What is ERP and how does it work?
An ERP (which stands for Enterprise Resource Planning) is software that helps organizations manage business functions and streamline operations with a centralized database and a user-friendly interface. Modules include accounting and finance, customer relationship management, supply chain, inventory management, manufacturing, human resources and business intelligence.
The global ERP market is expected to grow to $74.2 billion
by 2026
Source: Stratistics
95% of businesses experienced an improvement in their processes after implementing an ERP system.
Source: Panorama Consulting
Small businesses experienced a 36% reduction in the time it takes to make decisions because of ERP software.
Source: The Aberdeen Group
POPULAR ERP TOOLS
Common ERP Modules
Here are the most common ERP modules
Accounting and Finance
The accounting and finance module tracks the company's finances, including budget and expense planning, core accounting, revenue management and tax management..
Customer Relationship Management (CRM)
With the CRM module, businesses can manage their client-facing operations, such as sales, marketing and customer service. Employees can track sales prospects and customer pipelines. Users can also manage marketing tasks, including advertising and lead generation campaigns.
Supply Chain
The supply chain module tracks products from manufacturing to warehouse to distributors to customers. Features include supplier scheduling, purchasing, inventory, claim processing, shipping, tracking and product returns.
Inventory Management
Using the inventory management module, businesses can monitor materials and supplies through inventory control, purchase orders, automatic ordering and inventory scanning.
Manufacturing
Manufacturers and other production-oriented facilities can use the manufacturing module to manage their shop floors, looking at elements such as work orders, bill of materials, quality control, engineering, manufacturing process and planning, and product lifecycle management.
Human Resources
The human resources module helps organizations manage their hiring cycles from recruitment to succession. Companies can take advantage of the following features: applicant tracking, payroll, time and attendance, performance management and learning management.
Business Intelligence
A business intelligence module collects and analyzes data from multiple sources and helps users make better business decisions. Some features include customizable dashboards and visualization tools, ad-hoc and scheduled reporting, and real-time data access.
Top Benefits of ERP
Using an ERP system has the following benefits, including
More accurate data
An ERP system uses a single, centralized database, which cuts down on data entry, redundancies and errors from transferring information between multiple databases.
Employees across the company can generate reports from a single set of data. ERP systems can also help companies comply with strict regulations concerning data security.
Data-driven strategies
With an ERP dashboard, decision-makers have quick access to real-time data and key performance indicators. Users can also generate reports with visual insights and other business intelligence.
Armed with this information, leaders get a deeper understanding of their business and can make better decisions, improve their corporate planning and develop more data-driven strategies.
Standardized business processes
Companies often handle the same business processes differently across various departments and locations. These processes can be inefficient and produce inconsistent data that's hard to analyze.
ERP systems standardize business processes by increasing automation, streamlining operations and allowing companies to adopt industry best practices. Using standardized business processes leads to improved productivity, faster workflows and fewer mistakes.
Greater collaboration
Departments are often siloed by business unit or location, which can lead to an inefficient use of resources and missed opportunities. ERP systems break down these walls with centralized data and streamlined business processes.
Employees in various departments can access the same pool of information and work together to meet common business goals. Standardized workflows make collaboration more efficient.
Supply-chain efficiency
ERP systems streamline all aspects of the supply chain, from purchasing raw materials to customer fulfillment. The software can analyze shop floor data, for example, to help reduce lead times and inventory on hand, as well as increase machine utilization and on-time deliveries.
ERP solutions can also communicate with suppliers and customers to produce insights like demand forecasting to estimate future sales, which reduces waste and improves profitability.
Types of ERP DEPLOYMENT
Here are the three main types of ERP Deployment:
On-premise ERP
Software is installed and customized on the company's own hardware and servers. The company typically pays a one-time license fee to purchase the software and is responsible for maintenance, security and backup of the software and data. Many large manufacturing companies already use on-premise ERP systems because they can be customized for extensive manufacturing execution systems and advanced planning and scheduling.
