What is ERP and How Does It Work? Meaning, History, Features and More

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There’s a large number of available software solutions on the market for a wide range of processes. Whatever your business is, there’s likely already a software solution out there that meets the specific demands of your industry. One solution that companies of all sizes tend to purchase is ERP software. ERP stands for enterprise resource planning. But what exactly does this term mean, and how doos an ERP system work? We’re glad you asked. Read on to learn what is ERP and how it works, basic features of the software, installation and implementation, featuring insights from industry thought leaders.

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Definition of ERP

What is ERP?

Meaning and Definition

Think of enterprise resource planning as a tool that maintains a database of information related to business processes anywhere from human resources to customer relationship management. It’s a lot cooler than just a database though – most ERPs allow for the automation and integration of business processes, therefore reducing the amount of manual labor that your team has to perform. In summation, ERP software is a suite of integrated applications for managing, automating and connecting key business processes.

Lisa Anderson, Founder and President of LMA Consulting Group, emphasizes our last point:

In addition to your comments about using a centralized database to reduce manual labor and simplify workflows, I think it is important to note that having a centralized database and process enables consistency of business processes, and more importantly, reliable levels of service to customers.”

History of ERP: A Brief Summary

The concept of enterprise resource planning has existed long before the inception of ERP software. At its origin, ERP is a methodology used to manage and integrate key business processes.

  • 1960s: The enterprise resource planning methodology evolved into ERP software, which began to pop up in the 1960s in response to the growing factory industry.
  • 1972: SAP released its first solution for real-time data processing, effectively pioneering ERP software. Throughout the next two decades, technology advanced and ERP software became more and more popular.
  • 1990s: ERP software adoption increased steadily into the twenty-first century. The rise of the internet required software vendors to adapt – and along came cloud ERP software.
  • 2020: Today, cloud computing dominates the delivery model of ERP software. Mobile apps allow users to leverage system capabilities on-the-go.

How ERP Works

In general, enterprise resource planning uses a centralized database for various business processes to reduce manual labor and to simplify existing business workflows. An ERP system typically contains dashboards where users can look at real-time data collected from all across the business to measure productivity and profitability.

For example, an ERP supply chain solution might receive a customer order and then automatically send that information to the distribution center that is most efficiently positioned to complete the order in a timely manner. If you’ve ever noticed that the return address on packages that you receive from the same vendor isn’t always the same, you have likely seen the result of this technology firsthand. Depending on the solution that you select, your ERP may be able to look at inventory levels, shipment times and other factors to decide which distribution center would be most productive and cost-effective in completing an order.

Without an ERP, data is commonly siloed by department and can be difficult to access across a company. By using an ERP, data from multiple departments can be easily shared and visualized across an organization. This wealth of information and simplification can assist in the development of business goals and reduce the amount of time that your employees spend on tasks that could be automated.

Anderson emphasizes:

I think it is important to understand how an ERP system works in that a key benefit is the concept of a single source of information or truth. A compelling reason clients upgrade to an ERP system is to not have to work with multiple disparate sets of data; instead, it unites everyone on a single source.” With that, we’re going to expand on the benefits of ERP software next.”

Business Value

ERP software has a lot to offer when it comes to business value. We have an article dedicated to the benefits of ERP software, but the following points are the short and sweet of it. You can expect these benefits when using ERP software:

  • Focused IT Costs
  • Total Visibility Across the Organization
  • Improved Reporting and Planning
  • Flexible Modularity
  • Improved Efficiency
  • Customer Service
  • Data Security and Quality
  • Improved Collaboration and Workflows
  • Standardized Business Processes
  • Facilitated Regulatory Compliance
  • Improved Supply Chain Management
  • Superior Scalability

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Who Uses ERP Software?

Small businesses and mega-corporations alike use ERP software to streamline their workflows. Enterprise resource solutions are also used across various industries. Some of the industries where small and large businesses commonly use ERP software include:

  • Retail
  • Manufacturing
  • Pharmaceutical
  • Distribution
  • Technology
  • Hospitality
  • Construction
  • Aerospace and Defense

Depending on the ERP vendor, software can be customized or configured based on the specific needs of your industry. For example, many pharmaceutical companies that use ERP are able to keep track of legal regulations through their enterprise resource planning system, which allows them to then update their workflow accordingly.

Depending on which industry you are in, there may be a specific enterprise resource planning solution developed with your needs in mind. For example, distribution software and manufacturing software fall under the ERP suite. The benefit of using these specific solutions for distribution or manufacturing businesses would be that using this specialized software results in less need for customization or configuration to get the software up and running.

Thus far, we’ve learned what ERP software is, history of ERP software, how it works, what the business value of ERP software is and who uses it. Next, we’re going to get a little more technical with an introduction to features included in ERP software.

Features

One of ERP’s main selling points is the wide variety of features that are available across software solutions. Because the main premise of an ERP is how these various modules interact with one another to generate actionable insights and perform business functions, it’s important to check and see whether an ERP vendor includes the basic and specialized features that you need to help streamline your business operations.

