What is an ERP system?
An enterprise resource planning (ERP) system is software that brings activities like accounting, sales, inventory and operations, together in one place. “The intent of ERP systems, when they were first created, was to give companies one system on which to manage all key business functions across their departments,” explains Leon van der Poel, Senior Business Advisor, BDC Advisory Services. In other words, ERP software was developed to assist internal stakeholders in managing and operating a business.
ERP software can also be called ERP systems, programs or platforms. These terms mean the same thing and can be used interchangeably.
What’s more, ERP solutions vary widely. Some ERP systems may have only basic accounting capabilities, without payroll functionality. Some are designed for specific industries with specialized features, while others are more general. Most include modules that cover the core functions of any business. These commonly include:
- finance and accounting
- production
- inventory management
- supply chain management
- procurement and purchasing
- human resources
For example, ERP software specialized in the food and beverage industry might have additional, specialized functions to help you with regulatory requirements regarding traceability and quality control. Conversely, a system made for the wholesale distribution sector might focus more on warehouse and inventory management as well as logistics.
Adding to the confusion, ERP systems come in various forms: cloud-based or on-premises; off-the-shelf or custom-built, installed by the manufacturer or by a reseller. And software vendors often have their own definitions of an ERP system.
What is the difference between an ERP and a CRM?
ERP and customer relationship management (CRM) systems are both business software, but they serve different purposes. An ERP system lets your teams work from the same data and gives you a single view of your business. A CRM system focuses on managing customer relationships, sales activities and, in some cases, marketing.
If you already have an ERP, you can integrate a CRM system with it. This lets you connect customer data with your operational data. As a result, you can better anticipate demand and improve budgeting.
How does an ERP system help businesses?
An ERP system helps businesses manage resources by centralizing all their data on one platform. This comes with several advantages, like:
1. Increased data accuracy and consistency
When each department operates on a separate system, you risk running into informational breakdown. The reason is that departments always need to share information. But if their systems are not connected and integrated, they will need to rely on manual data transfer, increasing the likelihood of errors.
“Beyond data entry errors, two departments might compute things differently, leading to inefficient meetings where conflicting versions of the truth are discussed and debated,” explains Van der Poel.
Having a single system in which all information is stored and shared from will thus improve data accuracy and consistency.
2. Improved decision making
By consolidating data from all business areas, ERP platforms ensure decision-makers have a complete view of what’s happening inside the business. Importantly, since these systems eliminate the need to share information between departments manually, they also speed up decision making.
“With an ERP system, business owners can make decisions in real time,” says Van der Poel. “Rather than waiting for last quarter’s information to be consolidated in a spreadsheet, they can act on what happened this morning or even five minutes ago.”
3. Enhanced security of data and systems
Keeping multiple systems up and running is hard enough. Ensuring that each one is regularly updated and secure is even more challenging.
Managing software patches, security updates and compliance requirements becomes a resource- and time-consuming task when a company relies on several separate software systems. It also exposes the company to potential piracy or data breaches, as outdated systems are easier targets for cyberattacks.
“Security risks can be even worse when a company is still keeping information on paper, as there is no way to track who is accessing and copying it, and it can easily be misplaced,” adds Van der Poel. An ERP system increases your company’s data security by centralizing and digitalizing data.
With an ERP system, business owners can make decisions in real time.
Leon van der Poel
Senior Business Advisor, BDC Advisory Services
When should a business consider getting an ERP system?
ERP systems typically become indispensable once a company’s revenue approaches or exceeds $10 million.
“This is not an exact threshold,” stresses Van der Poel. “But this is often the point at which manual operations and data sharing really get out of hand. It is also around this point that productivity gains will usually offset the investment required.”
All in all, the right moment to consider ERP implementation really depends on the company’s specific challenges, opportunities and future plans. According to Van der Poel, a good way to determine if you need an ERP is to evaluate the complexity of your operations and the inefficiencies you’re experiencing. Key indicators include:
- manual workarounds
- data re-entry
- paper-based processes
If you find that managing multiple systems, sharing information across departments, or handling increasing volumes of data is becoming overwhelming, it may be time to consider an ERP system.
“The key is identifying when your current processes start to hinder your growth,” says Van der Poel. “An ERP system can offer a clear return on investment by streamlining operations and improving decision-making but assessing whether the upfront costs are consistent with your company’s medium- and long-term goals is important.”
“There is never a perfect time to implement an ERP,” Van der Poel explains, adding that the selection process and implementation of the ERP will take at least a year if done correctly.
If you’re not ready for an ERP, an interim solution could involve selecting different software tools. For example, an inventory management system that integrates with your existing accounting system.
What is the difference between an ERP and a digital operating platform (DOP)?
ERP systems have been around for decades, offering numerous benefits to businesses that use them. However, most companies eventually encounter a need that their ERP system cannot fully meet. They then implement one or two additional specialized software solutions.
Van der Poel considers a DOP to be like a “more modern version of the ERP.”
The versatility of DOPs enables companies to integrate additional software, such as for detailed route planning or marketing automation, as well as other devices, including the Internet of Things (IoT), while maintaining cross-department information sharing.
This preserves the ERP’s core advantage while offering greater flexibility to adopt and integrate with emerging technologies to support unique business and evolving needs.
Additionally, DOPs make it easier for businesses to share information with external partners, adds Van der Poel. “This is crucial in today’s business environment. For example, companies face increasing pressure to meet ESG standards, and share data on sustainability efforts with customers, suppliers or regulatory bodies.”
Ultimately, whether an ERP is the right next step depends on your business’s size, complexity and unique needs. There is really no one-size-fits-all approach.
How can you choose an ERP system?
1. Research your needs thoroughly
As with any major technology purchase, investing in an ERP system should serve a clear business purpose and fit your overall business strategy. To make sure it does, you need to create a detailed list of the requirements you need the system to fulfill.
2. Shop around
Make sure you are not just picking up the first product you saw at a trade show or had demonstrated for you. Compare offerings from different vendors.
3. Consider outside help to make an informed decision
ERP systems remain complex and can be difficult to implement. External expertise can help you map out your processes, choose the technology that’s right for you and train your employees.
Working with someone who has done this before will help you avoid the most common pitfalls and give you a higher chance of success.
4. Score vendors to choose the best fit for your business
As part of the selection process, you’ll want to send your technology requirements to vendors. Each vendor is scored based on how well they satisfy the company’s needs. The total cost of each proposal is also compared, including licensing, hardware, implementation and maintenance.
5. Involve employees in the process
Top picks are invited to present their product in detail. Employees should be involved in the entire process to help ensure buy-in and that everyone’s needs are met.
Next steps
With the right product and good implementation, an ERP system can be a powerful tool for boosting the productivity and profitability of your company. To learn more about finding the right system for your business, download BDC’s free guide: Could an ERP System Be Right for Your Business?