What is ERP? In short, ERP (Enterprise Resource Planning) is a suite of applications that is built to manage and integrate core business processes. Although it was mainly used by large enterprises, it is now popular among small and medium-sized businesses as well. In this article, we’ll guide you on ERP fundamentals beyond answering the question of “what is ERP” to assist you in your purchase journey.
So, What is ERP?
ERP is a business process management software that manages and integrates day-to-day business activities, such as financial, procurement, production, project, human resource, and other activities. It provides real-time and accurate information that helps stakeholders make good business decisions based on the data generated. By collecting a company’s shared transactional data from multiple sources, ERP eliminates duplicate data and provides data integrity.
A Brief History of ERP
The term ERP was invented in 1990 by Gartner Group, but the concept has actually existed since the 1960s. At that time, it was only applied to inventory management and control in the manufacturing industry. Software engineers created programs to monitor inventory, reconcile balances, and report on status. By the 1970s, the programs had evolved into Material Requirements Planning (MRP) systems for scheduling production processes.
In the 1980s, MRP was developed to cover more manufacturing processes, thereby converting it to MRP-II or Material Resource Planning. By 1990, the systems had more functions beyond the inventory management and other operational processes to other back-office functions such as finance, engineering, project, and human resource managements.
Along with the emergence of Y2K bug and the imminent introduction of the euro, companies in the 1990s rushed to update their existing systems. Many of those chose to completely update their systems by adopting ERP solutions. By 1998, NetSuite was founded, with the goal of creating a system that worked across a company and can be operated via the internet.
In the 2000s, Gartner Group re-developed ERP by issuing ERP II which is known as cloud ERP today. The systems offer high degree of flexibility that allows the users manage their businesses anytime and anywhere. Nowadays, cloud-based ERP systems are increasingly in demand among SMEs, due to the higher levels of mobility and affordable prices.
Why is ERP Important for Your Business?
Have you ever wondered why so many businesses are looking for ERP solutions? What do they need them? They would never consider implementing ERP in the first place if the systems don’t have advantages for their businesses. Let’s break down the benefits of an ERP system for your business.
1. Optimizing Efficiency
ERP systems serve to simplify a variety of business processes that take a lot of time and effort when done manually. Repetitive tasks such as tracking inventory, assigning tasks to employees, monitoring working hours, distributing salaries, generating financial reports, all can be done automatically.
By automating complex processes, your employees can focus more on their core deliverables without bugging each other. For example, the marketing team can generate daily web traffic data without having to request it from the IT team, or the accounting team can generate sales-related reports without having to rely on sales managers.
ERP systems also provide fast data access for managers and stakeholders in the company. Decision makers can monitor key performance indicators throughout the company through the dashboard. All required data can be generated in real time.
2. Increasing Team Collaboration
Cross-departmental collaboration is a crucial and often necessary part of a business. An ERP system breaks down barriers between departments in a company. With the data stored in a centralized and consistent ERP software, a department can access data from other departments. SaaS or cloud-based ERP can extend existing inter-team collaboration across multiple offices in different locations over the internet.
3. Reducing Operating Costs
ERP systems also help companies save on operational costs. Since most operational activities are automated, various interruptions, delays, and breakdowns can be properly anticipated. All of the complex work can be completed more quickly, thus reducing lead time. Companies can also reduce the amount of labor, because ERP solutions take over a variety of day-to-day tasks.
4. Improving Data Security
ERP solutions have firewalls and restriction controls to prevent data breaches. All the data is kept in a centralized system so that access points are closely monitored and security is concentrated. Admins that are responsible for managing company data can provide limited access rights to employees. For example, HR managers can hide some important data only for themselves and stakeholders while granting employees the permission to view their financial data.
Admins can also quickly deactivate access of laid-off employees and grant access to the new ones. ERP solutions also show user activities, so the admins can easily identify unauthorized actions or suspicious activity patterns in the system.
5. Making Realistic, Accurate Forecasts
One of the most crucial things for business advancement is ability to make accurate forecasts. Stakeholders rely on reports to make forecasts that will ultimately affect the decisions they make. Therefore, it is very important for businesses to get real-time, complete, and consistent reports. ERP can facilitate all that.
ERP reporting tools use sophisticated filters and analytics that can filter inconsistencies in the data. The system also ensures that the data obtained is generated in real time. Accurate business reports will help stakeholders make the best decisions for their business.
Types of ERP Deployments
There are several types of ERP developments that are trending in the market today. To avoid confusion when ERP vendors offer the solution to you, try to learn the following three popular types of ERP developments
It is also called the conventional ERP or on-site ERP. On-Premise ERP is installed locally on your company’s hardware and servers managed by your IT staff. Initial investment for conventional ERP is fairly high, because your company needs to purchase servers in order to run the system. You also have to IT staff responsible for managing and maintaining the system. In addition, upgrading an on-site ERP system also requires a lot of effort, since your IT team will have to start customizing from scratch again and your previously implemented customizations will be wiped out.
