ERP is a type of software organizations use to streamline and centralize the flow of information from core business processes. It helps consolidate data for accounting, inventory management, supply chain services and manufacturing into a single hub. Think customer relationship management (CRM) to manage sales pipelines, a digital record of financial transactions, a customer service platform for customer service, and more.
A business without ERP can manage its operations independently and with isolated systems and tools. While there is nothing wrong with using different software for organizations, there is no single source of truth for your business. Separate sources of data and management processes affect efficiency. They can cost thousands of dollars due to the complex basic operations in different systems.
What is an ERP system?
ERP systems are systems that organizations use to manage information and core business operations.
ERPs collect, store, and interpret data to provide quick insights for small and medium-sized organizations. They provide easy access to information across departments or teams, such as finance, marketing or sales, making it quick to get everyone on the same page.
Every ERP solution is unique. A single system can include integrated platforms on the cloud, or on-premise or offline systems. The features and processes that ERPs manage depend on the techniques and features within your organization.
Key components of ERP
Look at some of the critical components of an ERP system.
Human Resources (HR)
Employees are the lifeblood of any organization. Therefore, managing the employees from recruitment to final dismissal is one of the main components of an ERP system. Essentially, this component should cover important features such as recruitment, payroll, benefits management and talent management.
Customer Relationship Management (CRM)
Managing communications and relationships with leaders and customers is a vital part of ERP.
CRM enables organizations to collect and analyze data across customer touchpoints from initial contact to post-purchase. This information allows businesses to consolidate customer information such as account information, past purchases, the status of their orders and customer service issues.
For sales teams, CRM helps track the sales pipeline, identify sales opportunities, and create accurate sales forecasts. Marketing teams use this solution to manage marketing campaigns and deliver the data to the most effective marketing channel for conversions.
Business Intelligence (BI)
BI is another component of ERP systems. BI enables organizations to aggregate data to gain deeper insights that inform business decisions.
The BI component enables organizations to interpret raw data. Some provide comprehensive reports with tables and figures. However, more modern solutions are packed with customizable dashboards and other visualizations to help stakeholders understand complex insights.
If BI is not a feature, business data may be kept in separate silos. Data belonging to another department must be visible to other departments or teams, complicating collaboration, data analysis, and data sharing.
Supply Chain Management (CCM)
SCM involves the production of goods and services from raw materials to final products. As part of ERP, SCM enables stakeholders to control the entire manufacturing process from raw material procurement to product delivery.
Best-in-class SCM systems must be able to optimize the manufacturing process for distribution and efficiency. For example, a controller can track orders, get a real-time overview of raw materials and access all shipping documents in one central location. You can use demand forecasting to assess production speed and optimize shipping processes.
Inventory management software allows businesses to automate inventory processes. In this way, they have appropriate inventory for products to meet the needs of customers.
Most inventory management solutions sidestep manual inventory processes. You can sync inventory data with sales, provide detailed stock reporting, and provide multi-level tracking of serial numbers and multiple metrics per product ID or stock-keeping unit (SKU). They also come with seamless integration options for accounting systems, suppliers, shippers and retail point of sale (POS) systems.
Centralized inventory makes it easy to ship products to international customers and sell a variety of products through online and offline sales channels. For example, entrepreneurs can show the number of stocks left on the product page.
Accounting or financial management
The last major component of ERP is accounting and financial management.
Accounting capabilities allow users to track accounts receivable (A/R), accounts payable (A/P), and other financial information. It is also important to prepare reports such as income statements, quarterly earnings and balance sheets – critical to purchasing raw materials or closing deals with suppliers or contractors.
Revenue is the lifeblood of any organization. Therefore, an ERP that provides complete visibility of financial information helps stakeholders make informed decisions.
Types of ERP
There are three main categories of ERP: custom, cloud-based, and hybrid. Here is an in-depth look at each type.
on the premises
On the front end, ERP software is installed on computers and servers in the organization’s offices or physical locations. A one-time permanent license is paid up front, but costs vary depending on the size of the business. You also need to consider maintenance fees, software updates, and ongoing training.
This solution is ideal if your organization is handling sensitive data. Not only can you keep data in-house, but you can customize the module to suit your unique business processes.
Examples of well-known solutions include Epicor and SAP ERP Central Component.
