What is ERP System and how it works?

According to Wikipedia, “ Enterprise resource planning systems (ERP) is a category of business-management software—typically a suite of integrated applications—that an organization can use to collect, store, manage and interpret data from many business activities, including: product planning, cost , manufacturing or service delivery, marketing and sales, inventory management, shipping and payment ”

The definition seems to be very simple and precise, however ERP is not. Through this post we have answered questions associated with enterprise resource planning system in detail.

The mere definition of ERP is not enough for one to realize the complete ERP System, so we have discussed the important  aspects of ERP that defines it and makes it so important and critical. This includes the uses of ERP System, the drill down on working of ERP and not to miss the very important question “How does an ERP improve business performance?”

First thing first.

What is ERP System?

It is indeed a business software, a very important one, for any SME, SMB or large scale company. Small Businesses until have a large workload rely on small tools and generally opt for ERP Software once the business takes off and they have some data and a workload which gets difficult to be managed by independent tools.

Its always better to implement ERP system than to loose on prospects. ERP Software helps minimize expenses and maximize profits for any company making it a must have for any midsize and large business.

Enterprise Resource Planning Systems

To define Enterprise resource planning systems (ERP), the acronym ERP is not much of use.

Enterprise resource planning software is hardly anything about planning or resource, its more about enterprise.

ERP Software is a set of business software tools that integrates information of all the departments and functions across a company onto a single system that can serve the unique and varied needs of different departments. It caters to the needs of HR , finance, warehouse, supply and any other department and process a business has. Though every department in any company has a software optimised and fulfilling the demands of that particular department, what ERP does is, it fills in the gap, and provides information which a particular department’s system might not provide. This ERP bridge providing information and integrating processes improves the efficiency and effectiveness of all the processes. ERP implementation is huge change for most organizations. However, when it’s being done and when it has lived in the organization, there’s a huge payback. – Richard Aarnink

Enterprise resource planning system has come a long way, from an application for manufacturing resource planning (MRP) and computer integrated manufacturing (CIM) to ERP Systems covering all core functions of a business, regardless of its industry sector.

What does ERP software do?

ERP systems performs financial and business planning functions, which might formerly have been carried out by many smaller standalone applications.

Components of an ERP Solution:

ERP software integrates many business applications and activities which enables the system to cater to most of the processes and department if not all. We have taken the liberty of listing down the key functional modules of ERP software. Though it must be clarified that, this is by no means is a comprehensive list and that the reach of ERP within any organization extends far beyond these key areas depending upon the type of the organization.

Accounting and Finance

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

Manufacturing and Distribution

  • Purchasing, Tracking & Sales Shipments of Inventory Items
  • Track by Lot and/or Serial numbers
  • Track Quality Tests
  • Warehouse Management functions
  • Conversion Tracking
  • Tracking Labor, Overhead and Other manufacturing costs
  • Provide the total cost of production


  • Sales order creation
  • Sales order processing
  • Purchase order processing
  • Online sales

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.

How does ERP improve business performance?

ERP is an automation software. It basically automates business by performing various tasks more effectively with information that otherwise would not had been available. ERP simplifies most of the tasks for the users ultimately improving the fundamental process which is order fulfillment wherein a company takes order from a customer, ships it, bills it and provides after sales service. This is more or less covers all the processes of a business. That is why ERP is often referred to as back-office software. It provides a software road map for automating the different steps along the path to fulfilling an order.

"There was talk in the past that ERP systems were legacy, lacked the agility and flexibility, and did not support interoperability. Those days are over, ERP systems are more important than ever."                                                                                                           - Ray Wang, principal analyst at Forrester Research.

In this fast changing world and growing competition ERP is not just a tool to improve performance but has become a necessity for survival of a business. Running reports in real time, hands on information from all the departments, numbers with charts and results ready for analysis, having hidden data is now essential wherein there was a day in history when having any of these accessible to you would have paved your way to the zenith in your field of business. Ultimately, for a small business ERP could help leverage time and resources and help cut cost and stay ahead of competition, however for any SME, SMB and large company, an ERP is as important as any other software in the company. In an age where all business technology applications should provide some competitive advantage, 76 percent of IT chiefs said operational efficiency was the goal of their organization’s ERP investment, followed by support of global business (12%), growth (5%) and IT cost reduction (4%).

How much time will it take for ERP implementation?

You might come across ERP vendors telling you about three or six month average implementation time. Dont get fooled by it, There is no such thing as short time ERP Implementation. However, implementation of a certain module or ERP does not take long time. I still stand by my point, implementing modules is not ERP implementation at a whole, its more like adding a feature or an expensive accounting system.

However this is the smarter way. Rather than implementing ERP on could extend the functionality by adding features that the current ERP lacks. Opensource ERP is becoming the increasing choice of CTO’s and CIO’s. Implementing modules is going to take lot of time as well only that the process will be lot smoother providing a better insight on the system and its working for your business. In case of ERP the focus is never on the time it will take for ERP implementation but rather on understanding the need of ERP for the business and ways it will improve your business. The better you understand ERP requirements for your business, the better and smoother the implementation will be.

"If you define requirements well, and you can have a solid set, everything else flows easily from that,"                                                                                                                                                                                                -January Paulk, Panorama's senior manager.

When will I get payback from ERP—and how much will it be?

There is no denying the complexity in defining the investment side of the ROI equation for an ERP implementation. It is true indeed that first time ERP implementation dont have a very good track record. Don’t expect to revolutionize your business with ERP. It is a navel gazing exercise that focuses on optimizing the way things are done internally rather than with customers, suppliers or partners. Yet the navel gazing has a pretty good payback if you’re willing to wait for it..  Not matter how agonizing the process be at the start, how much it makes the CTO’s groan, it would bring in results in the long run. A Meta group study of 63 companies found that it took eight months after the new system was in (31 months total) to see any benefits. But the median annual savings from the new ERP system was $1.6 million per year.

Hopefully, you’re now more aware of the ins-and-outs of ERP. If you have any query, please let us know through comments or fill free to contact us at Nevpro.co.in.

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