Although it requires a lot of costs and effort, conventional ERP solutions are still in great demand as these systems allow companies to handle their own data to ensure safety. In addition, on-site ERP systems also offer ease of customization and give more control over the implementation process. Conventional ERP solutions are usually more popular among large-scale companies.
Cloud ERP or also called SaaS ERP is a type of ERP deployment that allows companies to manage centralized data via internet connection. Your ERP vendor is responsible for the smoothness of this system and they monitor it through the backend. Users only need a username and password to be able to access the system.
The investment cost for a cloud ERP system is much lower than that of the on-premise ERP. However, users are subject to overhead costs (usually monthly) for as long as they use the system. Cloud-based ERP solutions are more popular among small and medium-sized businesses. The advantages of cloud ERP are as follows:
- Faster Deployment
Unlike on-premise ERP, cloud ERP doesn’t require additional hardware so your company doesn’t have to waste time procuring and installing IT infrastructure. Cloud-based ERP installation time typically takes only 3-6 months while a conventional ERP system implementation requires at least a year.
- Periodic System Updates & Upgrades
Cloud ERP is continually upgraded by its provider and you can be assured that you always use the latest and most up-to-date ERP system. While if you are using a conventional ERP system, updates and upgrades must be done by removing any adjustments that have been used before
- High-Level Mobility
Cloud ERP allows you to keep an eye on your business anywhere and anytime. Since it’s website-based, users can access the system through supported browsers. You won’t have to come to the office just to view the various data you want, because you can access it through your mobile phone or tablet.
Hybrid ERP is a combination of on-premise ERP and cloud ERP. It serves as a logical solution for many companies who want to upgrade their current conventional ERP systems without having to change them. In addition to separating functions between conventional and cloud-based ERP, Hybrid ERP also helps companies integrate or add functionalities to their existing ERP systems at minimum cost.
Basic Modules of an ERP System
You have found the answer to the question “what is ERP?”. Now, you need to know the basic modules that can be found in any ERP system.
Accounting module manages the whole the incoming and outgoing cash flow. It also helps companies handle various accounting transactions such as expenditures, balance sheets, general ledgers, bank reconciliation, budgeting, tax management, and so on. Company financial statements can be made with just a few clicks with this module.
CRM (Customer Relationship Management) module helps improve sales performance through better customer service & build healthy relationships with customers. It also helps companies manage & track detailed information of their leads and customers including their communication history, calls, meetings, past purchases, and etc.
HRM (Human Resource Management) module helps improve the efficiency of the HR department. It helps companies manage employee details such as performance appraisals, job descriptions, skills, attendance, leave, and many more. Payroll Management is one of the most important sub modules in the HRM module that functions to manage payroll, travel costs, and reimbursements.
This module works to handle the sales workflow such as sales inquiries, quotations, sales orders, and invoices. The integration of Sales and CRM modules can accelerate the sales cycle and generate greater profits for the company.
Inventory module is useful for tracking and managing inventory in a company including monitoring inventory levels, scheduling orders, forecasting purchases and generating inventory reports. A great ERP system allows integration of inventory with barcode or SKU scanners. The inventory module will be more effective if integrated with the purchase module.
This module manages the processes involved in the procurement of goods. These include: supplier listing, quotation requests and analysis, purchase orders, goods receipt notes, and stock updates. This module can be integrated with the inventory module for more optimal stock management.
This module works to improve efficiency in manufacturing processes, such as; product planning, material routing, daily production monitoring, and Bill of Materials. An advanced ERP software allows the manufacturing module to be integrated with barcode or RFID scanners.
Things to Consider When Choosing an ERP Software
1. What your business needs
Every company has different challenges and needs. Good ERP softwares can be tailored to the unique needs of every business. Make sure you understand the challenges your business is facing and the solutions you expect from your ERP software. Explain all your needs in detail to your vendor so that they provide you with an ERP system with the specifications and features that meet your requirements.
2. Vendor Viability & References
Find out the detailed information about your vendor, including their experience in providing ERP solutions for various businesses. Who are their clients? In which industries their clients are engaged? How long has the vendor been operating? Don’t forget to request testimonials from each of their clients. If necessary, ask their clients directly regarding to the results they have gained from using the ERP software (including their relationships with your vendor).
When you talk to an ERP vendor, you shouldn’t forget to ask regarding to the support they provide. Support is a crucial element in every stage of a project, which consists of; requirement analysis, project planning, implementation, configuration, training and mentoring, and post implementation. Make sure that your vendor can be easily contacted when your ERP system is experiencing issues or when you have any inquiries related to the system.
4. Integration & Customization
Good ERP softwares allow their users to easily integrate and adjust them. You may not need a lot of integration or customization now, but your business needs can change at any time. You might want to add some modules or reduce them in the future. As your business gets bigger, the needs become more complex. So, make sure that the ERP software you choose can easily be adjusted to the scale of your business.
5. Implementation Process
One of the main factors that you need to consider when choosing an ERP software is the duration of the implementation. The ERP implementation period usually depends on how many adjustments need to be made. The more customization, the longer the implementation process. The implementation of cloud-based ERP tends to be faster and simpler than that of the conventional one. So, choose the most suitable and beneficial ERP deployment for your company.