Published: 16 Oct 2013
What is enterprise resource planning (ERP)?
ERP is a software system designed to help companies manage the key components of their businesses. A shop floor manager may check into ERP to check the status of a production order. HR managers can utilize ERP to access employee information and process payroll requests. Truck drivers even have the ability to update their shipment status on the ERP system from the road in real time. The potential use cases for ERP are almost limitless.
ERP systems are usually tied to a relational database, which collects transactional business information and sorts it into data tables. Having all this data automatically organized allows users to quickly pull the desired information from the system for faster analysis. Companies typically adopt ERP to help them reach their performance goals, whether those goals are financial or performance-based. ERP's functionality is vast, with modules available for nearly any area of the company that creates and uses business data.
Real-time visibility into business is perhaps the greatest benefit of ERP. By providing up-to-the-second information on available resources and the progress of orders and initiatives, ERP allows a business to be agile and quick to respond to any changes or requests. The visibility does not stop within the four walls of a business. ERP can also connect and share data with outside suppliers, partners, carriers and other invested parties.
What are some of the most common modules found in an ERP system?
ERP systems are known for harboring a very wide range of modules. In fact, ERP modules often support most, if not all, functionality from one end of the business to the other, making ERP a one-stop-shopping IT system.
Every ERP vendor -- Microsoft, SAP, Oracle, Infor, Epicor and others -- offers their own idea of a standard system, but there are some modules that appear in nearly every suite. These include modules for customer relationship management (CRM), human resources (HR) and human capital management (HCM), financial management and accounts payable, product lifecycle management (PLM), project management, order management, asset management, inventory management and, in systems that support manufacturing organizations, supply chain management (SCM) and warehouse management. Smaller ERP vendors usually offer more specialized systems that are targeted toward specific industry verticals.
Is ERP always an in-house system?
No. While traditional ERP software packages are still largely in-house, more ERP customers want to lessen the burden on their IT departments and servers. ERP vendors are responding to these shifting market demands by expanding their coverage options.
One of the most popular alternatives to in-house ERP is Software as a Service, or cloud ERP, where customers make use of on-demand technology that is hosted and maintained by an outside provider. The cloud model is particularly attractive to small and midsize companies that lack the IT funds and staff needed to keep up with a complex internal system. Cloud also offers more flexibility, as customers can often pick and choose which functionality they want, instead of paying for modules they don't intend to use. There are, however, still some bugs to work out before the cloud is right for everyone. Security issues may arise when any data -- especially sensitive financial data or trade secrets -- are put into the cloud, as it is more exposed to potential hackers or viruses than it may be within an in-house system. There's also the question of connectivity. If the hosted servers go down, customers are at the mercy of someone else's IT department to fix it in a timely manner. It's up to each company to decide whether the benefits of cloud outweigh the risks.
Two-tier ERP is also an alternative to a single in-house system. Under the two-tier model, a business will use one large ERP implementation that spans the entire company, while also using smaller ERP implementations to serve the needs of individual business units. This model is useful for companies with many separate plants, divisions or branches across located across the country or the globe. Two-tier ERP may be comprised of two in-house systems or, increasingly, one in-house system and one cloud ERP service.
How is ERP different from MRP?
Material requirements planning, or MRP, is the predecessor of today's ERP systems. Developed in the 1970s, MRP was singularly focused on the inventory side of manufacturing. The purpose of an MRP system was to keep track of what parts were needed to complete certain products, when the parts should be ordered to keep up with production and the amount of stock that always needed to be available in the warehouse.
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Eventually, manufacturers began to request that these systems expand to reach other key areas of business, such as payroll, capacity planning, scheduling, shop-floor control and supplier management. Material resource planning, or MRP II, was created to fill these information gaps. It was from this growing demand for more advanced business information that ERP was born. While MRP and MRP II were manufacturing-focused systems, today's ERP supports myriad modules, including -- but not limited to -- manufacturing. ERP is also a standard business application in industries such as healthcare, higher education, retail, insurance, banking and media.
Is choosing an ERP system difficult?
ERP software selection doesn't have to be difficult, but it is always an important decision that will have a major impact on the business. Companies should be sure to clearly define goals and requirements before beginning to explore vendor options. There are scores of ERP vendors flooding the market with new products every year, so knowing ahead of time what the ideal ERP system must do for the business will make ERP selection less overwhelming.
Creating a dedicated ERP project team of staff members from IT and from upper management is also a must, as no purchase of this magnitude should be left up to just one person or even just one department. Remember: The ERP system will likely be touching all areas of the business, and each stakeholder should be given the chance to provide input and suggestions.
If a company has existing software systems that the new ERP system will not replace, then the pre-selection process must also include ERP systems integration planning. Finding ways to integrate these systems with ERP will only make company data more accessible, and more useful, to all.
Finally, it's critical to understand the importance of thorough ERP training before, during and after an implementation. A new ERP system often means not just technological change, but cultural change as well, as employees must alter and adjust the way their work to fit with the new software. Investing in training is just another aspect of investing in ERP.
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