What is ERP?
Most people start by talking about the various components of ERP (Enterprise Resource Planning) systems. I’ll get there, but first a little background. In the 1980’s software companies came out with MRP systems that ran on mainframe systems initially. MRP at that time was an acronym for “Materials Requirements Planning”. These systems were focused on reducing material shortages and excesses on the manufacturing floor.
At that time, and still today, MRP calculations generally look at demands and supplies of inventory items. Demands include forecasts, sales orders and manufacturing orders. Supplies are inventory, purchase orders and manufacturing orders, which both consume inventory and produce it. The final factor was a bill of materials, which in complex products can be multiple levels deep. When MRP runs it looks at demands, supplies, bills of material and other planning parameters and then suggests that buyers and planners take actions to place, adjust or cancel purchase orders and manufacturing orders.
Next software companies and manufacturing companies moved to include resources, such as production workers and equipment in the planning process to help manage capacity and production levels. They also linked inventory related activity to the accounting systems so that there was a closed loop, integrated system which enabled manufacturers to better manage and account for the business.
In the 1990’s Customer Relationship Management, or CRM, systems started to catch on. These systems allowed companies to manage the sales process and track activity with customers. They started as standalone products but eventually MRP companies and CRM companies merged, or MRP companies developed their own CRM systems. That left the marketing with a challenge of what to call the combined systems so they ended up with Enterprise Resource Planning, or ERP as a label for the combination of MRP and ERP systems.
Software companies that did not have a manufacturing option picked up on the ERP label as well (and don’t necessarily have the “P” or planning component). These days the ERP term is used to label accounting and operations software no matter the industry.
Perhaps a simpler way to explain what ERP systems are is to think of them performing several functions:
What does ERP do?
Lead to Cash
Lead to cash starts with the process of acquiring new customers, securing orders, delivering products and services and finally invoicing for and collecting for those products and services. Typical software components include:
- Lead management
- Customer management
- Sales order entry
- Project costing
- Cash receipts
Procure to Pay
Procure to pay starts with ordering things like services, inventory, expense items and assets and then receiving them followed by recording the invoices and paying for those items.
- Purchase requisitions
- Purchase order management
- Services delivery
- Invoice entry
- Cash disbursements
The lead to cash cycle and procure to pay cycle both generate financial transactions that end up in the “books” or general ledger, which is the foundation of financial reporting. In addition the other cycles can also provide information for reporting and analysis of business performance. Some systems include report generation tools that are used to define and produce financial statements such as income statements and balance sheets. But some systems require an additional external tool to design and produce those reports. Most systems have a query tool that allows users to create their own views of the data. And most of ERP systems support exporting data to Excel for further analysis and some allow for the automatic refreshing of the Excel data without logging into the ERP system.
In the end, the primary objective of ERP systems is to enable companies to better manage their operations and provide better information to decision makers at all levels. So if you are looking for a system make sure the systems you consider meet your information needs and company objectives.