What is ERP system?

Enterprise resource planning (ERP) is the integrated management of main business processes, often in real-time and mediated by software and technology. ERP is usually referred to as a category of business management software—typically a suite of integrated applications—that an organization can use to collect, store, manage, and interpret data from many business activities. ERP system can be local based or cloud-based. Cloud-based applications have grown in recent years due to information being readily available from any location with Internet access.

ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data.ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

According to Gartner, the global ERP market size is estimated at $35 billion in 2021. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.

The ERP system integrates varied organizational systems and facilitates error-free transactions and production, thereby enhancing the organization's efficiency. However, developing an ERP system differs from traditional system development. ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.

Origin of ERP System

The Gartner Group first used the acronym ERP in the 1990s to include the capabilities of material requirements planning (MRP), and the later manufacturing resource planning (MRP II),as well as computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole that reflected the evolution of application integration beyond manufacturing.

Not all ERP packages are developed from a manufacturing core; ERP vendors variously began assembling their packages with finance-and-accounting, maintenance, and human-resource components. By the mid-1990s ERP systems addressed all core enterprise functions. Governments and non–profit organizations also began to use ERP systems. An “ERP system selection methodology” is a formal process for selecting an enterprise resource planning (ERP) system. Existing methodologies include: Kuiper’s funnel method, Dobrin’s three-dimensional (3D) web-based decision support tool, and the Clarkston Potomac methodology.

Characteristics of ERP System

ERP systems typically include the following characteristics:

• An integrated system
• Operates in (or near) real time
• A common database that supports all the applications
• A consistent look and feel across modules
• Installation of the system with elaborate application/data integration by the Information Technology (IT) department, provided the implementation is not done in small steps.
• Deployment options include: on-premises, cloud hosted, or SaaS

Functional areas of ERP System

An ERP system covers the following common functional areas. In many ERP systems, these are called and grouped together as ERP modules:

• Financial accounting: general ledger, fixed assets, payables including vouchering, matching and payment, receivables and collections, cash management, financial consolidation
• Management accounting: budgeting, costing, cost management, activity based costing
• Human resources: recruiting, training, rostering, payroll, benefits, retirement and pension plans, diversity management, retirement, separation
• Manufacturing: engineering, bill of materials, work orders, scheduling, capacity, workflow management, quality control, manufacturing process, manufacturing projects, manufacturing flow, product life cycle management
• Order processing: order to cash, order entry, credit checking, pricing, available to promise, inventory, shipping, sales analysis and reporting, sales commissioning
• Supply chain management: supply chain planning, supplier scheduling, product configurator, order to cash, purchasing, inventory, claim processing, warehousing(receiving, put away, picking and packing)
• Project management: project planning, resource planning, project costing, work breakdown structure, billing, time and expense, performance units, activity management

Best practices

Most ERP systems incorporate best practices. This means the software reflects the vendor's interpretation of the most effective way to perform each business process. Systems vary in how conveniently the customer can modify these practices.

Use of best practices eases compliance with requirements such as IFRS, Sarbanes-Oxley, or Basel II. They can also help comply with de facto industry standards, such as electronic funds transfer. This is because the procedure can be readily codified within the ERP software and replicated with confidence across multiple businesses that share that business requirement.

Advantages of ERP System

The most fundamental advantage of ERP is that the integration of a myriad of business processes saves time and expense. Management can make decisions faster and with fewer errors. Data becomes visible across the organization. Tasks that benefit from this integration include:

• Sales forecasting, which allows inventory optimization.
• Chronological history of every transaction through relevant data compilation in every area of operation.
• Order tracking, from acceptance through fulfillment
• Revenue tracking, from invoice through cash receipt
• Matching purchase orders(what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced)

ERP systems centralize business data, which:

• Eliminates the need to synchronize changes between multiple systems—consolidation of finance, marketing, sales, human resource, and manufacturing applications.
• Brings legitimacy and transparency to each bit of statistical data
• Facilitates standard product naming/coding

Benefits of ERP System

• ERP creates a more agile company that adapts better to change. It also makes a company more flexible and less rigidly structured so organization components operate more cohesively, enhancing the business—internally and externally.
• ERP can improve data security in a closed environment. A common control system, such as the kind offered by ERP systems, allows organizations the ability to more easily ensure key company data is not compromised. This changes, however, with a more open environment, requiring further scrutiny of ERP security features and internal company policies regarding security.
• ERP provides increased opportunities for collaboration. Data takes many forms in the modern enterprise, including documents, files, forms, audio and video, and emails. Often, each data medium has its own mechanism for allowing collaboration. ERP provides a collaborative platform that lets employees spend more time collaborating on content rather than mastering the learning curve of communicating in various formats across distributed systems.

Disadvantages of ERP System

• Customization can be problematic. Compared to the best-of-breed approach, ERP can be seen as meeting an organization's lowest common denominator needs, forcing the organization to find workarounds to meet unique demands.
• Re-engineering business processes to fit the ERP system may damage competitiveness or divert focus from other critical activities.
• ERP can cost more than less integrated or less comprehensive solutions.
• High ERP switching costs can increase the ERP vendor's negotiating power, which can increase support, maintenance, and upgrade expenses.
• Overcoming resistance to sharing sensitive information between departments can divert management attention.
• Integration of truly independent businesses can create unnecessary dependencies.

Critical success factors

Critical success factors are limited number of areas in which results, if satisfactory, will ensure the organization’s successful competitive performance. The CSF method has helped organizations specify their own critical information needs. Achieving satisfactory results in the key areas of critical success factors can ensure competitive advantage leading to improved organizational performance and overcome the challenges faced by organizations. Critical success factors theoretical foundation was improved upon, verified, and validated by several researchers, which underscored the importance of CSFs and its application to ERP project implementations. ERP system is popular for Business Setups Now A Days.