How do ERP systems work?

Introduction

ERP is such a broad and deep subject that it’s hard to understand what an ERP truly is and how it works. ERP stands for Enterprise Resource Planning. Historically, the whole idea was to plan the resources for an enterprise (or a company) and make them available for various users and business processes in a centralized manner.

But, which resources?

The resources could be anything that a company needs to run its operations. It could be human resources, machines, products, or assets. While some resources are common in most industries such as human resources and assets, some industries such as banking or service companies may not have products or machines whereas other industries such as manufacturing or distribution may not sell services.

While the ERP term captures the true essence, what it really misses is “F” where “F” stands for finance. If we included an “F” in the term ERP, it would become “Enterprise Resource Financial Planning.” This is great as the foundation of any ERP is the finance module. In other words, if you are trying to find software that could automate your sales process but you can’t afford to replace your current accounting software, it means that you probably don’t need an ERP. You might just need LOB software such as a CRM (read what is a CRM?).

The term ERFP does a great job of capturing the fundamental assumption of capturing the finance/accounting piece. It is slightly misleading, though, as ERPs help with several other planning activities such as operational, sales, inventory, warehouse, etc. That’s probably the reason why it was called an ERP, to begin with.

The Importance of Finance Module with ERP Systems


But, why is the finance module always required in the case of an ERP?

If the finance/accounting dept was completely siloed, as it is common with businesses that use software such as QuickBooks, Sage, or Xero to manage their accounting and financial processes, the departments would miss important financial insight in order to make key decisions. Or it will require fetching and duplicating data and reports across departments. Some of the key decisions organizations typically make with the help of an ERP are:

  • How much inventory do they need to ensure that their sales team is not missing opportunities but not overstocking either (which will result in locking of cash)?
  • Which items need to be purchased or produced in order to ensure that production is never halted?
  • How much cash do they need in each month and quarter to prevent cash flow shortages and ensure that the company can run its operations even if customers don’t pay timely?

As you can imagine, these decisions can’t be made without financial data.

Now that we agree that ERPs embed accounting and finance processes across the enterprise. Imagine how your salesperson would react if you asked them to learn how accounting works. This is why ERPs are also very good at encapsulating accounting or finance knowledge from an average business user so that accounting could be performed in an automated fashion in the background with all necessary controls and insight that a growing enterprise needs while business users get to see the details that are most important to them for their specific role. While this could be a great convenience for business users, it might not be as comfortable for a finance person who might be intimately familiar with accounts and journal entries. There is always a bit of a learning curve for every user and a successful ERP implementation requires that users forget their old habits and learn new ways of doing things.



The 2023 Digital Transformation Report

This digital transformation report summarizes our annual research on ERP and digital transformation trends and forecasts for the year 2023.

ERP Systems Automate Enterprise-wide Workflows

ERPs are also very good at automating enterprise-wide workflows, improving inter-departmental communication and collaboration, and enhancing customer experience. For example, when you get an inquiry for a quote from your customer, your sales team will look into inventory and see if the order can be fulfilled from a nearby warehouse. If not, the sales team might book the order from this warehouse and alert the other distribution center to ship the product directly from there or transfer it to this location in order to ship from here.

Your sales users–and in some cases customers–might be able to see inventory levels, shipping times, and which distribution center would be most cost-effective to fulfill the order. If you are into the manufacturing business and if you would like to know whether producing goods internally may be more cost-effective than sourcing from a vendor, this is possible as well if an ERP is designed for manufacturing and supports quoting and sourcing capabilities. Once goods are shipped, the finance team may be alerted to invoice the customer and ensure that the revenues are collected timely so that you don’t lose money because of delayed receivables. While these features sound promising, an ERP is far deeper with capabilities in what it can do to automate processes and gain efficiencies.

ERPs are so versatile and customizable that there is not a single industry that can’t benefit from an ERP by automating some of its processes. From small companies to large enterprises all take advantage of an ERP. If you are not using an ERP today for your operations, most likely either you are using siloed and disparate systems or you have added additional staff to perform routine and mundane tasks that could easily be automated using an ERP.

Conclusion

ERPs have evolved so much that it’s hard to keep track of the advancements. Modern ERPs provide a consistent experience across devices whether a user is using an ERP on their phone, on a barcode reader, on a machine prompt, or on a desktop. Traditional ERPs were archaic in their look and feel due to technology limitations but modern ERPs such as Acumatica or Infor CloudSuite Industrial have modernized their platforms and sometimes they could be as easy as using Facebook with real-time KPI widgets on each user’s homepage, notifications about the tasks they are expected to perform throughout the day on their phone, and intuitive workflows without remembering thousands of commands or screens.

Leave a Comment

Your email address will not be published.

Send this to a friend