What is ERP? An Enterprise Resource Planning Guide

Gabriel Gheorghiu
Gabriel Gheorghiu  |  August 10, 2018

ERP has evolved tremendously during the past decade, which makes it more accessible to companies of all sizes and from various industries.

Technologies such as cloud and mobile make ERP systems easier to implement and use, as well as increase adoption and return on investment (ROI), but they haven’t completely solved the main ERP challenge: its complexity.

What is ERP?

ERP, or enterprise resource planning systems, are defined as complete, integrated systems that manage all aspects of a production-based or distribution business, aligning financial management, human resources, supply chain management, and manufacturing or distribution with the core function of accounting.

ERP systems are used to provide transparency into the entire business process by tracking all aspects of production or distribution, financials, and back office. These expansive systems act as a central hub for end-to-end workflow and data. A variety of departments can view the information recorded by ERP systems to ensure the correct procedures are taking place.

ERPs are used by manufacturing and distribution companies. Instead of using standalone products (which may not properly integrate) in each separate department, ERP systems provide cohesiveness from the beginning to end of all business processes.

This assists in the expansion and growth of a company. While ERPs cover a wide range of functionality within themselves, they may integrate with customer relationship managers and professional service automation products. Users may also choose to integrate standalone products to form a unique ERP system. Others might solely select specific modules from an ERP system that are sold uniquely to best match business needs, instead of purchasing the entire suite. Some project-centric companies may run similar project-based ERP systems that do not focus on product manufacturing but still offer an end-to-end business solution.

ERP systems provide a variety of modules, and while each business has unique requirements, most ERP systems offer the following:

  • Accounting software features like General Ledger, Accounts Payable/Receivable, Budgeting and Cash Management
  • Human resources software (HR) functionality such as Recruiting, Payroll, or integration with HR and Payroll solutions
  • Basic sales and customer management features or integration with CRM software solutions
  • Functions to create different types of quotes, sales orders, and returns
  • Purchasing workflows and purchase order management
  • Inventory management software and warehouse management software including picking, packing, and shipping
  • Advanced supply chain software modules like demand planning and transportation management for distribution companies
  • Production modules that include Bill of Materials (BOM), Manufacturing Resource Planning (MRP) and quality management features for manufacturing companies
  • Reporting and analytics for all the modules included in the ERP solution

What You Should Know About ERP Software

Because it is used to manage all or most operations of a company, ERP is by definition a complex system. No matter which technology they use, ERP buyers need to take into account other factors such as change management and business process re-engineering to ensure the success of an ERP implementation.

The selection process is also critical for ERP buyers, because selecting the wrong solution can only lead to failure, no matter how hard vendors and buyers try to make it work. Also, as opposed to other types of software (such as CRM), ERP is a significant investment even for a small company. And unlike other systems, it is not easy for companies to switch from one ERP solution to another without causing major business disruptions.

To select and implement the best ERP solution for their needs, ERP buyers need to answer the following questions:

  • What are their specific needs (which can vary a lot depending on the industry, company size, or location)?
  • Which of these needs are critical and must be included in ERP? Which ones are nice to have?
  • Which vendors provide ERP solutions to cover specific needs and how (monolithic systems, packaging of several solutions, a modular solution)?
  • How are vendors selling (licensing model) and implementing (directly or through partners) ERP solutions?
  • What services are they offering to help with implementation, user adoption, and maintenance?

Clear answers to these questions will help buyers navigate the ERP market and identify the right solution for their company. 

Why Use ERP Software?

The most important reason why companies use ERP systems is to centralize all business activities in one single system and database. A single data repository reduces the errors caused by double entry or the lack of integration between multiple separate solutions.

Having an integrated solution also helps managers and executives with reporting and analytics, which can be a challenge when the data needs to be pulled from different solutions.

Finally, ERP systems allow users from different departments to work together on complex business processes and managers to track and monitor operations more effectively. This is particularly important for companies with multiple locations or groups of companies.

Who Uses ERP Software?

Most departments within a company can benefit from using ERP software, from sales, marketing, and HR to production and distribution.

