Definition of Enterprise Resource Planning (ERP)
Any business has a lot of moving parts which all need to work together for the business to run smoothly. Enterprise Resource Planning (ERP) is simply the software platform business owners use to connect all these different parts together.
ERP enables them to integrate all the different essential processes they rely on into one single system.
The ERP definition will change from business to business and to some extent be based on each business’s specific operational needs but at its heart will be cross-functional, end-to-end performance which brings all systems under one roof.
Understanding ERP systems
ERP might seem like a relatively new phenomenon but it actually predates the digital age by several decades. It was originally conceived as an inventory management system in the manufacturing sector, although the term Enterprise Resource Planning did not actually gain traction until the early Nineties.
How does an ERP system work?
Long term business operations can involve the use of siloed or legacy computer systems across different locations and departments. Often, these systems are unable to communicate with each other so a business has a group of completely separate systems all doing different things. The business lacks a cohesive workflow which leads to inefficiencies, greater risk of errors and higher costs.
A good example of this would be a shop with a legacy POS system which doesn’t automatically update the stock management system. After a particularly busy day the shop manager might not be aware they’d run low on one of their top-selling products, leading to it going out of stock and customers on subsequent days being disappointed.
ERP integration effectively brings all of these systems together, allowing them to be managed via a single platform. In the example above, the POS would automatically “talk to” and update the stock system, send a low stock alert and even raise an automatic purchase order for new stock.
Over the years ERP systems have evolved and are now typically cloud-based and capable of being operated from anywhere. ERP solutions enable decision-makers to manage seemingly disparate business functions through a single platform either on-premises, at home or on the road.
Functions commonly managed by ERP software include:
- inventory and order management
- supply chain management
- human resources
- customer relationship management
Benefits of ERP
ERP can transform the day-to-day operations of a small business, streamlining processes, promoting data-driven decision-making and improving e-commerce.
Improving business processes with ERP
ERP can optimise businesses by scheduling, planning and using resources in the most efficient way. By automating workflows and simpler business tasks it reduces labour costs and frees up workers to concentrate on more challenging work.
Enhancing accuracy and productivity
ERP systems are data-driven which increases accuracy in a business over time. The information gathered from day-to-day processes can be used to further refine and improve those processes. As ERP continues to be involved, increasingly artificial intelligence is being used to further improve accuracy and productivity.
Streamlining reporting and efficiency
ERP ensures data from different departments can easily be collated, shared and analysed once again, cutting down on costly manual processes and improving productivity. Reporting is automated and different reports can be created using various metrics.
ERP is a whole organisation process drawing together every facet from back-office operations and ecommerce to staff management and automated email marketing. Its foundations are collaborative with all parts of a business working together in harmony to achieve the most productive, profitable and positive outcome for a business.
Examples of ERP
Having established the definition of ERP, let’s take a look at some examples of where it may be prudent for companies to integrate an ERP system into their operations.
As companies grow, their operations become more complicated. Sticking with the same processes and procedures can lead to huge inefficiencies and waste.
Inventory tracking systems chosen out of necessity when they started out may not accurately account for increasingly complex costs. Likewise, rudimentary accounting software may no longer be fit for purpose when financial statements need to become more detailed and complicated. In order to make up for the shortcomings of old systems, new manual processes may need to be adopted, further compromising operational efficiency.
ERP provides businesses with an all-in-one software suite that can eliminate the manual processes that may impede growth.
Make tax compliance easier
Accounting errors and inconsistencies can prove serious impediments to tax compliance. As businesses of all shapes and sizes aim to make their operations more compliant with Making Tax Digital (MTD), ERP can be a useful aid.
It can automate bookkeeping processes and help to eliminate the errors that can act as red flags for HMRC. ERP can also save companies money by making them less reliant on outsourced third parties for accounting and bookkeeping support.
Poor record-keeping and inventory management can lead to waste of all kinds of resources from perishable goods to employee time. Integrating ERP systems may be beneficial for businesses that struggle to keep their bottom line down and want to increase their margins.
Future trends and advancements in ERP
There has been a shift towards cloud ERP systems and this is likely to continue for the foreseeable future. It has most benefited small businesses, giving them access to out-of-the-box systems and all the benefits they bring at a reasonable cost whereas a custom-built system might be cost prohibitive.
The Internet of Things (IOT) aka direct machine integration with computers is also likely to form part of ERP in the future and will provide improved efficiency, real-time business intelligence and effective forecasting.
Mobility of ERP is also increasingly important - with everyone using smartphones it makes sense for business owners to be able to run everything from their mobile device.
And of course there’s AI-powered ERP. AI is already transforming our leisure time - think Alexa and voice activation or Netflix and personalised recommendations for movies. There’s no reason it won’t integrate with ERP to automate and personalise many business functions too.
ERP deployment models
There are multiple ways ERP can be integrated into a business:
This is enterprise resource planning software which runs on your premises on in-house servers at your location or at locations which you control. This gives you full control over your business structure, security, integration and IT people. As well as giving you greater visibility it may also make it easier to integrate legacy systems.
Cloud-based ERP solutions
Cloud-hosted solutions are run by third party providers accessed over the internet. This kind of system doesn’t require the significant investment of hardware, software and staff an in-premises system does. Updates are also carried out by the vendor and they usually offer back-office IT support, allowing you to take advantage of tremendous computer power for a much lower monthly cost. They’re also highly adaptable and scalable as a business grows.
Hybrid ERP solutions
A hybrid system is the best of both worlds - you get on-premises ERP and its reliability but at a cheaper cost than a fully bespoke system. Your system also continues to function when not connected to the internet but once connectivity is restored all data will be synchronised.
Frequently asked questions about ERP
How is ERP different from CRM?
A CRM primarily supports front-office systems such as customer management, marketing, sales and advertising. ERP supports back-end functions including accounting, inventory management, HR and supply chain management.
What are the five components of ERP?
Finance - this encompasses all accounting and financial management and is one of the most important aspects of ERP. It integrates with other business elements to provide accurate business-wide financial information which can help the directors make data-driven decisions.
Human resources (HR) - ERP can streamline many core HR tasks such as recruiting, employee records, tracking hours, performance and benefits.
Manufacturing and logistics - ERP will usually provide some form of manufacturing operations management software. Such tools can help manufacturing teams plan, execute and monitor production runs.
Supply chain management (SCM) - In ERP the software will track the movement of materials from their raw state through to the finished product. Supply chains can be vast and complex in which case ERP modules for different components may be preferable.
Customer relationship management (CRM) - ERP can assume the functions of CRM too, namely recording contacts, details, orders, customer behaviours etc. It can provide real-time information on trends, automate key functions and improve relationships.
Why is ERP important? Importance of ERP in business operations
ERP, especially when cloud-based, benefits business processes by eliminating waste, providing better data visibility and communications, and reducing the errors that can occur when using manual processes.