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Enterprise Resource Planning (ERP) — definition, types and benefits

| Editor: Theresa Knell

Enterprise Resource Planning (ERP) systems help companies to plan resources and business processes as efficiently as possible.
Enterprise Resource Planning (ERP) systems help companies to plan resources and business processes as efficiently as possible. (Bild: ©Jakub Jirsák - stock.adobe.com)

What is Enterprise Resource Planning (ERP) and how is it used? Learn what you need to know about this topic: In this overview we introduce the types, benefits and costs of ERP systems and what companies should be aware of when implementing them.

Definition: What is an ERP system?

An Enterprise Resource Planning (ERP) system is used to plan, control and monitor resources such as equity or materials as well as business processes of a company efficiently and in a strategic way. The entire company is to be represented and all departments are directly linked to each other. The intelligent system is computer- or IT-based and partly also web-based or supported by central data administration. Enterprise Resource Planning (ERP) must be able to store and process extraordinarily large amounts of data.

Enterprise Resource Planning (ERP) is characterized by the fact that it plans complex processes within the company effectively and above all quickly. In this way, these important processes can be controlled at all times. Depending on the solution, an ERP system is suitable for a large number of companies - from large corporations to small and medium-sized businesses. There are hardly any boundaries between industries or sectors of the economy: Enterprise Resource Planning (ERP) can be useful almost anywhere. Providers of enterprise resource planning systems also offer various practical industry solutions.

Distinction from merchandise management systems

ERP and Enterprise Resource Planning (ERP) systems are not the same. The terms should therefore not be used synonymously. The main difference lies in the functions of the two system solutions. An ERP system covers all departments and resources of a company, while a merchandise management system concentrates primarily on goods, raw materials, materials and their storage. Due to the variety of tasks, Enterprise Resource Planning (ERP) is usually much more complex than a merchandise management system.

In addition, an ERP system encompasses the entire company and also includes customers and suppliers, who can intervene in the system independently if required, for example by placing orders or entering deliveries. Finally, Enterprise Resource Planning (ERP) can also be used by companies that deal not only with goods, but also or exclusively with services, for example banks, insurance companies and healthcare companies.

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What are the possible applications of Enterprise Resource Planning (ERP)?

An ideal ERP system covers all areas in a company - from the management of the company to the administration and all departments. These include, for instance:

  • Finances
  • Accounting
  • Payroll accounting
  • Procurement
  • Purchasing
  • Sales and Marketing
  • Materials management
  • Determination of material requirements
  • Production
  • Research and Development
  • Customer relationship management
  • Asset management
  • E-commerce
  • Human resources
  • Finance and accounting
  • Controlling
  • Quality management
  • Project management
  • Data administration and management
  • and many more

Enterprise Resource Planning (ERP): These modules are available

An ERP system can be used to control the various areas of a company. These areas are often represented in the form of modules.
An ERP system can be used to control the various areas of a company. These areas are often represented in the form of modules. (Bild: ©Trueffelpix - stock.adobe.com)

An ERP system usually consists of different modules. These are subsystems that can also be combined with each other. Each module represents a specific department of the company. The individual modules are then connected to each other and to a central database. In this way, it is possible to manage corporate processes efficiently and in a timely manner across departments.

Typical Enterprise Resource Planning (ERP) modules include:

  • Procurement
  • E-commerce
  • Logistics
  • Warehouse and inventory management
  • Accounting and financial management
  • Supply chain management

ERP system: What types are available?

As a result of several decades of development, numerous software solutions for Enterprise Resource Planning (ERP) are available today. The two most important types of enterprise resource planning systems are on-premise and cloud ERP. There are also a number of other solutions. They differ primarily in

  • scalability,
  • specialization,
  • their range of functions and
  • the techniques.

Companies can select and purchase Enterprise Resource Planning (ERP) modules according to their individual demands and needs. If required, individual modules can also be canceled again.

Enterprise Resource Planning (ERP) in the cloud as a software-as-a-service solution

Companies that need maximum flexibility should use a cloud-based Enterprise Resource Planning (ERP) solution. The unique advantage of cloud solutions lies in the worldwide access it allows. No matter whether the employees are located in the headquarters in Berlin, on vacation in Bali or on a business trip to Canada: Only the appropriate end devices (laptop, smartphone, tablet, etc.) and of course a stable and secure Internet connection are necessary to access the ERP. The solution is perfectly tailored to the use on mobile devices.