Traditional ERP has been designed for manufacturing and distribution companies, which is why it focuses on these business areas. Production managers and their teams use ERP to identify what needs to be manufactured, which raw materials or components are required, and how to plan and execute production cycles. Distribution departments of manufacturing or logistics companies use ERP to track inventory, purchase goods, and raw materials, pick and pack the products sold, and ship them to customers.

Accounting departments use ERP to create financial records for all the operations described above. ERP helps accounting teams track costs, prices, the value of the inventory or of the goods sold, and the profitability of the company.

ERP can also be a valuable source of information for other departments (such as product design and asset maintenance), even if they don’t always use it directly. For instance, product design may benefit from historical sales data to identify which products were the most successful, while asset management teams require production scheduling information to plan equipment maintenance.

Types of ERP Software

While ERP has been designed for large manufacturing companies, this type of software is nowadays used by companies of all sizes, from all industries. Previously, most ERP solutions were designed for a specific industry sector such as manufacturing or distribution. More recent ERP software focuses on other sectors such as professional services—this type of software is also known as professional services automation software.

Of all industry sectors, manufacturing is served by most ERP vendors who offer multiple types of solutions for each production type: discrete, process, and engineer to order (ETO) manufacturing. There are also ERP solutions that focus on only one industry such as fashion and apparel, food and beverage, or pharmaceuticals.

The way ERP solutions are sold, implemented, and used may be one of the main reasons why ERP doesn’t have a very good reputation. As vendors grew and tried to get into new markets, they acquired multiple ERP solutions or developed new software to complement their offering. The result was often a mix of various systems using separate databases and interfaces, more or less compatible and not always functional. Most of these offerings can be classified in a few major categories:

  • Best of breed ERP software includes back office and industry-specific functionality and is usually sold as a single solution. While some vendors offer modular offerings, buyers typically have to use a core product.
  • ERP suites are made of multiple solutions that can be sold together or separately. ERP suites can be industry-specific or focus on advanced features such as supply chain management or asset management
  • ERP software created for accounting solutions (such as QuickBooks or Microsoft Dynamics GP) provides industry-specific modules that can only be used with the accounting system they were created for. 

ERP Software Features

All ERP systems offer two essential types of functionality: back office for sales, accounting, or HR, which is similar for most ERP solutions; and modules for operations management, which can vary a lot depending on the industry of the company.

Back office: Accounting is the backbone of any ERP solution and usually includes features to define and manage one or multiple charts of accounts, as well as functionality to process accounting transactions such as journal entries, payments, or sales and purchasing invoices. An accounting module should also provide features for monthly and yearly financial close and to generate financial statements.

Sales features should include at least basic customer contact management, as well as robust sales orders management. It is preferable that an ERP also include the ability to track a sale from a quote or proposal to the final invoice. While most ERP solutions do not include lead management, this type of functionality can be beneficial to manage the entire customer lifecycle.

Purchasing is critical for manufacturing and distribution companies who need to find the right balance between demand and the inventory of raw materials and finished goods required to satisfy it. Companies also need to track purchasing costs as well as in-transit inventory with an estimated time of arrival (ETA). 

Human resources functionality can vary a lot from one system to another. Some ERP solutions only include payroll processing for accounting, while others deliver complete HR management modules that can be used to manage recruiting, payroll, benefits, and sometimes workforce scheduling and tracking.

Operations: Distribution functionality is used to manage the physical inventory of a company, often across multiple locations. Each location is usually separated into multiple areas, which can also have multiple storage units. ERP distribution modules also include features for picking, packing, and shipping finished goods, as well as receiving and returns. Another important feature is the ability to count inventory, either for all locations or by each storage area. This also helps companies calculate the value of their inventory and identify the products that weren’t sold for a long time and may need to be discarded.

Production modules include manufacturing resource planning (MRP) to identify the quantities of raw materials and labor needed for production, production scheduling and planning to define production cycles, and shop floor control to monitor manufacturing operations. Bills of materials are also a critical component of an ERP system for manufacturing because they are used to define the product structure, which elements are required for its production, in what quantities, and how the costs of each component are rolled up to calculate the final cost of the finished product. 

