ERP systems (or enterprise resource planning systems) are complete, integrated systems that manage all aspects of a production-based business, aligning financial management, human resources, supply chain management, and manufacturing with the core function of accounting. ERP systems are used to provide transparency into the entire business process by tracking all aspects of production, financials, and materials. These expansive systems act as a central hub for end-to-end workflow and data. A variety of departments can view the information recorded by ERP systems to ensure that the correct procedures are taking place.
ERPs are used by manufacturing and product-centric companies. Instead of using standalone products, which may not properly integrate, in each separate department, ERP systems provide cohesiveness from the beginning to end of all business processes. This assists in expansion and growth of a company. While ERPs cover a wide range of functionality within themselves, they may integrate with CRM software and PSA software products. Users may also choose to integrate standalone products to form a unique ERP system. Others might solely select specific modules from an ERP system that are sold uniquely to best match business needs, instead of purchasing the entire suite. Some project-centric companies may run similar project-based ERP systems that do not focus on product manufacturing, but still offer an end-to-end business solution.
ERP systems provide a variety of modules and while each business has unique requirements, most ERP systems offer the following:
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To understand what ERP is (and isn’t), it helps to know its history. ERP evolved from materials requirements planning (MRP) software, which was created in the ‘60s for large companies who needed to manage complex manufacturing operations. MRP was used mainly to identify, allocate, and track “resources" such as raw materials, parts, ingredients, and labor. As technology became more accessible, vendors added features for back office (accounting and HR) and front office (sales and CRM).
The evolution of ERP followed different paths, such as organic development or mergers and acquisitions. The result was often a mix of multiple products that were more or less integrated and sold as a package or separately.
It is crucial for buyers to understand how different ERP systems evolved over time so they can identify potential challenges, such as:
ERP systems can be categorized using multiple criteria, such as platform or delivery model. Other criteria can be used to differentiate between ERP products, such as:
What You Should Know About ERP Implementation
Selection — The success of an ERP implementation depends a lot on the selection process. It is doubtful that a company will successfully deploy an ERP system that does not cover its specific business needs. Even if the system gets implemented, it will not provide substantial benefits such as increased productivity and profitability, cost reductions, and better visibility into the operations of the company.
Here are more details on how to approach ERP selection to avoid investing in the wrong system:
Another selection challenge that will have a significant impact on the implementation is the possibility that companies may not find the ideal ERP for their business needs. One way to address this issue is to adopt a multitiered system, which means that several ERP systems are implemented for different purposes. For instance, a company may choose one ERP product for manufacturing and another one for distribution. While there are ERP systems that can cover both types of features, they are not always cost-effective, which is why SMBs tend to opt for a two-tier model.
Once a company has decided which ERP to purchase, there are two main approaches when it comes to the implementation of the system:
ERP Implementation Stages
ERP implementation is a complex process that shouldn’t be taken lightly, not even by small companies. In a nutshell, implementing ERP is very much like replacing all furniture in a house, including kitchen appliances and the bathroom sink and tub. ERP implementation will disrupt business operations because employees will need to learn the new system while still using the old one, valuable data may be lost when transferred between systems, and the company may need to use both systems in parallel.
Change management — ERP implementation is a complex process that shouldn’t be taken lightly, not even by small companies. In a nutshell, implementing ERP is very much like replacing all furniture in a house, including kitchen appliances and the bathroom sink and tub. ERP implementation will disrupt business operations because employees will need to learn the new system while still using the old one, valuable data may be lost when transferred between systems, and the company may need to use both systems in parallel.
Change Management — Another essential factor that can impact the success of an ERP implementation is change management. Many ERP buyers wrongly assume that vendors provide change management as part of the implementation process. While vendors can and do help with some change management activities, such as addressing resistance to the new system, companies are ultimately responsible for defining and implementing change management strategies. External consultants can help with advice and guidance, but each company needs to identify and address the issues that can be caused by such an important project as an ERP implementation.
Change management can be extremely beneficial to companies implementing ERP, but it is difficult to plan and implement. To ensure that they successfully manage change during an ERP implementation, companies should focus on the following:
How to evaluate success — It is challenging to define and track ERP implementation success. The statement claiming that 70% of ERP implementations fail is greatly exaggerated. There is no research to back up this statement—the report usually mentioned to support this claim shows that 45% of ERP implementations are considered “challenged" and only 19% failed. This simply shows that there are no set-in-stone criteria or standards for ERP implementation success. While companies aim to implement ERP on time and budget, these are not the only factors that make an ERP implementation successful. What matters most is user adoption, productivity increase, and financial benefits such as cost reductions. All these can only be achieved after using an ERP for at least one year, which is why implementation success cannot be measured immediately after the go-live date.
Since ERP provides features for most departments of a company, this type of software is used by most, if not all, employees. The following list includes a few departments that cannot function properly without using ERP.
