What is ERP? A guide to enterprise resource planning systems

Enterprise resource planning (ERP) software standardizes, streamlines, and integrates business processes across finance, human resources, procurement, distribution, and other departments. Here's what you need to know about these key IT systems.

What is ERP? A guide to enterprise resource planning systems
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What is ERP?

Enterprise resource planning (ERP) software standardizes, streamlines, and integrates business processes across finance, human resources, procurement, distribution, and other departments. Typically the software operates on an integrated software platform using common data definitions operating on a single database.

In 1990, Gartner created the term ERP to describe the evolution of materials requirements planning (MRP) and manufacturing resource planning (MRP II) as they expanded beyond manufacturing into other parts of the enterprise, typically finance and HR.

ERP systems evolved rapidly during the 1990s in response to Y2K and the introduction of the Euro. Most enterprises viewed Y2K and the Euro as the cost of doing business, and ERPs provided as a cost-effective way to replace multiple, old systems with a standardized package that could also address these issues.

ERP vs. CRM

On the surface, ERP and customer relationship management (CRM) systems may seem similar, but they aim to fulfill different purposes. Being all-encompassing in nature, ERP systems do often assume many of the functionalities of CRM systems, handling contacts and details about orders, but CRM systems provide a more targeted platform for linking customer information from a variety of sources. CRM systems are, in the main, used by sales and support organizations that are customer-facing but don’t perform the actual work of producing and fulfilling orders.

What are the main features of ERP systems?

The scale, scope, and functionality of ERP systems vary widely. However, most ERP software features the following characteristics:

  • Enterprise-wide integration. Business processes are integrated end to end across departments and business units. For example, a new order automatically initiates a credit check, queries product availability, and updates the distribution schedule. Once the order is shipped, the invoice is sent.
  • Real time (or near real time) operations. Since the processes in the example above occur within a few seconds of order receipt, problems are identified quickly, giving the seller more time to correct the situation.
  • A common database. A common database was one of the initial advantages of the ERP. It allowed data to be defined once for the enterprise with every department using the same definition. Individual departments now had to conform to the approved data standards and editing rules. While some ERPs continue to rely on a single database, others have split the physical database to improve performance.
  • Consistent look and feel. Early ERP vendors realized that software with a consistent user interface reduces training costs and appears more professional. When other software is acquired by an ERP vendor, common look and feel is sometimes abandoned in favor of speed to market. As new releases enter the market, most ERP vendors restore the consistent user interface.

How are ERP systems categorized?

ERP systems are typically categorized in tiers based on the size and complexity of enterprises served. Typical tiers include:

  • Tier I ERPs support large, global enterprises and handle all internationalization issues, including currency, language, alphabet, postal code, accounting rules, etc. For decades, Oracle and SAP have been considered Tier I. Microsoft and Infor are more recent competitors but are frequently categorized as Tier I as well.
  • Tier I Government ERPs support large, mostly federal, government agencies. These vendors support the nuances of government accounting, HR, and procurement. Oracle, SAP and CompuServe’s PRISM are considered Tier I with Infor and CGI’s Momentum close behind.
  • Tier II ERPs support large enterprises that may operate in multiple countries but lack global reach. Tier II customers can be standalone entities or business units of large global enterprises. Most of these ERPs have some internationalization but lack Tier I breadth. Depending on how vendors are categorized there are 25 to 45 vendors in this tier. See also: “How to select a Tier 2 ERP package.”
  • Tier II Government ERPs focus mostly on state and local governments with some federal installations. Tyler Technologies and UNIT4 fall in this category.
  • Tier III ERPs support mid-tier enterprises. Most handle a handful of languages and currencies but only a single alphabet. Depending on how ERPs are categorized, there are 75 to 100 ERP solutions.
  • Tier IV ERPs are designed for small enterprises. ERP systems designed for micro enterprises often focus on accounting and are not considered full ERPs by IT professionals.
  • Cloud ERP is growing rapidly. Many vendors offer a cloud version of their product. The best new ones emphasize heightened security, additional separation of duties, newer standards, and support for recent legislation.

ERP systems can be either proprietary or free and open sourced. Most open sourced ERPs are designed for small organizations or higher education. Many offer little functionality beyond finance.

Top ERP systems

Choosing an ERP system is among the most challenging decisions facing IT leaders. In addition to the above tier criteria, there is a wide range of features and capabilities to consider. To help you get a sense of the kinds of decisions that go into choosing an ERP system, check out “The best ERP systems: 10 enterprise resource planning tools compared,” with evaluations and user reviews of Acumatica Cloud ERP,  Deltek ERP, Epicor ERP, Infor ERP, Microsoft Dynamics ERP, NetSuite ERP, Oracle E-Business Suite, Oracle JD Edwards EnterpriseOne ERP,  Oracle Peoplesoft Financial Management and SAP ERP Solutions.

Why do enterprises implement ERP system?

