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What Is ERP? Rise to the Top With This Amazing Software

February 17, 2020

The ways in which humans experience the world has always been shaped by our relationship with technology. 

As it changes—from the wheel to the microchip—so too do the surrounding institutions of society adapt to the new modes of interacting with the world ushered in by these advancements. 

The widespread adoption of software into the common has been a more recent chapter of this story, yet its impact has seen one of the most radical shifts in the nature of work and labor since the oft-referenced industrial revolution.

ERP software has, in many ways, come to embody the complexity that has become characteristic of this stage of our technological development. Its comprehensive offerings position it as the single solution to all business problems. 

With the diffusion of technologies such as the cloud allowing for increasingly complex systems to enter mid-level and local markets, the stage is set for ERP systems to become far more accessible as they become easier to implement and use.  

In essence, ERP systems exist to bring the many different people, data, and processes that comprise a modern company together into one easily accessible place for a greater ability to calculate and predict many elements of a given business, such as profits or spending for an upcoming year. 

In this guide to all things ERP, we’ll discuss the different components of ERP software, how it can be used to benefit your business, and fundamental considerations for implementing these complex systems.

History of ERP

Due to the much-discussed complexity of ERP systems, it’s important to anchor any discussion of this software in the various stages of development that it has undergone since its introduction to the tech space, as well as the various changes that accompany this evolution. 

The history of ERP began in the manufacturing sector during the 1960’s as rudimentary inventory management (IC) systems. These were used to track the baseline supplies of raw materials and finished products against consumer demand. These early IC systems were often developed in-house by individual companies in order to address their particular needs.

It wasn't until the 1970s that something resembling our modern software solutions began to take shape in the form of Materials Requirements Planning — MRP — Software.

These systems applied early computational machines to the manufacturing elements of their business in order to achieve a then unprecedented level of coordination between procurement, manufacturing, and delivery of the finished products. Later, these systems began to incorporate other departments such as HR and sales under its umbrella in order to further fine-tune the production schedules for the company. 

The real leap that pushed MRP software into the realm of true ERP software was the full integration of every department in a business along a backbone of financials and accounting.

Ultimately, the imperative of MRP software and even the early IC systems was to track costs and maximize profit; taken to its logical conclusion, this principle led to the incorporation of accounting software as the core of the system. 

Since then, ERP has moved towards the software as a service (SaaS) model that uses the cloud in order to remotely deliver ERP systems. This eliminates the need for pricey investments into infrastructure or IT staff that has historically limited the software to larger companies. 

Finally, there has been a recent push for the adoption of AI and integration of the Internet of Things (IoT) in ERP systems. These trends are still fairly new, but promise exciting possibilities for thee future of ERP. 

Why use an ERP system?

The primary reason why a business would use an ERP system is to centralize all business processes and data into one core repository of information.

Not only does this have the benefit of helping to reduce reporting and operational errors caused by poor version control that comes with a lack of integration between departments, but it can produce powerful analytical findings to help provide leadership teams with insight into specific initiatives. This can increase productivity amongst the workforce, and even aid in the research and development of new products.

eleven benefits of erp

While ERP historically emerged out of a necessity to coordinate massive enterprise-level manufacturing organizations, it has applications far beyond these specific ventures.

For example, a small business owner might consider using an ERP system to help them gather data about internal resources, through supply chain and production modules, as well as external resources, such as customer relationships, in order to help them develop a strategy to grow and scale their business. 

Benefits of ERP

ERP systems are wide-reaching in scope, and as such can afford an incredibly varied list of benefits to a business that chooses to implement one into their workflow. 

Increase productivity

The aggregation of all different processes under one system can work wonders for the overall productivity of a business.

Not only does this ensure that information is quickly and easily available at all levels, it also prevents mistakes that could arise from a lack of version control and allows for teams to make quick, effective decisions with reliable information. 

