BACKGROUND IMAGE: iSTOCK/GETTY IMAGES
ERP, or enterprise resource planning, is a modular software system designed to integrate the main functional areas of an organization's business processes into a unified system.
An ERP system includes core software components, often called modules, that focus on essential business areas, such as finance and accounting, HR, production and materials management, customer relationship management (CRM) and supply chain management. Organizations choose which core modules to use based on which are most important to their particular business.
What primarily distinguishes ERP software from stand-alone targeted software -- which many vendors and industry analysts refer to as best-of-breed solutions -- is a common central database from which the various ERP software modules access information, some of which is shared with the other modules involved in a given business process. This means that companies using ERP are largely saved from having to make double entries to update information because the system shares the data, in turn enabling greater accuracy and collaboration between the organization's departments.
The changing role of the CIO
Read our in-depth guide for details of how the role of the CIO has evolved and learn what is required of chief information officers today.
ERP implementation options include on premises, cloud and a mix of the two, called hybrid, such as with platform as a service (PaaS) and infrastructure as a service (IaaS). Although ERP has historically been associated with expensive, monolithic, end-to-end implementations, cloud versions now enable easier deployments, which SMBs are taking advantage of in greater numbers.
Some ERP systems also offer next-generation capabilities, such as AI, IoT and advanced analytics, to foster digital transformation. Businesses typically turn to an ERP system when they outgrow spreadsheets and disparate, often siloed software systems and need the unifying capabilities of an ERP system to enable growth. As with many technology products, the specific definition of what constitutes ERP can vary widely from vendor to vendor.
How ERP works
ERP systems rely on a centralized relational database, which collects business information and stores them in tables. Having the data stored centrally allows end users, such as from finance, sales and other departments, to quickly access the desired information for analysis.
Instead of employees in different departments managing their own spreadsheets and reports, ERP systems allow for reporting to be generated from a single, centralized system. Information updated in one ERP module, such as CRM, HR and finance, is sent to a central, shared database. The appropriate information in the central database is then shared with the other modules.
Importance of ERP
Experts list four important business benefits of ERP:
- IT cost savings
- Business process efficiency
- A business process platform for process standardization
- A catalyst for business innovation
While businesses often focus on the first two areas because they’re easy to quantify, the latter two areas can create greater impact for businesses.
ERP makes real-time business data available throughout the organization, which enables businesses to adapt quickly and respond to changes. The business data available in ERP systems provides for more informed decision making within an enterprise. ERP systems can also share data with third party partners and vendors to improve efficiencies in the supply chain.
Benefits of ERP systems
ERP offers a plethora of benefits, most of which come from information sharing and standardization. Because ERP components can share data more easily than disparate systems, they can make cross-departmental business processes easier to manage on a daily basis. They can also enable better insights from data, especially with the newer technologies that many ERP systems are including, such as powerful analytics, machine learning and industrial IoT capabilities.
In addition, ERP software:
- boosts efficiencies by automating data collection;
- enables business growth by managing increasingly complex business processes;
- helps lower risk by enabling better compliance;
- fosters collaboration using data sharing and integrated information;
- provides better business intelligence and customer service capabilities; and
- improves supply chain management.
Advantages and disadvantages
Many consider ERP software to be a requirement for enterprises -- especially for core business functions such as finance -- and the same is arguably true for growing SMBs. The sheer volume of data that companies generate, along with the complexity of the global business landscape and modern consumer demands, has made streamlining business processes and managing and optimizing data increasingly critical. An ERP software system is typically at the core of such capabilities.
That said, there are advantages and disadvantages to implementing ERP.
- Can save money over the long run by streamlining processes.
- Provides a unified system that can lower IT-related expenses and end-user training costs.
- Enables greater visibility into myriad areas of the business, such as inventory, that are critical for meeting customer needs.
- Enables better reporting and planning due to better data.
- Offers better compliance and data security, along with improved data, backup and the ability to control user rights.
- Can have a high upfront cost.
- Can be difficult to implement.
- Requires change management during and after implementation.
