What Is Enterprise Resource Planning?

Enterprise Resource Planning (ERP) refers to the process of integrating essential company-running data and workflows into a single platform. Hundreds of thousands of companies use ERP systems — over 50% of them in the U.S. — to unify business processes, a number that has grown since Gartner coined the term in the 1990s. 

By bringing disparate business processes together (e.g. human resource management, supply chain, finance, and procurement) ERP systems enable easier flow of information between departments, more effective decision-making, and greater visibility into business-critical processes.

Enterprise Resource Planning software is essential to any scaling company trying to streamline operations and improve efficiency. ERP systems combine data from software across the business and distribute accurate, up-to-date information to authorized stakeholders. This makes it easier for teams to collaborate and trust their data.

At its core, Enterprise Resource Planning is a single source of truth for high-level company operations. Not only does it unify disjointed data sources across the business, ERP systems also reduce the number of software platforms a business needs. This increases efficiency, reduces operational expenses, and offers the strategic advantage that comes from unified systems. ERP is key for companies who want to increase impact and efficiency while decreasing spend.

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How Does an ERP System Work?

ERP systems facilitate connectivity between business tools, processes, and data. They are composed of several modules that serve specific functions — e.g. financial management, project management, manufacturing, supply chain management, customer relationship management, etc. ERP systems also integrate with other software and synchronize multiple data sources to provide a comprehensive view of the entire business. 

This makes it easier to integrate key business functions. ERP systems eliminate silos by bringing together relevant stakeholders of a process (e.g. order fulfillment) and shifting from discrete tasks (e.g. sales gets the order, inventory updates the stock, finance tracks payment, etc.) to one interconnected workflow. By enabling task and workflow automation, ERP platforms reduce the need for manual interference, which clears up bottlenecks, streamlines internal processes, and frees up time for more strategic work. 

Integrating business processes with an ERP system also allows teams to access real-time data. As a centralized source of truth, ERP systems synchronize data from multiple sources and provide the most accurate, up-to-date data available across the company. This improves data integrity, empowers data-driven decision making, and improves financial forecasting. The best systems come with robust user permissions so only authorized users can access sensitive company data.

ERP systems can be deployed using three main deployment types: on-premise (on in-house servers), in the cloud (on remote servers), and hybrid. While on-premise ERP gives you more control over your system, it has a higher up-front cost and requires more extensive IT support. Cloud ERP, on the other hand, is managed by a third-party provider, it’s less expensive to maintain and easier to integrate with your existing tech. Hybrid is a combination of on-premise and cloud-based ERP.

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What Do You Need to Implement an ERP System?

There are six types of ERP systems: on-premise ERP, cloud ERP, tiered ERP, industry-specific ERP, open-source ERP, and small business ERP. The type of system your company needs depends on different factors, like industry, business model, and size.

On-Premise ERP

On-premise (or on-prem) ERP systems are run on a company’s in-house servers. These systems require a bigger investment to get started — including servers, software licenses, and technical support for setup and maintenance. Still, they’re also more customizable and offer companies more control over their system. 

Cloud ERP

Unlike on-prem ERP, cloud ERP systems are hosted on remote servers and can be accessed from any authorized user’s device. They’re not as cost-intensive to start up and don’t require specialized IT knowledge to maintain. This is because cloud ERPs are managed by a third-party provider who takes care of security and software upgrades.

Tiered ERP

A tiered ERP system has multiple levels of functionality for companies with varying needs. With this type of ERP system, you can start with the modules you need then add over time, customizing your platform as you scale. This allows businesses to invest in a system that matches their size, budget, and goals. 

Industry-Specific ERP

Industry-specific ERP systems are usually outfitted to meet the needs of the vertical it serves, providing features and functionalities that best serve that particular industry. For example, an ERP system for service providers may have less use for supply chain management modules than ecommerce distribution companies. Industry-specific ERPs cater to the complexities of a specific industry and are structured to encourage best practices. 

Open-Source ERP

An open-source ERP is built on open-source code. This typically serves companies that want to build (vs buy) an ERP system and allows for extensive customization to fit the company’s specifications. As a result, open-source ERPs often require more specialized IT expertise to set up and maintain.

Small Business ERP

Because small businesses don’t need all the bells and whistles a bigger business would, small business ERP systems provide functionality specific to the needs of a small or mid-sized business. They also facilitate processes that are normally associated with bigger companies, like regulatory compliance and data analysis. 

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When Should I Consider an ERP System?

ERP systems offer several operational benefits and remove bottlenecks from common processes. If you’re considering whether or not it’s time for an ERP system, here are some questions to think about: 

1. Are my current systems and processes able to scale with my business growth?
2. Do I face challenges with accessing real-time, accurate data across departments?
3. Are there inefficiencies or bottlenecks in my day-to-day operations that impact productivity?
4. Is managing compliance and regulatory requirements becoming more time-consuming or complex?
5. Is my team struggling with data silos or disjointed systems that hinder collaboration?

First, think about your company’s day-to-day operations. How easy is it to execute a workflow when more stakeholders are added? Do your systems talk to each other, or are you patching them together with manual data entry? As your processes become more complex, an ERP system can help you streamline the moving parts, share data, and facilitate communication between all stakeholders. ERPs are dynamic enough to scale with your business and improve operational efficiency.

Next, think about how easy it is to find data — whether metrics, reports, or other documentation. Do you have to ask someone for an update? How long does it take to find what you need? An ERP system makes data immediately accessible by centralizing company data and synchronizing it across integrated systems. It also tracks business activity, provides an audit trail, and adjusts workflows to meet compliance regulations.

