What is ERP?
Enterprise resource planning (ERP) is a software system that helps organizations streamline their core business processes—including finance, HR, manufacturing, supply chain, sales, and procurement—with a unified view of activity and provides a single source of truth.
Introduction to enterprise resource planning
An easy way to understand ERP is to picture a company as a human body. Like a body, it has core processes that are vital to its health and functionality—instead of sleeping and digestion, think supply chain and sales. While many of these processes take place independently, they’re still linked by how they impact the body—or the business—as a whole. This also means that issues with one process can and often do affect the rest.
An ERP software system acts as an enterprise's central nervous system, helping efficiently manage all these crucial processes and operations by connecting them together in an integrated system.
The history and evolution of ERP
ERP’s humble beginnings are over a century old, in the form of a paper-based manufacturing system for production scheduling. In the early 1960s, manufacturing companies began adopting computerized business applications. They were faster and more accurate than manual processes—but also expensive, limited in functionality, and still pretty slow.
These pioneering applications spawned the development of dedicated, standalone solutions such as sales order processing and material requirements planning (MRP), which new software was eventually able to integrate into a single system that boosted operational efficiency. By the 1990s, ERP had transformed the technology sector by serving a broader range of business activities across multiple industries.
Faster internet speeds and new software development tools have further revolutionized ERP suites. The introduction of browser-based software paved the way for cloud ERP, greatly expanding the adoption, scope, and functionality of ERP solutions.
Today’s ERP systems increasingly use intelligent technologies such as artificial intelligence (AI), machine learning, natural language processing (NLP), and in-memory databases. They help businesses run more efficient processes, leverage up-to-the-minute insights from transactional and unstructured data, and stay competitive in a fast-moving environment.
Why is enterprise resource planning important?
Most or all of an organization's data should reside in the ERP system to provide a single source of truth across the business. For example:
Finance requires ERP to quickly close the books
Sales needs ERP to manage all customer orders
Logistics relies on well-running ERP software to deliver the right products and services to customers
Procurement utilizes ERP to source goods and services and manage supplier relationships
Accounts payable uses ERP to pay suppliers correctly and on time
Management needs instant visibility into the company's performance to make timely decisions
Banks and shareholders require accurate financial records, so they count on reliable data and analysis made possible by an ERP system
ERP examples by industry
How organizations rely on their ERP software varies significantly depending on the industry. Nonetheless, businesses in every industry—from automotive to wholesale distribution—need accurate, real-time information and effective business processes to compete and thrive.
Here are just a few examples of industry-specific ERP use cases:
Manufacturers
Discrete, batch, and continuous process manufacturers rely on ERP to meet product quality goals, manage asset utilization, control overtime costs, and more. Manufacturers also gain end-to-end inventory control by monitoring stock movements, pinpointing top and underperforming products, and managing procurement more efficiently.
Retailers
Retail underwent a significant transformation when brick-and-mortar stores merged with e-commerce and other digital sales channels. Consistent, integrated data is crucial for providing self-service options for identifying, configuring, purchasing, and shipping products. ERP also helps retailers reduce cart abandonments, improve website conversions, and boost average order value.
Service-centric companies
Professional accounting, tax, engineering, and legal services require powerful, real-time mobile ERP technology to balance service delivery commitments with financial health. The ability to stay on schedule while managing project profitability, resource utilization, and growth opportunities is key for professional services.
Utilities
Utility companies need to constantly review their capital assets, not only to meet demand for future services but also for the replacement of aging assets. Without ERP, managing these asset investments is a challenging, error-prone process.
ERP also helps solve another critical utility company issue—forecasting spare parts. Not having the right parts during an outage creates a significant customer service issue. On the other hand, having too many spare parts means excessive costs and out-of-date stock.
Wholesalers
Wholesalers, importers, direct store delivery, and 3PL/4PL firms want to reduce distribution costs, increase inventory turns, and shorten order-to-cash time. To achieve these goals, they need integrated inventory management, logistics functionality, and customized automated processes.
How do ERP systems work?
An ERP system consists of integrated module solutions or business applications that share a common database that connects them and lets them talk to each other. Each ERP module typically focuses on one business area, but they work together using the same data to meet the company's needs.
Companies pick and choose the module solution they want–such as financing, logistics, procurement, and HR—and can add and scale as needed. ERP systems can also support industry-specific requirements, either as part of the system's core functionality or through application extensions that integrate with the suite of modules.
