They are an essential tool for any company, but what is an ERP software? What’s its importance and its advantages? First of all, you have to know its meaning.
The acronym ERP means Enterprise Resource Planning, and is a software that manages operations related to different corporative processes and tasks.
It also groups interrelated processes and functions, manages their information flows and lines up communication between companies and customers.
Its origins, however, are much older than most people might think.
History of ERP
Back in 1913, engineer Ford Whitman Harris introduced the Economic Order Quality (EOQ) model, a system designed for production programming.
Then, in 1964, Black and Decker integrated EOQ concepts with a mainframe computer in a materials requirements planning solution (MRP).
This MRP replaced the EOQ as the manufacturing standard until the manufacturing resource planning development (MRP II) in 1983.
MRP II
MRP II had modules and integrated basic manufacturing components that included purchasing, bills of materials, programming and contract management; thus constituting a system that integrated different tasks and becoming a new option for companies to improve operational efficiency.
Concepts similar to MRP II were developed throughout the 1970s and 1980s. Additionally, financial functions, third – party management and human resources management were incorporated, thus creating a software category that, in 1990, would be named as the Enterprise Resource Planning System or ERP, for its acronym.
Nowadays, ERPs are a very important tool and companies from all sectors use them. With its expansion, however, its implementation costs also increased. In addition, the hardware required to run the software was located on the facilities of each company and consisted of huge computers in a special room.
This rudimentary machinery, like the software licenses, implied a considerable capital investment and its duration oscillated between only 5 and 10 years. In case a company wanted to customize their ERP systems to cover their particular needs, they had to incur in an additional expense that, frequently, was astronomical.
Continuing on its evolution, ERP technology integrated the internet and, in doing so, gained new features such as integrated analytics. At the same time, many companies began to realize that their ERP systems were short in security demands and new devices such as constantly evolving mobile phones took the lead.
It was all this evolutionary process that gave rise to the current ERP, which presents the following structure.
ERP structure
ERPs have a basic structure common to all cases:
- A server that its possible to use on company facilities or, in some cases, can be remote. This is not only its main advance but the most important advantage today.
- One or several modules linked to the same database that is updated in real time.
Likewise, ERPs have a defined data structure which, in turn, has a common database. It is precisely by this structure that is possible to fully centralize the information, as well as its access and understanding by the responsible staff of all areas.
This structure integrates to the processes of each company, nourishing from the workflows of all its different departments.
ERP types
First of all, the ERP’s design is based on one of the following categories
Administrative
Finance, accounting and human resources.
Operational
Production, supply chain, distribution, etc.
Additionally, ERPs are classified, according to their complexity, into:
Level I
Those designed for large corporations. It handles all types of currencies, postal codes, languages, accounting rules and other specialized functions.
Level II
Provide their services to international companies.
Level III
Offer their services to medium – sized companies. They also include management of different languages and currencies.
Level IV
Specialized in SMEs or small companies.
Likewise, they are classified according to other characteristics:
Generic
They are ERP designed to serve all types of companies regardless of their size or particular needs.
Parameterized
They have a certain level of customization, so they are better suited to more specific companies and sectors.
Custom
Designed for a specific client, covering their individual needs.
Given this wide range of options, a question often arises: which is the ideal ERP? The answer is: None.
The ideal ERP doesn’t exist, since the needs of each company are unique and, therefore, the ERP that perfectly accomplishes the particular requirements of one company, may not be suitable for another. However, there are comprehensive ERPs that include business performance management tools used to plan actions and project the results of any financial maneuver.
But whether they are simple or comprehensive, many people will wonder: do I really need to acquire an ERP for my company?
When is an ERP needed?
If the different areas of a company work with independent applications, and also execute manual processes to perform tasks, it means that there is a wate of time recording information, which, in turn, significantly delays the generation of reports that will also have a wide margin of error causing an inefficient decision making.
A growing business may also see its inventory grow to the point that Excel, spreadsheets and manual counting are insufficient due to their inaccuracy.
Does any of these situations sound familiar to you? If so, it is time to consider acquiring an ERP as in the following cases:
- When there are blockages in the production line, inventory management or in the company’s digital platform.
- Company growth is slow due to its systems.
- Information security mechanisms are deficient.
- The company begin to venture into digital platforms.
- When a new company is starting from scratch, in which case the implementation is much less traumatic.
- The company uses outdated hardware and software.
- It is necessary to integrate processes and centralize information.
- Difficulties arise in order management.
- It seeks to avoid errors such as duplicate information.
- There is excess inventory.
Advantages
- The business processes and periodic or repetitive tasks automation, which optimize resources and time and, in addition, leads to a reduction in the margin of error by limiting human intervention. In the same way, it generates a notable increase in productivity.
- Centralization of information so that all areas of the company can access it immediately, results in optimization of response times. This also helps to significantly reduce the margin of error.
- Database integration.
- Better vision of the business by virtue of reports in real time.
- Improves decision-making by having a more accurate picture of future scenarios.
- Greater control of production processes.
- Promotes communication among the different areas of the company, avoiding misunderstandings.
