Enterprise resource planning (ERP) systems are complete, integrated systems that manage all aspects of a production-based or distribution business, aligning financial management, human resources, supply chain management, and manufacturing or distribution with the core function of accounting. ERP systems are used to provide transparency into the entire business process by tracking all aspects of production or distribution, financials, and back office. These expansive systems act as a central hub for end-to-end workflow and data. A variety of departments can view the information recorded by ERP systems to ensure the correct procedures are taking place.
ERP systems provide a variety of modules, and while each business has unique requirements, most ERP systems offer the following:
Accounting features like general ledger, accounts payable/receivable, budgeting, and cash management
Human resources (HR) functionality such as recruiting and payroll, or integration with HR and payroll solutions
Basic sales and customer management features or integration with CRM solutions
Functions to create different types of quotes, sales orders, and returns
Purchasing workflows and purchase order management
Inventory and warehouse management software including picking, packing, and shipping
Advanced supply chain modules like demand planning and transportation management for distribution companies
Production modules that include bill of materials (BOM), manufacturing resource planning (MRP), and quality management features for manufacturing companies
Reporting and analytics for all the modules included in the ERP solution
What are the Benefits of Enterprise Resource Planning (ERP) Systems?
ERP systems can help businesses streamline business functions across the company. Managers and executives use it to monitor essential projects in real time and use historical data to define and optimize business strategies.
Single source of truth: ERP systems store all the company’s information in one place, which avoids duplication and inconsistency in data quality. A single data repository also ensures that users’ changes are reflected in the database, and everyone in the company has access to the most up-to-date information.
Visibility: Since all ERP users share the same system, they can access any data point that may help them be more productive. Also, customer-facing employees can find details about orders, transactions, or inventory availability. Finally, accountants can track all data on costs and profitability across all departments, business units, and geographical locations.
Automate operations and increase productivity: ERP systems can replace multiple types of software, add-ons, spreadsheets, or office tools used by various departments of a company. This allows users to spend less time switching between systems and focus more on operations. ERP also enables companies to define and implement company-wide business processes, which increases productivity and helps address accountability issues.
Who Uses Enterprise Resource Planning (ERP) Systems?
Since ERP provides features for most departments of a company, it is used by most, if not all, employees. The following list includes a few departments where ERP is necessary.
Accounting and finance: Accounting and finance departments need ERP for multiple purposes, the most important being the financial management of all the business transactions. Everything a company buys and sells, as well as all direct (wages, commissions) or indirect (insurance, utilities) costs, need to be tracked using generally accepted accounting principles (GAAP). Finance professionals use ERP to create financial statements and provide financial information for internal and external audits.
Operations: Operations teams use ERP to perform activities that are specific to the specialization of a company. For instance, production operations are specific to manufacturing companies, project management and delivery to professional services providers, and warehouse and inventory management to distributors. Some types of activities, such as inventory management, are essential for multiple types of companies. Others, like project and portfolio management, are specific to industry sectors such as professional services.
Sales: ERP is vital for sales teams because it contains a lot of valuable data on historical sales and information on products and services. Most ERP products also manage information on customer credit limits and can be used for debt collection.
Product: Product development teams may not always use ERP directly, but they rely on the information provided by the system. Sales data can show which products are most successful, while details on returns and defects help the company improve its offering. Engineers and designers can also use ERP and its integration with product lifecycle management (PLM) or computer-aided design (CAD) solutions to communicate product changes with the manufacturing department.
Purchasing and procurement: Purchasing and procurement is in charge of finding and buying any products and services that are needed by a company, such as raw materials and parts for manufacturers, consultants for professional services companies, or logistics providers for distributors. The most crucial challenge in procurement is to clearly understand what products or services a company needs and when. ERP systems provide information on sales orders that need to be fulfilled, which can be compared with the available inventory to determine what needs to be purchased. ERP systems also manage cost data for raw materials or components, which helps procurement professionals better negotiate.
Quality management: Quality management is essential in manufacturing but can also be important in distribution, and even professional services. For highly regulated industries such as food and beverage, the quality standards are high and penalties for non compliance hefty. While quality management can be provided as a standalone product, most ERP for manufacturing systems include features to track quality.
Software Related to Enterprise Resource Planning (ERP) Systems
ERP software overlaps with the solutions mentioned below but rarely delivers all the features of these products. For this reason, companies may opt to buy and use them separately.
PLM software: Companies use PLM to design complex products and structures (such as a conveyor system for a warehouse). Most ERP systems for manufacturing integrate with PLM to transfer product data between the two systems. Very few vendors sell ERP and PLM solutions, but most of them offer preconfigured integration with the most popular PLM products.
Enterprise asset management (EAM) software: Asset-intensive companies use EAM to track fixed assets, monitor their performance, and plan maintenance operations. While some ERP systems include functionality for maintenance or asset depreciation, large companies using complex equipment across multiple locations still require EAM for its advanced features such as predictive maintenance.