The ERP software system shown here illustrates enterprise resource planning use cases for sales. Typical ERP modules also address finance, manufacturing, procurement, and supply chain, among other applications.
While modern ERP systems provide an enormous range of business functionality, they must connect to and synchronize with other applications and data sources to be effective, including CRM and HCM software, e-commerce platforms, industry-specific solutions, and even other ERPs.
This integration gives companies a unified view of information from different systems, which helps increase business process efficiency, improve customer experiences, and facilitate collaboration across teams and business partners.
The flexibility of an ERP system allows it to integrate with a wide range of software products using connectors or customized adaptors, such as application programming interfaces (APIs). Other methods for ERP integration include enterprise service bus (ESB) and modern integration platform-as-a-service (iPaaS).
Types of ERP deployment
An ERP system has four common deployment types: on-premise, cloud-based, two-tier, and hybrid. Each type has its benefits and drawbacks, and businesses must identify which ERP deployment option best fits their needs.
On-premise ERP
On-premise is the traditional model for deploying ERP software, allowing for the greatest level of control. The software is typically installed on-location in a company’s data center. While total control is certainly a benefit, it also comes with the responsibilities of installation and ongoing maintenance.
Cloud ERP
With cloud ERP, the software resides on a remote, third-party server. It’s accessed via the internet as a subscription service (SaaS), with the software provider handling maintenance, updates, and security on the business’s behalf. Today, cloud ERP is the most popular ERP deployment method, offering lower upfront costs, greater scalability, faster innovation, and easier integration.
Two-tier ERP
Companies undergoing major operational changes—such as mergers, expansions, or acquisitions—will often opt for a two-tier model. For example, the tier 1 ERP may be an on-premise server at the parent organization’s headquarters, and the tier 2 ERP could be a cloud-based subsidiary system handling local or specialized functions. A two-tier strategy enables companies to start a controlled move to the cloud, migrating specific functions or business units without disrupting operations.
Hybrid ERP
A hybrid model is a type of two-tier ERP system that combines on-premise and cloud-based deployment to give businesses the flexibility to choose the best deployment for each application. Hybrid cloud ERP can be a stepping stone to a cloud-only two-tier model while still accounting for applications that may need to be on-premise to meet industry regulations or security requirements.
Six key benefits of ERP
As mentioned, the advantages of implementing an ERP system vary depending on the deployment model. That said, the following six benefits apply to all modern ERP solutions:
1. Higher productivity
Streamline and automate core business processes so people throughout the organization can do more with fewer resources
2. Deeper insights
Eliminate information silos, gain a single source of truth, and get fast answers to mission-critical business questions
3. Accelerated reporting
Fast-track business and financial reporting and easily share results to act on insights and improve performance in real time
4. Lower risk
Maximize business visibility and control, ensure compliance with regulatory requirements, and predict and prevent risk
5. Simpler IT
Use integrated ERP applications that share a database to simplify IT and give everyone an easier way to work
6. Improved agility
Identify and react to new opportunities with efficient operations and ready access to real-time data
How do I know if I'm ready for an ERP system?
Many organizations—especially smaller ones—often start out using simple, standalone tools to manage their business processes, such as QuickBooks or Excel spreadsheets. Adopting an ERP system might feel unnecessary, like an extra complication. However, as a business of any size matures and expands, these management tools may become inefficient and unsustainable, holding back scalability and hindering optimization.
Here are some common signs that a company has outgrown its management tools and is ready for a modern ERP system:
- Too much time spent on day-to-day tasks
If managing daily activities like closing the books is taking longer and longer, the culprit may be too many disparate applications. ERP software integrates solutions and data into one system with a common interface, making it easier for business units to communicate and do their jobs effectively. - Difficulty accessing critical business data
Can you easily answer important questions about your business, such as revenue per product line or number of returns? If not, segregated systems and a lack of access to metrics and KPIs may be holding you back. - Runaway business processes
Are there areas where your processes are getting away from you? Maybe it's harder for you to manage inventory, satisfy customers, or keep costs in check. If so, your business processes may need restructuring to accommodate growth or changing priorities—a natural fit for integrating new ERP software. - Lack of standardized processes and duplicate data sets
If different departments are all using their own applications and processes to get things done, you're probably spending too much time on duplicate data entry. When information can’t flow between systems, reporting takes longer, and errors are more likely, all of which hampers decision-making. - Too many missed opportunities
If business units spend all their time just keeping the business running, then there’s no bandwidth to pursue potential opportunities or innovations. Many ERP systems include intelligent capabilities, like machine learning and predictive analytics, making it easier to identify and capitalize on profitable new ventures.
