What is Enterprise Resource Planning? (Enterprise Resource Planning) – Forbes Advisors

ERP refers to the type of software that organizations use to simplify and centralize the flow of information from core business processes. It helps consolidate information for accounting, inventory management, supply chain services and manufacturing into one hub. Imagine having customer relationship management (CRM) to manage sales pipelines, digitized records of financial transactions, customer service platforms to provide customer support, and more.

Businesses without an ERP can use separate and isolated systems and tools to manage their operations. While there’s nothing wrong with using different software for your organization, there’s no single source of truth for your business. Independent sources of data and management processes reduce efficiency. You can spend thousands of dollars due to complex basic operations across different systems.

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What is an ERP system?

An ERP system is a system that organizations use to manage data and core business operations.

ERP aggregates, stores and interprets data to provide instant insights to small and medium-sized organizations. They provide easy access to data across departments or teams such as finance, marketing or sales, getting everyone on the same page faster.

Every ERP solution is unique. It may involve a single system, an integrated platform on the cloud or on-premises or disconnected systems. The functions and processes of ERP management will depend on the technologies and functions within your organization.

Key Components of ERP

Following are some key components of an ERP system.

Human Resources (HR)

Employees are the lifeblood of any organization. Therefore, managing employees from recruitment to eventual dismissal is one of the main components of an ERP system. Essentially, this component must cover basic functions such as recruiting, payroll, benefits administration, and talent management.

Customer Relationship Management (CRM)

Managing communications and relationships with prospects and customers is an essential part of ERP.

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, order status and customer service issues.

For sales teams, CRM can track leads throughout the sales funnel, identify upsell opportunities and generate accurate sales forecasts. Marketing teams use this solution to manage campaigns and funnel information to the most effective marketing channels for conversions.

Business Intelligence (BI)

BI is another component of an ERP system. BI allows organizations to aggregate data for deeper insights to inform business decisions.

BI components enable organizations to interpret raw data. Some provide comprehensive reports with tables and figures. However, more modern solutions include customizable dashboards and other visualizations so stakeholders can understand complex insights.

When BI is not a function, 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 the production of 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.

A state-of-the-art SCM system should be able to optimize the manufacturing process for increased spread and efficiency. For example, supervisors can track orders, get a real-time overview of raw materials and access all shipping documents in one central hub. They can also use demand forecasting to assess production rates and optimize shipping processes.

inventory management

Inventory management software allows businesses to automate the inventory process. This way, they have the proper product in stock to meet the needs of their customers.

Most inventory management solutions can ditch the manual inventory process. They can synchronize inventory data with sales, provide detailed inventory reports, and provide multi-level serial number tracking and multiple units of measure per product ID or stock keeping unit (SKU). They also include seamless integration options for accounting systems, suppliers, shippers, and retail point-of-sale (POS) systems.

Centralized inventory makes it easy to ship products to international customers and sell a variety of products on both online and offline sales channels. For example, an entrepreneur can display the remaining stock count on a product page.

accounting or financial management

The final major component of ERP is accounting and financial management.

Accounting features allow users to track accounts receivable (A/R), accounts payable (A/P) and other financial information. It’s also crucial for generating reports such as profit and loss statements, quarterly revenues, and balance sheets—crucial for sourcing raw materials or closing deals with suppliers or contractors.

Revenue is the lifeblood of any organization. Therefore, an ERP that provides complete visibility of financial data will help stakeholders make informed decisions.

Types of ERP

ERP falls into three main categories: custom, cloud-based, and hybrid. Here’s an in-depth look at each type.

on-premise deployment

On-premises ERP software is installed on computers and servers within an organization’s office or physical location. It is paid up front with a one-time perpetual license, but the cost will vary depending on the size of the business. You’ll also need to factor in maintenance costs, software updates, and regular training.

This solution is ideal if your organization is dealing with confidential information. Not only can you keep information internally, but you can also customize modules to suit your unique business processes.

Notable examples of on-premises solutions include Epicor and SAP ERP Central Component.

cloud based

Cloud-based ERP software employs the ERP software-as-a-service (SaaS) model. Unlike on-premises ERP, this type of software runs on a network of remote servers rather than office-based servers.

