What is ERP
Surely you have heard the word ERP many times, especially if you work for a company either in a financial department, sales department, administrative department, warehouse or in many other areas. However, you may not know what an ERP is or what it is for, what its meaning is or have many other questions about it, such as how an ERP can help your organization.
If you do not know what an ERP is or you want to go deeper into the concept of what an ERP is, keep reading, because in this article we will explain what an ERP is, what it is for, ERP deployment models and much more about this topic.
What is an ERP? The ERP definition can be quite confusing as there is no single ERP concept or model with a single function. It comes from the acronym “Enterprise Resource Planning”. In the 1990s, the concept of ERP as we know it today was born, when the consulting firm Gartner was credited with using the term for commercial purposes to define the new business planning programs that came to market with a much broader scope than the existing programs at that time focused solely on manufacturing and finance.
An ERP is an application that contains a centralized database that collects information from different departments or business processes by connecting this central database to the information contained in the specific modules or applications of each business area. An ERP is composed of several modules and connects these modules (accounting, inventories, sales, marketing, procurements…), each of them having a specific functionality. The information is collected in a central database to give the management and employees visibility between departments, improving data quality and eliminating the conflicts that are generated when there are different data sources. It is a program or software that allows companies to control all the information flows that are generated within an organization.
An ERP helps manage a business or areas of a business such as finances, inventories, accounting, procurements, sales and much more. In other words, it is a system that helps to manage different processes of a company in a single integrated system.
Main ERP approaches
There are two main approaches when setting up, building or implementing an ERP in a business or in a company or business group.
The first option is to buy and implement software from different vendors for each one of the different processes, businesses or areas of the company, each one with a specific function. An example of this option would be to have an accounting system contracted with one vendor, a sales program with a different vendor and another system for warehouse inventory with a third vendor. These systems are integrated (connected) into a central database (ERP) from which all the information is exploited.
The second option is to buy all the programs used in the management of the different processes of the company or of the different areas of the company from the same supplier, these being modules of the central database (ERP). Continuing with the previous example, it would consist of contracting the central database (ERP) to a supplier, and with that same supplier, to contract the specific modules of accounting, sales and warehouse inventory.
The first option is more complex as it usually requires integrations, often complex, because the different systems are not usually designed to work in a connected way. On the other hand, the second option is usually simpler since a unified platform offers simple integrations between modules already designed from the beginning to be connected and a common user interface for users, so the implementation is usually simpler. However, it is worth mentioning that not all the modules offered by an ERP vendor are always the best programs for a specific area or business process taking into account the particularities of the business or process and therefore some organizations prefer to contract specific modules with different vendors and then integrate them into the ERP.
Most common ERP modules
Nowadays, there is a wide variety of ERP modules, each supporting specific business processes and providing the employees in those departments with the transactions and information necessary to perform their jobs. As previously mentioned, these modules go far beyond finance and other fundamental functions such as supply chain management and customer communication. Each module connects to the ERP system, which provides a single source of truth and accurate, shared data across departments. The most common ERP modules are as follows:
Procurement modules, also known as sourcing and purchasing modules, are responsible for recording and providing all the information related to a company’s procurement process for the raw materials or services needed to manufacture its products or provide its services. These modules centralize the purchasing process on a single platform, guides it and can even automate the process. Their functionalities usually include, among others, the request for quotations from suppliers, the registration of contracts, the approvals for purchases if required, purchase orders, etc.
Sales / Customer Relationship Management (CRM):
A sales module, better known as CRM, is a customer relationship management (CRM) program that tracks and records all relationships and interactions with prospects and customers. It tracks all customer communications, helps with lead management and can improve customer service and increase sales. In addition, they often include order management, contract management, invoicing, sales performance management, and sales force support.
Marketing modules are currently very focused on digital marketing (email, web, social media) and allow companies to optimize and personalize their messages to customers or prospects and to track and record all events in this area. They usually consist of marketing automation tools and serve to increase leads, sales and customer loyalty. In many cases, the Marketing module is integrated within the Sales/Customer Relationship Management (CRM) module.
The finance and accounting modules are usually the main module or base module and the most important in ERP systems. It is the module in charge of managing the accounting books (general ledger and journals) and all financial data of the organization. This module is responsible for tracking and recording all transactions, including accounts payable (AP) and accounts receivable (AR), and handles reconciliations and financial reporting. Additionally, they are set up to comply with the accounting standards applicable to each business according to its nature, complying the accrual principles and the different applicable accounting principles. Additionally, most of the financial modules can prepare financial statements for a specific period and preparing financial reports.
Human Resources modules have various names, the most common ones being Human Resources Management Module (HRM), Human Capital Management Module (HCM) or Workforce Management Module (WFM). Their main functionalities include keeping time records of worked hours, personal time off (PTO), sickness and leaves. In addition, they usually offer payroll management functionalities, personnel performance evaluation management, demographic data and even support the hiring processes.