Additional ERP Features

Industry-specific accounting modules such as fixed assets accounting or project accounting are used by manufacturers of custom industrial equipment or heavy machinery.

Advanced supply chain functionality is required by distribution companies or manufacturers that also manage their distribution operations.

Manufacturing execution functionality can be delivered as part of an ERP solution or as standalone manufacturing execution systems. 

Trends Related to ERP Software

Two-tier ERP implementation is used by companies that cannot find one ERP solution to cover all their needs. For instance, a manufacturer may use one ERP to manage production and a separate solution for finance and accounting. Companies with multiple locations may also choose different ERP solutions for each site. While this approach isn’t ideal, it can be a good compromise and avoids investing in ERP solutions that offer too many or not enough features for the specific needs of the buyer. 

New technologies such as artificial intelligence (AI), the internet of things (IoT), robotics, or 3D printing are disrupting ERP in many ways, directly or indirectly. AI and bots are slowly being incorporated into ERP offerings, and IoT is increasingly essential for manufacturing and supply chain. Technologies such as 3D printing aren’t included in ERP, but can replace features and functions such as spare parts inventory management. If a company can print spare parts instead of ordering them, managing inventory may not be needed. 

Microservices are an attempt by ERP vendors to deliver their solutions in a more flexible way. Vendors are trying to sell apps for different needs such as accounting, inventory, sales, and even production, which can be packaged in multiple combinations depending on what the customer is looking for. While this can be beneficial for buyers, most vendors don’t yet have a clear offering of apps and microservices. 

Potential Issues with ERP Software

 Old systems with new interfaces can be a big challenge for ERP buyers, mostly because there is a disconnect between the business logic of the system and the user interface. Many solutions that were designed to be used on premises are now available in the cloud, but haven’t been completely redesigned for this type of delivery model.

Integration is critical for ERP, especially for manufacturing companies who are using other systems such as product lifecycle management (PLM) or enterprise asset management (EAM). To streamline and improve the product lifecycle from design to manufacturing and maintenance, ERP needs to integrate with PLM and EAM. Also, since most ERP solutions offer limited functionality for customer and sales management, integration with CRM and similar software is crucial. 

Software and Services Related to ERP Software

Software: Most other types of enterprise software are related to ERP, some of the most important being: 

  • CRM software is used when companies need advanced marketing and sales functionality.
  • Product lifecycle management software provides data on the structure of finished products and technical specifications on how to manufacture them.
  • HR software helps companies manage their employees, including their salaries and benefits, but can also be used for scheduling and time and attendance.
  • Supply chain management systems provide advanced distribution features such as warehouse management for multiple locations, demand planning, or transportation and fleet management.
  • Enterprise asset management software is used by manufacturers who need to manage their assets such as production equipment or for the maintenance of the products they sell to their customers.

Services: Implementation and support services are offered by all ERP vendors; however, they are not always clearly defined and can be expensive. While implementation is usually included in the cost of the ERP system, vendors offer additional services such as project management or change management.

Change management services can be provided by vendors or by third-party consultants to help companies increase ERP adoption and ensure that the system is used optimally. These services can also be used to reduce the disruptions caused by the transition from an old system to a new one.

Next step in choosing an ERP software

With hundreds of ERP solutions on the market, it's difficult to make a decision. Equipped with the knowledge you have now, you can utilize G2 Crowd's ERP systems category to browse over 280 different solutions and read thousands of real-user reviews.

Gabriel Gheorghiu
Author

Gabriel Gheorghiu

Gabriel’s background includes more than 15 years of experience in all aspects of business software selection and implementation. His research work has involved detailed functional analyses of software vendors from various areas such as ERP, CRM and HCM. Gheorghiu holds a bachelor's degree in business administration from the Academy of Economic Studies in Bucharest (Romania), and a master's degree in territorial project management from Université Paris XII Val de Marne (France).