What are Enterprise Resource Planning (ERP) Systems?
Enterprise resource planning (ERP) evolved from materials requirements planning (MRP) software, which was created in the 1960s for large companies who needed to manage complex manufacturing operations. MRP was used mainly to identify, allocate, and track resources such as raw materials, parts, ingredients, and labor. As technology became more accessible, vendors added features for back office (accounting and HR) and front office (sales and CRM). While initially, only enterprises could afford to invest in ERP, it is now more affordable and widely used by small and medium-sized businesses.
ERP evolved through organic development or mergers and acquisitions. The result was often a mix of multiple products that were more or less integrated and sold as a package or separately.
- Organic development strategies were adopted by vendors who focused exclusively on creating and improving their offering. Some vendors focused on one product only, while others created multiple solutions and sometimes different editions of the same product for different purposes. For instance, an ERP solution can be delivered as a light version for small businesses and as an enterprise edition for large companies.
- Acquisitions are the most common strategy vendors use to expand into new markets and deliver new features. The primary challenge with acquiring software is that it is difficult to integrate all products into a single offering. While some vendors combined multiple products into one, most ERP solutions acquired are still sold as standalone systems.
- Mergers are rare in the ERP market, and they usually happen when two vendors join forces to complement each other’s offering. This can lead to a sophisticated package of multiple systems with overlapping functionality.
- Partnerships allow vendors to offer additional functionality without investing in developing it. When vendors partner, they provide standard integration between their products, which makes it easier for companies to use them together.
What Does ERP Stand For?
ERP stands for enterprise resource planning, meaning ERP systems are used to define, schedule, and track all the company’s resources, from employees to materials and intellectual property.
What Types of Enterprise Resource Planning (ERP) Systems Exist?
ERP systems can be categorized using multiple criteria, such as platform or delivery model. Other criteria can be used to differentiate between ERP products, such as:
Best of breed vs. suites
ERP systems differ based on the way the modules of the system are implemented and used. Best of breed ERP provides all modules together, and buyers have little flexibility when it comes to choosing what features to use. A suite is a mix of modules and sometimes separates products that can be delivered in multiple combinations.
Open source vs. proprietary
ERP systems differ based on the source code of the system and its availability for customers and partners. Open-source ERP providers allow users to change the source code and make modifications. Vendors of proprietary ERP only allow certified partners to access and modify the source code of their system.
Depending on who develops and manages the system, some ERP vendors have full control of the product and only allow partners to create apps or extensions, while other ERP providers rely on resellers to add entire modules and change the source code.
Generic or vertical
Based on the types of features included, ERP can be generic or vertical. Generic ERP can be used by any company that doesn’t have industry-specific requirements, usually for back office and front office activities only.
Vertical or industry-specificERP systems are described in more detail below:
Some ERP systems provide functionality for a limited number of industries. ERP vendors choose to specialize because a generic ERP solution will not be beneficial for companies who need features to address their specific challenges. It is also complicated to create ERP products or adapt them to new industries.
The level of specialization can vary from one product to another. While some products focus on industry sectors like manufacturing or distribution, others provide functionality for one industry only, such as fashion and apparel.
ERP for manufacturing: ERP systems for manufacturing industries differ from one another based on the production types of the finished products and the way they are manufactured. Such ERP systems are described below:
- Discrete ERP software: Discrete manufacturers combine parts and components to create finished goods. Some examples of products delivered by discrete manufacturers are furniture, computers, and electronics, or clothing and apparel. To manage production, discrete manufacturers need to define what types of components are required for each finished product and in what quantities. This is known as a bill of materials (BOM) and is a critical feature of any ERP for discrete manufacturing. In some cases, multi level BOMs are required to manage the production of the finished product and some of its components. For instance, a computer manufacturer may need a BOM for each type of computer and another one to assemble hard drives. Since not all hard drives are compatible with all computers, the manufacturer needs to create a multilevel BOM (also known as a nested BOM) for each type of product.
- Process ERP software: Process manufacturing combines raw materials and ingredients to create batches of indistinguishable product units, such as food, drinks, paint, or detergent. These types of finished products can be sold in bulk or packaged for individual use. Instead of BOMs, process manufacturers use recipes and formulae, which define how ingredients need to be mixed to obtain a finished product. Recipes identify what ingredients are required and in which quantities, while formulae determine the chemical reactions that occur during production.
