What is ERP? Key features of top enterprise resource planning systems

Posted on 27th Sep 2018

Every organization manages people, purchases products and services, sells (or gives away) something and accounts for money. The way each activity is handled will vary, but every enterprise performs these basic functions. In most cases, it is more effective to handle these processes through an integrated software platform than through multiple applications never designed to work together. That's where enterprise resource planning (ERP) systems come in.

While ERPs were originally designed for manufacturing companies, they have expanded to service industries, higher education, hospitality, health care, financial services, and government. Each of industry has its own peculiarities. For example, government ERP uses Contract Lifecycle Management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP. Banks have back-office settlement processes to reconcile checks, credit cards, debit cards, and other instruments.

What is ERP?

ERP is software that standardizes, streamlines and integrates business processes across finance, human resources, procurement, distribution, and other departments. Typically, ERP systems operate on an integrated software platform using common data definitions operating on a single database.

ERP history

In 1990, Gartner created the term ERP to describe the evolution of materials requirements planning (MRP) and manufacturing resource planning (MRP II) as they expanded beyond manufacturing into other parts of the enterprise, typically finance and HR.

ERP systems evolved rapidly during the 1990s in response to Y2K and the introduction of the Euro. Most enterprises viewed Y2K and the Euro as the cost of doing business, and ERPs provided as a cost-effective way to replace multiple, old systems with a standardized package that could also address these issues.

What is an ERP system used for?

ERP systems improve enterprise efficiency and effectiveness by:

Integrating financial information. Without an integrated system, individual departments, such as finance, sales, and so on, need to rely on separate systems, each of which will likely have different revenue and expense numbers. Staff at all levels end up wasting time reconciling numbers rather than discussing how to improve the enterprise.
Integrating orders. An ERP coordinates order taking, manufacturing, inventory, accounting, and distribution. This is much simpler and less error prone with a single system than with a series of separate systems for each step in the process.
Providing insights from customer information. Most ERPs include customer relationship management CRM tools to track all customer interactions. Coupling these interactions with information about orders, deliveries, returns, service requests, etc., provides insight about customer behavior and needs. [ See also: CRM vs. ERP: What's the difference and which do you need? ]
Standardizing and speeding manufacturing. Manufacturing companies, especially those with an appetite for mergers and acquisitions, often find that multiple business units make similar widgets using different methods and computer systems. ERP systems can standardize and automate manufacturing and supporting processes. This standardization saves time, increases productivity, and reduces head count.
Standardizing HR information. Many enterprises, especially those with multiple business units, lack a simple way to communicate with employees about benefits or to track employees’ hours and expenses. An ERP system, with a self-service portal, enables employees to maintain their own personal information, while facilitating time reporting, expense tracking, vacation requests, scheduling, training, etc. By integrating information, such as advanced degrees, certifications, and work experiences, into an HR repository, individuals with specific capabilities can be more readily matched to potential assignments.
Standardizing procurement. In the absence of an integrated procurement system, analyzing and tracking purchases across the enterprise is challenging. Large enterprises often find that different business units purchase the same product but don’t receive the benefit of volume discounts. ERP procurement tools arm purchasing teams for vendor negotiations by identifying widely used vendors, products, and services.
Facilitating government reporting. ERP systems can greatly enhance an organization's ability to file the necessary reporting for government regulations, across finance, HR and supply chain.

What are the benefits of ERP systems?

ERP improves business performance in several ways. Specifically:

Internal efficiency. Properly operating ERP systems enable enterprises to reduce the time required to complete virtually every business process.
Better decision-making. ERPs promote collaboration through shared data organized around common data definitions. Shared data eliminates time wasted arguing about data quality and it permits departments to spend their time analyzing data, drawing conclusions, and making better decisions. The most effective decision-making balances central guidance with some amount of local autonomy. Central command and control is rarely responsive to local needs while full-field autonomy precludes enterprise-wide coordination. Shared data and common business processes allow decisions to be made within headquarters’ parameters by the individuals closest to the situation.
Increased agility. Standardization and simplification result in fewer rigid structures. This creates a more agile enterprise that can adapt quickly while increasing the potential for collaboration.
Enhanced security. While a centralized data base with enterprise data is a big target, it is easier to secure than data that is scattered across hundreds of servers in closets or under desks. It is particularly difficult, if the security team is not aware of the server or that it contains corporate data.

4 key features of ERP systems

The scale, scope, and functionality of ERP systems vary widely. However, most ERP software features the following characteristics:

Enterprise-wide integration. Business processes are integrated end to end across departments and business units. For example, a new order automatically initiates a credit check, queries product availability, and updates the distribution schedule. Once the order is shipped, the invoice is sent.
Real time (or near real time) operations. Since the processes in the example above occur within a few seconds of order receipt, problems are identified quickly, giving the seller more time to correct the situation.
A common database. A common database was one of the initial advantages of the ERP. It allowed data to be defined once for the enterprise with every department using the same definition. Individual departments now had to conform to the approved data standards and editing rules. While some ERPs continue to rely on a single database, others have split the physical database to improve performance.
Consistent look and feel. Early ERP vendors realized that software with a consistent user interface reduces training costs and appears more professional. When other software is acquired by an ERP vendor, common look and feel is sometimes abandoned in favor of speed to market. As new releases enter the market, most ERP vendors restore the consistent user interface.

Types of ERP systems

ERP systems are typically categorized in tiers based on the size and complexity of enterprises served. ERP systems can be either proprietary or free and open source, though most open source ERPs are designed for small organizations or higher education and may offer little functionality beyond finance.

Typical tiers include:

Tier I ERPs support large, global enterprises and handle all internationalization issues, including currency, language, alphabet, postal code, accounting rules, etc. For decades, Oracle and SAP have been considered Tier I. Microsoft and Infor are more recent competitors but are frequently categorized as Tier I as well.
Tier I Government ERPs support large, mostly federal, government agencies. These vendors support the nuances of government accounting, HR, and procurement. Oracle, SAP and CompuServe’s PRISM are considered Tier I with Infor and CGI’s Momentum close behind.
Tier II ERPs support large enterprises that may operate in multiple countries but lack global reach. Tier II customers can be standalone entities or business units of large global enterprises. Most of these ERPs have some internationalization but lack Tier I breadth. Depending on how vendors are categorized there are 25 to 45 vendors in this tier. [ See: How to select a Tier 2 ERP package ]
Tier II Government ERPs focus mostly on state and local governments with some federal installations. Tyler Technologies and UNIT4 fall in this category.
Tier III ERPs support mid-tier enterprises. Most handle a handful of languages and currencies but only a single alphabet. Depending on how ERPs are categorized, there are 75 to 100 ERP solutions.
Tier IV ERPs are designed for small enterprises. ERP systems designed for micro enterprises often focus on accounting and are not considered full ERPs by IT professionals.

Over the past few years, ERP vendors have created new systems designed specifically for the cloud. At the same time many longtime ERP vendors have created cloud versions of their software.

Cloud ERP is becoming increasingly popular, but all cloud ERPs do not operate in the same fashion. There are two major types:

ERP as a service. With these ERPs, all customers operate on the same code base and have no access to the source code. Users can configure but not customize the code.
ERP in an IaaS cloud. Enterprises that rely on custom code in their ERP cannot use ERP as a service. If they wish to operate in the cloud, the only option is to move to an IaaS provider, which shifts their servers to a different location.

For most enterprises, ERP as a service offers three advantages: The initial cost is lower, upgrades to new releases are easier, and reluctant executives cannot pressure the organization to write custom code for their organization.