Accounting and Finance — Accounting and finance departments need ERP for multiple purposes, the most important being the financial management of all the business transactions of the company. Everything a company buys and sells, as well as all direct (wages, commissions) or indirect (insurance, utilities) costs, need to be tracked using generally accepted accounting principles (GAAP). Finance professionals also use ERP to create financial statements and provide financial information for internal and external audits.
Operations — Operations refers to activities that are specific to the specialization of a company. For instance, production operations are specific to manufacturing companies, project management and delivery to professional services providers, and warehouse and inventory management to distributors. Some types of activities, such as inventory management, are essential for multiple types of companies. Others, like project and portfolio management, are specific to industry sectors such as professional services.
Sales — Sales need ERP even though there are lots of tools that they can use in their work. The main reason why ERP is so vital for sales is that it contains a lot of valuable data on historical sales and information on products and services. Most ERP products also manage information on customer credit limits and can be used for debt collection.
Product — Product development teams may not always use ERP directly, but they rely on the information provided by the system. Sales data can show what products are most successful, while details on returns and defects help the company improve its offering. Engineers and designers can also use ERP and its integration with PLM or CAD solutions to communicate product changes with the manufacturing department.
Purchasing and Procurement — Purchasing and procurement is in charge of finding and buying any products and services that are needed by a company, such as raw materials and parts for manufacturers, consultants for professional services companies, or logistics providers for distributors. The most crucial challenge in procurement is to clearly understand what products or services a company needs and when. ERP systems provide information on sales orders that need to be fulfilled, which can be compared with available inventory to determine what needs to be purchased. ERP systems also manage cost data for raw materials or components, which helps procurement professionals better negotiate.
Quality Management — Quality management is essential in manufacturing but can also be important in distribution, and even professional services. For highly regulated industries such as food and beverage, the quality standards are high and penalties for non-compliance hefty. While quality management can be provided as a standalone product, most ERP for manufacturing systems include features to track quality.
All ERP systems provide functionality for a limited number of industries. ERP vendors choose to specialize for two main reasons:
The level of specialization can vary from one product to another. While some products focus on industry sectors like manufacturing or distribution, others provide functionality for one industry only, such as fashion and apparel.
ERP for Manufacturing — The main differences between production types are the finished products and the way they are manufactured. Discrete manufacturing companies deliver individual products such as computers, while the result of process manufacturing is usually a batch of goods such as 1,000 pounds of ice cream. Engineering-to-order refers to custom products that can be personalized for each customer.
Discrete Manufacturing — Discrete manufacturers combine parts and components to create finished goods. Some examples of products delivered by discrete manufacturers are furniture, computers, and electronics, or clothing and apparel. To manage production, discrete manufacturers need to define what types of components are required for each finished product and in what quantities. This is known as a bill of materials (BOM) and is a critical feature of any ERP for discrete manufacturing. In some cases, multilevel BOMs are required to manage the production of the finished product and some of its components. For instance, a computer manufacturer may need a BOM for each type of computer and another one to assemble hard drives. Since not all hard drives are compatible with all computers, the manufacturer needs to create a multilevel BOM (also known as a nested BOM) for each type of product.
Manufacturers use BOMs for other essential purposes such as calculating the cost of the products they manufacture. The production cost of a product is the sum of the costs of its components and the labor required for manufacturing. The total cost also includes expenses for utilities, rent, administrative personnel, and other indirect costs. Companies use the total production cost to determine the price of a finished product by adding a profit margin to the cost.
BOM is also used to determine the quantities of components required to fulfill demand. Using MRP functionality, manufacturers match demand (open sales orders) with existing inventory and create purchase orders for missing components. MRP should also take into account components that have been ordered but not yet received, as well as production orders for parts manufactured onsite.
Process Manufacturing — Process manufacturing combines raw materials and ingredients to create indistinguishable products such as food, drinks, paint, or detergent. These types of finished products can be sold in bulk or packaged for individual use. Instead of BOMs, process manufacturers use recipes and formulas, which define how ingredients need to be mixed to obtain a finished product. Recipes identify what ingredients are required and in which quantities, while formulas determine the chemical reactions that occur during production.
As opposed to discrete manufacturing where the quality is managed for each product, a formula error can compromise an entire batch in process manufacturing. The good news is that it is possible to adjust the quality of a batch by adding ingredients or additives for food processing. In some cases, like hazardous substances, it is more difficult to adjust the quality, and a recipe error may result in accidents or pollution.
Another challenge specific to process manufacturing is the fact that ingredients and finished products have a limited shelf life and need to be used or consumed before their expiration date. This means that ingredients cannot be ordered and stored for unlimited periods of time, and the finished goods need to be delivered to retailers and consumers as soon as possible. Furthermore, products like food and beverage or hazardous materials require special storage and transportation conditions to maintain their quality and avoid accidents.
ETO — Engineering-to-Order (ETO) manufacturers customize their products to create a personalized offering for a limited number of customers or sometimes even for individual customers. This doesn’t mean that ETO manufacturers develop new products for each customer. Standard products (like heavy equipment and fixed assets) can be sold without modifications but may need to be customized at the demand of the customer.