Compared to discrete manufacturing where the quality is managed for each product, in process manufacturing, a formula error can compromise an entire batch in process manufacturing. It is possible to adjust the quality of a batch by adding ingredients or additives for food processing. In some cases, like hazardous substances, it is more difficult to adjust the quality, and a recipe error may result in accidents or pollution.
Another challenge specific to process manufacturing is that ingredients and finished products have a limited shelf life and need to be used or consumed before their expiration date. This means that ingredients cannot be ordered and stored for unlimited periods of time, and the finished goods need to be delivered to retailers and consumers as soon as possible. Furthermore, products like food and beverage or hazardous materials require special storage and transportation conditions to maintain their quality and avoid accidents.
- ETO ERP software: Engineering-to-order (ETO) manufacturers customize their products to create a personalized offering for a limited number of customers or sometimes even for individual customers. This doesn’t mean that ETO manufacturers develop new products for each customer. Standard products (like heavy equipment and fixed assets) can be sold without modifications but may need to be customized based on the demand of the customer.
Due to the importance of customization, functionality like quote and proposal management or quote to order is critical for ETO manufacturing. Contract management is also essential to clearly define the expectations of the customer, service level agreements, and warranties.
Another essential module of ERP ETO is project management. Each product delivered is usually so complex that companies need to track tasks, milestones, and resources for each contract or customer. Project management helps ETO manufacturers offer custom products on time and monitor the resources used in production to calculate their final cost.
- Mixed-mode manufacturing: This combines two of the manufacturing types described above. The most common example is the mix between discrete and process manufacturing.
Distribution ERP software: Distributors are companies that buy products from manufacturers and resell them to other companies or directly to consumers. The core of the distribution business is the purchasing of products, their storage, and their delivery from the supplier to the customers. While most ERP systems offer features for purchasing, inventory, and shipping, that doesn’t necessarily make them an excellent choice for distribution companies.
The following are a few types of functionality that differentiate ERP for distribution from other kinds of ERP:
- Basic warehouse management features are provided by most ERP solutions, but distribution companies need advanced functionality to manage large warehouses and distribution centers, as well as third-party storage facilities.
- Route planning software helps distribution companies schedule deliveries so that products are delivered on time, at optimal cost.
- Yard and dock management helps distributors optimize shipping and receiving by planning loading and unloading activities. Since warehouses have a limited number of docks, inbound and outbound shipments are assigned a specific time and dock to avoid delays and penalties from transportation companies.
- Freight management allows companies to choose the best carrier or transportation company, depending on price, type of shipment, and supplier performance. By using reliable shippers at reasonable prices, distributors can reduce operational costs and increase customer satisfaction by ensuring that goods are delivered on time.
ERP for distribution should not be confused with supply chain and logistics software (SCM), which covers all activities performed by various partners from a supply chain network, including manufacturers, suppliers, logistics companies, and customs brokers.
Professional services automation software: Also known as ERP for professional services or PSA, this type of software is designed to address the specific needs of companies in industries such as consulting, design and architecture, IT services, legal and financial services, or training and development. All these companies have in common the fact that they rely extensively on specific knowledge and a professionalized workforce.
The core functionality for PSA software is project management. Project management software comes in different flavors, and buyers need to find the right tool for their company. The most basic project management products focus on task management and can only be beneficial for small companies or teams. These products usually provide no or little functionality for front and back office, which means that buyers will need to integrate them with accounting or sales software.
Project and portfolio management is an advanced type of project management software, which helps companies manage portfolios of projects. Medium and large professional services companies use this type of software because they have complex offerings and need to manage hundreds or thousands of projects simultaneously.
ERP for PSA combines traditional project management with various features for front office and back office, such as sales, marketing, billing, or accounting. Some PSA solutions also include project portfolio management. It is therefore vital for buyers to identify what features are included in an ERP for PSA system.
