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Running a business

What is ERP and how does it work?

By QuickBooks Australia

Published on June 28, 2023

Enterprise resource planning (ERP) software gathers all of an organisation’s business tools in one virtual room to facilitate workflow and solidarity between departments. An ERP system helps to improve business performance through a number of different functional modules such as finance, sales, manufacturing, supply chain management and human resources.

According to Gartner, the enterprise resource planning market grew 8.8% to a value of US$38.8 billion in 2019. As businesses grow and find the need to improve efficiency while maintaining a certain quality of service, ERP software becomes an attractive option. However, ERP systems can be costly and complex, and it is not uncommon for businesses to struggle with adoption and thus experience negative business impacts.

For these reasons it’s important to understand what ERP is, the features these systems offer and the tradeoffs your organisation can expect from adopting one.

What is an ERP system?

An ERP system is a type of software used to plan and manage a range of business processes and tasks. Looking back at the history of ERP, these systems have evolved from paper-based scheduling models to today’s multi-modular computer-based systems.

Early history of ERP

The first recognised ERP was the economic order quantity (EOQ) designed by Ford W. Harris in 1913. The EOQ was an inventory review protocol intended to help companies reorder at the right time to reduce inventory management costs. While brilliant at the time of development, this model assumed that demand, ordering and holding costs all remained constant. Of course, no such assumptions are possible in today’s business environment.

ERP vs MRP

MRP stands for material requirements planning. This was the next major development in the history of ERP, when toolmaker Black and Decker computerised Joseph Orlicky’s MRP model in 1964. MRP was used to calculate the material and components needed to manufacture products.

In 1983, manufacturing resource planning, or MRP II, came into use. As an extension of the original material resource planning model, MRP II software integrates other business functions such as general accounting, cost control, machine capacity, raw materials procurement and demand forecasting.

Finally, in the 1990s, Gartner coined the term enterprise resource planning to indicate the next evolution of enterprise planning software. Gartner defines ERP as a suite of business applications that share a common process and data model, covering a broad range of operational end-to-end processes.

Types of ERP systems

Unique business operations mean individual companies may find different ERP applications more or less valuable. For example, US dollar store Dollar General, with more than 15,000 stores, countless items for sale and numerous suppliers, will likely need a robust inventory management system. Meanwhile, a growing construction firm will require accurate job costing and estimate functionality.

To meet different business requirements across industries, ERP models have developed for industry-specific needs. Purpose-built ERP systems include models for:

Manufacturing
Wholesalers and distributors
Retailers
Construction and contractors
Professional services
Nonprofits
Accountants.

In addition to industry type, ERP systems can also be classified by deployment method: on-premise ERP or cloud ERP. According to a projection by Hosting Tribunal, 83% of enterprise workloads will be hosted via cloud services by the end of 2020. Nevertheless, when it comes to highly sensitive operations or lawfully protected data, some organisations have a need to host applications on owned computing infrastructure. Hence, hybrid solutions that utilise both public cloud and on-site resources are not uncommon.

On top of industry-specific needs, a company’s size, number of employees, geographic distribution and internal resources for ERP implementation will influence solution selection. This is where it counts to pay attention to features.

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What are the primary features of ERP?

ERP systems offer a suite of features that are able to manage the core business management functions of most companies. These features are less industry-specific and include tasks like generating financial reports, running company payroll and tracking inventory items.

ERP suppliers typically include some form of the following applications in their software:

Finance and accounting
Inventory and operations
Customer relationship management (CRM)
Sales orders
Purchasing and supplier management
Reporting and analysis
Human resources and payroll.

These multi-module ERP solutions are often complex and come with high barriers to adoption. One of these modules, customer relationship management, have more recently been included as a core module of an ERP. However, some businesses have been reticent to adopt new CRM software, instead seeking to continue using their best-fit solution.

ERP vs CRM: how to decide which one you need

To target the right market segments, improve customer engagement and boost retention, almost every business needs to conduct CRM. Traditionally, CRM systems were marketed and sold as standalone software-as-a-service (SaaS) packages.

Though early enterprise resource planning software focused on managing the inputs of production, modern ERP systems encompass nearly every business function, including customer relationship management.

A good CRM has functionality for lead management, contact management, real-time customer data insights, business intelligence and workflow automation. As a business grows, simple spreadsheets will no longer be enough to track customer engagements. On the other end of the spectrum, attempting to adopt the complex CRM modules often built into ERP systems can come with a steep learning curve and negative business impacts.

Instead of attempting to adopt the one-size-fits-all type of CRM included in an unwieldy ERP system, growing businesses can benefit from using a best-fit CRM that integrates with their existing system. By sharing information via a common database, separate business applications such as payroll, inventory management and CRM can “talk” to each other to avoid duplicate data entry and improve the accuracy of information across the organisation.

ERP software benefits

The high-level benefits of an ERP system can be summed up in three main points:

The free flow of information between business applications
Real-time, accurate business insights across the organisation
Ability to automate workflow processes.

Depending on the industry and business activities, these benefits may take many forms. For a wholesaler, it may mean superior warehouse management with automated cycle counts, which then shares real-time data with a connected procurement ERP application. For a shipping and logistics company, an ERP should enable real-time tracking of all goods in transit or storage, along with automated invoicing upon delivery of goods.

With improved collaboration and visibility, businesses of all sizes can reap the benefits of enterprise resource planning systems. Information is power, and business processes connected through shared virtual workflows improve efficiency, enable superior business insights and fuel better decision-making. All of this helps contribute to a healthier bottom line.

Final thoughts

A better fit for mid-sized and large companies may be industry-standard software like QuickBooks, an end-to-end solution that combines best-in-class accounting with powerful business management functionality.

An organisation operating with a legacy system that doesn’t scale for growth or provide ready access to accurate information needs to make a change. Rather than adopting complex software with a steep learning curve, consider a solution that is simple to deploy and can be customised with best-in-class apps tailored to your unique business needs.

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What is ERP and how does it work?

What is an ERP system?

Early history of ERP

ERP vs MRP

Types of ERP systems

Grow Your Business with QuickBooks

What are the primary features of ERP?

ERP vs CRM: how to decide which one you need

ERP software benefits

Final thoughts

Related Articles

Looking for something else?

Get QuickBooks

Help Me Choose

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