# Enterprise Resource Planning (ERP): Meaning, Components, and Examples

> **Definition**
>
> Enterprise Resource Planning (ERP) integrates and manages a company's core business processes to streamline operations and improve communication across departments.

## What Is Enterprise Resource Planning (ERP)?

Enterprise resource planning (ERP) is a platform companies use to manage and integrate the essential parts of their businesses. Many ERP software applications are critical to companies because they help them implement resource planning by integrating all the processes needed to run their companies with a single system.

An ERP software system can also integrate planning, purchasing inventory, sales, marketing, finance, human resources, and more.

### Key Takeaways

*   ERP software can integrate all of the processes needed to run a company.
*   ERP solutions have evolved over the years, and many are now typically web-based applications that users can access remotely.
*   Some benefits of ERP include the free flow of communication between business areas, a single source of information, and accurate, real-time data reporting.
*   There are hundreds of ERP applications a company can choose from, and most can be customized.
*   An ERP system can be ineffective if a company doesn't implement it carefully.

#### Enterprise Resource Planning (ERP)

![Enterprise Resource Planning (ERP) Definition](https://www.investopedia.com/thmb/B6IhtoTEuX0YFXzwSTvpfSy7imw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/erp-4196982-d232fedd39e64910bc29033d4db2e9ca.png)

*— Investopedia / Joules Garcia*

## Understanding Enterprise Resource Planning (ERP)

You can think of an enterprise resource planning system as the glue that binds together the different computer systems for a large organization. Without an ERP application, each department would have its system optimized for its specific tasks. With ERP software, each department still has its system, but all of the systems can be accessed through one application with one interface.

ERP applications also allow the different departments to communicate and share information more easily with the rest of the company. It collects information about the activity and state of different divisions, making this information available to other parts, where it can be used productively.

ERP applications can help a corporation become more self-aware by linking information about production, finance, distribution, and human resources together. Because it connects different technologies used by each part of a business, an ERP application can eliminate costly duplicates and incompatible technology. The process often integrates accounts payable, stock control systems, order-monitoring systems, and customer databases into one system.

## How Enterprise Resource Planning Platforms Work

ERP has evolved over the years from traditional software models that made use of physical client servers and manual entry systems to cloud-based software with remote, web-based access. The platform is generally maintained by the company that created it, with client companies renting services provided by the platform.

Businesses select the applications they want to use. Then, the hosting company loads the applications onto the server the client is renting, and both parties begin working to integrate the client's processes and data into the platform.

Once all departments are tied into the system, all data is collected on the server and becomes instantly available to those with permission to use it. Reports can be generated with metrics, graphs, or other visuals and aids a client might need to determine how the business and its departments are performing.

> **Important**
>
> A company could experience cost overruns if its ERP system is not implemented carefully.

## Types of ERP Systems

There's a number of different ERP solutions that can meet a variety of business needs. This list is not meant to list every single type of ERP, though the list is pretty comprehensive. Any business considering implementing an ERP system should be able to find value in some of these types of systems, and multiple systems may be relevant in any given situation.

### On-Premise ERP

On-premises ERP systems involve purchasing the software licenses and installing the ERP system directly onto a company's own servers. Companies have full control over the system and data, as it resides within their premises. Customization and integration with existing systems can be more extensive, and this type of ERP usually requires dedicated IT resources for maintenance, updates, and security.

### Cloud ERP

Cloud ERP systems are hosted on remote servers and accessed through the internet. Cloud ERPs like [SaaS products](https://www.investopedia.com/terms/s/software-as-a-service-saas.asp) offer better scalability, allowing businesses to easily adjust resources and features as needed without significant upfront investment in hardware. Cloud ERP systems typically have a subscription-based pricing model, and updates/maintenance are managed by the ERP provider (not the company itself).

### Industry-Specific ERP

Industry-specific ERP systems are tailored to meet the unique needs and requirements of particular industries. These systems often include industry-specific modules, functionalities, and best practices to address the complexities of the industry. For example, consider a manufacturing firm that is heavily reliant on inventory, supply chain management, and distribution of goods. That type of ERP will be vastly different than a client-based ERP such as a financial institution's ERP.

### Open-Source ERP

An [open-source](https://www.investopedia.com/terms/o/open-source.asp) ERP system (or any open-source software, for that matter) provides users with access to the source code. This means a company can customize, modify, or redistribute the ERP to better meet the company's needs. Implementing and maintaining open-source ERP systems may require more technical expertise and resources compared to commercial ERP solutions.

### Small Business ERP

On the other hand, small business ERP systems are designed specifically for the needs of small and medium-sized businesses (SMBs). These types of ERP systems try to offer balance between being slightly niche while offering essential functionalities at a more affordable price point. Because they are less robust, small business ERP solutions are often easier to implement and require less customization compared to enterprise-level ERP systems.