Cloud ERP
RSoftware and data are hosted on a remote third-party server. Companies generally pay a subscription fee to access the software through the internet. Vendors are responsible for software maintenance and updates. The data server provider manages the hardware and ensures data security and backup. Because of their low up-front costs and faster implementations, cloud ERP solutions are often deployed by small and medium-sized businesses. For more info, take a look at our definitive guide to cloud ERP.
Hybrid ERP
Cloud and on-premise software, often from multiple vendors, is integrated into one system. This is an increasingly common option as many companies integrate newer cloud ERP solutions into their legacy on-premise system.
Types of ERP Buyers
The type of ERP deployment you choose depends on your specific needs as a buyer. Here are the common types of buyers.
Large and enterprise-level companies
These buyers have multiple business divisions and locations. Because they have many business processes, large and enterprise-level companies will likely need extensive customization of their ERP software. In addition, they may already have a large IT staff and data server infrastructure to leverage in their implementation.
Small and medium-sized businesses (SMBs)
SMBs typically can't afford the high up-front costs of an on-premise ERP solution. They usually need a solution that can scale for future growth. Because they have fewer business units and locations, SMBs may be comfortable with a standardized ERP software. They generally don't have a large IT staff.
Industry-specific buyers
Some companies will have industry-specific business processes or regulations that require specialized ERP solutions. Manufacturing and distribution companies, for example, often need extensive customization for specific manufacturing execution systems and advanced planning and scheduling. Companies in heavily regulated industries, such as health care, finance and government contracting, will need ERP solutions with compliant and audit-ready modules and processes.
How to Choose an ERP
ERP systems require significant investment and time to implement. And once you've finished implementation, it can be incredibly expensive and difficult to switch to a different vendor.
That's why it's important that you thoroughly research your options before making a final decision. Here's what you should consider before choosing an ERP:
Identify your company's needs
To understand what you need from an ERP solution, you first must understand your current business processes. Identify the issues your company is facing, as well as opportunities to streamline operations.
It's vital to define the requirements of your ERP software based on these issues and opportunities. You'll want to set goals and objectives for what your company will accomplish after implementation.
Creating a Shortlist
Once you've established objectives, create a shortlist of vendors that best fit your needs. We recommend making a list of your required features, as well as preferred-but-not-necessary features, so that you won't be oversold by vendors that push extra functionality.
Figure out if there's a vendor that offers your required features or if you'll need extensive customizations. Remember that customizing any ERP software takes time and makes implementation more challenging.
Contact vendors
After you've put together your shortlist of vendors, it's time to reach out to them. Discuss your objectives and required features. Ask the vendor about its experience with customers in your industry.
You'll also want to request a demo of the software with real-life scenarios, if possible. Some vendors will suggest a virtual demonstration, but see if they'll meet with you at your office. Another way to test ERP software is to take advantage of a free trial, if offered.
Conduct due diligence
Be sure to compare not only different price quotes, but also deployment options, implementation times and customer support.
Once you've narrowed down the list of vendors, request referrals from customers in your industry or that are a similar size to you. Find out if there are any issues with the vendor or the software.
ERP Implementation
ERP implementation is the process of ERP software installation, data migration and user training. It's not a one-time event, but rather a continuous process or life cycle.
Here are the seven key steps for a successful ERP implementation:
Research
Form an implementation team that can communicate effectively and has the knowledge and commitment to guide the project from beginning to end. Document and examine current business processes. Identify common problems or errors, duplicated or unnecessary efforts and missed opportunities with customers. Set goals and objectives for the implementation, and define the key performance indicators that will be affected.
Installation
Evaluate your current operations and re-engineer business processes into standard operating procedures. Build the infrastructure, such as networking facilities and data collection or display devices. Install the software.
Migration
Review and edit your data for accuracy and uniformity. Set up new databases, map database fields between the old and new systems, and transfer your data.
