How Does an ERP System Work? Definition, Benefits & Functions

Our guest author Alexander Vollertsen presents a few ERP systems to you in this article and explains how they work and where their use is worthwhile.

What is an ERP system?

ERP systems(Enterprise Resource Planning - in short ERP) are software systems used by businesses to manage and link their important business areas .

Many ERP software applications are important for businesses because they help them in many areas of their organization and integrate all the processes required for their business operations into a single system.

The aim is to plan all traditional resources, such as personnel, materials, capital and project planning, and finance and accounting – just to name a few possible areas.

Linking individual modules in a ERP system,also allows for a common operation within a system across departments, locations, and clients.

 

The key points at a glance

• ERP software can integrate all processes that are vital for running a business.
• A big advantage of an ERP system is free communication between business sectors within the system, for instance data reports can be exchanged in real time.
• ERP systems are generally well integrated into other ongoing systems using standardized interfaces.

What are the benefits of an ERP system?

With an ERP software, it's possible for all employees of a company to digitally represent their processes and workflows. Due to the connected structure of an ERP system, the data reach the responsible offices considerably quicker than would be possible with other IT solutions.

For larger businesses, an ERP system serves as a tie that binds the varying computer systems of the different sectors of an organization.

Without an ERP system, each department would have its own software application, optimized for its specific tasks.

With ERP software, the company has a central application where the relevant modules are provided for individual departments.

Which employee is allowed to access certain modules can be centrally controlled and ensured by permissions and releases in the configuration of an ERP system.

As an ERP system is managed centrally, further advantages arise, such as in master data maintenance - as only a central data record or a central setting has to be changed and is therefore immediately available to all users.

ERP applications also enable different departments to communicate with the rest of the company and exchange information more easily. They gather data on the activities and status of various departments and make this information available to other parts of the company where it can be utilized and evaluated productively.

A good example of this could be found in Project management - the items offered to the customer can be directly linked to a task in project management, and thus for instance, upon successful completion of a milestone in the ERP system, its billing information is sent. Communication can thus occur directly in the ERP system without any system breakdown.

Even small businesses can hugely benefit from an ERP system - and link production, finances, sales, project management, and human resources.

Since they connect various technologies used by each part of a business, an ERP application can save costly, duplicative, and incompatible technologies.

The workflow in an ERP system normally integrates quote and order entry, controlling, resource management, time recording, warehouse management, creditor accounting, order monitoring, and supplier and customer databases into a single system.

How does an ERP system work?

ERP systems can, like the processes in companies, be quite complex. Therefore, most providers of such systems offer their solutions in modules and the company can decide which functions the ERP system should fulfill or expand with further functions.

Most ERP systems on the market have adapted to the times of mobile and cross-location work and already offer solutions that can be used without specific client software. Access is then usually via a web browser and offers all the advantages of the cloud.

In the background of every ERP system, there are numerous databases and archives where the obtained business data and documents are stored. The ERP system usually visualizes these databases in a context that is understandable for the user and controls which access the respective user should and may have to this information.

Login occurs, whether via the cloud or through client software, usually through a login with a username and password. 2FA support is now also a standard feature for cloud applications and is offered by most manufacturers to maximize data security especially in web applications.

Once the user has successfully connected to the ERP system, they can now work in their relevant modules of the ERP system within the scope of their permissions.

This way, for example, individual jobs can be created, which contain offered services that are linked to certain customer master data and thus produce a package of stored customer master data, defined services, quantities, conditions, deadlines, etc. This data package is defined as a job or, depending on the wording of the ERP system, as a project, etc., which can be adjusted according to certain specifications and rules and used depending on the possibility for further modules in the ERP system until another status has been reached for this job.

What functions does an ERP system offer?

The range of functions of ERP systems can indeed be different.

Not every business, for instance, needs an integrated project management in the ERP system, rather it wants order processing and financial accounting to be covered.