Ensure transparency 

Having your organization’s data stored in a single, accessible location can do wonders for having an informed workforce and ensuring the transparency of your operations.

With key points of information so readily available, it helps foster an environment where every member of the company is able to clearly conceptualize the broader purpose of their work and focus their time and energy on what really matters. 

Consolidate finances 

The wide-reaching capabilities of ERP systems allow for the streamlining of financial data by eliminating the onerous task of using multiple systems to collect financial reports from each department. Data silos quickly become a thing of the past under these new strategies. 

Manage risk

One of the benefits of having so much data in one place is the ability to forecast and evaluate future financial risks to your company. ERP software makes this easier than ever since the wide-scale adoption of the cloud and SaaS delivery methods.

Oftentimes, the requirements of keeping a system as expansive and as integral as ERP secure can be a daunting task, both financially and technically. The SaaS model means that such concerns are handled by the software provider, whose explicit job is keeping their customer’s data secure rather than by a small onsite IT team who probably has a thousand other concerns on top of worrying about a specific piece of software. 

Stay compliant

Since many of the companies that make use of ERP software have a presence in several different countries, it’s crucial that they’re able to quickly adapt to and meet the different legal regulatory demands of the areas in which they operate.

ERP software almost always has built-in modules to assist all types of businesses in staying up to date on the latest laws and regulations regardless of size or location of operation.

Related: Many companies will use several different solutions to help manage compliance. G2 Track can help you with this crucial element of business as well as reduce wasted spending with different SaaS systems.

Develop operational agility 

Being able to react to changes in the market is a crucial ability of every business, regardless of industry.

Having a single database affords you insight into both internal metrics, such as procurement, as well as external data like customer relationships and sales leads. When one changes, it will almost certainly have an effect on the other, so being able to react in real-time is a powerful advantage of ERP software. 

Provide analytics and reporting

One of the biggest headaches for managers and executives can be trying to pull different sets of data from far-flung departments that have little incentive to talk to one another. Often times, the information you receive can be geared towards wildly different initiatives and goals. Having the data stored in a single place makes data analysis a breeze for your business. 

Track costs

Another benefit of having the departments of your business integrated in ERP software is the ease with which it enables you to understand the overhead and direct materials that you’re shelling out from day-to-day. This can be a complicated thing to keep track of, especially if you rely on multiple locations for your operations.

ERP is, among other things, built around having data readily available for each location in order to help you keep your operating costs well within budget. This also has the added benefit of helping to save money by reducing waste and overall operating costs with the afforded boost of efficiency. 

Identify bottlenecks 

Having a bottleneck — a problem in one department that slows down the entire business — can be disastrous for your organization. Luckily, ERP is here to help. 

The entire production lifecycle of even the simplest of products can be extremely complex. Luckily, the end-to-end integration afforded by ERP can help demystify the process somewhat and provide insights into what parts of the process are working optimally and where an improvement could be made. 

Monitor profitability

Ultimately, the goal of each software solution employed by your organization should be to, directly or indirectly, impact the overall profitability of your business in a positive way.

This has become a fundamental necessity for any business to stay competitive; very similar to physical infrastructure, you can’t expect a business with dated and inefficient hardware to keep up with the more stringent demands of the market. 

ERP software has a unique advantage in this realm as the end-to-end integration. It provides a holistic look at all elements of profit, not just the baseline numbers. Being able to see exactly where and how losses are occurring can go a long way towards building a plan for future profit optimization and subsequently keeping your business competitive in the days to come. 

Manage quality 

Producing a good or service that goes above and beyond the standards of the market is a crucial element of increasing profitability and overall viability of your business.

ERP software can easily track factors that would lead to poor quality products. It can also manage the processes necessary to get the highest quality raw materials through the supply chain and to their designated production point in your business.  

Avoid errors

Stopping problems before they happen is much more preferable than fixing a mess that has already occurred. Unfortunately, the modern business operates at several different levels at once and along multiple different axes.

