Definition of enterprise resource planning (ERP)
Enterprise resource planning (ERP) refers to a type of software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations. A complete ERP suite also includes enterprise performance management, software that helps plan, budget, predict, and report on an organization’s financial results.
ERP systems tie together a multitude of business processes and enable the flow of data between them. By collecting an organization’s shared transactional data from multiple sources, ERP systems eliminate data duplication and provide data integrity with a single source of truth.
Today, ERP systems are critical for managing thousands of businesses of all sizes and in all industries. To these companies, ERP is as indispensable as the electricity that keeps the lights on.
What is an ERP system?
How can these solutions manage organizations day-to-day business activities, such as accounting, finance, procurement, project management, supply chain, and manufacturing.
Enterprise resource planning systems are complete, integrated platforms, either on-premises or in the cloud, managing all aspects of a production-based or distribution business. Furthermore, ERP systems support all aspects of financial management, human resources, supply chain management, and manufacturing with your core accounting function.
ERP systems will also provide transparency into your complete business process by tracking all aspects of production, logistics, and financials. These integrated systems act as a business’s central hub for end-to-end workflow and data, allowing a variety of departments to access.
ERP Systems and software support multiple functions across the enterprise, mid-sized, or small businesses, including customizations for your industry.
What’s the difference between ERP and financials?
Although the terms “accounting / financials” is often used when describing ERP software, accounting / financials and ERP are not the same thing. Accounting refers to a subset of modules within ERP.
Financials are the business functions relating to the finance department of an organization and includes modules for financial accounting, subledger accounting, accounting hub, payables and receivables, revenue management, billing, grants, expense management, project management, asset management, joint venture accounting, and collections.
Accounting software uses reporting and analytical capabilities to comply with the reporting requirements of governing bodies, such as the International Financial Reporting Standards Foundation (IFRS), Financial Accounting Standards Board (FASB) for Generally Accepted Accounting Principles in the United States (GAAP), as well as for other countries (HGB in Germany and PCG in France, for example).
For public organizations, accounting software has to be able to produce periodic financial statements for governing regulators. For these types of financial reports, a narrative reporting tool is used. The person who is ultimately responsible for financials is the CFO.
While accounting software handles one area of the business, ERP encompasses a wide range of business processes—including accounting / financials. ERP software can include capabilities for procurement, supply chain management, inventory, manufacturing, maintenance, order management, project management, logistics, product lifecycle management, risk management, enterprise performance management (EPM), human resources / human capital management.
ERP systems also integrates with or creates front-office applications to build holistic views of customers, including customer relationship management (CRM) solutions. Additionally, cloud-based ERP applications are often embedded with next-generation technologies, such as the internet of things (IoT), blockchain, AI, machine learning, and digital assistants. These advanced technologies deliver data and capabilities that not only enhance many traditional ERP functions; they create new opportunities for increased efficiencies, new services, and deeper insight across an enterprise. Since ERP systems are comprehensive across an enterprise, their management often involves a partnership with the CFO as well as the CIO, COO, and other key executive leaders.
Cloud-based ERP applications are often embedded with next-generation technologies, such as the internet of things (IoT), blockchain, AI, machine learning, and digital assistants.
ERP systems are designed around a single, defined data structure (schema) that typically has a common database. This helps ensure that the information used across the enterprise is normalized and based on common definitions and user experiences. These core constructs are then interconnected with business processes driven by workflows across business departments (e.g. finance, human resources, engineering, marketing, and operations), connecting systems and the people who use them. Simply put, ERP is the vehicle for integrating people, processes, and technologies across a modern enterprise.
For example: consider a company that builds cars by procuring parts and components from multiple suppliers. It could use an ERP system to track the requisition and purchase of these goods and ensure that each component across the entire procure-to-pay process uses uniform and clean data connected to enterprise workflows, business processes, reporting, and analytics.
When ERP is properly deployed at this automotive manufacturing company, a component, for example, “front brake pads,” is uniformly identified by part name, size, material, source, lot number, supplier part number, serial number, cost, and specification, along with a plethora of other descriptive and data-driven items.
Since data is the lifeblood of every modern company, ERP makes it easier to collect, organize, analyze, and distribute this information to every individual and system that needs it to best fulfill their role and responsibility.
ERP also ensures that these data fields and attributes roll up to the correct account in the company’s general ledger so that all costs are properly tracked and represented. If the front brake pads were called “front brakes” in one software system (or maybe a set of spreadsheets), “brake pads” in another, and “front pads” in a third, it would be tough for the automotive manufacturing company to figure out how much is spent annually on front brake pads, and whether it should switch suppliers or negotiate for better pricing.
