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What is an ERP System?

Posted by on February 22, 2012

Synopsis: Our high level explanation of an ERP system Answers two key questions:

  1. What is an ERP system?
  2. How do ERP systems work?

Future articles will explore each area of ERP systems in more depth so stay tuned to our ERP blog for more information.

What is an ERP system?

An Enterprise Resource Planning System, commonly known as an ERP system, is a set of business software tools designed to facilitate the flow of information between all departments or functions within a business.  The ERP system integrates information seamlessly throughout the rest of the company.  When the first ERP systems were designed over 25 years ago companies both large and small, used function-driven software for each area of their business.  For example, the accounting, purchasing, inventory, and sales departments each used a different software package which frequently didn’t talk or integrate with any of the other systems.  Reporting and tracking of even the most basic business activities across these different ‘data silos’ was tedious, error prone, and unreliable.  A well designed ERP solution has the ability to process information from every part of the organization, and any type of transaction, within a single, integrated-solution which can track–in real-time–business operations and provide timely, accurate information to business managers. No more need to export data from multiple systems do extra computations and arrive at the results from last month’s sales or production run. With a modern ERP system each person within the company has the information they need to do their job and it is available now – or as the technology folks like to say it “in real-time”.

Elements of an ERP Solution

Since the first ERP system was designed and built over 25 years ago, ERP software solutions have evolved to where most business activities can be captured in a single system.  The following is a review of the primary functional areas of ERP software, but is by no means a comprehensive list. The primary functions include:

Accounting and Finance

  • General Ledger
  • Accounts Payable
  • Accounts Receivable
  • General Journals
  • Trial Balance and Financial Reporting
  • Bank Reconciliation
  • Cash Management and Forecasting
  • Budgeting

Distribution

  • Purchasing, Tracking & Sales Shipments of Inventory Items
  • Track by Lot and/or Serial numbers
  • Track Quality Tests
  • Warehouse Management functions

Manufacturing

  • Track the conversion of raw materials into finished goods
  • Track Labor, Overhead and Other manufacturing costs
  • Provide the total cost of production

Modern ERP systems are able to track and provide first-in-first-out (FIFO) and Average Costing in production allowing firms to move away from the inefficient and inaccurate ‘Standard Cost’ method of production costing.

Service Management

  • Track and monitor post sales service to products in the field
  • Warranties
  • Service Contracts
  • Product Lifetime Costing has become standard functionality in current ERP solutions.

Benefits of ERP Solutions

A well-designed, properly setup and correctly implemented ERP solution can provide tremendous benefits to any company no matter their size or scope.  The ability to instantly run status reports with no manual data entry in spreadsheets can provide companies with invaluable information on business operations and allow for more timely reactions to changing business environments.  Companies that have been deemed successful with above average or high profit levels in relation to their industry frequently attribute their success, at least partially, to their ERP solution.  Forward looking firms have begun to look at their business systems as a key element of their overall business investment strategy and apply the same financial metrics to business software that are used when acquiring a new plant or new equipment.

In the fast changing world of business, an advanced, modern ERP system is no longer just a key to business success, but a core element of survival.  If your firm has difficulty running reports in real-time, if your employees waste time re-entering the same data into multiple systems, or key business metrics are calculated by hand on spreadsheets, your firm could benefit from a modern ERP business package.

 

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