It’s easier than ever for crucial bits of information to become lost in translation and result in an issue. ERP software is a powerful tool for ensuring every element of your business is on the same page by reducing the chance a costly mistake could occur due to faulty information. 

How does an ERP system work?

ERP functions as a single source of truth for the many disparate workflows that make up the overall operations of a given business. These systems streamline the data collected from all over the company into a single space, usually a curated dashboard, where everything from finances, production quotas, and inventory can be seen and analyzed. 

erp system concept

Standardizing functions, data, and definitions across entire enterprise organizations -- some of which transcend linguistic and national barriers -- is the core intention of these systems. 

This allows ERP solutions to act as central hubs for the different workflows from all parts of a business in order to ensure appropriate alignment between departments and allow for easier compliance protocols, predictive analysis, and financial forecasting.

ERP has also proven to be a powerful tool for avoiding data duplication and ensuring that every department is working off up-to-date information.

Parts of an ERP system

ERP systems contain a multitude of different functions, however, these can generally be split into two distinct categories: back office (sales, marketing, HR, etc) and operations (production, distribution, procurement, etc).

It might seem counterintuitive to label sales as ‘back office,’ however, ERP systems draw distinctions between the management of people and customers versus the physical production and distribution of goods instead of basing their structure on the proximity of a particular department to the end customer.

elements of erp

Some of these functions go beyond simply being add-ons to the core system, and are fully integrated software solutions gathered under the umbrella of a single ERP system. 

Back-office modules

The back-office elements of ERP are generally situated around an accounting system but include other essential business functions such as HR and sales as well.

These functions can vary widely based on industry and vendor, but generally include everything not pertaining to the direct creation and management of a business’ end product. 

Accounting 

A robust accounting system is the backbone of ERP software and generally includes features to manage multiple charts of accounts, as well as the ability to process transactions such as sales, payments, and purchasing invoices. These modules also have the ability to automatically generate financial statements and assist with monthly and yearly financial close management. 

Regardless of the type of system, you can easily find robust financial management and accounting software with features like accounts payable, budgeting, and cash flow management. 

HR

The exact nature of HR integration can vary wildly for different ERP solutions. While essentials like payroll processing are the baseline for these systems, some have entire HR management systems built into them with the capability to manage benefits, recruiting, and even workforce scheduling.

Risk and compliance 

Manufacturing is a complex industry, full of delicate machinery that can quickly lead to dangerous conditions for workers without the proper  planning.

Luckily, ERP software provides software that help with tax compliance, permission features for employees, and safety applications to ensure full insight and control into this crucial element of business.

Sales

Sales features will, on average, include basic customer contact management as well as modules that will include the ability to manage sales orders.

This aspect of ERP solutions should be able to track a sale all the way through its lifecycle, beginning with the initial quote or proposal and terminating with the final invoice. Some ERP systems include full CRM software and the ability to manage and nurture leads, though this is not the norm across the industry. 

Purchasing

Alongside accounting, a powerful purchasing module is the hallmark of a good ERP system. It is a critical component for manufacturing and distribution companies who are looking for a way to strike the right balance between consumer demand — something that integration with sales can help paint a more accurate picture of — and the acquisition of raw materials necessary to meet it. 

Analytics suites 

With the ability to aggregate so much data in one central database, a good ERP system comes equipped with the ability to quickly compile analytical reports on all the modules contained within a specific solution.

This can help translate the overwhelming amount of data that a single system can contain into something more readily accessible for executives and managers.

Operations modules

A company’s physical inventory is one of the crucial resources that, alongside financials and accounting, is at the heart of what makes ERP software so valuable. This branch of functionality coordinates and manages the physical inventory of a company, though it can vary greatly from industry to industry.

The parts of ERP software that fall under the operations umbrella include inventory management, supply chain, and procurement modules, as well as the coordination of product distribution, often across several different locations. 

