What is ERP and what is an ERP System?

Katharina-Maria Röder 8/11/2022

In this article, you will learn what ERP is, what ERP systems are, and how they can help you.

Table of contents

What is ERP (Enterprise-Resource-Planning)?
Why is ERP important?
What is an ERP system?
How does an ERP system work?
What types of ERP systems are there?
Which ERP software is there?
What benefits do ERP systems offer?
How have ERP systems evolved?
Conclusion

Running a business is no simple matter, after all, leadership determines success or failure. The larger the company grows, the more difficult it becomes to keep track of everything. More staff, more projects, more processes. And, the more important it becomes to optimally plan business resources. Enterprise-Resource-Planning (ERP) is the keyword here. Why ERP is important, what ERP systems are, and how they can help you - all this is explained in this article.

What is ERP (Enterprise-Resource-Planning)?

The term Enterprise-Resource-Planning, or ERP, was coined in 1990 by market research company Gartner. It referred to business management platforms that more and more businesses began to use at the time. Enterprise-Resource-Planning translates to corporate resource planning. This concisely summarizes what it's all about: optimally planning, controlling, and managing the existing resources in the company. Resources include operating equipment, capital, and personnel, for example. ERP systems are used to perform these tasks as best as possible.

Recommended ERP-Systeme

On our comparison platform OMR Reviews you can find more recommended ERP systems. We present over 300 solutions that are specially tailored to the needs of small and medium-sized companies, start-ups and large corporations. These ERP systems offer comprehensive support in all business processes. Take this opportunity to compare the various ERP solutions, drawing on authentic and verified user reviews:

SAP S/4HANA Cloud, public edition

Why is ERP important?

In every company, there are activities in which several employees with different responsibilities have to work together across departments.

This becomes difficult when data and processes are distributed across multiple, unrelated systems. It is almost impossible to keep all participants up to date. As a result, collaboration and work efficiency suffer.

Apart from everyday business, company development also suffers. Decentralized processes, data and documents do not allow a 360-degree view of the company. Weaknesses and growth potential cannot be easily identified.

With ERP, these problems are solved; an ERP system simplifies the process. Centrally stored information from the entire company gives managers and other senior staff a cross-departmental overview. Weaknesses in processes can be identified and remedied, for example. Efficiency increases, costs decrease.

Also, the company's development is intensified. Some ERP systems already have artificial intelligence, which can play through different scenarios and support decision-making.

What is an ERP system?

ERP systems, like Haufe X360 are software systems and consist of several modules, which are tailored to individual business processes. ERP tools have a common process and data model that covers entire business operations, e.g., in the areas of finances, human resources, sales, and service. Companies use them to link and manage their most critical business areas. The central database is the heart of the ERP system. All modules send their data to this database and also obtain it from there. This common data storage provides insight into all departments and allows executives to verify and evaluate the performance of different departments. Decisions are then made based on this evaluation.

These are some of the basic modules:

Purchasing
Production
Sales
Order processing
Inventory management
Warehouse management
Customer service (CRM)
Research and Development (R&D)
Human Resources (HR)
Financial and Accounting

ERP modules

There are two approaches to setting up an ERP system. The first approach is to acquire the required software from various providers and merge the data in a central database. The second approach is to source all necessary modules from an ERP provider and avoid integrations. The applications are already designed to work smoothly together. The majority or all the required ERP modules often come from one supplier, making it the better variant, as it is simpler. Integrating different systems is often complicated and requires many IT employees or an IT service partner. Once the integrations are set up, they must be continuously maintained. This makes the first approach unattractive for small and medium-sized businesses.

How does an ERP system work?

ERP systems differ from standalone applications in their central database. In this database, all business transactions and actions from all modules are recorded. The modules can communicate with each other due to the integration. The central database ensures that each module has correct and up-to-date information. Let's look at an example using a customer order to see how this interaction of the modules in the ERP system works.

The employee, Mrs. Müller, enters contact information about the customer, Mr. Schmidt, into the ERP system during a customer conversation and creates a customer order in the order processing module. She then checks the availability of the ordered product in the inventory management module. Afterward, she returns to order processing to initiate shipping.