Further benefits are the high security level, the good service provided by the companies and the possibility to test free demo versions. This ERP system is particularly suitable for smaller companies, for whom flexibility and quick reactions are a decisive factor to ensure their survival in a competitive market. However, any company, regardless of its size, can benefit from this system.

Enterprise Resource Planning (ERP) on-premise

The on-premise variant of Enterprise Resource Planning (ERP) is ideal for large companies or corporate groups that attach importance to a locally installed solution. Worldwide access via the Internet is not automatically possible. For mobile use, for example, the technical prerequisites need to be established at first. In return, data sovereignty over remains with the company. The company is completely independent in their decisions on what happens to them. On the other hand, the company is also responsible for updates, the renewal of hardware components and the security of the servers. Obviously, this binds resources in the IT department.

Cloud-based ERP systems are available as software-as-a-service or as hybrid solutions. In this case, selected subsystems are also accessible on the cloud, while the system is located in the company.
Cloud-based ERP systems are available as software-as-a-service or as hybrid solutions. In this case, selected subsystems are also accessible on the cloud, while the system is located in the company. (Bild: ©NicoElNino - stock.adobe.com)

Hybrid solutions

A hybrid ERP system combines the best of the two previously mentioned software solutions. On the one hand, a large subsystem is operated locally in the company, i.e. On-premise. On the other hand, selected subareas can also be accessed via the cloud.

Social Enterprise-Resource-Planning (ERP)

This is a solution that also includes the increasingly important social networks. This makes it even easier to contact (potential) customers who like to communicate via Facebook and other platforms. Especially young people can be reached very easily and in a way that is appropriate for their target group.

What are the advantages of an ERP system?

More than 9 out of 10 companies in the industry already use Enterprise Resource Planning (ERP). This makes industrial companies one of the front runners. However, this is not surprising, because in a digitalized world an ERP system offers many advantages:

  • optimized business processes and increased performance
  • increased competitiveness
  • processes are accelerated
  • improved organizational processes
  • strengthened cooperation between the departments
  • reduced costs and increased turnover
  • replaces inefficient and cumbersome isolated data processing solutions in the company
  • encompasses the entire company
  • first-class communication between separate departments
  • Enterprise Resource Planning (ERP) can be set up locally, mobile and in the cloud
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Typical disadvantages of Enterprise Resource Planning (ERP)

However, a disadvantage that should not be underestimated, especially by small companies, is the high risk of losing money if a company spends too little time and effort on implementing the system. The use of ERP systems should be well planned and requires strategic implementation. Other relevant disadvantages for companies are:

  • high investment costs
  • large expenditure for acquisition, maintenance, training and other
  • similar systems are difficult to integrate
  • firm commitment to the supplier

Overview of ERP system providers

There are currently well over 400 providers of enterprise resource planning systems in German-speaking countries. The most widely known providers include the following:

  • SAP has the largest market share - both in Germany and worldwide. The Enterprise Resource Planning (ERP) system is aimed primarily at large companies and is available as an on-premise application and as a subscription solution in the cloud.
  • Oracle, a database expert, also has successful ERP systems, including popular cloud solutions.
  • Sage has decades of experience. The Enterprise Resource Planning (ERP) systems are aimed at medium-sized businesses.
  • Microsoft is also an old hand in the field of software development. With "Dynamics", the company also offers an enterprise resource planning system among their brand products. This variant is also aimed at SMEs.

In addition, there are numerous other providers of ERP systems. Among other things, they differ in their target group, for example whether they offer applications for SMEs or large companies. There are also providers who have aligned themselves to specific industries and whose solutions contain corresponding modules. Proalpha, for example, offers corresponding industry components as part of its Enterprise Resource Planning system.

In their search for the right ERP system, companies can use software comparison platforms that take into account factors such as the sector, the size of the company and the number of employees. Examples are ERP-Kompass or the Softwarecheck.

Checklist: What you should bear in mind when choosing an ERP system

When it comes to choosing the right enterprise resource planning system, there is no standard solution. The system must be suitable for the respective company and be able to represent the business strategy. This makes it all the more important for companies to be aware in advance of their requirements and to communicate them clearly afterwards. Not least because the introduction of a new ERP system usually requires a lot of time and effort and the system can be used for the next 10 years if possible.

The manufacturer Abas Software offers on its website a list with five criteria to look for in ERP selection.

