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Enterprise Resource Planning (ERP) Definition

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Running a business becomes increasingly more complicated as it grows larger and becomes more successful. Streamlining interdepartmental communication, data storage and resource distribution take on greater importance as a business transitions from a startup into a marketplace leader. Enterprise resource planning (ERP) systems enable businesses to stop operating as a collection of independent departments and merge into a cohesive operation capable of meeting customer expectations and market goals.

ERP is a blanket term covering many different concepts and data management solutions. Even those familiar with ERP may not fully realize what new system implementations can mean for improving employee productivity and increasing revenue.

Continue reading to discover what ERP systems are and how they can change your business.

What is an enterprise resource planning system?

Stripped down to the basics, the concept of an ERP system is a centralized database that enables businesses to improve the flow of information between departments. Using cloud computing and software systems, ERP works to improve core business processes through automation and artificial intelligence.

As a business grows, communication between departments becomes more challenging and essential. Early in your business’s development, it may have been necessary to allow each department to track its own data and keep its own records separate from the rest of your operation. But increased growth requires every department to have access to up-to-date data without spending too much time searching for it.

For example, if your shipping and order processing departments use different spreadsheets or inventory tracking systems, your teams will have difficulty accessing accurate information. A breakdown can occur where each department uses a separate set of facts and figures, leading to inaccurate or incomplete perceptions and faulty decision-making. This can lead to discrepancies that impact the customer experience.

ERP systems eliminate the need for departments to use individual spreadsheets or separate systems by combining all information into a central database. With an ERP solution, your shipping and order processing teams can pull data from the same shared resource, eliminating the potential for confusion.

When the time comes for every part of your business to start operating in unison rather than separately, you may want to consider implementing ERP solutions.

The most common components of ERP

ERP software does more than collate different data sets. The technology features various modules designed to meet the unique needs of each department in your business, from human resources and shipping to accounting and logistics. While the modules offered can vary between ERP programs, most include a few common feature sets.

Human resources

Employee management tools factor prominently in most ERP models, as HR systems are often an easy source to draw from when looking to improve existing processes. One of the primary benefits of ERP is the automation of routine tasks, an area where HR departments often stand to benefit the most.

HR plays an enormous role in the success of any business, but the department also represents an incredible drain on resources. Onboarding, offboarding and benefit distribution and administration all take time to manage properly. Using manual processes to enter employee hours, track vacation and perform other administrative tasks hampers productivity and makes it harder for your HR team to meet employee needs.

Payroll management software is often a key component of ERP systems. Manually entering payroll data and submitting direct deposits is an inefficient use of your team’s time. HR components automate most payroll tasks to save valuable time while ensuring your employees receive accurate pay on time.

ERP HR components help to reduce the potential for human error. Data entry mistakes like incorrectly inputting employee hours or withholding excess taxes are eliminated with automated systems. The distribution of training materials, employment forms and other essential documents is more manageable when tracked in a centralized hub, making it easier to onboard without worrying that information isn’t being shared equally among new employees.

Supply chain management

Successful supply chain management necessitates tracking multiple data points from each supplier. Accurately tracking the goods you have on hand, the turnaround time for orders and the availability of resources contributes to ensuring your supply chain remains capable of meeting the demands of your business. When a link in your supply chain fails, you need to know immediately and identify a new supplier before facing production delays.

ERP programs provide real-time data so you can stay ahead of any potential disruptions. Automated systems can notify you when supplies drop below a designated threshold and automatically place new orders with suppliers. If a supplier can’t meet your order, you’ll have extra time to find an alternative solution without delaying your production schedule.

Supply chain management modules also help you save money by tracking which inventory items you typically purchase around the same time. Placing larger orders can reduce shipping costs, and even net a bulk order discount from the supplier.

Supply chain management

Finance

Financial management is one of the primary components of ERP systems and is one of the key features that makes ERP an indispensable tool.

Finance modules evaluate and monitor accounting data, including budgets, expenses, cash flow and sales. Analysis of this data can identify areas of excess spending and allow you to find opportunities for reducing costs. Using real-time data to create financial models allows you to accurately predict future financial earnings and make more informed spending decisions in the present.

