ERP refers to the type of software organizations use to streamline and centralize the flow of information from core business processes. It helps consolidate information for accounting, inventory management, supply chain services and manufacturing into a single hub. Imagine having a customer relationship management (CRM) for managing sales pipelines, a digitized record of financial transactions, a customer service platform for offering customer support and more.
A business without an ERP could manage its operations using separate and isolated systems and tools. While there’s nothing wrong with using different software for organizations, there’s no single source of truth for your business. Separate sources for data and management processes hurt efficiency. You may spend thousands of dollars because of complex basic operations across different systems.
What Is an ERP System?
ERP systems are the systems that organizations use to manage data and core business operations.
ERPs aggregate, store and interpret data to provide instant insights for small and medium-sized organizations. They provide easy access to data across departments or teams—like finance, marketing or sales—making it faster to get everyone on the same page.
Every ERP solution is unique. It may involve a single system, integrated platforms on the cloud or on-premise or disconnected systems. The features and processes that ERPs manage will depend on the techniques and features within your organization.
Key Components of ERP
Here’s a look at some of the critical components of an ERP system.
Human Resources (HR)
Employees are the lifeblood of any organization. Thus, managing employees from recruitment to final severance is one of the main components of an ERP system. Essentially, this component must cover essential features, such as recruitment, payroll, benefits administration and talent management.
Customer Relationship Management (CRM)
Managing communications and relationships with leads and customers is a crucial component of an ERP.
A CRM allows organizations to collect and analyze data across customer touchpoints from initial contact to post-purchase. This information enables businesses to consolidate customer information, such as account information, past purchases, the status of their orders and customer service issues.
For sales teams, a CRM enables tracking leads across the sales pipeline, identifying up-selling opportunities and generating accurate sales forecasts. Marketing teams use this solution to manage marketing campaigns and funnel the information toward the most effective marketing channel for conversions.
Business Intelligence (BI)
BI is another component of ERP systems. BI allows organizations to aggregate data to gain deeper insights that inform business decisions.
A BI component enables organizations to interpret raw data. Some offer comprehensive reports with tables and numbers. However, more modern solutions are packed with customizable dashboards and other visualizations so stakeholders can understand complex insights.
When BI is not a feature, business data may be stored in separate silos. Data belonging to another department needs to be visible to other departments or teams, complicating collaboration, data analysis and data sharing.
Supply Chain Management (SCM)
SCM involves producing goods and services from raw materials to final products. As an ERP component, SCM allows stakeholders to oversee the entire manufacturing process, from raw material procurement to product delivery.
Best-in-class SCM systems should be able to optimize the manufacturing process for spread and efficiency. For example, a supervisor can track orders, get a real-time overview of raw materials and access all shipping documents in one centralized hub. They can also utilize demand forecasting to evaluate the speed of production and optimize shipping processes.
Inventory management software lets businesses automate inventory processes. That way, they have appropriate stock for products to meet customer demand.
Most inventory management solutions can cast aside manual inventory processes. They can sync inventory data with sales, provide detailed stock reporting and offer multilevel serial number tracking and multiple units of measure per product ID or stock keeping unit (SKU). They also come packed with seamless integration options for accounting systems, vendors, shippers and retail point-of-sale (POS) systems.
Centralized inventory makes it easy to ship products to international customers and sell various products on online and offline sales channels. For example, entrepreneurs can display the number of stocks left on the product page.
Accounting or Financial Management
The last main component of an ERP is accounting and financial management.
Accounting capabilities let users track accounts receivable (A/R), accounts payable (A/P) and other financial information. It’s also vital to producing reports, such as income statements, quarterly revenue and balance sheets—crucial to purchasing raw materials or closing deals with suppliers or contractors.
Revenue is the lifeblood of any organization. Thus, an ERP that provides complete visibility of financial data will help stakeholders make informed decisions.
Types of ERP
There are three main ERP categories: custom, cloud-based and hybrid. Here’s an in-depth look at each type.
On-premise ERP software is installed on computers and servers within the organization’s offices or physical locations. It is paid upfront via a one-time perpetual license but costs will vary depending on the size of the business. You’ll also need to consider maintenance fees, software updates and periodic training.