Due to the importance of the customization, functionality, like quote and proposal management or quote to order, is critical for ETO manufacturing. Contract management is also essential to clearly define the expectations of the customer, service level agreements, and warranties.
Another essential module of ERP ETO is project management. Each product delivered is usually so complex that companies need to track tasks, milestones, and resources for each contract or customer. Project management helps ETO manufacturers offer custom products on time and monitor the resources used in production to calculate their final cost.
Mixed-mode manufacturing combines two of the manufacturing types described above. The most common example is the mix between discrete and process manufacturing.
ERP for Distribution — Distributors are companies that buy products from manufacturers and resell them to other companies or directly to consumers. The main difference between distributors and retailers is that the former are not using physical stores for sales. Since e-commerce technology became more accessible, distributors started to resell products online.
The core of the distribution business is the purchasing of products, their storage, and their delivery from supplier to the customers. While most ERP systems offer features for purchasing, inventory, and shipping, that doesn’t necessarily make them an excellent choice for distribution companies.
The following are a few types of functionality that differentiate ERP for distribution from other kinds of ERP:
ERP for distribution should not be confused with supply chain and logistics software (SCM), which covers all activities performed by various partners from a supply chain network, including manufacturers, suppliers, logistics companies, and customs brokers. SCM delivers advanced features such as demand planning, sales, operations planning, transportation management, and supply chain visibility, which are usually not part of ERP for distribution products.
ERP for Professional Services — Also known as ERP for Professional Services Automation (PSA), this type of software is designed to address the specific needs of companies in industries such as consulting, design and architecture, IT services, legal and financial services, or training and development. All these companies have in common the fact that they rely extensively on specific knowledge and a professionalized workforce.
The core functionality for PSA software is project management. Project management software comes in different flavors, and buyers need to find the right tool for their company.
Through acquisitions or organic development, some vendors provide solutions that cover multiple industry sectors, such as manufacturing and distribution. Manufacturers can significantly benefit from this type of software when they prefer to have their own fleet and deliver products themselves. There are also distributors that may decide to mix products and sell them as packages, which is usually known as an assembly. Assembly activities are considered light manufacturing and do not require advanced features, but some ERP features used in production are needed, such as bill of materials, kitting, product configuration, or basic MRP.
A recent trend is the diversification of operations by manufacturers to find new revenue sources. Since manufacturing is one of the slowest-growing industry sectors, manufacturers are looking to increase revenues by delivering services related to the products they make and sell. These companies need an ERP system that can manage their manufacturing operations, as well as related services. For instance, a manufacturer of industrial lighting equipment may decide to provide installation and maintenance services to its customers.
Other Vertical ERP Systems
Vertical ERP systems focus on industry sectors other than manufacturing, distribution, or professional services. The term ERP is used in these industries to describe a system that combines front- and back-office features for the industry. ERP can be used interchangeably with terms that are specific to each sector, such as student information systems for education.
Construction — Construction software is used to manage projects for residential or industrial buildings, as well as infrastructure. Typical construction software doesn’t always include back-office functions like accounting, which is why some vendors created ERP solutions for this industry. ERP for construction delivers all the modules needed to manage operations, project management, front office, and back office.
education — Education software manages student admissions and enrollment, courses and examinations, or educational facilities for K–12 or higher education institutions. This type of software usually integrates with accounting solutions to track student payments and invoices and to manage the finances of the educational institution. ERP for education provides all features in one system or integrated package.
Energy — Energy industries, like mining or oil and gas, are asset-intensive, which means that they need asset management functionality. Due to the nature of their operations, energy companies also need environmental health and safety features to protect their employees and avoid pollution. ERP for energy usually combines all these features with typical back-office (accounting) and front-office (sales) modules.
Government — Government or public sector software focuses on managing the services provided to citizens and on maintaining public infrastructure such as roads, buildings, airports, and so on. Since most solutions designed for government agencies only cover some of the requirements mentioned above, ERP vendors created specific products for this industry.
Health Care — Health care software can cover multiple requirements specific to this industry, such as medical scheduling and billing, practice management, and electronic health records (EHR). There are also products that cover the needs of specialized practitioners such as optometrists, physical therapists, or chiropractors. All these products are usually sold separately and require integration with accounting or sales software, which is why ERP vendors adapted their products to provide integrated systems for health care.
Retail — Retail management systems are similar to ERP for distribution but offer additional features such as store management, merchandising, and assortment management. ERP for retail combines all these features with accounting to provide the full range of functionality required to manage a retail business.
Utilities — Utilities is another asset-intensive industry, but it also requires specific billing features. Utility billing is based on consumption, which can vary from month to month, and invoices are usually generated based on meter readings. Also, utility companies generally have thousands or tens of thousands of customers who are billed individually every month. ERP for utilities provides complex billing features, as well as accounting, asset management, and inventory, as well as purchasing and sales.