Project management 

With such a vast array of complex systems comprising the structure of the modern corporation, being able to track, manage, and assign tasks in a single location is a crucial aspect of conducting the day to day operations of a business.

Both manufacturing as well as professional services organizations need to have a robust systems for managing the dozens of projects that are created everyday and ERP allows for the integration of this with all aspects of the business, affording unparalleled insight into the various workflows that comprise the latest initiatives. 

Production

This particular element of ERP systems is a natural outgrowth of the preceding type of software, MRP, and is still central to the operations side of ERP software.

These modules operate by producing production schedules based on identifying the quantities of raw materials and labor required to fabricate the end product. ERP systems also function to define the production structure, that is, what materials are required for production, in what quantity, and how the cost of each is aggregated into the final calculation of the overall cost of the business. 

Inventory and warehouse management

No matter the type of industry in which your company lies, picking, packing, and shipping are all crucial elements of getting the products of your employee’s hard labor to the end consumer.

ERP software helps coordinate this by making use of full manufacturing operations management (MOM) software -- generally used in production based businesses -- and in so doing, provides insight into the relative value of an organization’s physical inventory. This can help a company identify the demand for specific products and further influence production quotas as well as gather valuable data for back-office departments. 

Supply chain management

ERP systems include supply chain management software that can range from the bare necessities to fully-built systems in their own right. This is used to coordinate the transportation of raw materials to sites of production and also brings finished products out into the market.

With the additional functionality of ERP software, supply chain management becomes a powerful tool for demand planning. This allows flexible reactions to changes in the market in the form of adjustable production quotas which leads to more accurate sourcing of raw materials and a reduction in wasted direct materials.

These modules also have functionality for managing transportation for companies directly involved with the distribution of goods.  

Types of ERP systems

Business is a multi-faceted combination of a variety of different and interlocking needs. The software we use to help manage these are no different.

It’s common to find several different classification schemes in almost every type of solution. This is usually to help satisfy the different requirements of an increasingly diverse customer base and range of organizations that have begun to adopt new technology to help their organizations run with competitive efficiency. 

For ERP systems, the variation in classification occurs along three axes: organization size/type, the way the software itself is deployed, and the model of ERP that makes up the system itself. 

3 types of erp systems

Organization size

ERP software services four different types of clients. While this generally refers to the relative size of a company, it also draws a distinction between private business and government contracts:

  1. Multinational enterprise businesses and government corporations at the federal level
  2. National enterprises and local governments 
  3. Mid-market business solutions
  4. Small business operations

Software deployment

In addition to the target clients, ERP systems can also be divided along with the technology they utilize to deploy the software itself.

This often has an effect on what type of business can use it, as well as the degree of control and customization the organization needs over their system.

  1. On-premise ERP: These systems run on physical infrastructure that is on-sight and is physically hosted by the end-user. These types of systems generally require a great deal of initial capital investment and incur significant costs for both maintenance and security but provide the greatest  control out of all the options. 
  2. Cloud ERP: The development of cloud ERP has been the principle driving force for the adoption of ERP systems across businesses of all industries and sizes. By having software hosted remotely, the initial cost for adoption and upkeep of an ERP system drops dramatically, however, there is a sacrifice in terms of how much control the end-user has to customize the system. 
  3. Hybrid ERP: A blend of the two, hybrid ERP systems have some functions hosted on-site and some deployed remotely through the cloud. 

System model 

The final axis of ERP classification comes down to the features that are offered by specific systems.

It’s very common to find some ERP systems that specialize in a particular element of a niche industry—food production and delivery is an obvious example—being used for specific modules while other, more general systems pick up the slack in other areas.

These are usually classified as:

  1. Best-of-Breed: These types of ERP systems are full packages meant to do everything. What they lack in specialization, they make up for in sheer options and choice. 
  2. Modular ERP: The exact opposite of the larger systems, modular ERP systems are comprised of small systems tailored for a specific industry or problem as well as a partnered piece of accounting software such as Microsoft Dynamics GP.
  3. ERP Suites: A combination of different systems. These forms of ERP solutions have different systems that have been combined in order to provide one synthetic system that’s able to do nearly everything. The components of these suites can be sold together as full packages or separately should particular modules not be relevant to your business.  