Supply chain management software: This type of software manages logistics operations across the entire supply chain. Distributors and wholesalers often use supply chain suites together with their ERP system to ensure that they have full visibility and control over their supply chain.
HR software: HR and talent management software provides functionality that is not usually part of an ERP system, such as recruiting, performance management, and employee engagement. Even when ERP has a module for payroll or workforce management, their features may not be sufficient for global companies or large organizations. These types of businesses may need a separate system to manage human resources.
CRM software: CRM is frequently used to complement the sales and marketing features of an ERP system. A few features that are not always included in ERP software are marketing campaign automation and lead generation. Companies using both systems need to be careful not to create duplicate data and processes, creating confusion, and generating inaccurate information.
Business intelligence software: While all ERP products have analytics modules, advanced features such as forecasting or predictive analytics aren’t always included. Companies that need these features use a separate business intelligence (BI) software that gathers and analyzes data from the ERP system and other data sources (software and databases).
Challenges with Enterprise Resource Planning (ERP) Systems
Traditional ERP was installed on the premise of the buyer, which required investments in hardware and IT personnel. Also, ERP software had cluttered interfaces and could not be used remotely or on mobile devices. New technologies like the cloud delivery model and web-based interfaces made ERP systems more flexible and easier to use, but a few challenges persist.
Integration: The integration and consolidation of data between multiple systems or modules of an ERP suite are essential to avoid double entries and to ensure data accuracy. Ideally, all data should be transferred and synchronized between all ERP modules or products used by a company.
Cost: Due to their complexity, ERP systems require significant investments. The cost of the ERP platform can vary depending on how the solution is sold. An ERP product that provides standard ERP features (accounting, operations, and essential functions for front office) is more affordable but can get expensive in the long term, as companies grow and need advanced features. Conversely, a package that includes standard and advanced features will require a higher initial investment but may cost less over the long term.
Platforms: The platforms used to create ERP products, such as programming languages and databases, can have a significant impact on the performance and ease of use of the system. This can be a challenge when vendors acquire products that were built on various platforms or different versions of the same platform. While most vendors built their products to be compatible with the most popular databases, such as Microsoft SQL Server and Oracle RDBMS, some solutions were developed using other options, such as Progress and MySQL.
Delivery model: The delivery model refers to the physical location where the data is stored. Companies have been using their servers for a long time, but many companies are adopting the cloud model, which means that vendors are responsible for storing and managing the data. The cloud model is also known as software as a service (SaaS) and can be more complicated than it seems at first sight. SaaS can be single or multitenant, depending on how many companies share a database. Also, companies can use private, public, or hybrid clouds.
Which Companies Should Buy Enterprise Resource Planning (ERP) Systems?
While any business can benefit from using ERP systems, it is most beneficial to mid-market and enterprise companies in manufacturing, distribution, and professional services.
Manufacturers: ERP’s single data repository allows manufacturers to have more visibility into their costs, operations, and projects. Manufacturers in complex industries such as aerospace and defense may use multiple ERP systems for different types of activities. For example, a company may use an ERP system for manufacturing and another one for distribution.
Wholesalers and distributors: Distributors use ERP to manage their logistics operations, from inventory management and warehousing to shipping and receiving. These features are always included in ERP for distribution, but large companies may need advanced functionality such as transportation and fleet management or third-party logistics.
Professional services companies: ERP is mostly beneficial to medium and large professional services companies in complex industries such as architecture, engineering, and construction (AEC). These companies require a unified solution for accounting, project management, sales, and procurement. Small businesses in the professional services sector may benefit from using lightweight ERP, but they usually prefer a mix of multiple solutions such as project management and accounting.
What do Enterprise Resource Planning (ERP) Systems Cost?
The software cost can be straightforward (for cloud systems) or very complicated (for suites or packages with multiple modules, add-ons, extensions, etc.). The final cost of an ERP software is rarely the same as its list (or standard) cost. This is because vendors tend to combine multiple products and modules, offer incentives such as discounts and free licenses, and professional services.
Additional services are offered by vendors to improve and optimize the ERP system. Some examples include business process reengineering, configuration and customization, or industry-specific consulting. These services are rarely included in the standard price, and they may be quite expensive, which may significantly increase the total cost of the ERP system.
Return on Investment (ROI)
There are no set-in-stone criteria or standards for the success of ERP implementation. While companies aim to implement ERP on time and budget, these are not the only factors that make ERP implementation strategy successful. What matters most is user adoption, productivity increase, and financial benefits such as cost reductions. All these can only be achieved after using an ERP for at least one year, which is why implementation success cannot be measured immediately after the go-live date.
Depending on their complexity, ERP systems reach maximum efficiency in 2 to 5 years. This means that most users have adopted the system, and is used frequently (full adoption is ideal but difficult to achieve). ROI calculations are more relevant at this stage when users better understand the benefits and shortcomings of the system.
Implementation of Enterprise Resource Planning (ERP) Systems
How are Enterprise Resource Planning (ERP) Systems Implemented?