Criterion 1: Support the processes in the company. A supplier in the automotive industry probably has different system requirements than a manufacturer of machine tools. Here, care should be taken to ensure that the Enterprise Resource Planning system suits the individual requirements accordingly. Ideally, there are already experiences of other companies in the industry that can be used as a reference.

Criterion 2: Fulfillment of non-functional selection criteria. According to Abas, these criteria include interfaces that ensure that the ERP software can be integrated into the existing IT landscape. The fulfillment of compliance-requirements and the current advancement of the software should also be considered in the selection. An Enterprise Resource Planning (ERP) system should be future-proof - not only with regard to the advancing digitalization and degree of automation, but also in the context of data mobility.

Criterion 3: Scalability, flexibility and internationalization. An Enterprise Resource Planning System (ERP system) should be able to grow with the business. The system must also be able to adapt to the company's activities, restructuring and changes in processes. If a company expects to set up further subsidiaries abroad in the future, topics such as tax law and accounting are just as important as language packages.

Criterion 4: The provider's industry know-how. Once a provider has made it into the shortlist, its previous industry experience should be reviewed This can be done, for example, by user reports or direct inquiries of existing customers.

Criterion 5: Planning of costs and follow-up costs. In addition to the initial costs, long-term operating costs must also be included, which can vary depending on the license. If, for example, modular solutions are retrofitted, this also has an effect on the price. The more employees join a company, the higher the subsequent training costs for the system.

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Implementation of an ERP system

Companies should be aware of the importance of through preparation and introduction to the enterprise resource planning system for their business success. The following phase model of the ERP introduction in 8 steps is provided by Software Lotse and assumes that a suitable provider has already been selected.

Software Lotse recommends that you first draw up plans based on the individual targets for Enterprise Resource Planning (ERP), which also include time and cost plans. The desired system solution can then be introduced step by step. This should be possible without detours, while always maintaining the flexibility and freedom from disturbances of the real operation. It is worthwhile to proceed in clearly distinguishable steps.

Step 1: Specifications. The specifications briefly and concisely reflect the needs and wishes of individual departments and are compiled by them individually.

Step 2: Requirements. Together with representatives of the departments, the provider clarifies in workshops to what extent the specifications can be implemented. This is how the requirements are specified.

Step 3: Installation of a test system. Employees can familiarize themselves with Enterprise Resource Planning (ERP) by using a test system. It is advisable to use company test data that already exists.

Step 4: Set-up of the ERP system. The ERP system is set up and adapted to the company’s needs. Decisions determined by the specifications are now being implemented.

Step 5: Data preparation for the implementation. Master data and other data from the old system is prepared for the Enterprise Resource Planning system and cleaned up in the meantime.

Step 6: Training and documentation. The users of the company should receive extensive training so that they can benefit from best possible know-how. It is recommended to motivate these users to create their own documentation.

Step 7: Data import. The data prepared and cleaned in step 5 is imported into the new system.

Step 8: Live operation. The old system is shut down.

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This is what an ERP system costs

It is difficult to predict how much the ERP system will actually cost the company altogether. Another problem: Companies tend to overestimate actual costs. Erpexpert.de identifies three major cost factors that companies should consider in their planning.

  • Internal costs: These costs include employee working hours, training or the cost of reduced productivity to be expected during the changeover phase. These expenses are difficult to calculate. Here again it can help to talk to other companies who have recently introduced an Enterprise Resource Planning (ERP) system and want to share their experience. A discussion with the provider about their assessment can also be helpful.
  • External costs: This includes the costs for software, licenses and data preparation. This can result in various follow-up costs. Therefore, companies should ask for a list of expected maintenance and support costs that are expected in the next few years after the implementation.
  • Main costs of the ERP system. The number of expected user licenses and the system scope, i.e. the choice of modules, are decisive. Companies should take care to plan as precisely as possible in advance and to narrow the functional scope of the ERP system down as much as possible. This can be achieved, for example, with the help of a specification sheet. A further main cost factor is the individual adaptation of the system to the company’s needs. It will rarely be the case that the standard version of a system fits optimally to the operational requirements. In order to keep the costs low, one should already pay attention during the selection to achieve the highest possible coverage.

Overall, it is not advisable to simply choose the cheapest option when opting for an enterprise resource planning system. Since the company should work intensively and for a long time with it, it is definitely worth investing a little more money, time and effort in the selection process at the beginning. Ask your provider to calculate the point in time at which a return on investment can be expected!

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This article was first published by MM Logistik.

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