Through acquisitions or organic development, some vendors provide solutions that cover multiple industry sectors, such as manufacturing and distribution. Manufacturers can significantly benefit from this type of software when they prefer to have their own fleet and deliver products themselves. There are also distributors that may decide to mix products and sell them as packages, which is usually known as an assembly. Assembly activities are considered light manufacturing and do not require advanced features, but some ERP features used in production are needed, such as bill of materials, kitting, product configuration, or basic MRP.
Since manufacturing is one of the slowest-growing industry sectors, manufacturers are looking to increase revenues by delivering services related to the products they make and sell. These companies need an ERP system that can manage their manufacturing operations, as well as related services. For instance, a manufacturer of industrial lighting equipment may decide to provide installation and maintenance services to its customers.
Other vertical ERP systems
Vertical ERP systems focus on industry sectors other than manufacturing, distribution, or professional services. The term ERP is used in these industries to describe a system that combines front and back office features for the industry. ERP can be used interchangeably with terms that are specific to each sector, such as student information systems for education.
Construction ERP software: Construction software is used to manage projects for residential or industrial buildings, as well as infrastructure. Typical construction software doesn’t always include back office functions like accounting, which is why some vendors created ERP solutions for this industry. ERP for construction delivers all the modules needed to manage operations, project management, front office, and back office.
Education ERP software: Education software manages student admissions and enrollment, courses and examinations, or educational facilities for K–12 or higher education institutions. This type of software usually integrates with accounting solutions to track student payments and invoices and to manage the finances of the educational institution. ERP for education provides all features in one system or integrated package.
Energy: Energy industries, like mining or oil and gas, are asset-intensive, which means that they need asset management functionality. Due to the nature of their operations, energy companies also need environmental health and safety features to protect their employees and avoid pollution. ERP for energy usually combines all these features with typical back office (accounting) and front office (sales) modules.
Government: Government or public sector software focuses on managing the services provided to citizens and on maintaining public infrastructure such as roads, buildings, airports, and so on. Since most solutions designed for government agencies only cover some of the requirements mentioned above, ERP vendors created specific products for this industry.
Health care operations: Health care software can cover multiple requirements specific to this industry, such as medical scheduling and billing, practice management, and electronic health records (EHR). There are also products that cover the needs of specialized practitioners such as optometrists, physical therapists, or chiropractors. All these products are usually sold separately and require integration with accounting or sales software, which is why ERP vendors adapted their products to provide integrated systems for health care.
Retail management systems: Retail management systems are similar to ERP for distribution but offer additional features such as store management, merchandising, and assortment management. ERP for retail combines all these features with accounting to provide the full range of functionality required to manage a retail business.
Utilities software: Utilities is another asset-intensive industry, but it also requires specific billing features. Utility billing is based on consumption, which can vary from month to month, and invoices are usually generated based on meter readings. Also, utility companies generally have thousands or tens of thousands of customers who are billed individually every month. ERP for utilities provides complex billing features, as well as accounting, asset management, and inventory, as well as purchasing and sales.
What are the Common Features of Enterprise Resource Planning (ERP) Systems?
The following are core features of ERP systems that can help users manage relationships with customers, plan and schedule operations, and monitor costs and profitability.
Accounting: ERP systems provide functionality for all accounting functions, from creating a general ledger (GL) and chart of accounts to creating invoices, processing payments, generating financial statements, and conducting financial close. Some ERP systems also include advanced features such as multicurrency and multi-entity management for global companies, project accounting for project-oriented firms, and fixed assets depreciation for asset-intensive industries such as manufacturing, construction, or utilities.
Front office: While all ERP systems have some sales and marketing features, the level of support for front office functionality varies significantly from one product to another. Some vendors develop modules for these features, while others prefer to integrate their ERP systems with CRM and marketing automation software.
Back office: Other than accounting, ERP systems include a wide range of back office features, from payroll and human resources (HR) to maintenance and regulatory compliance. These modules are delivered in multiple ways, such as standard functionality, add-ons, or through integration. For instance, ERP systems for medium and large manufacturers include a module for workforce management and integrate with talent management solutions. Similarly, maintenance features aren’t usually robust, and buyers need to integrate ERP with computerized maintenance management systems (CMMS) or enterprise asset management (EAM) software.