Additionally, it might be time to consider an ERP system if it’s becoming harder to make accurate forecasts. ERP systems track business performance across all integrated data sources and provide real-time data analysis, enabling finance and other stakeholders to plan with sound data.

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The Business Value of Adopting ERP

ERP systems enable more efficient business operations, leading to reduced costs and a higher return on investment. ERP systems provide:

Improved Efficiency and Productivity

An ERP system helps teams move faster without sacrificing quality. ERP systems synchronize company data, automate data entry, and streamline cross-functional workflows, allowing teams to access data and make decisions more quickly. 

Centralized Data for Better Decision Making

ERP systems are a single source of truth for company data. By providing access to real-time data, ERP systems empower teams to make smarter decisions using accurate data. 

Cost Savings and ROI

A centralized ERP system reduces the need for multiple, uncoordinated tools, lessens the likelihood of duplicate data entry, and decreases the risk of human error. By increasing efficiency, ERP software helps lower both operational costs and capital expenditures and increases profits.

Scalability for Growth

As your team grows, your tools need to grow with you. ERP systems can be as small as you need in the beginning while leaving room for more complex workflows, additional data sources, and a bigger workforce as you scale.

Enhanced Collaboration and Communication

ERP systems allow people from across companies to collaborate and communicate efficiently. It centralizes the workflow and increases visibility, allowing collaborators to gain real-time insight into a project’s status, a relevant document, or key performance metrics.

Regulatory Compliance and Risk Management 

ERP systems help mitigate risk and enhance compliance by maintaining a paper trail for every process and approval workflow. When combined with automation, it’s even easier to track transactions and ensure that processes are compliant with industry standards and regulations.

Improved Customer Service and Satisfaction

An ERP system helps you serve customers more quickly and efficiently. Through the centralized platform, you can access real time data that lets you respond to customer requests and provide timely information about their order. 

Better Financial Management

ERP systems track all transactions, manage cash flow and runway, and quickly generate reports on the company’s financial health. They also help finance teams budget and forecast more accurately.

Enhanced Reporting and Analytics

An ERP system helps businesses track and analyze data. Users can also generate reports based on key performance indicators and present information in visually digestible formats, aiding speedier decision-making.

Improved Supply Chain and Inventory Management

Rather than using disconnected systems to track the different stages of production, an ERP system allows you to manage suppliers, forecast demand, and plan logistics using real-time data in a single location.

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Business Applications of ERP

ERP systems are robust yet flexible, which makes it useful to several industries and job functions. Here are some business applications of ERP systems.

General Ledger and Financial Accounting

An ERP system handles a company’s financial data, including accounts payable and receivable, revenue recognition, financial reporting, and other key tasks in a single location. It empowers finance to track every transaction and spend more time forecasting and budgeting than manually chasing receipts and payments. 

Payroll and Employee Benefits Management

ERP systems maintain employee records, including salary, requested time off, performance reviews and taxes. They also provide high-level visibility into workforce trends across departments and the entire business so leadership can make informed hiring decisions.

Procurement and Supplier Management

You can manage supplier interactions — including payment, volume, purchase orders, related contracts, etc. — using an ERP system. It also automates purchases, analyzes requests for quotes, and tracks related invoices.

Order Processing and Billing

With an ERP system, you can oversee the entire process of receiving and fulfilling customer orders. The system maintains up-to-date data, which allows you to track the order from your warehouse to your customer’s door in a centralized location.

Production Planning and Scheduling

ERP systems are full of historical product and operational data that can help you plan and schedule production cycles more accurately. You can also use this data to allocate resources, monitor stock levels, and track customer demand with greater efficiency.

Quality Control and Assurance

ERP systems allow you to standardize your processes and outline quality assurance testing requirements to ensure consistency. It also provides data-based insights into where there might be hiccups in quality control so you can remedy the situation quickly.

Customer Support and Service Management

Businesses can boost their customer service by using an ERP to track all relevant customer information. This way, if a customer has an inquiry about their product or service, you can easily refer to order numbers, tickets, or previous correspondence and provide accurate data, increasing customer satisfaction.

Human Capital Management (HCM)

Because of their difference in scope, ERP systems integrate well with HCM software. While HCM manages the employee lifecycle — tracking payroll, recruitment, onboarding, etc. — ERP situates that data within the wider context of the entire organization and monitors workforce trends.

Demand Forecasting and Inventory Optimization

With centralized inventory and comprehensive analytics, teams can use ERPs to forecast demand more accurately and optimize inventory based on data. ERPs track inventory-related metrics like stock levels, turnover rate, and order cycle time, allowing you to better predict demand.

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The Future of ERP

What started as a financial management tool in the 1960s is today an efficient, scalable, and intelligent solution that helps businesses streamline operations and make smarter decisions. In the future, ERP systems will continue to set the standard and benefit from ongoing technological advancements. 

With SaaS deployments becoming more prevalent, cloud-based ERP systems will continue to dominate the market, replacing traditional on-premise solutions. Cloud ERPs will be more popular because they offer businesses greater flexibility and remote access, allowing for easier updates and scalability. Stronger cybersecurity measures and enhanced customization will help data remain secure and businesses stay agile and competitive.

The adoption of emerging technologies like the Internet of Things (IoT) and blockchain will further enhance ERP systems. These technologies will collect more accurate data, improve security, and streamline processes, providing businesses with more robust solutions. Additionally, as more systems integrate with AI and machine learning, ERPs will also enable businesses to make data-driven decisions faster, using real-time analytics, predictive insights, and automation to optimize operations in real time. 

Finally, as business environments become increasingly mobile, ERP systems will evolve to offer enhanced mobile access. Employees will be able to work and access critical information from anywhere, allowing for more flexibility and better collaboration.