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What is ERP?

erp, enterprise resource planning
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To integrate all aspects of a business' operation into one easy-to-use system, many companies turn to Enterprise Resource Planning (ERP) solutions. ERP refers to the software and tools that businesses can use to process and manage information from all parts of the company. ERP solutions store that information in one database, giving businesses a simplified look at how all their systems are running.

“ERP is like the nervous system for a business,” Mark Jeffery, research director of technology initiatives at the Kellogg School of Management at Northwestern University, said in an interview with ITTechNewsDaily.

Among the divisions that can be tied together using ERP software are product planning, manufacturing, inventory, sales, marketing, human resources and accounting. ERP takes all the software and applications used to run each of those divisions and converts it to one software program that is standard across each of the departments. The goal is to ensure things are running at optimal efficiency and in sync with each other.

ERP Software

In order to implement an ERP program, businesses first must find the ERP software solution that makes the most sense for them. There is a wide range of ERP software providers, with many specializing in services for large, midsize or small businesses.

Most of the top ERP software providers give businesses the option to customize the software to fit their needs by picking and choosing which parts of the operations they want included. Specifically, they can choose the functions, such as accounting human resources or manufacturing, they need most.

Besides servicing different-sized businesses, ERP software providers also differ in the types of businesses they cater to. While many offer an all-encompassing solution that can work for any business, some have a more focused product that works best for, for instance, manufacturers or distributors.

Software providers can also differ in how they host the solution, which can be an important factor for a business to consider. Options include having it hosted onsite on the business' own server or using a cloud-based solution that can be accessed from anywhere.  

Some of the higher-rated ERP software providers include SAP, Oracle, Exact Max, Microsoft Dynamics, Epicor and Netsuite.

Benefits and drawbacks to ERP software

As with any business solution, there are advantages and disadvantages to using ERP software. One of the largest benefits is the picture it gives business owners of their operation. By tying critical data from all parts of a company into one easy-to-understand database, business owners are able to quickly identify areas of strength, as well as spot looming problems before they reach a critical stage. When used properly, the software should provide a better map for future planning.

"The biggest benefit of ERP is the integration and visibility of data it provides,” Marianne Bradford, author of "Modern ERP" (Lulu.com, 2010), told ITTechNewsDaily.  “This can lead to better business strategies and tactical decision making in a company."

The software helps businesses cut back on duplication and saves time by better aligning each department. This allows for improved workflow and better efficiency, which can boost the company's bottom line.

ERP software is also advantageous for businesses trying to improve their financial reporting and regulation compliance.

The biggest downside to implementing an ERP software solution is the cost. Depending on the size of the company, it can cost millions of dollars to install and train employees to use the system.  The cost can't just be looked at in terms of purchase price, since it will take a considerable effort to train employees how to use the ERP software and how to make sure managers are looking at the data properly to ensure they're getting the most out of it.

“Yes ERP is expensive, and it can get really, really expensive if people don’t know what they are doing,” said Jeffery.  “The cost of the project is the cost of the software and the cost of the consulting, which can be at least what the software costs.”

Since the training can be so extensive, businesses that install the software sometimes experience a drop in productivity while employees get brought up to speed. For some, a dip in output isn't very noteworthy, but for others, any decline in productivity can be devastating.

Other expenses include IT infrastructure upgrades that usually need to occur before the software is installed, as well as the cost of maintaining the software and making sure it is running at optimum performance.

Despite the cost, Jeffrey told ITTechNewsDaily the benefits are significant.

"If you look at just the cost, you will see a high price tag,” said Jeffery. “But if you look at the productivity of employees and the transparency of information, that's where you get the real gains."

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