Testing
Test all interfaces, functionality and reports with real-life scenarios and transaction data. Make sure business processes are flowing correctly between departments.
Training
Train users in the new software. Users may find it difficult to change old roles, processes and behaviors. Manage change by providing users with the opportunity to offer feedback on the software.
Deployment
Choose between three types of deployment: big bang (instantaneous), phased approach (in stages) or parallel operation (run both systems simultaneously). Be prepared for challenges on the go-live date. Test and audit the system for accuracy, reliability and speed.
Support
Maintain ongoing support of the software and its users. Budget time and resources to identify issues and fix errors. Evaluate the success of the ERP project using key performance metrics that are tied back to your goals and objectives.
Pricing
One of the most important considerations in selecting an ERP solution is pricing, which depends upon:
- Software license
- Implementation team and consultants
- Type of deployment
- Level of customization
- Number of users
- Hardware and software installation
- Data security, backup and storage
- Training and IT staff
ERP costs vary significantly based on the type of deployment::
On-premise ERP
On-premise ERP software generally requires the purchase of a perpetual license, which gives the business ownership of the software. Companies pay for customizations, installation of the server infrastructure and software, data migration and user training. Overall, on-premise ERP implementations require a very large up-front investment, but lower ongoing costs.
Cloud ERP
Cloud ERP solutions require less initial investment because they don't need hardware and data server ownership and installation. In addition, they commonly use a software-as-a-service (SaaS) licensing and delivery model. Companies pay a subscription fee to access the software and updates, as well as data security, backup and storage. This fee is paid monthly or annually based on the number of users and level of features.
Open-source ERP
Open-source ERP software can be a cost-friendly alternative, because the source code is publicly available and free to download. Customizing and implementing an open-source ERP solution, however, can be complex and require additional IT staff.
ERP Shortcomnings
Here are the main shortcomings of ERP's
ERP implementation
ERP implementation is known to be a long, complex and expensive process. From not selecting the right solution to not having realistic expectations, there are many potential obstacles.
Managing change
One of the biggest challenges is managing change within the organization. Employees often have difficulty changing their behaviors and job routines, which can lead to implementation failure.
Planning for upgrades
Many companies also find that, as their business needs change over time, their ERP system no longer supports their growth. Upgrading an ERP system or transitioning to a different vendor, however, can require reimplementation and other obstacles.
Market Trends
The ERP market is shifting significantly each year. Here are a few key trends:
Artificial intelligence and the Internet of Things will drive innovation
Manufacturing systems are increasingly automated. ERP systems need to communicate directly with them, not only collecting data but also making decisions without human intervention.
Artificial intelligence (AI) can guide warehouse selection and engineer-to-order processes. Data collection devices that communicate using the Internet of Things (IoT) can transmit data that's used to improve overall equipment effectiveness and reduce equipment breakdown.
Better Buys has asked industry experts for their thoughts on new ERP trends, and the common theme is that ERPs will use AI and IoT to transform manufacturing processes.
Cloud and SaaS ERP are becoming more common
Cloud and SaaS ERPs offer the flexibility, scalability and agility that companies need to adapt to changing technological and business trends.
SaaS models allow SMBs to invest in ERP systems without large up-front costs or extensive IT staff. The company only pays for what it needs it consumes and can scale usage easily if required.
In addition, a cloud ERP vendor maintains and updates a single, standardized version of the software, which allows upgrades to be delivered seamlessly and makes it easier to integrate the solution with new technology and services.
Ransomware threatens data security
Companies with their own data servers are facing more ransomware attacks, which use malicious software to block companies from accessing their data. The attackers demand a ransom to restore access, and even if the company pays, the data may remain blocked.
To prevent this, many companies are turning toward cloud ERP vendors, who typically host their software with reputable data service providers like Amazon, Microsoft and IBM. Public clouds offer 24/7 monitoring and data backup, minimizing the threat of ransomware attacks.
For companies with little to no IT or data security staff, using an ERP software on the public cloud may be safer and less stressful.