Customer relationship management

A customer relationship management (CRM) tool is another common component found in ERP systems. This module tracks sales leads and customer information to provide useful data points that your sales and marketing teams can use to improve revenue growth.

This approach offers insights into customer habits that can be used to implement changes to your sales strategy. Understanding what motivates customers to make purchases, the time frame within which decisions are usually made and how much the average customer spends will help create a more accurate profile you can use to refine sales messaging.

A CRM module can also track individual contacts and potential sales leads. Organizing information — such as who last contacted a lead, what they discussed and when the scheduled follow-up dates are — works to ensure top-notch lead nurturing and maximal conversion rates.

The major benefits of ERP

You now know the broad strokes of how ERP can impact each part of your business. Here's a more detailed breakdown of how ERP systems can improve workflows company-wide.

Comprehensive reporting

Thorough reporting may not be the most exciting part of a business’s day-to-day operations, but it’s invaluable for ensuring everything runs efficiently. ERP software companies understand the value of comprehensive reporting and have made easy documentation a key feature in their modules.

Reporting often falls into categories that include:

Forms, such as purchase agreements, orders, checks and invoices

Customizable weekly or monthly reports

Analytical reports that details everything from emerging trends to real-time sales data

Executive reports that track key performance indicators (KPIs)

When developing a comprehensive reporting strategy, these and other data types must be considered. ERP systems allow businesses to implement a detailed reporting strategy across departments that tracks this information and makes it searchable.

Centralized data

Enterprise resource planning, whether in the cloud or on-premise, eliminates the need for individual departments to maintain their own spreadsheets and databases. Your team no longer has to search through incompatible systems or mismatched data sets to find the most up-to-date information.

Storing real-time data in one system empowers you to:

Reduce reporting errors caused by outdated or inaccurate information

Prevent projects from falling behind due to inattention or missed messages

Eliminate errors that result from manual data entry mistakes

Lower the risk that valuable data gets lost or mismanaged

Increased productivity

By automating manual processes and tasks like payroll, time tracking, scheduling and inventory management, you free team members to divert their focus to more critical matters that may not always receive the time and attention they deserve.

Data entry and collection are not only time-consuming but also error-prone. Eliminating manual data entry tasks alone will save your business an incredible amount of time, and it will eliminate costly mistakes, too.

Detailed insights

Big data analytics is an ERP tool that allows businesses to find insights hidden within large data sets. These data tools examine massive amounts of information to find existing trends that may not be obvious at first glance. Through the analysis, mining, visualization and cleaning up of data, ERP systems can identify missed opportunities and areas that can be improved.

Areas of your business that data mining can enhance include:

Customer acquisition and retention

Identification of potential risks and liabilities

Sales trends and marketing opportunities

Manufacturing efficiency and productivity

Substantial cost savings

The improved efficiency and elimination of redundancy offered by ERP systems directly lead to increased savings for your business.

When properly implemented, ERP companies can enjoy substantial cost savings by:

Eliminating delays caused by a lack of communication or the use of inaccurate information

Improving training processes by automating forms and onboarding

Reducing the cost of human error by replacing manual data entry with automated systems

Increasing the amount of time your teams have to focus on essential tasks that directly impact sales and customer service

Eliminating redundant systems and fees paid to SAS tools

Enhanced data and cloud security

ERP systems feature built-in security controls that keep your data safer than when stored in individual files or on separate databases. Cloud security also offers improved protection against valuable files getting deleted or lost due to user error or hardware malfunction. You can also protect files from being changed by unauthorized users and limit which team members can access files when stored on a centralized database with different levels of permission.

The importance of ERP systems for business growth

For businesses looking to eliminate redundancy, improve data flow and increase revenues, ERP systems offer the tools needed to meet those goals and boost operational efficiency. From tracking small business loans to streamlining recruiting, ERP systems offer the type of flexibility your business needs to stay ahead of the competition.

Most ERP system providers offer your business the ability to work with their modules before making a purchase decision. A demo provides the chance to get familiar with the system’s dashboard, user interface and data integration tools to give you a better idea of whether the system is the right fit for your business needs. If you're considering purchasing an ERP system, always request a demo to get a clearer idea of the potential return on your investment.