10 things to look for in an ERP system
The capabilities of a modern ERP system often vary based on the industry they serve and the modules they offer. However, no matter how specialized an ERP might be, there are 10 core features that all enterprise resource management systems should have:
- A common database: Centralized information and a single source of truth for consistent shared data and a cross-functional view of the company
- Embedded analytics: Built-in analytics, self-service BI, reporting, and compliance tools that deliver intelligent insights across the business
- Data visualization: Visual presentation of key information with dashboards, KPIs, and point-and-click analytics to assist in quick and informed decision-making
- Automation: The capability to automate repetitive tasks with advanced robotic process automation (RPA) powered by AI and machine learning
- Consistent UI/UX: A standardized look and feel across modules, with easy-to-use configuration and personalization tools for processes and users—including customers and suppliers
- Integration: Smooth integration of business processes and workflows as well as open integration with other third-party software solutions and data sources
- New technologies: Support for generative AI and machine learning, digital assistants, Internet of Things (IoT), security and privacy, and mobile technology
- Technology platform: A fast, stable technology stack for this long-term investment—including a low-code/no-code platform, iPaaS, data management, and more
- Multinational support: Global support for languages, currencies, and local business practices and regulations—along with technical support for cloud services, training, and implementation
- Choice of deployment: Offering cloud-based, on-premise, two-tier, or hybrid deployment options
ERP software isn’t one-size-fits-all
Small business ERP
ERP software can help a small business move beyond spreadsheets and efficiently manage every aspect of its growth—from sales and customer relationships to financials and operations. Small business ERP tools are typically in the cloud, quick to install, and designed to scale with the business.
Midmarket ERP
ERP software designed for midmarket companies and subsidiaries benefits from built-in analytics, rapid deployment, and best practices for dozens of business processes. Midsize ERP tools help growing businesses scale and compete, even with limited resources. Modular, cloud-based enterprise ERP systems are also good for midmarket companies with complex processes or plans for rapid growth.
Enterprise ERP
Large companies with global or subsidiary operations need a robust, market-leading ERP system with embedded AI, machine learning, analytics, and intelligent automation to transform business models and processes. Businesses can use ERP systems on-premise, in the cloud, or in a two-tier or hybrid scenario, depending on their need.
ERP trends to watch
Digital transformation is—quite literally—speeding up. As enterprises adopt digital technologies in every part of the business, they’re largely focused on eliminating “drags,” otherwise known as anything that slows the business down, including outdated processes and systems. So, it’s unsurprising that companies demand more robust ERP systems to help banish drags and increase agility.
As ERP innovation builds momentum, here are four major trends to keep an eye on:
Generative AI
Embedding ERP software with generative AI capabilities helps businesses automate manual tasks while simultaneously adapting, adjusting, and optimizing their core processes to meet company-specific needs.
Along with automating tasks and delivering insights, generative AI empowers non-IT users by making it easy to interact with their ERP system using natural language commands and queries. Any user can ask a question and get an immediate answer that leverages all available documentation and data.
Vertical integration
Companies are ready to end the tug-of-war between best-in-class solutions and integrated ERP. New offerings promise the best of both worlds—a fully integrated ERP system with vertical extensions that allow businesses to get the specific functionality they need without painful integration issues or data silos.
Cloud, cloud, cloud
Preference for cloud ERP will continue to intensify as more companies discover the benefits—including "anywhere" access, reduced hardware and technical support costs, greater security, and integration with other systems. As the speed of business continues to accelerate, adopting a cloud mindset becomes even more essential.
User personalization
Staff, customers, and suppliers all want content and functionality that matches their specific needs or interests and makes them more productive. Changing workforce demographics, particularly in industries like manufacturing, are also driving interest in low- and no-code platforms.
These platforms provide users with an easily customizable experience rather than forcing them to adapt to the software. Users can also expect customized dashboards, AI-driven search, personalized chat, and personalized workflows across devices.
Discover the possibilities of a modern ERP
With a cloud-based ERP solution, your business can manage much more than process. Explore the latest in ERP news, trends, and best practices.