Based on the cloud
Cloud-based ERP software adopts the Software-as-a-Service (SaaS) model for ERPs. Unlike front-end ERP, this type of software runs on a network of remote servers rather than an office-based server.
One of the best qualities of a cloud-based solution is that updates are delivered several times a year. In contrast, on-premises software offers them every five to 10 years. Cloud-based ERP does not require hardware, software, or specialized information technology (IT) personnel to manage servers. In addition, it is cost-effective, easier to maintain and faster to configure than on-premise ERP.
Despite these advantages, some cloud-based solutions offer less personalization and customization than on-premises solutions. Instead of owning the software, you have to rely on the cloud provider for as long as your business runs on it. At first glance, the price seems cheap. Still, you can spend more depending on the length of your subscription and the size of your business.
Some examples of cloud-based ERPs are Wrike, NetSuite ERP, Wrike, Rossum, Sage Intact, and Odoo.
People who want the best of both worlds can opt for a hybrid ERP that offers both cloud-based and on-premise ERP solutions.
This approach usually involves two phases: a front-end ERP system for corporate functions (Phase 1) and another to support business units or areas (Phase 2). Combined, these two tiers allow businesses to reduce costs and meet the unique needs of the organization.
Historically, most businesses deployed one ERP system for the entire organization. However, extending the functionality of ERP to handle all business units and multiple locations took a lot of work.
Adopting a hybrid solution allows businesses to explore multiple cloud ERP solutions and choose the one that best meets their on-premises needs. It’s also faster than waiting for corporations to implement a company-wide ERP solution.
3 examples of ERP
Organizations use ERPs to manage enterprise resources, supplier relationships, financial information, and sales. There are many use cases, and each organization and different organizations may use ERP in different ways depending on their needs. Let’s look at some examples.
Example 1. Amazon
Amazon is a tech giant specializing in artificial intelligence, retail, cloud computing and online streaming. Since 2008, the company has changed its focus and used SAP software to manage many of its business operations, from accounting to sales and human resources management.
ERP allows vendors to track revenue, customer analytics, and customer loyalty. Based on the information collected, they can improve sales to improve their customer experience.
Example 2. Fulton and Roark
Fulton & Roark – Men’s Grooming Products Retailer – Implemented NetSuite ERP. Historically, the company used spreadsheets and accounting software to track cost of goods sold (COGS) to track changing production costs or work processes. Thus, they performed manual double data entry, which was inefficient and unmanageable as the company doubled its sales year.
NetSuite ERP helped the team more accurately pinpoint accounting errors related to inventory. They can reduce their reliance on accounting and monitor profit margins. They have also significantly increased production and sales volume while saving workers’ heads.
Example 3. Cadbury
Due to the high demand for chocolate and sweets, Cadbury struggled to meet their production and distribution targets. SAP implementation has helped the organization to automate warehouse and distribution systems and overall processes.
Some notable achievements include:
- Streamlining warehouse management system and improving structure in depots and branches
- Standardize and automate processes across 16 company locations
- It increases productivity and eliminates waste associated with production
- Improve vendor efficiency, which helps reduce costs and vendor costs.
Advantages of ERP
Let’s take a look at some of the benefits that ERPs can bring to your business.
Reduce duplication and errors in data entry
An ERP system helps to reduce the amount of data and poor data quality. Consider duplicative payments to contractors, poorly posted information, and duplicate data entries that distort perceptions. Poor data quality is problematic because it threatens data integrity, limits visibility, encourages misunderstandings and conflicts, and wastes valuable company resources. An ERP system can quickly catch duplicate data errors and replicate data sources independently across silos.
Manually recording payroll and making direct deposits is cumbersome and time-consuming. Therefore, managing payroll and finances is one of the most critical features of ERP. An ERP can automate payroll processing and is less prone to human error than manual data entry. Also, it should provide you with a complete record of tax obligations and legal obligations related to income tax to ensure compliance with state, local and federal laws.
Facilitate information and procedures
The best ERP systems provide an overview of business operations through shared databases. It can track business inputs, finances, raw materials, and finished products—along with essential processes, such as sales orders, payroll, reporting, purchase orders, and work orders. While these solutions are typically critical for large corporations, they also bring some benefits to small and medium-sized businesses (SMBs).
Improve collaboration and productivity.
ERP provides a software framework that connects the various components of a company. Because the systems are connected and the interfaces are the same, it’s easy to share information across departments and see what’s happening in different areas of the company.