In addition to features that are commonly included with an ERP system “out of the box”, there are many add-ons or modules that can be implemented based on your business needs. Otherwise, some vendors offer a modular system, meaning you never have to choose a solution with “core” capabilities you don’t need. The modularity of ERP software is a major trend in the ERP industry and allows users to configure solutions that assist in day-to-day operations for their specific business.

Anderson raises another point:

. . .the advantage of this modularity and configurability is that it allows smaller companies to step into ERP slowly, yet most enterprise resource planning systems are scalable to grow with their business.”

Some commonly requested configurable modules include:

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Common Features of ERP

Accounting

The accounting module can help you reduce the amount of time that your accountants spend on tedious tasks such as manually inputting receipt information from expense reports. With an automated and integrated accounting system, you can perform actions such as automatically sending invoices to clients with outstanding balances. With this example, the integrated solution would pull from customer history to automatically fetch contact information and amount owed before sending an invoice to the client. This module is especially helpful because it may look at the actual operating cost to determine profitability and forecast potential revenue growth. Integration to payroll software is commonly used within accounting solutions to manage employee payroll.

Human Resources

A human resources module can help you keep track of candidate applications, employee PTO and bonus allocation among other tasks. A good example of how this tool would integrate with other modules is that you could automatically reimburse employees for extra PTO leftover at the end of the year by integrating this system with your accounting program. This function would work by automatically looking at leftover PTO days for employees across the company, calculating how much is owed and then using employee bank account information to submit payment.

Manufacturing

ERP software is incredibly helpful to manufacturing and distribution companies. These tools are multi-faceted and can help streamline many aspects of the manufacturing process. For example, a tool within this suite might be able to determine the reordering point of materials needed for the production of goods. This could be measured based on factors such as how popular the item is, the amount of the resource currently available on hand and projected time it would take for the material to ship. Therefore, if you are projected to run out of lumber on Thursday and it typically takes three days to arrive, your materials would be automatically reordered on Monday.

Shelly Gore, CEO and Cofounder of A Bigger View, offers her insight on a manufacturing ERP tool that she’s noticed has been highly requested this year:

As a specialist in ERP for manufacturing, I have seen a rapid increase in demand for remote monitoring to keep workers productive while maintaining social distancing. To this end, an ideal ERP system enables mobile technologies such as scanners and tablets to report inventory receipts, movements and consumption, as well as the production of finished goods in real-time from the production floor. All other departments, such as sales, purchasing and planning can now sell, buy and plan with confidence in the most current data.”

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Customer Relationship Management

CRM tools are great for boosting a customer’s relationship with your company and ensuring that their experience is flawless. Customer relationship management can analyze customer browsing and purchasing history to send them targeted ads for products that they may be interested in. It can also keep customers “in the know” as to the shipment status of their order. Think about the Domino’s Pizza screen that shows exactly where your meal is at in the baking process. Buyers appreciate updates on the status of their purchases, as it indicates legitimacy and customer care.

Inventory Management

Automated inventory tracking is a commonly requested ERP module. This tool can predict when an item will go out of stock and automatically reorder products based on this estimation. It may also provide recommendations as to which inventory items to place next to one another based on customer purchasing habits in order to streamline the distribution process.

Outside of these core ERP features, there’s a wide range of other modules and add-ons available today. Specialized features can offer industry-specific functionality, and add-ons typically offer advanced, specialized technologies. For example, a manufacturing business may desire order management capabilities. Here are more examples:

  • Sales Management
  • Marketing Management
  • Distribution Management
  • Reporting and Analytics
  • Financial Management
  • Compliance Management
  • Integrations for Shipping, Social Media, Email and Much More

Check out our list of the six main ERP components for more information on these key features.

Identifying an ERP with the right functionality for your business involves gathering your requirements and comparing solutions. To learn more about this process, read our ERP Selection Process and Criteria article, which details the simple four-step process. As you’re browsing and shortlisting vendors, you can read our Top Cloud ERP list to explore the most highly revered solutions. Lastly, reference our ERP Implementation article to get started on adopting your ERP.

Next, we’re going to explain how ERP is deployed. Deployment is another important factor to consider when selecting an ERP; you should review your requirements to decide which method is best suited for you.

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Deployment

ERP software can be obtained either through on-premise installation, a cloud-based solution or a combination. Some ERP vendors offer both installation methods, or even a hybrid deployment, but many vendors are beginning to move their software to a cloud-based system only. This is a response to buyer trends – there’s an ever-increasing demand for cloud ERP, or SaaS ERP. In addition, software is moving to the cloud in general.

