An ERP Primer: Essentials that You Need to Know for Better Business Flow

In the old days, HR, accounting, and finance used different software. The result is a disjointed organization where nobody knows what everybody else is doing.

Lack of coherence contributed to faulty decision-making, inaccurate inventories, and painfully slow flow of information.

Enterprise resource planning (ERP) software introduced a centralized way of working with information.

With one-stop access, different departments in a company can efficiently work together -- which leads to higher productivity.

For example, people in sales can quickly access inventory information to find out which products are available.

Conversely, the inventory department can see sales volume so they can forecast the acquisition of new products or raw materials.

Although ERPs were initially used in manufacturing, other businesses were quick to pick up on the benefits of centralized information.

If you are new to ERP, this post answers the following questions for you:

What is an ERP software? What is the best ERP tier for your business? How can your business benefit from an ERP? What features are a "must" for your ERP? Is it possible to make a custom ERP? Does your business need a custom ERP?

What is an enterprise resource planning (ERP) software?

ERP software is a broad term that covers any software that automates business activities.

It is important to note that ERP is not one piece of software, but a broad term that describes software that is used to automate business functions and centralize data.

For example, finance and inventory management software may fall into the broader definitions of what an ERP is.

There are also ERPs that combine different modules. For example, some ERPs have modules for customer relation, business intelligence, inventory, and finance.

Which industries use ERP?

ERPs are most commonly used in manufacturing industries (31%). Because of the many and complex aspects of manufacturing, it only makes sense that ERPs are most needed in the industry.

Information technology accounts for the second-highest usage (18%) of ERPs, followed by finance (16%), and the public sector (11%).

What are the different business activities that can be enhanced by an ERP?

Project management

Accounting

Inventory

Human capital management

Supply chain operations

Risk management and compliance

Business Intelligence

Distribution

Origin of the ERP

The first system to automate business processes was used by manufacturers and is called material requirements planning (MRP). Manufacturers needed to find a way to ensure that the production chain remains uninterrupted. So they came up with a system to:

• Track the materials and components they have.
• Identify which materials and components were most important.
• Create a schedule to acquire new materials and components.

Basically what an MRP did was put all important information in one place.

By being able to work with centralized information, manufacturers can make decisions early and prevent gaps in operations.

This principle proved effective and it was an easy decision to apply it in other business aspects such as accounting, finance, marketing, and so on.

Different tiers of an ERP

There are different tiers of ERPs that fit varying company sizes.

Tier 1

A tier 1 ERP is designed for big organizations with multiple locations. Companies that use tier 1 ERP usually make billions of dollars in ERP.

Because of its functionalities and complexities, tier 1 ERPs require specialized hardware and skilled IT professionals to operate and maintain. Some notable vendors of tier 1 ERPs are SAP, Oracle, and Microsoft.

Tier 2

A tier 2 ERP is designed for mid-market companies and state and local governments. It is lighter weight and more customizable compared to a tier 1 ERP. Sage 300 and SalesForce are examples of a tier 2 ERP.

Tier 3

A tier 3 ERP is ideal for companies that employ less than 20 people. It may have basic accounting and business tools; and costs less than a tier 2 ERP. Tier 3 ERP vendors usually have a data migration system in place for businesses whose needs have outgrown the capabilities of a tier 3 ERP.

How can business owners and employees benefit from an ERP?

Save time doing things. You can automate routine tasks with an ERP. For example, a financial services company may spend a lot of time manually recording invoices. An ERP can extract and verify invoices from one database; then store invoice data in a cloud database.

Work with correct data. Without a centralized data repository, one department may alter data without the rest of the company knowing it. This leads to other employees working with outdated data. Data integrity is compromised. An ERP makes it possible to work with real-time data, whether through cloud computing or in-house servers.

Eliminate unnecessary communication. For example, an ERP enables sales and logistics to see the same real-time data. There is no need to tap someone's shoulders to know what is going on.

Create reliable forecasts. An ERP system can keep track of data trends, increasing the likelihood of predicting future trends with greater accuracy.

Analyze data. An ERP can give insight into what is happening in the different aspects of business operations. This gives opportunities to identify fraud, reduce operational costs, and increase customer satisfaction.

Save on IT spending. Without an ERP, an IT team needs to deal with multiple software systems. An ERP brings cluttered software into one place, potentially reducing the overhead cost of IT services.

Comply with security and data privacy laws. Unmanaged devices are devices that are not authorized for working with company data. These devices represent points of vulnerability, such as when an employee accesses an accounting software from a compromised laptop. Modern ERPs are designed with privacy and security in mind:

• Attribute-based access gives different levels of access to different users.
• Extra layer of access verification ensures that only authorized employees can access company data.
• Data access visibility makes it possible to see who is accessing which data, from which locations.
• Data masking obscures sensitive client and customer data.
• Compliance with government laws and regulations ensures that all government-endorsed steps are taken to protect sensitive data.

What are the ideal features of an ERP?

ERPs in different tiers and for different industries have varying features. There are core features that all good ERPs have:

Automation. An ERP should eliminate repetitive manual tasks.

Integration. An ERP should bring multiple work tools and departments into a centralized interface. For example, an ERP can be the software where finance, sales, human resource, and administration can easily work with the same data in real-time.

Reporting. An ERP should be able to give users a picture of what has been going on in the company. How many orders were processed or created in the last 30 days? How many people were newly hired? How does each employee's productivity measure against the deadlines? These questions can be answered by the graphs and numbers that an ERP can create reports for.

Data analysis. An ERP should contain tools that allow a user to process, interpret, and make inferences from the given data.

Accounting. Tracking, recording, and analyzing financial transactions are the basis of running a sound business. An ERP should enable users to work with accounts payable, accounts receivable, and general ledgers. It should allow users to create budgets and make sound forecasts.

Is it possible to customize an ERP?

Yes. Businesses face unique challenges that off-the-shelf ERP cannot fully address. That is why custom software development may be necessary.

There is a difference between configuration and customization. Configuration is when out-of-the-box features are modified based on user specifications.

Custom enterprise resource planning software can mean two things:

• Expanding the functionalities of an out-of-the-box ERP software; or

• Creating an ERP software from scratch.

These components of ERP software can be customized:

User interface. The buttons, visual design, and all the components the users interact with. Documents and forms. The output that an ERP can generate, such as invoices, receipts, order confirmations, and reports. Integrations. The third-party software that an ERP can interact with to supplement its capabilities. Functionalities. Adding new capabilities or process workflows to fill the gaps inherent in using out-of-the-box solutions.

Is custom ERP worth it?

Deciding whether new software is worth building comes down to its return on investment. These questions are a good way to start:

What business processes or workflows does your current ERP fail to support?

Do you have the technological resources needed to customize an ERP? These resources include databases, hosting (for cloud ERPs), and programming languages.

Do you have the right human resource or software partner to customize an ERP?

What value will the customization add? How did you calculate that value?

Will the customization make it difficult to upgrade the software in the future?

How hard will users find it to adapt to new customizations?

What resources and budget are needed to implement the customization?

Still not sure whether to choose custom or out-of-the-box software? Check out our post about custom versus off-the-shelf software.

Final Note

ERP software is a must-have advantage for businesses of all sizes. The question becomes whether an out-of-the-box ERP suits your business or if you need custom enterprise resource planning software.

Do you need help working out what solution works best for you? Talk to one of our CTOs today.