What is ERP? | Enterprise Resource Planning Explained

Jalene Ippolito January 14, 2021

ERP (or Enterprise Resource Planning) is a category of software that manages the various functions across your business, in one system. Take a step back and think about all the processes that are essential to running your business – accounting, sales, inventory, purchasing, manufacturing, service, etc. The list goes on based on your business structure. Most small and mid-size companies have a separate application for each of these processes. ERP software changes that approach – it integrates all the functions across your entire organization into one system.

For instance, let’s consider a distributor of industrial supplies that sells through both traditional and online channels. When a customer places an order on their eCommerce site, a sales order is automatically created in their ERP system. The financial information flows straight through to accounting so they can process the payment. The order details go to the order management department to pick, pack, ship the order and send a confirmation to the customer. Inventory counts are automatically updated in the system as the order is processed, which then feeds into the purchasing department’s data, so they know what products to order and when. The data automatically flows between departments, because they’re all working in the same system, with the same set of data.

Key ERP Differentiators

While some providers of business management software will position their product as an ERP solution, not all software is created equal. So, what sets ERP apart from other business management software?

  1. ERP software has a shared database that supports multiple functions used by different business units.
  2. With data from all your departments in one system, ERP software enables company-wide integration as we illustrated in the example above.
  3. Process automation allows you to operate in real-time and make faster, more informed decisions.
  4. ERP software provides synchronized reporting, as you pull data from one system instead of manually compiling from multiple applications and spreadsheets.

A Brief History of ERP

While the acronym was first coined by Gartner Group in the 1990s, the origins of ERP go back much further. Back in 1913, engineer Ford Whitman Harris developed the economic order quantity (EOQ) model – a paper-based manufacturing system for production scheduling. Then in 1964, toolmaker Black and Decker combined EOQ and a mainframe computer to create a materials resource planning (MRP) solution. This was the manufacturing standard until MRP II was developed in 1983. MRP II featured modules and integrated core manufacturing components, like purchasing, bill of materials, scheduling and contract management.

Moving into the 1990s, the term ERP was used to represent the next evolution that took the software beyond manufacturing. Software vendors began creating applications that addressed all core business functions, like accounting, HR and more. Modern ERP solutions have gone beyond the back end operational functions to include revenue generating processes like sales, eCommerce and marketing automation.

While ERP was traditionally the domain of large enterprise due to the high cost, high growth small and mid-size companies are rapidly adopting ERP. In fact, the top 20% of growing businesses have implemented ERP to streamline their operations and gain a competitive advantage. The rise of cloud ERP solutions has only fueled the movement, making ERP more affordable and easier to implement for smaller organizations.

Benefits of ERP

In a nutshell, ERP software streamlines your business processes and makes it easier for your employees to do their jobs. Digging into more detail, ERP allows you to:

  • Lower operational costs by simplifying your processes and your IT stack, with all key data in one system.

  • Boost efficiency by automating everyday tasks, freeing up your team to focus on higher value tasks.

  • Gain real-time visibility with powerful reporting that allows you to make confident, data-driven decisions about your business.

  • Deliver a top-notch customer experience with better information and faster response times.

  • Build a platform to scale your business.

Signs You’re Ready for ERP

Given that you’re already researching ERP, you probably have an inkling that an ERP project is in your future. But how do you know if you’re ready to take the leap? Here are the top indicators that it’s time for ERP.

  1. You have many unanswered questions about your business. You’re managing by gut feel because you don’t have easy access to reliable information.
  2. Your business is built on manual processes with duplicate data in different systems. While each business unit has their own function, they can’t operate in a vacuum. That means you’re wasting time entering the same data in multiple systems, just so your people have access to the information they need.
  3. You’re spending too much time on daily tasks. Whether it’s managing inventory, closing the books or keeping customer information up to date, if you’re doing it all manually, it’s time to automate.
  4. You have loose processes that are causing issues. Maybe you’re finding it hard to manage your inventory effectively, you’re dropping the ball with customers or your costs are simply getting too high.
  5. You need a system that will help you grow the business. Managing the day-to-day of the business takes so much time and effort that you’re missing out on new opportunities – or worse, you have no way to identify what those opportunities are.

How to Choose an ERP Solution

Hopefully you have a good grasp of what ERP is and how it can transform your business. But how do you find the right ERP software for your business? The process can be overwhelming, especially if you’ve never implemented ERP before. But we’ve got you covered – our Accounting vs. ERP Guide has everything you need to know.


Download Your Guide of "Simplifying Software Selection: Accounting vs. ERP for Small Businesses"

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