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.
ERP implementation options include on premises, cloud and a mix of the two, called hybrid, such as with platform as a service and infrastructure as a service. 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.
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.