If your organization is dealing with confidential information, this solution is ideal. Not only will you be able to keep information in-house, but you can also customize the module to suit your unique business processes.
Famous examples of on-premise solutions include Epicor and SAP ERP Central Component.
Cloud-based ERP software adopts the software-as-a-service (SaaS) model for ERPs. Unlike on-premise ERP, this type of software runs on a network of remote servers—instead of an office-based server.
One of the best qualities of a cloud-based solution is that updates are delivered several times per year. By contrast, on-premise software offers them every five to 10 years. A cloud-based ERP does not need hardware, software or specialized information technology (IT) personnel to manage servers. Moreover, it’s cost-effective, easier to maintain and faster to set up than an on-premise ERP.
Despite these advantages, some cloud-based solutions offer less personalization and customizability than on-premise solutions. Rather than owning the software, you must rely on a cloud provider as long as your business depends on it. In hindsight, it seems cheaper. Still, you could spend more money based 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.
Those seeking the best of both worlds can opt for a hybrid ERP, which offers a mix of cloud-based and on-premise ERP solutions.
This approach often includes two tiers: an on-premise ERP system for corporate functions (tier 1) and another system to support business units or locations (tier 2). These two tiers combined allow businesses to reduce costs and meet an organization’s specific needs.
Historically, most businesses deployed one ERP system for the entire organization. However, extending an ERP’s functionality to accommodate all business units and multiple locations took a lot of work.
Adopting a hybrid solution allows businesses to browse from a stack of cloud ERP solutions and pick those that will meet their local requirements. It’s also much faster than waiting for corporations to implement a company-wide ERP solution.
3 Examples of ERP
Organizations use ERPs to manage company resources, supplier relationships, financial data and sales. There are many use cases, and each organization and different organizations may use ERP differently based 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 shifted its focus and used SAP software to manage several aspects of its business, from accounting to sales and HR management to order management.
The ERP allows vendors to track revenue, customer analytics and customer loyalty. Based on the data collected, they can improve the experience of their customers to increase sales.
Example 2. Fulton & Roark
Fulton & Roark―a retailer of men’s care products―implemented NetSuite ERP. Historically, the company used spreadsheets and accounting software to track changing inventory costs or workflows to monitor the cost of goods sold (COGS). Thus, they performed manual double data entry, which was inefficient and unmanageable because the company doubled their sales year over year.
NetSuite ERP helped the team pinpoint inventory-related bookkeeping errors with greater accuracy. They could minimize their reliance on accounts and monitor profit margins. Also, they increased production and sales volume significantly while maintaining employee headcount.
Example 3. Cadbury
Cadbury struggled to meet their production and distribution targets because of the high demand for chocolates and confections. A SAP implementation helped the organization redesign warehousing and distribution systems and automated entire processes.
Some notable achievements include:
- Streamline warehouse management system and improve structure in depots and branch offices
- Standardize and automate processes across 16 company locations
- Boosts productivity and eliminates production-related waste
- Improve vendor efficiency, which helped reduce costs and vendor expenses
Benefits of ERP
Let’s look at some of the advantages ERPs can bring to your business.
Decrease duplicates and errors in data entry
An ERP system can help minimize redundant information and poor data quality. Think of duplicated payments to contractors, poorly labeled information and duplicate data entries which skew insights. Poor data quality is problematic because it threatens data integrity, limits visibility, fosters misunderstandings and conflicts and wastes valuable company resources. An ERP system can catch duplicate data errors quickly and duplicate sources of information stored in separate siloes.
Manually recording payroll payments and delivering direct deposits is cumbersome and time-consuming. Thus, payroll and managing finances are one of the most crucial features of an ERP. An ERP can automate payroll and be less prone to human error than manual data entries. Also, it should provide you with a complete record of tax obligations and legal obligations for income-related taxation to ensure compliance with state, local and federal laws.
Streamline information and operations
The best ERP systems provide a complete overview of business operations via common databases. It can track business resources, financials, raw materials and finished products— along with essential processes, such as sales orders, payroll, reporting, purchase orders and work orders. While these solutions are commonly critical for large corporations, it also brings some advantages for small and medium-sized businesses (SMBs).
Improve collaboration and productivity
ERP offers a software structure that links different elements of a company. Since 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 company sectors.