ERP systems explained simply

Timo Gerhardt, Thursday 20 October 2022 | Reading time: 12 min.

The abbreviation ERP stands for Enterprise Resource Planning. Corresponding software applications support organizations in controlling operational processes.

The origin and meaning of ERP systems

The first predecessor of ERP (Enterprise Resource Planning) was developed and established in industry more than 100 years ago. EOQ (Economic Order Quantity) did not require a computer at all, only pen and paper were used to improve time planning in production.

For over half a century, this paper-based system was the standard. Then the implementation of a central mainframe computer was considered a revolution: MRP (Material Requirements Planning) was born.

A big step towards today's ERP systems was then made with MRP II (Manufacturing Resource Planning). For the first time, various components of production were combined in the form of modules on a central platform. Now, it was possible to specifically coordinate modules such as contract management, purchasing or work time tracking.

When computer technologies developed with increasing speed in the 1990s and such systems were given more and more functions and became easier to use, the term ERP was used for the first time. What this term exactly means and its significance for your company is explained below:


What is an ERP system?

ERP stands for Enterprise Resource Planning and refers to a system that serves as a central control unit in companies. The focus is on the management and automation of business processes in a wide variety of areas. These include, among others, human resources, manufacturing, sales, finance or the supply chain.

By integrating cross-departmental data and information, ERP systems serve as an aid to executives in decision-making, insight gathering, and process optimization. The networked structure makes it possible to map even cross-departmental work processes in detail.

The ERP system is often described as the central nervous system of an organization. Just as our brain ensures the day-to-day functionality of our limbs, metabolism and other bodily functions, an ERP system in companies ensures that different departments can interact and are coordinate with each other. For this reason, an effective ERP solution is indispensable for many companies today.

What an ERP system must be able to do

As mentioned above, ERP solutions and related systems have been a much-used tool in companies for several years now. Over time, and especially in the context of digitalization, the functions, but also the expectations placed on such a system have changed significantly. When looking for an ERP solution that is suitable for you, you should pay close attention to the fact that certain basic functions are fulfilled by the software. In the following, we will show you which classic functional areas should always be covered:

  • Finance: The core functions here include administrative accounting, assets accounting, accounts payable and accounts receivable, in addition to controlling. Other functions that can supplement this area are, for example, the management of payments and reminders or the preparation of the annual financial statements.
  • Logistics: Here, care should be taken to ensure that the software covers purchasing and sales, materials management, warehouse management and distribution. Supplementary functions such as transport and foreign trade management or goods receipt and goods issue processing can be useful.
  • Production: In this context, planning and control functions that take capacities into account are of great importance. Equally essential is the collection of operational data. Functions for managing production orders and material requirements planning can also be of great benefit.
  • Human resources: The central functions here, in addition to recruiting and managing employees, are career planning and payroll accounting. Complementary functions can include compensation calculation or personnel development.
  • Additional functions: A rapidly increasing proportion of corporate transactions are now conducted online. An ERP system can also help in this matter through e-business functions. Integration of a CRM (Customer Relationship Management) system is also not uncommon these days. In this way, existing and potential customer relationships and corresponding interactions can be easily handled within the ERP solution. Integrated Supply Chain Management (SCM) can be considered as an extension of the logistics function. This goes beyond the company's own limits when considering logistical processes and takes into account participants along the entire supply chain.

This is only a selection of the most important standard tools that are of great importance, especially in the manufacturing sector. A list of functions that can bring added value for companies may include, e.g., the integration of further marketing and sales functions. An interface to a data warehouse, including archiving and database management, is also often useful. Even the integration of full-fledged project management applications is no longer a rarity in ERP systems.

Mobile and Social ERP

In times of digitalization and networking, there are two terms in connection with ERP that are clearly gaining in importance: Mobile ERP and Social ERP. We will explain what these terms are in the following:

Mobile ERP simply means that providers make their software available on mobile devices by means of an app. This allows users to access all relevant information at any time, regardless of location. For example, when contracts are signed, orders can be triggered without delay, and stock levels can be called up while still talking to the customer on site. Limited performance of mobile devices and data protection concerns when transferring data often pose a challenge in this context.

Social ERP, on the other hand, views ERP systems as a place for social exchange. They serve as a platform on which users can share and consume relevant information. A possibility for efficient communication and networking in real time is created - also with external stakeholders. To this end, ERP systems should be structured similarly to social networks. They should be simple, user-friendly and intuitive to operate. Individual needs should be able to be satisfied through possible personalization. An appealing design can round this off.

