ERP Explained: What is it? Why use it?

Can you run your business with a pen and a paper? I don’t think so. What software solutions can come to the rescue? The most popular recommendation you here is probably: ERP * In a series of Blog posts I will dissect ERP to the what, why, how, benefits and challenges. We start today with: What is an ERP system and why should you consider getting one?

A typical business has to handle money, employees, suppliers, sales, marketing, some also have inventory to maintain, production, warehouses etc.

One cannot manage all of these areas with a pen and a paper. We use computer software for managing all these areas (and more).

You can find computer software to any of these business areas, such as for managing your financials (accounts receivables, accounts payable, bank accounts, invoices, …); human resources (new hires, training, payroll, etc…); Production (Manufacturing planning, reporting…) and so on.

Why consider an ERP system?

In a single organization, or company, it would be difficult to integrate all of these different solutions into a coherent database that supports all processes. Consider that both the financial system, and the human resources system, both have their own employees list. But in a single company, you really need only one employees list to serve all aspects of the business: financials, human resources, production, payroll, etc.

In addition, you have business processes that span multiple areas. For example, consider the purchasing process, that may look like this:

  • The inventory system identifies levels below threshold of a certain item.
  • It creates a purchase order to buy more of that item.
  • The purchase order is them processed with one of your suppliers.
  • A financial commitment created.
  • The item is then shipped and arrives at the warehouse.
  • Update to the financial log is posted.
  • Update of inventory.
  • Update to production planning.

So many departments and areas are touching this process.

Now, imagine that all of this needs to be implemented over multiple, disparate, isolated software solutions. A lot of programming to maintain to make them exchange data, orchestrate the complete process and just keeping everything working when every piece has its own upgrades and changes. A lot of money just on integration and unproductive maintenance!

In addition, how do you really know how your business is doing? how much have you sold - is it the number that the financial system presents? maybe the production system? maybe the sales system? Each system has its own “version of the truth”.

What is an ERP system?

ERP software refers to a standard software you purchase (not develop), designed to support your organization’s processes and data across the board (crossing all core departments: manufacturing, financials, sales & marketing, logistics, human resources, etc.).

Using an ERP package, your employees are storing data as they do their standard work, such as: accepting a new employee, entering a new sales order, creating an invoice, sending out a shipment, etc.

A typical ERP software will support the workflow of your processes. For example, as the manufacturing department reported on consuming raw materials for production, the system may flag purchasing to buy more material so that it arrives in time for the next manufacturing batch. Creating a purchase order for that material creates a financial commitment at the financial department.

Managers typically make use of the accumulated data to track performance and trends over time, allowing them to take actions, make decisions and steer the organization based on its operations and performance. Exploiting the accumulated data for business insight takes us to another big topic: Business Intelligence (BI, or Analytics), which deserves a separate post.

The term ERP was coined in the 70’s, and stands for Enterprise Resources Planning, highlighting the encompassing nature of the concept, as opposed to department-specific software solutions.

In my next post I’ll summarize key considerations in selecting an ERP solution for your organization.

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