ERPs improve enterprise efficiency and effectiveness by:

  • Integrating financial information. Without an integrated system, individual departments, such as finance, sales, and so on, need to rely on separate systems, each of which will likely have different revenue and expense numbers. Staff at all levels end up wasting time reconciling numbers rather than discussing how to improve the enterprise.
  • Integrating orders. An ERP coordinates order taking, manufacturing, inventory, accounting, and distribution. This is much simpler and less error prone with a single system than with a series of separate systems for each step in the process.
  • Providing insights from customer information. Most ERPs include CRM tools to track all customer interactions. Coupling these interactions with information about orders, deliveries, returns, service requests, etc., provides insight about customer behavior and needs
  • Standardizing and speeding manufacturing. Manufacturing companies, especially those with an appetite for mergers and acquisitions, often find that multiple business units make similar widgets using different methods and computer systems. ERP systems can standardize and automate manufacturing and supporting processes. This standardization saves time, increases productivity, and reduces head count.
  • Standardizing HR information. Many enterprises, especially those with multiple business units, lack a simple way to communicate with employees about benefits or to track employees’ hours and expenses. An ERP system, with a self-service portal, enables employees to maintain their own personal information, while facilitating time reporting, expense tracking, vacation requests, scheduling, training, etc. By integrating information, such as advanced degrees, certifications, and work experiences, into an HR repository, individuals with specific capabilities can be more readily matched to potential assignments.
  • Standardizing procurement. In the absence of an integrated procurement system, analyzing and tracking purchases across the enterprise is challenging. Large enterprises often find that different business units purchase the same product but don’t receive the benefit of volume discounts. ERP procurement tools arm purchasing teams for vendor negotiations by identifying widely used vendors, products, and services.
  • Facilitating government reporting. Government reporting requirements continue to increase in a variety of areas, including:
    • Financial reporting. In virtually every country, reporting requirements continue to increase at national, state, and local levels. Management hopes that the International Financial Reporting Standards (IFRS) will be more widely adopted and that this standardization will make reporting less time consuming.
    • HR Reporting. The U.S. and most European countries have a wide variety of federal, state, and local reporting requirements. The E.U.’s proposed General Data Protection Directive attempts to reduce the burden by harmonizing the current E.U. Data Protection Directive into a single reporting requirement for all E.U. members. Mexico, Japan, and other countries also require a variety of HR reports.
    • Supply chain. Dodd-Frank requires companies to report to the SEC if their product contains minerals mined in war zones (known as conflict materials) with the funds used to continue the fighting. The California Safer Consumer Products Regulation, the E.U.’s Regulation on Registration Evaluation, Authorization and Restriction of Chemicals (REACH), and Washington State’s Children’s Safe Product Act are all designed to protect consumers from hazardous materials. California Transparency in Supply Chains Act and the U.K’s Transparency in Supply Chain provisions of the Modern Slavery Act attempt to eliminate slavery. ERP systems can greatly enhance organizations’ ability to filing the necessary reporting for regulations such as these.

What are the benefits of ERP systems?

ERP improves business performance in several ways. Specifically:

  • Internal efficiency. Properly operating ERP systems enable enterprises to reduce the time required to complete virtually every business process.
  • Better decision-making. ERPs promote collaboration through shared data organized around common data definitions. Shared data eliminates time wasted arguing about data quality and it permits departments to spend their time analyzing data, drawing conclusions, and making better decisions. The most effective decision-making balances central guidance with some amount of local autonomy. Central command and control is rarely responsive to local needs while full-field autonomy precludes enterprise-wide coordination. Shared data and common business processes allow decisions to be made within headquarters’ parameters by the individuals closest to the situation.
  • Increased agility. Standardization and simplification result in fewer rigid structures. This creates a more agile enterprise that can adapt quickly while increasing the potential for collaboration.
  • Enhanced security. While a centralized data base with enterprise data is a big target, it is easier to secure than data that is scattered across hundreds of servers in closets or under desks. It is particularly difficult, if the security team is not aware of the server or that it contains corporate data.

Will an ERP add value to every enterprise?

Most enterprises can benefit from an ERP system. Every organization manages people, purchases products and services, sells (or gives away) something and accounts for money. The way each activity is handled varies by industry and country, but every enterprise performs these basic functions. In most cases, it is more effective to handle these processes through an integrated software platform than through multiple applications never designed to work together.

While ERPs were originally designed for manufacturing companies, they have expanded to service industries, higher education, hospitality, health care, financial services, and government. Each of industry has its own peculiarities. For example, government ERP uses Contract Lifecycle Management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP. Banks have back-office settlement processes to reconcile checks, credit cards, debit cards, and other instruments.

With any industry, it is important to pick an ERP vendor with industry experience. Educating a vendor about the nuances of a new industry is very time consuming.

How should an ERP implementation team be organized?

Most successful ERP implantations are led by an executive sponsor. This is the executive who will receive the majority of the program's benefits when the new system is operational. At a minimum, this executive should sponsor the business case, get approval to proceed, monitor progress, chair the steering committee, remove road blocks, and capture the benefits. With the exception of internal IT projects such as infrastructure refreshes or ITIL rollout, the CIO should NOT sponsor projects.

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