Enterprise resource planning (ERP) systems provide real-time data and automate workflows, driving operational improvements. Indeed, 80% of businesses told KX and the Centre for Economics and Business Research (CEBR) that their revenues increased “after implementing real-time analytics,” and 60% saw significant efficiency and productivity gains.
But what is an ERP, and how does it work? ERP software centralizes backend processes and information, allowing organizations to manage accounting and operations effectively. Explore ERP types, functionality, and costs.
What is an ERP system?
An ERP is accounting and operations-oriented business management software. It features an integrated suite of applications for managing day-to-day operations, from financial planning and accounting to order processing and fulfillment. Most importantly, the platform serves as a single source of information.
The central database stores information from multiple departments, ensuring data integrity and eliminating data duplication. Some vendors package ERP platforms as a single, comprehensive system. Others let companies pick general and implement individual modules.
ERP modules may include:
- Finance and accounting.
- Human resources (HR).
- Customer relationship management (CRM).
- Logistics and manufacturing.
- Procurement and supply chain management.
- Ordering and fulfillment.
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How does an ERP work?
ERP software automates processes and streamlines workflows, lowering costs and increasing productivity. Instead of piecing together disparate technologies, companies can use an integrated ERP system. An ERP’s primary function is to unify transactional data from multiple departments. Authorized users access information and tools from a central hub connected to a cloud or on-site database.
It gives leaders a snapshot of how divisions work together, allowing them to measure profitability and productivity. Likewise, employees can access information from different sources. For example, a salesperson can view real-time inventory levels while taking orders. Plant managers know when to increase production based on sales, and the ERP automatically alerts suppliers when stock runs low.
Types of ERP systems
ERP solutions can be on-premise, cloud-based, or hybrid. Small and mid-sized businesses (SMBs) often select cloud-hosted applications, which are faster to implement and easier to manage. Enterprises that handle confidential data or require advanced customization may prefer to keep ERP systems on-site.
Hybrid versions combine on-premise and cloud-based tools. Organizations choosing this option often use a tier I ERP for corporate processes and separate services for individual locations or units.
Panorama Consulting Group defines the ERP tiers as:
- Tier I: These platforms serve organizations with over $750 million in annual revenue. Tier I applications can support complex entity structures and operational processes. ERP examples include Oracle ERP Cloud and SAP S/4HANA.
- Upper tier II: Software in this category assists SMBs earning $250 million to $750 million. These systems handle company data encompassing multiple business units and industries. Sage X3, DELMIAworks, and IFS are upper-tier II products.
- Lower tier II: SMBs with $10 million to $250 million in annual revenue typically use these ERP systems. The software works best for organizations with a single entity in a specific sector. ERP examples include Plex Systems, NetSuite, Abas, and Rootstock.
- Tier III: These systems are for smaller businesses, and, in some cases, enterprises add Tier III tools for niche features or to support different locations. This group has “hundreds of software providers,” like Sage ERP 100, Aptean, and ECI.
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Instead of piecing together disparate technologies, companies can use an integrated ERP system.
What businesses use ERP applications?
Although ERPs were initially designed for manufacturers, modern systems support every industry, from e-commerce to government. The technologies are popular with construction, distribution, and manufacturing companies. But retailers and financial firms also leverage ERPs or similar business management tools. Indeed, any company wanting to analyze and optimize inventory management, accounting, and sales benefits from ERP systems.
Startups, SMBs, and large enterprises use ERP software to manage resources. Small businesses can leverage affordable out-of-the-box solutions, while enterprises can customize ERP software to meet industry requirements and support compliance objectives.
Panorama Consulting Group said, “Most of our clients tell us that their primary reason for implementing enterprise software is needing access to real-time data.” For instance, manufacturers use ERPs to adapt to market dynamics and improve decision-making. Small businesses gain operational visibility by combining customer and financial information.
Several ERP solutions cater to niche industries. While manufacturing ERPs have production scheduling and purchase planning tools, construction software has job costing and estimating capabilities. Apparel systems offer order management and quality control features, whereas cannabis ERP software tracks everything from cultivation to sales.
Core ERP software features
ERP system components typically align with a company’s needs and differ by business size and industry. Each module has features to support department-specific activities. Nearly all applications provide automation and analytics capabilities.
Aside from a central database, ERP system features may include:
- Accounting tools: ERPs replace accounting software with accounts payable and receivable, general ledger, and cash management capabilities.
- Sales and marketing functions: Some ERPs have CRM features for managing customer relationships, marketing campaigns, and lead generation.
- HR modules: Employee data management tools centralize workforce information and processes for timekeeping, hiring, and onboarding tasks.
- Inventory and warehouse software: ERPs allow businesses to track inventory in real time. This module streamlines picking, packing, and shipping workflows.
- Production modules: Factory leaders can access manufacturing resource planning, bill of materials (BOM), and quality management tools.
- Supply chain management: This module offers real-time transportation insights, demand planning, and supplier integrations.
- Procurement and purchasing functions: ERP software handles purchasing workflows, from purchase requisition paperwork to automating invoice payments.
- Sales management: ERPs support the sales of goods and services with built-in estimation tools for quotes, ordering functions, and return management.
- Automation: Each ERP module automates back-end processes. For instance, it automatically updates inventory levels and customer profiles.
- Reporting and analytics: Customizable dashboards and data visualization tools deliver insights from all modules.
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ERP software costs
The cost of ERP systems varies, with many vendors offering custom prices. SoftwareConnect estimated that “the average monthly cost of ERP software for a small business ($1 to $5 million in annual revenue) is $1,740. For an enterprise-level company making over $100 million annually, the monthly cost increases to $9,330.”
However, this pricing doesn’t reflect the total cost of ownership (TCO). According to SoftwareConnect, “The implementation of ERP software is, generally, twice the cost of using the software annually.”
The following factors impact total ERP costs:
- Number of employees or users.
- Software type (perpetual license, open-source, or subscription).
- Deployment model (on-premise, cloud, or hybrid).
- ERP implementation strategy.
- Number and type of modules.
- Customization requirements.
- Employee training and support.
- Hardware and data migration.
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