- Prevents delays and blockages in the production process.
- It gives the option of accessing from anywhere and from any device.
- Up – to – date and reliable information is available all the time.
- Effective monitoring of purchases and sales, that leads to better negotiation with third parties.
For all these reasons ERPs are an extremely useful tool. Additionally, most of them offer to each company the option of building their own ERP according to their specific needs and characteristics.
Things to consider
ERPs also works to forecast problems, remove obstacles and make the necessary changes to ensure the company growth.
Likewise, it allows monitoring, scheduling, optimizing and speeding up the production, distribution and delivery processes.
In the same way, it simplifies sales in physical stores and online purchases. Regarding supply chains, ERP systems help to optimize controls and management in production plants and warehouses.
Related to inventory management, ERPs help companies to improve production planning, thus avoiding fall into the two possible extremes: having too many stocks or not having enough raw material.
ERP, when working with BI (Business Intelligence) provides all the necessary data for report generation on the company status, which allows correcting failures and improving key processes such as sales and marketing.
In conclusion, ERPs significantly increase the competitiveness of any company, regardless of its size or sector. In addition, it is a fact that effective cooperation between employees, such as the one that ERPs promote, can increase productivity from 20% through 30%.
However, not all are advantages and benefits. The ERP implementation can also entail some disadvantages as the following.
The disadvantages
- Most of them have a high cost, due to the level of personalization that an ERP system requires to fully satisfy the particular needs of each company, although in recent years, options that are as effective and complete as affordable appeared in the market.
- Some may have hidden costs that arise after the purchase and implementation of the software.
- In case installation is required, it may take longer, causing delays and, losses. This disadvantage, however, doesn’t occur with cloud software since it doesn’t have to be physically implemented.
- There may be a setback in productivity during the first months (adaptation time).
- It doesn’t offer immediate benefits.
- In many cases it requires reconsidering work processes.
- It requires periodic updates that usually imply an additional investment of both money and time, although, currently, there are software that offer free updates.
Most of these systems also suppose a significant investment for companies that, however, is proportional to the benefits: a 2022 Panorama Consulting survey revealed that 40% of companies that purchase an ERP notice a significant increase in their productivity. Additionally, there are software, not only effective, but also affordable for small and medium – sized companies because of their low cost.
Recommendations before implementing an ERP
It is advisable, before acquiring an ERP, to study the particular needs of the company in order to choose the one that is most suitable. In the same way, it is important to monitor the performance of the ERP during the first weeks to detect failures and correct them in a timely manner.
In general, the best things to do before purchasing an ERP are:
- Give more importance to the functions over the cost.
- Be aware of the dimensions of the company and its goals in the short, medium and long term.
- More than an expense, acquiring an ERP is an investment.
- Be clear about the objectives of the company.
- Knowing the areas that most need an update to decide the key modules to include.
Although in many cases, just its implementation may seem overwhelming, it is fully worth it: according to statistics, ERP implementation generated process improvement for 95% of companies. There are currently software much easier to implement than the traditional ones.
The constant evolution of technology gave the public an ERP type that is extremely useful in current conditions: a cloud-based ERP.
Cloud – based ERPs and their advantages
Modern ERPs, which are integrated to the cloud, allow companies to effectively respond to market fluctuations and keep up with trends in their industry area.
In these cases, the software runs on a network of remote servers, and cloud provider can update the software several times a year instead of doing a single, extremely expensive, update every 5 or 10 years. For the same reason, operating costs decrease since it’s no longer necessary for companies to hire additional staff or acquire new software or more hardware.
In the same way, it allows departments such as marketing and sales to invest more time in the innovation and design of advertising strategies.
Additional advantages
- It eases the adoption of SaaS technologies and the implementation of artificial intelligence.
- Gives a new impetus to the current ERP system by improving essential tasks.
- Allows access to new technologies using cloud applications that complement the ERP modules without altering operations.
- Eliminates dependency on third – party providers for analysis and reporting.
- Promotes the evolution of the different functions of the ERP.
- Counting on more solid security mechanisms that also work 24 hours a day.
One of the factors that prevented small companies from accessing an ERP was the cost. For this reason, until not long ago, ERPs were a luxury that only big corporations could access.
Cloud technology democratized access to management tools, making them available to all types of companies, which now allows SMEs to compete with big companies more equally. Besides, they’re subscription – based, so companies pay only for what they use, unlike paying for an on – site ERP license.
Maintenance
Also, cloud-based ERP maintenance is easier since it requires fewer computing resources. On the other hand, local ERP is limited by the specific machinery and systems of each company, while an ERP linked to the cloud is much more flexible.
To conclude, it is important to point out that now, in the midst of the digital age, ERPs cover mobile platforms and social networks, keeping up with technology advances in response to the demands of an increasingly competitive corporate scene, thus becoming the ideal tool for any company that seeks to obtain advantages that allow it to stand out in the market.
Like in a natural selection process, companies that don’t adequately adapt to changes are doomed to disappear. A company that implements an ERP according to its needs, however, will remain in the business.
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