Once the delivery confirmation for Mr. Schmidt arrives, Mrs. Müller creates an entry in the accounts receivable of the financial ledger, the collective entry for the accounts in the finance module. There, she generates an invoice and sends it to Mr. Schmidt. When the payment is received, Mrs. Müller enters this amount in the ledger or in a cash management module. The income is then booked.

If the work process is mainly automated, a large part of the manual data entry is done by the ERP system. Some data fields are pre-filled with information from other modules. In the background, the ERP modules exchange information with each other or change records in the database. This ensures that the data is correct. If, for example, Mrs. Müller requests a delivery, the data in the inventory management module must be changed. The number of items in stock is reduced by the ordered quantity. An automatic reorder can often be set up when a certain stock limit is reached.

In the CRM, Mrs. Müller can note important aspects of the communication with Mr. Schmidt. All department employees have access to the customer history and can offer Mr. Schmidt the best possible support for all concerns. After the customer contact, an email can be automatically sent to Mr. Schmidt, asking for service satisfaction. This helps identify weaknesses and take action.

Managers can have reports created with all available data at any time:

How much turnover was generated this month compared to the previous one?

Which products are ordered most frequently?
What is the average delivery time?
How satisfied are customers with the service?

These reports create the foundation for strategic decisions and operational measures.

Do you want to learn about more applications? Then check out this article to see more Examples of how ERP systems are used in different business fields.

What types of ERP systems are there?

There are three types of ERP systems: On-Premises, Cloud, and Hybrid systems. The different delivery types have impacts on the functions of an ERP product, its ease of use, costs, and implementation speed.

On-Premises:

In an On-Premises system, the software runs on company-owned servers and the company is responsible for security, maintenance, upgrades and other updates. IT employees with the necessary expertise are required for maintenance. An On-Premises system usually has to be paid for in advance. A software license is paid for each user. Implementation can take years, depending on the size of the company. Updates to new versions are sometimes a lengthy process. However, these systems have two significant advantages: they can be more easily adapted to the company's needs, and the integration of other local systems is easier.

Cloud:

A cloud-based ERP runs on remote servers operated by a third party. Users usually access a Cloud-ERP via a web browser. This provides more flexibility as they can access the Cloud-ERP from any location with an internet connection. A Cloud-ERP supports business processes less than On-Premises-ERP, simplifying usage.

There are several deployment options for Cloud-ERP, including Single-Tenant and Multi-Tenant. A Single-Tenant solution is a stand-alone ERP instance used by one company only. The server space is not shared. In this model, your company manages the software itself, including maintenance and upgrades. This variant gives you more control over the software and makes it easier to customize. However, this also leads to more work.

In a Multi-Tenant-SaaS-ERP, multiple companies use the same hardware and software instance of the provider. Most Cloud-ERP solutions are Multi-Tenant solutions. The software provider carries out all updates and upgrades. These services are included in the monthly or yearly subscription, which is based on the number of users, as well as the required computing power or storage capacity.

Hybrid:

Companies don't want to switch completely to the cloud for various reasons. This creates hybrid ERP systems that combine the advantages of both solutions and are perfectly tailored to the individual requirements of the company. In the EU, strict rules apply regarding data protection. Sensitive data like those often found in the HR department, for example, continue to be stored on their own servers. The document management system, on the other hand, can easily be transferred to the cloud.

Which ERP software is there?

On OMR Reviews, you can already find over 50 rated ERP systems for all company sizes. To make it easier for you to start, we have compiled a selection of the most popular ERP-Systeme here:

⁠On OMR Reviews, we also have articles on the best ERP systems for medium-sized businesses and ERP systems for SMEs.

What benefits do ERP systems offer?

As you already know, ERP systems offer a variety of features. Depending on what is used, the perceived benefits may differ. However, here are six benefits that ERP systems offer to all users:

1. Transparent workflows

As all work processes and data are located in one system, you can check the status of all activities at any time. All employees are up to date, and obstacles are quickly identifiable.

