What is ERP?

Simply put, ERP is software that runs the finances of a business, the profit and loss of that business. 

Unlike finance only software packages, ERP can, however, extend into the back office operations of that business, be that manufacturing, distribution or the management of some service that the business sells to its customers.

The term ERP evolved from MRP software, that is, Materials Requirements Planning software which was first developed in the 1960s to help manufacturers plan production and schedule the inventory needed for that production.

With MRP, it was the planning that provided the most benefit to manufacturers. Rather than having to hold expensive inventory and incur the additional cost of storing and securing this inventory until the products the manufacturer sold needed to be produced, MRP software was able to forecast production based on historical demand and predict when inventory should be purchased to be produced to meet future demand. This saved manufacturers a lot of money and made the production and supply chain a lot more efficient.

In the 1990s, many companies sought to replace their old software systems, largely spurred by worries regarding the Millennium Bug, and this was when the term ERP was coined to define the more modern and all embracing business management software. Whereas, MRP software focussed on manufacturers and managing the production process, the new breed of software focussed on finance because it was determined that finance, essentially the making of profit, is at the heart of every business and therefore can be applied to every type of business, not just manufacturers.

But like MRP, it’s the ability to plan that makes ERP software unique. ERP stands for Enterprise Resource Planning. In current ERP software, a resource stands for any asset in a business that that business wants to manage. This can be inventory, it can be the business’ customers, the business’ money or the business’ people. In fact, it can be any resource that that business specialises in, that that business values and makes profit from.

Having the ability to plan a company’s resources from a financial perspective gives a company’s management team a lot more control over the business and how it is operating. It also gives that management insight into areas where the business can improve to achieve its objectives, whether that is to better the customer experience, become leaner and make more profit or expand into new business territories or divisions.

By deploying ERP software, management can control finance, sales, production, customer service, distribution, warehousing, logistics, employees and inventory all in one software application. By containing all these different operations in the one application, companies avoid the duplication of data in different systems and can track productivity from each end of the business.

Now, new ERP software which is mobile and can be cloud based extends even further into the business by focussing less on functionality and more on achieving results through improved communication, collaboration and business process automation.

This is why ERP seems complicated. It keeps getting bigger and bigger, more all encompassing as it takes over more of the management of a business but essentially ERP is simple: it is software that manages the finance of a business to help management plan to improve the profits of that business.

Join us next week when we discuss the best ERP software to invest in. Sneak peak, it’s called Microsoft Dynamics ERP.

What next?

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