ERP definition

Enterprise resource planning (ERP) is a system of integrated software applications 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.

ERPs were originally designed for manufacturing companies but have since expanded to service industries, higher education, hospitality, health care, financial services, and government. Each industry has its own ERP 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.

The benefits of an ERP system

ERP systems improve enterprise efficiency and effectiveness 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 and 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 unifying procurement across an organization’s disparate business units. An ERP system can also provide a standardized HR platform for time reporting, expense tracking, training, skills matching, and the like, and greatly enhance an organization’s ability to file the necessary reporting for government regulations, across finance, HR and the supply chain.

Properly operating ERP systems enable enterprises to reduce the time required to complete virtually every business process. They also promote collaboration through shared data organized around common data definitions, resulting in better decision-making. The standardization and simplification that ERP systems offer result in fewer rigid structures, thereby creating a more agile enterprise that can adapt quickly while increasing the potential for collaboration. An ERP systems centralized database, while being a bigger target, is easier to secure than data scattered across hundreds of systems.

4 key features of ERP systems

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

1. 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.
2. 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.
3. 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.
4. 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.