Manufacturing modules are used by companies with complex manufacturing processes. Their main function is to support and simplify the manufacturing process, coordinating all the necessary steps of the manufacturing process, as well as providing information on the entire process in real time so that production can be adjusted to demand at all times. Its functionalities usually include the planning of raw materials and resources needed for manufacturing, manufacturing monitoring and quality management.
Logistics and Supply Chain Management / Inventory Management
Logistics management or supply chain management or also called inventory management modules (sometimes stand-alone modules) are responsible for recording the movement of raw materials and inventory levels. Their main functionalities include recording information related to warehouse activities such as reception, picking, packing and shipping of materials, maintaining information on inventory levels and providing key inventory-related metrics. Additionally, transportation and logistics management tools are included. These modules increase visibility into the supply chain and can lead to time and cost savings in warehouses by identifying more efficient ways to execute these tasks.
These modules are usually used by services companies or companies that for some reason must interact with customers for example for support activities. They usually include information on the status of the service, how the service needs to be performed, repair needed, and even analytics of that information with which sales representatives or assigned technicians can perform the service in a more efficient and faster way having a control of the services provided, services in progress or services to be provided in the future.
Enterprise Asset Management (EAM)
Enterprise Asset Management (EAM) modules are used by companies with many fixed assets, or that make intensive use of them. They include functionalities for maintenance, use and depreciation, planning of activities over them, security, etc. Thanks to the information obtained, it is possible to increase the efficiency of these assets, minimizing downtime or planning them in a more efficient way.
R&D and Engineering
The R&D and engineering modules support the product design and development function, and also facilitate product lifecycle management, recording all related information at all times.
Types of ERP Deployment Models
Nowadays, there are different ways deploy an ERP and the most appropriate type of deployment will depend on the company and its needs. The most common methods of ERP deployment are cloud, on-premise or hybrid that combine environments. Below, we will summarize how each method works and the key differences between them.
A cloud-based ERP, the ERP runs on remote servers, i.e. the software runs on a provider’s server (cloud). The server is maintained by the provider. Access by users to an ERP in the cloud is usually done through a web browser, which allows them greater flexibility, since they only need an internet connection to access the ERP and all the information contained on it.
This is the traditional model in which the ERP is hosted on the company’s local servers. The company has full control, but is responsible for security, maintenance, upgrades and other modifications. Maintenance requires experienced in-house IT staff. For many years, on-premise ERP was the only option, but this deployment model has declined in recent years as a result of the emergence of the cloud.
Hybrid ERP as its name suggests, combines elements of on-premises and cloud deployments. In this case, some of the ERP applications and data are hosted in the cloud, while others are hosted on local servers. This hybrid approach is also often referred to as two-tier ERP. For this model to work, the cloud systems must be linked to the local platform to ensure a constant flow of information, a complex operation to develop.
The Open-source ERP is a cheaper alternative, but it is not as widespread as the other deployment models. In this model, the open-source ERP vendor allows companies to download their software for free and charges an annual fee only if the customer wants access to the cloud. These solutions have been improving over time especially in terms of the number of modules available but the main disadvantages are the reduced support from the vendor and that the system configurations and upgrades tend to fall on the customer.
ERP systems by business size
An ERP is not only for large or multinational companies, but there are different models that suit different sizes of companies or different types of businesses. Similarly, there is no one ERP that is best for all small, medium or large companies, respectively. But there are specific features for each segment, as well as preferred deployment models for each business profile that can be identified.
ERP for large-companies
Large companies, with operations in different geographical locations or with complex corporate structures with numerous subsidiaries, due to the nature of their operations require systems that can capture, process and interpret a large amount of data and handle the needs of a large number of business units. They usually have ERP deployed in the cloud, accessible directly from any location and with the associated advantages of having a single system or hybrid (two-tier) ERP that uses a SaaS solution for parts of the business and integrates with the main local ERP.
ERP for mid-size companies
We understand medium-sized companies in this segmentation as medium-sized companies that have a certain corporate structure, and operations in several locations, and/or are in a growth phase and intend to increase either the number of companies in the group or the number of locations or business units. These companies often require ERP systems that are capable of supporting their future growth plans, as well as specialized modules to support their current operations. These ERP systems must help growing businesses to scale and compete without complexity and cost. For this reason, and because they tend to lack large IT teams, cloud ERP is very common in this segment. They have lower upfront costs and are often easier to use for companies with limited in-house technical expertise.
ERP for small companies
Smaller companies that take the step to implement an ERP in the organization usually have an ERP system that has basic functionalities and not too many features to avoid the software having many more functions than they need. In addition, this allows them to reduce implementation costs and the training required for employees. ERP for small businesses are usually in the cloud, because they are quick to install and designed to grow with basic functionality.
Snab as management and automation software
Snab is a cloud-based platform, which allows businesses to automate the receipt and record of invoices received, digitizing the process and having a real-time control of all transactions, due to the connection with all bank accounts in addition to giving your business accurate information of all accounts payable/receivable. Request a demo with us.