There are also different requirements for order processing – while a production agency mainly depicts tangible goods and external costs in the ERP system, a PR agency captures the temporal component and relies more on time recording.

The usually modular structure of ERP systems often allows a wide range of functions to be “activated” as needed and according to the licensing model in order to optimally depict business processes.

The functions listed here are a rough overview of what an ERP system can cover.

Since the modules in an ERP system are usually connected, all available data can be used on top of each other, making the operation maximally efficient.

• Commercial project processing
• Billing of orders
• Time recording
• Resource and task allocation
• Project management
• Sales control and customer management (CRM)
• Inventory management system / warehouse management
• Business Intelligence and analysis
• Controlling
• Production planning and control (PPS)
• Human Resource Management
• Purchasing
• Quality Management
• Media processing
• Supplier management
• Finance and accounting
• Document management

ERP systems will also play a crucial role in the future in collecting data for one's own business and using it with the help of new software tools for data analytics and other AI solutions.

Who can benefit from an ERP system?

In general, it can be said, ERP systems have become almost indispensable and are a helpful tool, which one no longer wants to miss for recording business data!

Even for small businesses, suitable software solutions are not only affordable these days, but also easy to use – comprehensive documentations for the various ERP solutions assist in implementing them on a small scale independently. The providers usually provide templates and very good support.

For large and medium-sized businesses with a large number of employees, several locations, and possibly different company names, selecting and subsequently implementing can be quite a challenge.

In this case, one should definitely ensure sufficient resources in their own business besides the support of ERP providers or create these so that also later, after the implementation, they have enough resources for administration and possibly for in-house support as well as training.

ERP systems can make a substantial contribution to reducing costs and increasing performance in all areas of a business, as the central application provides a comprehensive view of order status, resources and of course the financial situation.

Especially in the areas of agency, production, personnel, and materials management, an ERP system offers a much higher degree of clarity due to its compact structure than reading from several systems.

Which ERP systems are recommended?

When choosing the right ERP system it is extremely vital to first understand the needs and of course to look at which needs may arise in the future on the company and how scalable an ERP solution is.

There are many good industry-specific solutions in the ERP sector that meet a wide range of needs with a lot of expertise.

It is important to take a close look at these different ERP solutions and to test them without time pressure in order not to come to the realization after a short time or a few years that the selected ERP solution no longer meets the business model and that maintenance is becoming increasingly problematic or is becoming an overwhelming task.

The selection of an ERP system ultimately needs to be considered carefully, as a change is generally never loss-free. Existing data like jobs / projects and their structures can rarely be transferred flawlessly to a new ERP system and there is always a need for users to get used to it, which of course always takes a toll on productivity in the application.

If, however, you have found an ERP system that is suitable for business purposes, such a system can help to keep almost all sectors of the company under control, and all In- and Output goes a tidy way and the data obtained is best organized and archived for a long time.

I myself have been able to get to know several ERP systems in my professional career and have been convinced more or less by individual solutions.

What is extremely important is a well-considered implementation of the ERP system and of course what features, performance, and expansion possibilities such an ERP system brings along.

Once a company reaches a certain size and structure, it is certainly impossible to avoid well-known providers such as SAP S/4HANA Cloud, public edition, Sage ERP, Microsoft Dynamics 365 Sales, Xentral ERP & Co. However, by now there are some very good industry-specific ERP solutions that can be used for small, medium, and large businesses, and whose licensing model suits you. These include weclapp, JTL, e.bootis-ERPII, microtech büro+, 360ᵉ by e-velopment, DreamRobot, NEKOM, Myfactoryor Sage 100. All tools from Sage in comparison, with the most important features and including matching articles, can be found on our Sage overview page. In addition, there are ERP software systems that are designed for small and micro businesses such as Billbee or for specific shop systems such as Pickware for Shopify and Shopware.

Those looking for the right ERP system for their business can find a well-sorted archive of suitable ERP solutions with many user ratings and user experiences on OMR Reviews.