A key ERP principle is the central collection of data for wide distribution. Instead of several standalone databases with an endless inventory of disconnected spreadsheets, ERP systems bring order to chaos so that all users—from the CEO to accounts payable clerks—can create, store, and use the same data derived through common processes. With a secure and centralized data repository, everyone in the organization can be confident that data is correct, up-to-date, and complete. Data integrity is assured for every task performed throughout the organization, from a quarterly financial statement to a single outstanding receivables report, without relying on error-prone spreadsheets.
The business value of ERP
It’s impossible to ignore the impact of ERP in today’s business world. As enterprise data and processes are corralled into ERP systems, businesses can align separate departments and improve workflows, resulting in significant bottom-line savings. Examples of specific business benefits include:
Improved business insight from real-time information generated by reports
Lower operational costs through streamlined business processes and best practices
Enhanced collaboration from users sharing data in contracts, requisitions, and purchase orders
Improved efficiency through a common user experience across many business functions and well-defined business processes
Consistent infrastructure from the back office to the front office, with all business activities having the same look and feel
Higher user-adoption rates from a common user experience and design
Reduced risk through improved data integrity and financial controls
Lower management and operational costs through uniform and integrated systems
ERP deployment models: From on-premises to the cloud
ERP’s past: 1990s to the new millennium
From the 1990s until the beginning of the twenty-first century, ERP adoption grew rapidly. At the same time, the costs of implementing an ERP system began to climb. The hardware required to run the software was typically on company premises, with big machines in a server room. Both the hardware and the software licenses required capital investments and depreciated over 5 to 10 years. In addition, organizations nearly always wanted to customize their ERP systems to fit their specific needs, entailing an additional expense of software consultants and training.
Meanwhile, ERP technology was evolving to embrace the internet, with new features and functionality such as embedded analytics. As time went on, many organizations discovered that their on-premises ERP systems couldn’t keep up with modern security demands or emerging technologies such as smartphones.
Cloud ERP—A new ERP delivery model
Enter the cloud—specifically, the software-as-a-service (SaaS) delivery model for ERP. When ERP software is delivered as a service in the cloud, it runs on a network of remote servers instead of inside a company’s server room. The cloud provider patches, manages, and updates the software several times a year—rather than an expensive upgrade every 5 to 10 years with an on-premises system. The cloud can reduce both operational expenses (OpEx) and capital expenses (CapEx) because it eliminates the need for companies to purchase software and hardware, or hire additional IT staff. These resources can instead be invested in new business opportunities, and the organization is always up-to-date on the most recent ERP software. Employees can shift their focus from managing IT to more value-added tasks such as innovation and growth.
7 reasons to move to an ERP cloud solution
For businesses of all sizes, including enterprise and small to midsize, retiring on-premises systems and moving entirely to the cloud all at once isn’t always possible. Or, at the very least, it’s not something they’re comfortable doing within a short development window. Meanwhile, staying the course with an on-premises ERP, ignoring all the advantages of enterprise resource planning as a cloud solution, is no longer an ideal path, either. Why should you consider using cloud applications to replace or augment your on-premises system?
1. Readily adopt new and evolving SaaS technologies
Next-generation technologies, like artificial intelligence (AI), help cloud-based systems rapidly improve their capabilities with no need for periodic updates, unlike your legacy system. Now, with no additional or new input from the end-user, ERP systems continually become significantly easier to manage and use.
2. Extend the value of your existing ERP System
Augmenting and integrating legacy software with cloud applications can complement, enhance, and supplement important tasks. This approach can breathe new life into legacy ERP systems, giving businesses a great opportunity to start adopting cloud capabilities.
3. Access new technologies
Finding cloud applications that complement your legacy ERP software modules lets you immediately take advantage of rapidly advancing new technologies and improving user paradigms. These provide complimentary systems that deliver immediate business capabilities and value without a fundamental change in your operations.
4. Reduce third-party dependencies
Reporting and analytics for legacy systems typically require involvement from a third-party vendor to generate operational business intelligence. Using cloud applications from your legacy ERP vendor often produces the same or better intelligence without needing an additional vendor relationship.
5. Evolve your financial systems
Legacy systems were never meant to be modern reporting engines. Cloud-based technology was born in the last decade and developed, as a core principle, with an entirely different mindset and understanding of not only what was possible but what was needed to be successful for ERP platforms.
6. More robust security resources
Cloud solution service providers have large, full-time teams that are exclusively dedicated to proactively monitoring and staying current with cloud security issues and threats, 24 hours a day.
7. Attract in-demand talent
The next generation of young workers have grown up with seamless technology that is mobile, easy to use, and always-on. No company that continues to rely purely with on-premises technology will be able to recruit top talent, regardless of age.
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