What is Enterprise Resource Planning (ERP) and How Does It Work?

Have you ever thought about how businesses keep everything running seamlessly? The secret is often in Enterprise Resource Planning (ERP). This all-in-one software solution helps companies manage finance, Human Resources (HR), sales, and much more in one place. In this blog, we take a closer look at what ERP is, the different types of ERP systems, and how they work. We also explore the benefits that ERP brings to businesses across industries. Curious to learn more? Let’s dive into the world of ERP! 

Table of Contents 

1) What is Enterprise Resource Planning (ERP)? 

2) Types of ERP Systems   

3) How Does ERP Systems Work? 

4) Benefits of ERP 

5) Limitations of ERP 

6) Examples of ERP Usage 

7) Conclusion 

What is Enterprise Resource Planning (ERP)? 

ERP is a type of software that helps businesses manage their main activities, like finance, Human Resources, manufacturing, supply chain, sales, and purchasing. It brings all these processes together in one system, giving a clear and unified view of everything that’s happening in the company. This way, everyone works with the same information.
 

Types of ERP Systems  

Here are the types of ERP Systems: 

On-premise ERP 

This type of ERP is installed on a company’s own servers. The company buys the software and has full control over it and the data. It allows for customisation and integration but requires dedicated IT resources for maintenance, updates, and security. 

Cloud ERP 

Cloud ERPs are hosted on remote servers and accessed via the internet. They offer better scalability, allowing businesses to adjust resources and features as needed without a big upfront investment in hardware. These systems usually have a subscription-based pricing model, and the ERP provider handles updates and maintenance. 

Industry-specific ERP 

These ERPs are designed to meet the unique needs of specific industries. They include specialised modules and functionalities to handle industry-specific challenges. For example, a manufacturing ERP focuses on inventory and supply chain management, while a financial institution’s ERP would be different. 

Open-source ERP 

Techniques such as open-source ERPs grant users outright access to the source code and offer companies the advantage of changing, enhancing, or even redistributing the software to their needs. However, they are typically harder to implement and maintain than a commercial ERP system, as they may need more technical knowledge and hardware to operate. 

Small Business ERP 

These ERPs are designed for Small and Medium-scale enterprises (SMEs). This system is providing core business capabilities at comparatively low costs and are typically less complex than enterprise ERS’ and require customisation. 

Tiered ERP 

Tiered ERPs provide different levels of functionality and scalability to suit businesses of various sizes and complexities. Companies can choose the tier that matches their current needs and budget, with the option to upgrade or add modules as their requirements grow. For example, a company expanding internationally might add foreign currency modules later on. 

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How Does ERP Systems Work? 

Here are the key points on how ERP systems work: 

a) Integrated Modules: ERP systems consist of modules or business applications that share a common database, allowing them to communicate with each other. 

b) Focus Areas: Each module focuses on a specific business area, such as finance, logistics, procurement, or HR, but they all use the same data. 

c) Customisation: Companies can choose the modules they need and add more as they grow. 

d) Industry-specific Support: ERP systems can support industry-specific requirements through core functionality or additional applications. 

e) Wide Range of Functions: Modern ERP systems offer extensive business functions but need to connect and sync with other applications and data sources to be fully effective. 

f) Integration: ERP systems integrate with Customer Relationship Management, (CRM) and Human Capital Management (HCM) software, E-commerce platforms, industry-specific solutions, and other ERPs to provide a unified view of information. 

g) Improved Efficiency: This integration improves business process efficiency, customer experiences, and collaboration across teams and partners. 

h) Flexibility: Connections to other software products can be established using connectors or others like Application Programming Interface (APIs), Enterprise Service Bus (ESB) and Integration Platform-as-a-Service (iPaaS). 

Benefits of ERP 

Here are six key advantages of using an ERP system: 

a) Increased Productivity: By streamlining and automating essential business processes, ERP systems help employees accomplish more with fewer resources. 

b) Enhanced Insights: ERP systems eliminate data silos, providing a single source of truth. This allows for quick answers to critical business questions. 

c) Faster Reporting: It speeds up business and financial reporting, making it easy to share results. It acts on insights to improve performance in real time. 

d) Reduced Risk: ERP systems enhance business visibility and control, ensure compliance with regulations. It also helps predict and prevent risks. 

e) Simplified IT Management: Integrated ERP applications share a common database, simplifying IT management and making it easier for everyone to work. 

f) Greater Agility: With efficient operations and real-time data access, businesses can quickly identify and seize new opportunities. 

Limitations of ERP 

Some of the key weaknesses include: 

a) Organisational Challenges: ERP systems may not eliminate inefficiencies or improve everything if the company doesn’t rethink its organisation. This can lead to incompatible technology. 

b) Resistance to Change: ERP systems often fail to meet their objectives because companies are reluctant to abandon old processes. Additionally, they may be hesitant to let go of software that has worked well in the past. 

c) Project Fragmentation: Splitting ERP projects into smaller parts can lead to cost overruns. It’s crucial to manage ERP projects as a whole to avoid this issue. 

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Examples of ERP Usage 

Here are a few examples of ERP:  

Manufacturing Companies 

Manufacturers use ERP to ensure product quality, manage assets, control overtime costs, and oversee inventory. This helps them track stock movements, identify top and underperforming products, and manage procurement efficiently. 

Retail Businesses 

With the rise of e-commerce, retail companies need consistent, integrated data to offer self-service options for customers. ERP helps reduce cart abandonments, improve website conversions, and increase average order value. 

Service-oriented Companies 

Professional services like accounting, tax, engineering, and legal firms use ERP to balance service delivery with financial health. They rely on ERP to stay on schedule, manage project profitability, utilise resources effectively, and seize growth opportunities. 

Utility Providers 

Utility companies use ERP to manage their capital assets and plan for future services and replacements. ERP helps them forecast spare parts needs, avoiding customer service issues during outages and reducing costs from excess inventory. 

Wholesale Distributors 

ERP helps wholesalers and logistics firms to reduce distribution expenses, improve inventory turnaround time and reduce order-to-cash cycle. To achieve these goals, they require integrated inventory management and logistics functions, and automation. 

Conclusion 

Enterprise Resource Planning (ERP) systems are vital for businesses to manage and integrate their core processes efficiently. By centralising data and providing real-time insights, ERP systems help improve decision-making, streamline operations, and enhance collaboration across departments.  Implementing an ERP system can significantly boost a company’s productivity and competitiveness in today’s market. 

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