Logistics: These features help companies manage their inventory of raw materials, components, and finished goods. Manufacturers need to buy, store, and optimize the use of raw materials such as fabric for fashion or parts for equipment manufacturing. This can be achieved by identifying demand and finding the best price to quality ratio components. Companies also need to track shipping to customers, from suppliers, and between multiple warehouses or production facilities.
Production: Production management functionality is the core of any ERP system for manufacturing companies. This module covers BOM, material resource planning (MRP), master production schedules (MPS), work in process (WIP), and quality control. Production managers use these features to monitor all stages of the manufacturing cycle, identify defective products, and track the shop floor equipment and personnel’s status.
Reporting and analytics: ERP analytics should provide statistics and insights on all activities managed using the system. When companies use separate systems for CRM or HR, they need to be integrated with ERP to transfer data between them. For instance, to estimate the demand for a product, procurement managers need multiple data types from different systems, such as sales history from CRM, open proposals from quote management, and shipping and returns from ERP.
Integration: Even though all departments of a company can use ERP, this doesn’t happen very often because there are better options for functionality like sales and marketing, and buyers prefer a robust standalone CRM system to a light CRM module part of an ERP system. Integration between ERP and other software is, therefore, essential to ensure data consistency and avoid double data entry.
Platform: The success of an ERP system depends on the technology used to create, store, and manage it. A service-oriented architecture offers more flexibility and allows buyers to customize the software. Similarly, the database that stores all business information should keep data secure, allow users to back up the data, and facilitate integration with other data sources. Even cloud ERP uses databases, except that the vendor manages them on behalf of the customer.
Most common features of ERP systems
What are the Benefits of Enterprise Resource Planning (ERP) Systems?
ERP systems can help businesses streamline business functions across the company. Managers and executives use it to monitor essential projects in real time and use historical data to define and optimize business strategies.
Single source of truth: ERP systems store all the company’s information in one place, which avoids duplication and inconsistency in data quality. A single data repository also ensures that users’ changes are reflected in the database, and everyone in the company has access to the most up-to-date information.
Visibility: Since all ERP users share the same system, they can access any data point that may help them be more productive. Also, customer-facing employees can find details about orders, transactions, or inventory availability. Finally, accountants can track all data on costs and profitability across all departments, business units, and geographical locations.
Automate operations and increase productivity: ERP systems can replace multiple types of software, add-ons, spreadsheets, or office tools used by various departments of a company. This allows users to spend less time switching between systems and focus more on operations. ERP also enables companies to define and implement company-wide business processes, which increases productivity and helps address accountability issues.
Who Uses Enterprise Resource Planning (ERP) Systems?
Since ERP provides features for most departments of a company, it is used by most, if not all, employees. The following list includes a few departments where ERP is necessary.
Accounting and finance: Accounting and finance departments need ERP for multiple purposes, the most important being the financial management of all the business transactions. Everything a company buys and sells, as well as all direct (wages, commissions) or indirect (insurance, utilities) costs, need to be tracked using generally accepted accounting principles (GAAP). Finance professionals use ERP to create financial statements and provide financial information for internal and external audits.
Operations: Operations teams use ERP to perform activities that are specific to the specialization of a company. For instance, production operations are specific to manufacturing companies, project management and delivery to professional services providers, and warehouse and inventory management to distributors. Some types of activities, such as inventory management, are essential for multiple types of companies. Others, like project and portfolio management, are specific to industry sectors such as professional services.
Sales: ERP is vital for sales teams because it contains a lot of valuable data on historical sales and information on products and services. Most ERP products also manage information on customer credit limits and can be used for debt collection.
Product: Product development teams may not always use ERP directly, but they rely on the information provided by the system. Sales data can show which products are most successful, while details on returns and defects help the company improve its offering. Engineers and designers can also use ERP and its integration with product lifecycle management (PLM) or computer-aided design (CAD) solutions to communicate product changes with the manufacturing department.
Purchasing and procurement: Purchasing and procurement is in charge of finding and buying any products and services that are needed by a company, such as raw materials and parts for manufacturers, consultants for professional services companies, or logistics providers for distributors. The most crucial challenge in procurement is to clearly understand what products or services a company needs and when. ERP systems provide information on sales orders that need to be fulfilled, which can be compared with the available inventory to determine what needs to be purchased. ERP systems also manage cost data for raw materials or components, which helps procurement professionals better negotiate.