ERP Deployment Types

  • On-premise ERP software is installed directly onto the servers your business owns and maintains. This means that you must host and maintain your ERP.
  • Cloud-based ERP software is deployed through the web which allows users to access the system anytime they have an internet connection. Typically, a cloud ERP vendor distributes updates and handles system maintenance. There’s a variety of cloud-based deployment and hosting options available – below is a quick overview:
    • SaaS (software-as-a-service) ERP is subscription-based, meaning that you pay a monthly fee which can depend on how many users you have.
    • A private cloud is either hosted on your on-site datacenter or by a third-party service provider.
    • The public cloud is managed by third-party cloud service providers and delivered through the Internet.
  • Hybrid ERP software offers a combination of deployment and hosting services, allowing you to dictate your own ERP experience.

Cloud ERP software carries several advantages. First and foremost, users can access the system anytime they have an Internet connection and limited infrastructure is required. Additionally, cloud vendors periodically distribute updates and maintenance fixes, so the system is always up-to-date. As a result, cloud ERP users save time and money with these easy-to-use systems.

Gore makes an argument for cloud deployment:

An ideal cloud ERP solution only requires an internet connection and a web browser. This not only increases an organization’s effectiveness by enabling employees to work remote, it also facilitates remote support of their system.”

Gore goes on to explain a large benefit of cloud deployment,

Companies can hire the best consultants from anywhere in the world to support their operations, which can in turn be anywhere. My team currently supports corporations in 24 U.S. states and three international countries. Our team is, in turn, distributed over nine states and two countries. In the past, with on-premise solutions, this was impossible.”

Benefits of Cloud ERP

Integration

It’s highly likely that your company already uses some software in its day-to-day operations, whether it be QuickBooks for accounting or Salesforce for CRM. ERP integration allows you to apply your current software to your new ERP so that the features can work together holistically.

When you are looking at ERP integration opportunities, you should take note of whether potential ERP vendors say that their product is customizable or configurable. It can be a pain to remember this key difference along with all of the other needs you’ll have to bring up to potential vendors, but the difference between the meaning of these two words in the software realm can make or break a potential solution option.

A customizable software solution can be amended using code to add on specific capabilities and features. This is a more labor-intensive process than implementing requirements for a configurable solution, which meets requirements without using code by using tools that exist in the application. Therefore, depending on the IT and development resources that are available at your company, you may prefer a configurable solution over a customizable one or vice versa.

One of the reasons that ERP integrations can fail is due to a lack of planning in regards to factors such as need for customization, incorrect budget setting and absence of an IT resource allocation strategy. The chance of a successful integration can be improved by creating goals and using foresight when analyzing solution options. For example, a good question to ask yourself might be “Can I afford the base ERP software plus the specific features that I need?” If the answer is no, you might start looking at lower cost options or push back your timeframe for ERP implementation.

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Wrap-Up

ERP software is a versatile, widely-implemented solution that many companies use to facilitate business processes. Because of the range of customization and configuration options available, you can tailor solutions to your specific needs and to the existing software that you already use. By automating sometimes challenging and often tedious workflows, an ERP aims to make your day-to-day workflow a little easier.

What additional questions do you have about how an ERP system works? Let us know in the comments below!

Madeline ReinboltWhat is ERP and How Does It Work? Meaning, History, Features and More

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Join the conversation
  • Laurel Larsen - July 23, 2019 reply

    This article did a great job explaining enterprise resource planning. It’s really cool that ERP is so customizable and can fit tons of different situations. The fact that it’s used across a huge variety of businesses only adds to the impressiveness.

    Lindsey Jenkins

    Lindsey Jenkins - July 24, 2019 reply

    Thanks for reading, Laurel! I’m glad that you found the article useful.

  • Zahoor khan - March 3, 2020 reply

    Please share a video how to use

    Madeline Reinbolt

    Madeline Reinbolt - March 4, 2020 reply

    We’ll take this suggestion into consideration, Zahoor! Thank you for reaching out.

  • Rumesh tharindu - March 8, 2020 reply

    Greate one

  • Kwabena Nhyira - March 20, 2020 reply

    Wow I had little knowledge on ERP, but after visiting your site , i have learnt a lot. very helpful information

    Madeline Reinbolt

    Madeline Reinbolt - March 23, 2020 reply

    I’m so glad our website was helpful to you, Kwabena!

    Sunday - June 18, 2020 reply

    Can erp be use in a church

    Madeline Reinbolt

    Madeline Reinbolt - September 2, 2020 reply

    Sunday, ERP software can be used to manage operations at a church. Fill out our requirements template: https://pmo.selecthub.com/erp-requirements-template-site-vers/ or give us a call at 855-850-3850 for more help.

  • William Gonzalez - April 5, 2020 reply

    Outstanding informative piece on ERP. Thank you. W.A.G

    Madeline Reinbolt

    Madeline Reinbolt - April 21, 2020 reply

    Thanks for reading, William!

  • Nithyashree - April 18, 2020 reply

    It is very informative fr students
    Thank you

  • EOS Teknologi - August 28, 2020 reply

    Thank you, very useful and allow references on site

    Madeline Reinbolt

    Madeline Reinbolt - September 2, 2020 reply

    Thanks for reading, EOS Teknologi!

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