’ll get a wide range of methodologies and steps to ensure a smooth software selection process. You may see 12 stages here, five steps there or 100 common mistakes when picking the suitable ERP. At SelectHub, we offer a straightforward, nine-step methodology called Lean Selection. This methodology helps you understand that software selection is a collaborative, analytical process. Here’s a brief overview of each step in the Lean Selection process and how it can help your company find the ideal ERP solution: Establish: Ask yourself why you need a new solution. Are you not meeting productivity numbers? Are you losing production time because of repetitive tasks? Admitting your problems is the first step to finding resolutions. Collaborate: Develop a software selection committee to help you understand what your company needs in functionality and deployment terms. Gather department leaders (accounting, marketing, CRM, etc.), colleagues, internal and external stakeholders, power users and more. After all, more heads are better than one. Define: Sit down with your committee to list and prioritize much-needed requirements. Allow everyone to have input. Distribute: Compare potential vendors with your requirements list to evaluate how well they stack up with your needs. Justify: Shortlist vendors and ponder: Do you need a new system or add-ons for your current system, or should you end your software selection quest? Prove: Whether you’re looking for add-ons or a brand-new solution, you can reach out to potential vendors and establish demos, use cases or proofs-of-concept (POCs). POCs give you a simulated experience based on a current or previous system user but is typically more expensive. Rank: Score and classify vendors based on how well their software performs your desired functionality. The higher the score, the likelier you’re willing to choose a particular vendor. Negotiate: After reviewing your demo scores and ranked list, sit down with your ideal vendor (note that this process should help you find at least two or three potential vendors you want to implement) to review their contracts and agreements. Have your legal team review the contract if it feels sketchy. If you disagree with the contract, move to your next vendor and repeat this step. Sign: Once you’ve agreed with your ideal vendor, sign your contract and develop an effective implementation plan. Compare Top ERP Leaders Implementation Steps Typically, implementations go wrong because they go over budget, they lack the right team to perform the task, people have far-fetched expectations or they lack a solid implementation plan. It’s vital to sit down with vendors and your internal team to establish a strategy. Define a Budget: Set a reasonable budget. Allot some extra money in case delays or additional needs arise. Establish Data Migration: Ensure you move all of your essential data to this solution. Any mistake can lead to misinformation about certain company aspects, such as inventory, finances and more. Set Up Training: If you haven’t already, train and get your users acclimated to the system. Ask vendors if they offer helpful tips, reading material and training guides to help your business learn and utilize the system at total capacity. Training can be time-consuming, but you’ll see a higher return on investment (ROI) once acclimated. Perform System Tests: Conduct system tests to ensure modules perform at optimal levels. This step is also a time to ensure your integrations work correctly and that the system can operate in your routine workflows. Go-live and Perform Post-go-Live Tasks: Launch your system and evaluate its performance. Review employee and overall productivity, customer satisfaction rates and other crucial KPIs. Moving Forward ERP software is a versatile, widely-implemented solution that many companies use to facilitate business processes. You can tailor solutions to align with your specific needs and existing systems you already use, thanks to numerous customization and configuration options. Review our in-depth comparison guide and requirements template for more ERP solutions and modules. What additional questions do you have about how an ERP works? Let us know in the comments below! Contributing Thought Leaders Lisa Anderson is the founder and president of LMA Consulting Group, a consulting firm that specializes in manufacturing strategy, end-to-end supply chain transformation and technology adoption that maximizes the customer experience and enables profitable, scalable, dramatic business growth. Lisa has been named in the Top 46 most influential in Supply Chain by SAP, a Top 40 B2B Tech Influencer by Arketi Group and a Top 50 ERP Influencer by Washington-Frank. She recently published, ‘I’ve Been Thinking,’ an inspiring collection of 101 strategies for creating bold customer promises and profits. Shelly Gore is CEO and co-founder of A Bigger View. For over 25 years, she successfully designed and implemented complex IT and Cloud-Based ERP for corporations in North America and Europe. At Oracle’s OpenWorld and SuiteWorld conferences, Shelly presents on global supply chain, advanced manufacturing, continuous improvement, mobile apps for operational efficiency, warehousing and quality best practices. She is a Thought Leader for the National Science Foundation’s Center of Excellence in IT and serves on the Council of Business Advisors for the Santa Fe Business Incubator. Khaleel HayesWhat is ERP (Enterprise Resource Planning)? A Comprehensive Guide08.05.2024