Once a company has decided which ERP to purchase, there are two main approaches when it comes to the implementation of the system:
Big bang: This refers to the strategy of completely replacing legacy systems with a new ERP solution at a fixed date (also known as the go-live date). This applies to all locations and business units of the company, which should start using the new system at the same time.
Phased: Phased means that the ERP system is implemented gradually across the company, either by location or by department. For instance, the manufacturing and accounting departments may be the first to use the system, while other departments are still implementing it. Also, the headquarters of a company is usually the first to deploy an ERP solution, and the other locations are scheduled to go live at a later date.
Who is Responsible for ERP Systems Implementation?
Depending on the system’s complexity, companies can choose to manage implementation using internal resources, personnel provided by the ERP vendor or its partners, and external consultants and project managers.
An ERP implementation should have an executive sponsor who oversees the project, approves budgets, and allocates resources. This person also manages the relationship with the vendor, its partners, and other external stakeholders involved in the project.
What Does the Implementation Process Look Like for ERP Systems?
Implementation of ERP is a complex process. ERP project implementation will disrupt business operations because employees will need to learn the new system while still using the old one, valuable data may be lost when transferred between systems, and the company may need to use both systems in parallel.
The typical stages of an ERP implementation are:
Data migration: Moving all the information from one ERP system to another is not easy but is necessary. Companies need historical data for forecasting purposes and sometimes for compliance. For instance, companies are required by law to keep tax documents for at least three years.
Setup of the new system: Once a company starts using a new ERP, all transactions will be associated with GL accounts and cannot be deleted. This makes it very difficult to remove GL accounts, which is why the initial setup of the system should be thoroughly performed and tested.
Training: Training employees takes time and can be costly, which is why some companies tend to rely on a few employees that learn the system very well and are supposed to train the others. This approach can be beneficial for small companies but not for large businesses with many employees and complex processes. Vendors and their partners are the most qualified to provide individual training, which usually includes learning content and hands-on practice.
Testing: Vendors usually provide a test database that should be used to familiarize users with the new system and to identify potential issues. Ideally, tests should be performed on a database that contains data and is configured in accordance with the business processes of the company.
The go-live date: The focus of the company and the ERP system vendor is to make the system work, but it is also essential to identify and address critical issues such as data inaccuracy or an incomplete setup of the system.
After-sales support: After-sales support allows companies to sail smoothly through the transition phase, which can take weeks or months. Sometimes companies may decide to manage this phase on their own, which is usually a mistake and can have serious long-term consequences.
Another essential factor that can impact the success of planning ERP is change management. Many ERP buyers wrongly assume that vendors provide change management as part of the implementation process. While vendors can and do help with some change management activities, such as addressing resistance to the new system, companies are ultimately responsible for defining and implementing the strategies. External consultants can help with advice and guidance, but each company needs to identify and address the issues that can be caused by such an important project as an ERP implementation.
Change management can be extremely beneficial to companies implementing ERP, but it is difficult to plan and implement. To ensure that they successfully manage change during implementation of an ERP system, companies should focus on the following:
Involving users as early as possible in the decision-making process, starting with the selection of a new ERP. A common mistake is to allow executives to choose an ERP system without consulting with subject matter experts from the company.
Communicating any changes or decisions related to the selection and implementation of an ERP product makes employees feel involved in the process. It also helps to encourage feedback and suggestions on how to improve the chances of success.
Business process reengineering allows companies to revaluate how they function and find opportunities for improvement. Business processes should not be modified to fit the workflow of the new system. Also, companies need to understand processes from different departments and business entities. Learning how the system works and how it helps the company is much more critical than merely training users to use the product.
Encouraging collaboration and knowledge exchange between teams and departments can help companies optimize their ERP investments and make their employees more productive. Collaboration can also reduce the unhealthy competition between departments and align all employees with the goals of the company.
Enterprise Resource Planning (ERP) Systems Trends
Industry 4.0
Digital transformation in manufacturing can be achieved using intelligent technology such as the internet of things (IoT), virtual reality, and augmented reality. While ERP does not manage these technologies, the system needs to exchange data with both hardware (sensors and fixed assets) and software (IoT management and digital twins).
Artificial intelligence (AI)
There are multiple applications of AI that can make ERP more efficient. AI can analyze large amounts of complex data, identify trends, and suggest opportunities to improve operations. Robotic processing automation (RPA) is used to create bots that can perform basic tasks quickly and efficiently. Some ERP vendors use conversational user interfaces, which simulate a conversation between computers and users; these interfaces allow ERP users to find information by asking questions or telling computers to execute simple tasks such as sending an email or printing an invoice.
Microservices
This type of software architecture is being increasingly used by vendors to provide more flexible solutions. As opposed to monolithic ERP, microservices allow buyers to implement and use collections of software modules from different products. For instance, a manufacturing company that handles its distribution and sells online will benefit from using a custom solution that includes features otherwise sold separately.