Quality management: Quality management is essential in manufacturing but can also be important in distribution, and even professional services. For highly regulated industries such as food and beverage, the quality standards are high and penalties for non compliance hefty. While quality management can be provided as a standalone product, most ERP for manufacturing systems include features to track quality.
What are the Alternatives to Enterprise Resource Planning (ERP) Systems?
There are no other types of software that provide the same functional depth as ERP, therefore ERP cannot be completely replaced by other solutions. Buyers sometimes choose a mix of two or more solutions as an alternative to ERP. One of the solutions is usually accounting software, and the others vary depending on the company and its operations.
Software Related to Enterprise Resource Planning (ERP) Systems
ERP software overlaps with the solutions mentioned below but rarely delivers all the features of these products. For this reason, companies may opt to buy and use them separately.
PLM software: Companies use PLM to design complex products and structures (such as a conveyor system for a warehouse). Most ERP systems for manufacturing integrate with PLM to transfer product data between the two systems. Very few vendors sell ERP and PLM solutions, but most of them offer preconfigured integration with the most popular PLM products.
Enterprise asset management (EAM) software: Asset-intensive companies use EAM to track fixed assets, monitor their performance, and plan maintenance operations. While some ERP systems include functionality for maintenance or asset depreciation, large companies using complex equipment across multiple locations still require EAM for its advanced features such as predictive maintenance.
Supply chain management software: This type of software manages logistics operations across the entire supply chain. Distributors and wholesalers often use supply chain suites together with their ERP system to ensure that they have full visibility and control over their supply chain.
HR software: HR and talent management software provides functionality that is not usually part of an ERP system, such as recruiting, performance management, and employee engagement. Even when ERP has a module for payroll or workforce management, their features may not be sufficient for global companies or large organizations. These types of businesses may need a separate system to manage human resources.
CRM software: CRM is frequently used to complement the sales and marketing features of an ERP system. A few features that are not always included in ERP software are marketing campaign automation and lead generation. Companies using both systems need to be careful not to create duplicate data and processes, creating confusion, and generating inaccurate information.
Business intelligence software: While all ERP products have analytics modules, advanced features such as forecasting or predictive analytics aren’t always included. Companies that need these features use a separate business intelligence (BI) software that gathers and analyzes data from the ERP system and other data sources (software and databases).
Challenges with Enterprise Resource Planning (ERP) Systems
Traditional ERP was installed on the premise of the buyer, which required investments in hardware and IT personnel. Also, ERP software had cluttered interfaces and could not be used remotely or on mobile devices. New technologies like the cloud delivery model and web-based interfaces made ERP systems more flexible and easier to use, but a few challenges persist.
Integration: The integration and consolidation of data between multiple systems or modules of an ERP suite are essential to avoid double entries and to ensure data accuracy. Ideally, all data should be transferred and synchronized between all ERP modules or products used by a company.
Cost: Due to their complexity, ERP systems require significant investments. The cost of the ERP platform can vary depending on how the solution is sold. An ERP product that provides standard ERP features (accounting, operations, and essential functions for front office) is more affordable but can get expensive in the long term, as companies grow and need advanced features. Conversely, a package that includes standard and advanced features will require a higher initial investment but may cost less over the long term.
Platforms: The platforms used to create ERP products, such as programming languages and databases, can have a significant impact on the performance and ease of use of the system. This can be a challenge when vendors acquire products that were built on various platforms or different versions of the same platform. While most vendors built their products to be compatible with the most popular databases, such as Microsoft SQL Server and Oracle RDBMS, some solutions were developed using other options, such as Progress and MySQL.
Delivery model: The delivery model refers to the physical location where the data is stored. Companies have been using their servers for a long time, but many companies are adopting the cloud model, which means that vendors are responsible for storing and managing the data. The cloud model is also known as software as a service (SaaS) and can be more complicated than it seems at first sight. SaaS can be single or multitenant, depending on how many companies share a database. Also, companies can use private, public, or hybrid clouds.