2. Customized reporting and analysis

Data is only helpful if it is used and correctly interpreted - the ERP system helps you with this. It offers you extensive reporting possibilities. If you change a process, for example, you can measure the success of this adjustment using reports. Managers can create dashboards that display all relevant KPIs for them daily.

3. Easy collaboration

ERP systems simplify the sharing of information within a team, e.g., for customer orders, contract documents, and customer data. Cross-departmental access to real-time data and making changes is possible for all employees according to their access rights. This improves and accelerates collaboration.

4. 360-degree view of the company

ERP systems access real-time data from the entire company. As a result, they can show essential developments and provide you with comprehensive business insights. This data basis improves decision-making by the company's management.

5. Data security

ERP providers know that your ERP system contains confidential and sensitive data. Therefore, they take measures to ensure their security. Cloud ERP software, in particular, use the latest security protocols to prevent your company from falling victim to a cyber attack.

6. Cost savings

This is arguably the greatest benefit, as you save in very many areas. Let's take two application examples. The automation of many basic, recurring tasks reduces errors due to manual execution. If your company grows, you also won't need to hire more employees for these activities. Company-wide transparency helps identify weaknesses leading to higher costs. This, in turn, leads to better use of all company resources.

Are you involved in e-commerce? Then find here the Benefits of an ERP system in e-commerce.

How have ERP systems evolved?

The beginnings of ERP systems lie in 1964 with the invention of material requirements planning (MRP) systems by IBM engineer Joseph Orlicky. Companies used MRP software to prepare production plans, determine the need for material for production, and track inventory of finished products.

About twenty years later, in 1983, management expert Oliver Wight developed the MRP-II systems (Manufacturing-Resource-Planning). While the MRP-II software was still targeted at manufacturing companies, it offered new functions for better production planning such as capacity planning and manufacturing control.

Only in the 1990s did ERP systems evolve into today's business management platforms. This new technology brought all business areas together in a central database, from accounting to product development to manufacturing, order processing and human resources. These first ERP systems were associated with high investment and operating costs. Companies had to buy servers, hire an IT team with the necessary expertise and then pay for licensing and implementation. On top of that were high bills for maintenance and upgrades. This is highly mistaken even though there were already hosted ERP solutions at the time, these systems were generally expensive and complex.

History ERP

In 1998, NetSuite brought out the first Cloud-ERP. The Cloud solution revolutionized the market as it significantly reduced investment costs and made the ongoing costs predictable. It was no longer necessary to buy servers or hire IT professionals. The host managed the infrastructure and provided upgrades automatically. As a result, ERP systems became affordable even for smaller companies.

And what does the future hold? Technologies such as Artificial Intelligence (AI), Blockchain, Augmented Reality (AR), and the Internet of Things (IoT) are influencing today's developments in the ERP field. Many of these technologies are already integrated into leading ERP solutions.

Conclusion

An ERP system is an asset for every company. Thanks to the individual composition of individual modules, it adapts perfectly to your company's needs. Thanks to the holistic overview, companies are better able to plan and deploy resources. ERP systems also promote the exchange of communication and knowledge within the company. They network systems to improve quality and efficiency and create synergies between teams and departments.

FAQ

What does ERP mean?

ERP stands for Enterprise-Resource-Planning. It includes planning, controlling, and managing all business resources like personnel, capital, material.

What is an ERP system?

An ERP system is software that supports you in the overall management of your company. The composition of the modules is based on your company.

How does an ERP system work?

An ERP software serves as a holistic system that encompasses all areas of your company. All company data is recorded centrally in this software. This optimizes and simplifies the internal processes of all departments. This saves time, personnel, and promotes your company's growth.

Is an ERP system suitable for every company?

Yes, it is not aligned to a particular size or industry. For every company, there are suitable modules and delivery models.

Are cloud-based ERP systems better?

Not necessarily. A cloud solution is usually cheaper and quicker to implement. The post-implementation costs can be lower, as the ERP provider carries out the maintenance and upgrades. Whether an On-Premises, Hybrid or Cloud ERP is the best solution needs to be assessed individually.