What is ERP (Enterprise Resource Planning)?

Sarah Leung
July 23, 2015

With the abundance of enterprise software on the market today, it can be incredibly confusing to keep them straight. They all seem to have confusing acronyms, and you’re not even sure what they stand for, let alone what the software actually does. One of the most common of these mysterious software acronyms is “ERP.” You’ve heard of it before, and it seems to be a blanket term for many different functions. There also seems to be a lot of variety in terms of how different companies implement their ERP systems. So what is ERP, and how are businesses using this type of software? If you need further clarification, we have the answers right here.

What is ERP?

ERP stands for “enterprise resource planning.” At a high level, ERP is a category of software designed to help businesses automate their back office functions. These can include everything from product planning and inventory management to accounting and human resources. An ERP is seen by many businesses as the system they run their business on. The ERP system is actually an expanded, evolved version of what’s called “Materials Resource Planning” (MRP), a business process that emerged in the 1960s and 70s as a way to improve how manufacturers ordered the materials they needed to make their products. Companies would assess what they planned to produce and what they would need to produce it. They would then look at the existing inventory they had on hand to determine what they needed to procure from suppliers. Doesn’t sound all that revolutionary nearly two decades into the 21st Century, but it was a big step. Over time, Material Requirements Planning evolved into “Manufacturing Resource Planning,” or “MRP II” (because that’s not confusing at all!), which added more forecasting abilities, financial planning, and operations planning. Eventually, these systems grew into the complex ERPs that we know today. Here are a few things that ERP systems do for businesses:

  • Tracking accounts payables & receivables, cash flow, and financials
  • Tracking inventory and enabling smarter product planning with forecasting and budgeting tools
  • Standardizing manufacturing processes
  • Managing payroll processing
  • Tracking quality control testing
  • Tracking total cost of production for individual products

The basic scope of what an ERP system can do is determined by the business operations that a company performs. ERPs are most typically used in industrial manufacturing and wholesale distribution companies, but they are also used in a whole host of other industries, including Retail, Financial Services, Healthcare, Real Estate, etc. Companies implementing ERPs also range in size from large corporations to mid-market and small and medium-sized businesses.

Why do companies use ERP systems?

The main purpose of an ERP system is to combine and integrate all of a company’s functions into a single system that can serve the needs of everyone across departments. Rather than have Finance, HR, and Operations each running their teams on individual, siloed systems, ERPs allow companies to access data, collaborate, and communicate on the same platform––in theory, anyway. If implemented the right way, this can certainly have a huge impact on efficiency and productivity. By combining these business processes into one system, companies can avoid redundancies, miscommunication, and human error. If, for example, a company is able to connect their inventory management and shipping processes and invoice tracking within a single system, they can automate a series of manual processes while improving forecasting accuracy for future production. Companies can also use ERP systems to rid themselves of “information islands,” with useful data trapped in one area of the business and unable to be leveraged in another. Having the entire company on the same page ultimately enables better decision-making.

The Limitations of ERP systems

Though ERP systems are often touted as all-in-one platforms, they do have limitations. Since the beginning (i.e. the days of MRP and MRP II), ERPs have been designed to automate and streamline back office processes. All the functions we’ve been talking about––payroll, accounts receivable, manufacturing, shipping, order processing––are functions that occur “behind the scenes.” For this reason, ERPs are often unable to have a significant impact on front-end customer facing processes like sales and customer service. An ERP is basically a collection of recorded facts. It’s a large, complex ledger for a business––keeping track of when a customer placed an order, how much stock was received to a warehouse, or when cash was received to settle an invoice. Even though many ERP vendors have developed customer relationship management software modules (or acquired pure-play CRM providers), these solutions are often not robust or tailored enough to meet the demands of the complex, evolving sales conversations that lead to a sales order. To quote one of our past articles on the subject, “Sales orders are the living documents that represent the interactions between your customer-facing staff (e.g. sales reps and customer service people) and your customers. Invoices are the domain of your finance people, and as crucial as they are, finance is not the front-line of your business.” This is why you’ll see many businesses still equipping their sales representatives with pens and paper order forms to write orders. Those orders then have to be sent in to the back office, whether by fax, email, or phone, and then manually entered into the ERP system by data entry staff. In other words, the ERP may be a necessary tool for the back office. But because it was designed for accountants, inventory managers, operations managers, and HR personnel, sales teams have been stuck in a vortex of paper and fax. This has made room for other categories of software to enter the market, like sales order management software, which encompasses mobile order writing applications and B2B eCommerce platforms. These systems can be integrated directly with ERP systems to balance the needs of both back office and front-line processes.

What is ERP: A Concluding Summary

ERP, or enterprise resource planning, is both a broad process and category of software that tracks many back office functions like payroll, inventory management, and purchasing. These systems are used to track business processes from one centralized location while minimizing redundancies and inefficiencies. While ERPs are great for the back office, however, they are largely insufficient when it comes to the front-line sales process. While back office staff have automated much of their processes with ERPs, sales teams are still using outdated paper-based order writing, manual order submission (which is why fax machines are still a “thing” in B2B sales), and data entry. The advent of sales order management software, however, is digitizing the sales and order writing process. Order management systems that can integrate with ERP systems are promoting efficiency across the entire organization.