- Basic, core ERP modules may be less sophisticated compared to targeted, stand-alone software. Companies may require additional modules for more control and better management of specific areas, such as the supply chain or customer relationship capabilities.
ERP implementations: On-premises ERP vs. cloud ERP vs. hybrid ERP
Legacy ERP systems tend to be architected as large, complex, homogeneous systems that do not lend themselves easily to a cloud service delivery model. As such, most ERP systems, particularly those from large legacy vendors, are run on premises.
The deployment of a new ERP system in-house can involve considerable business process re-engineering, employee retraining and back-end support for database integration, data analytics and ad hoc reporting.
However, for a number of reasons, an ever-increasing number of companies are moving to cloud ERP, especially SaaS and hybrid ERP -- where part of the ERP software suite runs on premises and part runs in the cloud. Cloud-based ERP modules are built to be loosely coupled, which can reduce the cost and complexity of a deployment. Because cloud ERP does not require the hardware and infrastructure necessary for on-premises implementations, it can save on costs, both in terms of the technology purchases required and the IT staff required to manage it. Cloud ERP may also be more efficient with automatic upgrades and easier scaling.
Perhaps most importantly, ERP vendors have focused on their cloud products to enable powerful data processing capabilities, IoT, machine learning, blockchain, advanced analytics, 3D printing and other new and emerging technologies that can help companies achieve digital transformation and better compete in the changing global marketplace.
Some companies are reluctant to put mission-critical systems and applications in the cloud for a variety of reasons, including perceived security risks or loss of data control. Other companies in highly regulated industries or government agencies may be restricted by where systems and data is located geographically. In addition, on-premises ERP provides greater customization options, which can be important.
Multi-tiered ERP systems
The most common ERP deployment, either on premises or cloud-based, is a standard system from one vendor -- generally a large legacy seller, although the vendor landscape is changing rapidly.
Many organizations now run multiple ERP systems under one environment, commonly known as two-tier -- or multi-tier -- ERP. Reasons for this include geographic differences in the organization, different divisions running different systems or company mergers for which various systems have been brought into one environment.
These deployments often have one large Tier 1 ERP that runs across the organization and includes functions that are critical to the organization as a whole, and one or more other ERPs, called Tier 2, that run less critical functions or are specific to departments.
There are many ERP vendors with a wide variety of functions and on-premises or cloud deployment options.
The most widely deployed legacy platforms are SAP, Oracle and Microsoft Dynamics, all of which have multiple ERP brands and on-premises and cloud deployment options. Their customers range from large enterprises to SMBs.
Other leading vendors include Epicor Software Corp., Infor, IFS World, Sage Software Inc., Syspro USA, IQMS and QAD Inc. Leading cloud ERP vendors include NetSuite Inc., Kenandy Inc., Acumatica Inc. and Plex.
Many of the smaller ERP vendors offer software that handles common business processes, as well as functions that focus on specific industries like manufacturing, retail, healthcare or the public sector.
ERP vendors have a variety of support models for ERP systems depending on licensing contracts with customers.
Support services usually have multiple levels -- from phone support to consulting -- and associated costs and include services like bug fixes, incident resolution, patches, and updates and upgrade assistance. Cloud ERP systems that automatically update areas such as patching have helped reduce service costs for companies.
Support services are generally handled by the ERP vendors, although there are independent firms that offer third-party support for some vendors' ERP systems.
History of ERP
Gartner coined the term “enterprise resource planning” in 1990. ERP is preceded by Material Requirements Planning (MRP), developed by IBM engineer Joseph Orlicky as a system for calculating the materials and components needed to manufacture a product.
In 1983, management expert Oliver Wight developed an extension of MRP called MRP II, which broadened the planning process using a method that integrated operational and financial planning. MRP II added other production processes, such as product design and capacity planning.
ERP emerged as an expansion of MRP II, extending its scope beyond manufacturing to cover business processes such as accounting, human resources and supply chain management, all managed from a single, centralized database.
ERP has expanded to encompass a growing set of business-critical applications, such as business intelligence, sales force automation (SFA) and marketing automation. While MRP and MRP II applied to the manufacturing industry, ERP is used by a wide range of industries today.