What Is Enterprise Resource Planning Systems?

An enterprise resource planning system, or ERP, gives businesses an information technology tool that combines and integrates the various information systems it uses into one comprehensive system to manage operations. An ERP typically includes finance and accounting, human resources, supply chain and inventory, and manufacturing information systems. Its purpose is to facilitate the flow of information among all departments in an organization, and manage data sharing with outside systems, such as suppliers, business partners, clients and regulatory agencies.

  1. Background

    • ERPs evolved from the materials management systems developed for manufacturing in the 1980s. Known as material resource planning, MRP or computer-integrated manufacturing, these systems managed the raw materials, manufacturing process and delivery schedules in factories. Their goal was to lower stockpiles of expensive inventory to just-in-time levels. Over time, businesses added additional modules, such as accounting and financial planning systems, to the MRPs; this made them ERP systems. In addition, service-base businesses began to implement these integrated systems, adding human resources, project management and other systems.

    ERP Modules

    • ERP modules can be used independently or in conjunction with other modules. Typical modules include accounting and finance, human resources, supply chain, manufacturing, project management, decision support, product planning, order tracking and customer service. Many businesses start with accounting and finance systems, then add human resources and supply chain modules for make a core ERP. The software for each module is unique to that function, incorporating business rules, best practices and regulatory requirements, such as Sarbanes-Oxley reporting in financial systems. Each module shares data with other modules, thus eliminating the need for basic data entry by each department involved in a business process.

    ERP Installation

    • Because of the complexity of the ERP, implementation can take up to two years, depending on the modules installed. Modules are typically installed consecutively, rather than concurrently. However, with the emergence of "software as a service" or "software on demand," also called SaaS, ERP can be more rapidly deployed through the Internet, which makes it more cost-effective and feasible for smaller companies. In SaaS arrangements, a third-party provider offers ERP services to client organizations via the Internet. Each client has secure access to its information and uses it to manage operations for a monthly fee.

    ERP and Business Processes

    • Business processes work hand-in-hand with the ERP system, and new ERP technology should not be coupled with legacy business processes. The success of the ERP depends on improving and streamlining business processes to make best use of the ERP.

    ERP Benefits

    • ERP systems offer several benefits. First, they integrate data from all functional areas of the business, so management has complete and immediate access to all daily operations and financial data. This information can be used to analyze problem areas, identify trends, plan for the future and track progress toward goals. ERPs can lead to better customer service, because orders are less likely to be lost and customer service representatives can give clients and account managers up-to-date status reports for each customer request. In addition, the business has better control of inventory, which reduces cost. Manufacturers can standardize and speed up their processes by automating some steps and eliminating duplicate steps. It also simplifies human resources management, including payroll, benefits, employee relations and training.

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