What is ERP? Enterprise resource planning systems explained

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ERP definition

Enterprise resource planning (ERP) is a system of integrated software applications that manages day-to-day business processes and operations across finance, human resources, procurement, distribution, supply chain, and other functions. ERP systems are critical applications for most organizations because they integrate all the processes necessary to run their business into a single system that also facilitates resource planning. ERP systems typically operate on an integrated software platform using common data definitions operating on a single database.

ERPs were originally designed for manufacturing companies but have since expanded to serve nearly every industry, each of which can have its own ERP peculiarities and offerings. For example, government ERP uses contract lifecycle management (CLM) rather than traditional purchasing and follows government accounting rules rather than GAAP.

Benefits of ERP

ERP systems improve enterprise operations in a number of ways. By integrating financial information in a single system, ERP systems unify an organization’s financial reporting. They also integrate order management, making order taking, manufacturing, inventory, accounting, and distribution a much simpler, less error-prone process. Most ERPs also include customer relationship management (CRM) tools to track customer interactions, thereby providing deeper insights about customer behavior and needs. They can also standardize and automate manufacturing and supporting processes, and unify procurement across an organization’s business units. ERP systems can also provide a standardized HR platform for time reporting, expense tracking, training, and skills matching, and greatly enhance an organization’s ability to file the necessary compliance reporting across finance, HR, and the supply chain.

Key features of ERP systems

The scale, scope, and functionality of ERP systems vary widely, but most ERP systems offer 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. Because 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 enables data to be defined once for the enterprise with every department using the same definition. Some ERP systems split the physical database to improve performance.
Consistent look and feel. ERP systems provide a consistent user interface, thereby reducing training costs. 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 solutions

ERP systems are categorized in tiers based on the size and complexity of enterprises served:

Tier I ERPs support large global enterprises, handling all internationalization issues, including currency, language, alphabet, postal code, accounting rules, etc. Tier I vendors include Oracle, SAP, Microsoft, and Infor.
Tier I Government ERPs support large, mostly federal, government agencies. Oracle, SAP, and CompuServe PRISM are considered Tier I with Infor and CGI 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. Depending on how vendors are categorized there are 25 to 45 vendors in this tier.
Tier II Government ERPs focus on state and local governments with some federal installations. Tyler Technologies and UNIT4 fall in this category.
Tier III ERPs support midtier enterprises, handling a handful of languages and currencies but only a single alphabet. Depending on how ERPs are categorized, there are 75 to 100 Tier III ERP solutions.
Tier IV ERPs are designed for small enterprises and often focus on accounting.