One of the best qualities of a cloud-based solution is that it provides multiple updates per year. In contrast, on-premises software is offered every five to ten years. Cloud-based ERP does not require hardware, software, or specialized information technology (IT) staff to manage servers. Plus, it’s cost-effective, easier to maintain, and faster to set up than on-premises ERP.

Despite these advantages, some cloud-based solutions offer less personalization and customization than on-premises solutions. As long as your business depends on the cloud provider, you must depend on the cloud provider, not own the software. In hindsight, it seems cheaper. Still, you can spend more depending on the length of your subscription and the size of your business.

Some examples of cloud-based ERP are Wrike, NetSuite ERP, Wrike, Rossum, Sage Intact, and Odoo.


Those looking for the best of both worlds can opt for hybrid ERP, which offers a combination of cloud-based and on-premises ERP solutions.

This approach typically consists of two tiers: an on-premises ERP system for corporate functions (Tier 1) and another system supporting a business unit or site (Tier 2). The combination of these two layers enables enterprises to reduce costs and meet the specific needs of the organization.

In the past, most businesses deployed one ERP system for the entire organization. However, extending the functionality of ERP to accommodate all business units and multiple locations requires a lot of work.

Adopting a hybrid solution enables businesses to browse from a bunch of cloud ERP solutions and choose one that meets their on-premises needs. It’s also much faster than waiting for a company to implement a company-wide ERP solution.

3 Examples of ERP

Organizations use ERP to manage company resources, supplier relationships, financial data, and sales. There are many use cases, and each organization and different organizations may use ERP in different ways according to their needs. Let’s look at some examples.

Example 1. Amazon

Amazon is a tech giant focused on artificial intelligence, retail, cloud computing and online streaming. Since 2008, the company has shifted focus and uses SAP software to manage many aspects of its business, from accounting to sales, human resources management to order management.

ERP allows vendors to track revenue, customer profiling, and customer loyalty. Based on the data collected, they can improve the customer experience to increase sales.

Example 2. Fulton & Roark

Fulton & Roark—a retailer of men’s care products—implemented NetSuite ERP. In the past, the company used spreadsheets and accounting software to track changing inventory costs or workflows to monitor cost of sales (COGS). As a result, they perform manual double data entry, which is inefficient and difficult to manage as the company’s sales double year over year.

NetSuite ERP helps the team more accurately pinpoint inventory-related bookkeeping errors. They can minimize reliance on accounts and monitor profit margins. Additionally, they have significantly increased production and sales while maintaining headcount.

Example 3. Cadbury

Cadbury is struggling to meet its production and distribution targets due to high demand for chocolate and confectionery. The SAP implementation helped the organization redesign its warehousing and distribution system and automate the entire process.

Some notable accomplishments include:

  • Simplify warehouse management system and improve warehouse and branch structure
  • Standardize and automate processes across 16 corporate locations
  • Increase productivity and eliminate production-related waste
  • Increased supplier efficiency, which helps reduce costs and supplier fees

The benefits of ERP

Let’s take a look at some of the advantages ERP can bring to your business.

Reduce duplication and errors in data entry

ERP systems can help minimize redundant information and poor data quality. Think duplicate payments to contractors, mislabeled information and duplicate data entries that distort insight. Poor data quality is problematic because it threatens data integrity, limits visibility, fosters misunderstanding and conflict, and wastes valuable company resources. ERP systems can quickly catch duplicate data errors and store duplicate sources of information in separate silos.

financial management

Manually recording payroll payments and providing direct deposit is cumbersome and time-consuming. Therefore, payroll and financial management is one of the most important functions of ERP. ERPs automate payroll and are less prone to human error than manual data entry. Additionally, it should provide you with a complete record of your tax obligations and income-related tax legal obligations to ensure compliance with state, local and federal laws.

Simplify information and operations

The best ERP systems provide a complete overview of business operations through a common database. It can track business resources, financials, raw materials and finished goods, and basic processes such as sales orders, payroll, reports, purchase orders, and work orders. While these solutions are often critical for large enterprises, they also offer some advantages for small and midsize businesses (SMBs).

Improve collaboration and productivity

ERP provides a software structure that connects the different elements of a company. Since the systems are connected and share the same interface, it is easy to share information across departments and see what is going on in different parts of the company.

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