How your business can benefit from an ERP system

Every business is unique. Companies are complex organizations that always differ from one another in terms of structure, available resources, goals and many other aspects. Consequently, there is no single ERP solution that is suitable for a wide range of heterogeneous companies. The first prerequisite for such a system to bring added value is that it fits the company’s needs. If this prerequisite is met, you can benefit from the following 6 advantages:

  • Increased productivity and efficiency: An ERP solution helps you streamline as well as automate business processes. The increased efficiency translates into freed up time that can be spent on those business processes that drive innovation.
  • Reduced business risk: ERP implementation in the enterprise creates transparency and provides insight into operational dependencies and interactions. This makes targeted control much easier and unforeseen events can be avoided or counteracted in time.
  • Simple infrastructure: By combining various tools on a central system, the IT infrastructure in the company is significantly simplified. A large number of functions use the same all-encompassing database, and multiple data storage is avoided.
  • Valuable insights: The ERP system becomes the sole source of internal company data. These are networked and can be accessed immediately. They serve as a useful and meaningful aid in making important decisions.
  • Optimized reporting: With the ERP system as the central storage unit for all relevant information, reports can be generated quickly and with real-time data. Based on this, actions can be taken to improve operational performance.
  • Improved agility: By providing data in real time, deficits and opportunities can be identified immediately. An appropriate response can be made instantly. This can be a key competitive advantage in a dynamic business environment.

ERP vs. PM: Where are the similarities and differences?

Projects are characterized by the fact that they are unique, novel and complex. Projects have specific goals and are operated under certain time, budget and scope limits. Project management software supports teams in managing projects.

On the other hand, especially in the manufacturing industry, there are fixed business processes that are carried out continuously in companies and are the subject of permanent optimization measures. This is where ERP systems come in, creating transparency and enabling targeted control of integrated processes in the company.

While PM software is aimed at managing one-off challenges, ERP systems tend to provide more for monitoring and controlling routine processes with due regard for all the business units concerned.

Although some ERP systems include individual project management functions, it usually turns out to make more sense to interface with professional project management software. This ensures that relevant data is automatically exchanged between the two systems. Particularly regarding classic production key figures such as budgets, an interface to the project management software represents clear added value: The project budget is determined on the expenditure side not only with the costs from labor hours, but also with the data from the material cost inventory of the ERP system. Controlling benefits from automatically generated expenditure/revenue comparisons that reliably reflect the status quo of ongoing projects in real time.

What you should look out for during implementation

The most important thing when selecting ERP software is that it fits your company's needs. There is a wide range of standard software on the market that already covers many of the basic operational requirements. However, configurations may become necessary to map your company's processes. In this case, the ERP system must be adaptable beyond the basic functions to fulfill its role as a central control tool in everyday business.

Furthermore, there are also several solutions that are tailored to an industry. Their functions are more precisely tailored to the needs of the user, which results in higher productivity. Again, it is important to evaluate whether the standard functionality of the industry-specific ERP solution is sufficient for your company.

If this is not the case, then you are best advised with a custom software. Here, the system is tailored directly to your needs by the provider. However, this usually results in significantly higher implementation costs and longer implementation cycles.

In addition to the best possible fit for your company, there are several other aspects that you should consider when choosing an ERP system:

  • A system that grows with you: Especially due to increasing digitalization and networking, we live and work in a fast-paced world. Companies are thus repeatedly confronted with new challenges. The growth of organizations requires ERP solutions to be flexible and able to change with the company.
  • Cloud-based vs. on-premise solution: ERP systems are available both as software-as-a-service (SaaS) and as an on-premise solution with data stored on in-house servers. A cloud solution is being advised by most vendors, not least to mitigate operational expenses and capital costs.
  • Consistent user experience: To ensure high user acceptance and ease of use, it is important to establish a system with a consistent user interface across all applications.
  • Excellent support: The ERP system is the heart of a company. If problems occur here, this can have fatal consequences. For this reason, it is essential to choose a provider whose expertise is always available to the user.
  • A holistic perspective: Choose an ERP solution that provides the most comprehensive view of your business. The software should be able to connect all relevant areas of the organization so as to provide you with the data, transparency and insights that you require in order to operate more successfully. Areas that are not directly mapped by the system should at least be able to be connected via suitable interfaces.

Ultimately, an ERP system helps to manage all of a company's processes efficiently. It can therefore create enormous added value. However, care should be taken to implement the solution that is exactly right for you in order to exploit its full potential.

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