Enterprise Resource
Planning (ERP): Meaning,
Components, and Examples

Understanding Enterprise Resource Planning (ERP)

You can think of an enterprise resource planning system as the glue that binds together the different computer systems for a large organization. Without an ERP application, each department would have its system optimized for its specific tasks. With ERP software, each department still has its system, but all of the systems can be accessed through one application with one interface.

ERP applications also allow the different departments to communicate and share information more easily with the rest of the company. It collects information about the activity and state of different divisions, making this information available to other parts, where it can be used productively.

ERP applications can help a corporation become more self-aware by linking information about production, finance, distribution, and human resources together. Because it connects different technologies used by each part of a business, an ERP application can eliminate costly duplicates and incompatible technology. The process often integrates accounts payable, stock control systems, order-monitoring systems, and customer databases into one system.

How Enterprise Resource Planning Platforms Work

ERP has evolved over the years from traditional software models that made use of physical client servers and manual entry systems to cloud-based software with remote, web-based access. The platform is generally maintained by the company that created it, with client companies renting services provided by the platform.

Businesses select the applications they want to use. Then, the hosting company loads the applications onto the server the client is renting, and both parties begin working to integrate the client's processes and data into the platform.

Once all departments are tied into the system, all data is collected on the server and becomes instantly available to those with permission to use it. Reports can be generated with metrics, graphs, or other visuals and aids a client might need to determine how the business and its departments are performing.

Types of ERP Systems

There's a number of different ERP solutions that can meet a variety of business needs. This list is not meant to list every single type of ERP, though the list is pretty comprehensive. Any business considering implementing an ERP system should be able to find value in some of these types of systems, and multiple systems may be relevant in any given situation.

On-Premise ERP

On-premises ERP systems involve purchasing the software licenses and installing the ERP system directly onto a company's own servers. Companies have full control over the system and data, as it resides within their premises. Customization and integration with existing systems can be more extensive, and this type of ERP usually requires dedicated IT resources for maintenance, updates, and security.

Cloud ERP

Cloud ERP systems are hosted on remote servers and accessed through the internet. Cloud ERPs like SaaS products offer better scalability, allowing businesses to easily adjust resources and features as needed without significant upfront investment in hardware. Cloud ERP systems typically have a subscription-based pricing model, and updates/maintenance are managed by the ERP provider (not the company itself).

Industry-Specific ERP

Industry-specific ERP systems are tailored to meet the unique needs and requirements of particular industries. These systems often include industry-specific modules, functionalities, and best practices to address the complexities of the industry. For example, consider a manufacturing firm that is heavily reliant on inventory, supply chain management, and distribution of goods. That type of ERP will be vastly different than a client-based ERP such as a financial institution's ERP.

Open-Source ERP

An open-source ERP system (or any open-source software, for that matter) provides users with access to the source code. This means a company can customize, modify, or redistribute the ERP to better meet the company's needs. Implementing and maintaining open-source ERP systems may require more technical expertise and resources compared to commercial ERP solutions.

Small Business ERP

On the other hand, small business ERP systems are designed specifically for the needs of small and medium-sized businesses (SMBs). These types of ERP systems try to offer balance between being slightly niche while offering essential functionalities at a more affordable price point. Because they are less robust, small business ERP solutions are often easier to implement and require less customization compared to enterprise-level ERP systems.

Tiered ERP

Tiered ERP systems offer different levels of functionality and scalability to cater to businesses of varying sizes and complexity. Companies can choose the tier that best matches their current needs and budget, with the option to upgrade or customize as their requirements evolve. This would entail adding on modules as they become relevant (i.e. a company that is scaling to international operations may wait to implement foreign current modules).

Benefits of ERP

Businesses employ enterprise resource planning (ERP) for various reasons, such as expanding, reducing costs, and improving operations. The benefits sought and realized between companies may differ; however, some are worth noting.

Improves Accuracy and Productivity

Integrating and automating business processes eliminates redundancies and improves accuracy and productivity. In addition, departments with interconnected processes can synchronize work to achieve faster and better outcomes.

Improves Reporting

Some businesses benefit from enhanced real-time data reporting from a single source system. Accurate and complete reporting help companies adequately plan, budget, forecast, and communicate the state of operations to the organization and interested parties, such as shareholders.

Increases Efficiency

ERPs allow businesses to quickly access needed information for clients, vendors, and business partners. This contributes to improved customer and employee satisfaction, quicker response rates, and increased accuracy rates. In addition, associated costs often decrease as the company operates more efficiently.

Increases Collaboration

Departments are better able to collaborate and share knowledge; a newly synergized workforce can improve productivity and employee satisfaction as employees are better able to see how each functional group contributes to the mission and vision of the company. Also, menial and manual tasks are eliminated, allowing employees to allocate their time to more meaningful work.