Example of ERP software in action 

When it comes to a complex topic like ERP systems, an example of it in action can go a long way to demonstrating how it works. 

Consider a company in the food and beverage industry that sources ingredients from a variety of different farms around the country and packages them for mass distribution in their factories.

ERP software would be incredibly helpful in not only tracking the purchasing of the raw materials, but also in ensuring total transparency and accurate reporting across the business. ERP makes it easy to compile all the data about every aspect of the process—from raw material collection to production and distribution—in order to ensure the accurate construction of a single database for use across the entire business.  

More so, ERP solutions can be tailored to fit the strict regulations that surround this industry in order to automatically ensure that the products being delivered to the public are compliant with the laws that shape this particular industry.  

Who are the primary users of ERP systems?

ERP systems are primarily used by manufacturing and distribution companies, however, they can be useful for many other types of businesses as well. 

The background of ERP systems has certainly influenced how it’s broadly used; accounting, operations, and manufacturing departments will be the go-to for ERP as they are the direct inheritors of the technology that was initially developed to solve the challenges of their working lives.

Production managers often use ERP systems to identify demand quotas, and from these, decide on how much and what type of raw materials need to be sourced in order to meet these goals.

In addition, operations departments such as warehouse management and procurement officers frequently use ERP systems to track inventory and coordinate any and every logistical demand of the business.  

However, this by no means should imply that ERP software can’t add incredible value to teams all over a company. Having a centralized database can work wonders for developing new products and service offerings that better meet the demands of the market.

For example, a product development team might look at the data collected from historic sales of their company’s offering in order to come up with a better sense of what their consumer base is looking for in their products, and develop that accordingly.

Additionally, company management can use the powerful analytic tools afforded by these systems to find ways to streamline their spending and identify areas that need optimization in order to reduce unnecessary costs. 

ERP implementation 

The most important part of ERP systems is selecting the right one for your business and making sure its implemented correctly. Even the cheapest ERP options carry hefty price tags, so a failed implementation or wrong choice at even the very earliest stages can result in a catastrophic amount of wasted resources.

Below are some questions to help guide your thinking when it comes to selecting and implementing ERP software:

  • What are your specific needs? Have you identified clear pain points for your business? What answers do they need?
  • Which areas must be addressed by an ERP software solution? What are auxiliary concerns that can be discarded?
  • Which vendors supply solutions or specialize in fulfilling specific needs?
  • What style of implementation is being offered by the vendors you’re interested in? Is that workable for your company?
  • Does a prospective vendor offer any services to assist with implementation?

Employing social proof through software review platforms can also be an incredibly effective way to hone down the incredible number of choices to find a solution that is relevant to your business.

G2 has verified user reviews of the leading software solutions on the market to help guide you in your decision-making process. After all, hearing the perspective of someone who has already tackled and solved the problem you are currently facing can be some of the most valuable insight you can find.

So long as you are smart about the choices you make regarding your business’ objective needs and resist the ever-present call to cut costs and reduce spendings, you’ll be sure to pick a software that works well for you. And if you’re still unsure, there are many skilled ERP implementation consultants who can help you make the right decision for your organization’s particular needs. 

It's time to manage your resources

ERP systems are large, complex software solutions fit to tackle the many intricate challenges that confront the modern business.

There are dozens of different ways that these tools can impact your business and increase productivity, insight, and cost efficiency. However, it’s crucial to consider exactly how such an expensive software can benefit your business and that you spend the appropriate time to select the best vendor to fit your needs. 

Looking for something a little less complex than a full piece of ERP software? Check out G2’s comprehensive category of accounting software to help you get started managing your finances.

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