### Tiered ERP

Tiered ERP systems offer different levels of functionality and scalability to cater to businesses of varying sizes and complexity. Companies can choose the tier that best matches their current needs and budget, with the option to upgrade or customize as their requirements evolve. This would entail adding on modules as they become relevant (i.e. a company that is scaling to international operations may wait to implement foreign current modules).

## Benefits of ERP

Businesses employ enterprise resource planning (ERP) for various reasons, such as expanding, reducing costs, and improving operations. The benefits sought and realized between companies may differ; however, some are worth noting.

### Improves Accuracy and Productivity

Integrating and automating business processes eliminates redundancies and improves accuracy and productivity. In addition, departments with interconnected processes can synchronize work to achieve faster and better outcomes.

### Improves Reporting

Some businesses benefit from enhanced real-time data reporting from a single source system. Accurate and complete reporting help companies adequately plan, budget, forecast, and communicate the state of operations to the organization and interested parties, such as shareholders.

### Increases Efficiency

ERPs allow businesses to quickly access needed information for clients, vendors, and business partners. This contributes to improved customer and employee satisfaction, quicker response rates, and increased accuracy rates. In addition, associated costs often decrease as the company operates more efficiently.

> **Important**
>
> ERP software also provides total visibility, allowing management to access real-time data for decision-making.

### Increases Collaboration

Departments are better able to collaborate and share knowledge; a newly synergized workforce can improve productivity and employee satisfaction as employees are better able to see how each functional group contributes to the mission and vision of the company. Also, menial and manual tasks are eliminated, allowing employees to allocate their time to more meaningful work.

## ERP Weaknesses

An ERP system doesn't always eliminate inefficiencies within a business or improve everything. The company might need to rethink how it's organized or risk ending up with incompatible technology.

ERP systems usually fail to achieve the objectives that influenced their installation because of a company's reluctance to abandon old working processes. Some companies may also be reluctant to let go of old software that worked well in the past. The key is to prevent ERP projects from being split into smaller projects, which can result in cost overruns.

> **Tip**
>
> Employing change management principles throughout the ERP life cycle can prevent or reduce failures that compromise full implementation.

## ERP vs. CRM

ERP and [customer relationship management (CRM)](https://www.investopedia.com/terms/c/customer_relation_management.asp) platforms are two different types of software systems used in business. At their core, ERP focuses on internal business processes and operations, while CRM is centered around managing interactions with customers and prospects.

ERP systems are designed to integrate and automate core business functions. In contrast, CRM systems are dedicated to managing customer relationships and interactions. This can range from things like sales leads, marketing campaigns, customer service inquiries, and contact management. While the goal of ERPs is to streamline processes, the goal of CRMs is to enhance customer engagement, satisfaction, and loyalty.

Despite their distinct focus areas, ERP and CRM systems often overlap in certain areas. Many modern ERP systems include CRM functionalities. This integration enables businesses to synchronize customer information, such as contact details, purchase history, and communication logs, between ERP and CRM systems. For example, a CRM would traditionally host a customer's purchase history. By looping that into a broader ERP system, a company can predict when the customer will re-order, make sure it has sufficient quantity on hand at a specific time, and make sure it has enough personnel on hand at a specific time to fulfill the potential order.

## ERP Solutions Providers

Some familiar names are leaders in ERP software. Oracle Corp. ([ORCL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=orcl)) originally supplied a relational database that integrated with ERP software developed by SAP ([SAP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sap)) before launching their own ERP. Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)) has long been an industry leader, with many customers using multiple software applications from the company.

As cloud-based solutions have grown in popularity in recent years, the traditional ERP industry leaders have seen challenges from upstarts such as Bizowie and Workwise.

## ERP Examples

As of 2013, New York gallery Ronin Gallery still used paper for inventory and a standalone software for accounting. After moving the whole business to Oracle NetSuite products, including NetSuite ERP, the productivity of its employees doubled. All inventory and consignment information are now in one place and accessible to the right employees, and the gallery can make tailored recommendations to more than 30,000 customers.

N&N moving supplies moved to NetSuite after adding locations. The company had been having trouble keeping track of business and accounting data as it was in multiple places. With NetSuite the company reduced payroll processing time by 84%. The company also improved the accuracy of time tracking and could see data from across its locations.

Green Rabbit, a perishable goods logistics company, was running off of standalone accounting software, spreadsheets, and email. On this system communication was poor, and data was not synched, hurting efficiency. ERP software help cut inventory errors, increase order fulfillment without delays, The company now also has error free synchronized data, and tripled its order volume.

## Tips for Choosing an ERP System

When selecting an ERP system, there's many things for you to consider. Here are some key features to consider during your decision-making process:

*   Ensure that the ERP system can **scale** with your business as it grows and evolves. It should accommodate increasing transaction volumes, users, and data without significant disruption or performance issues.
*   Seek an ERP solution that allows for **customization** to adapt to your unique business processes and requirements. You can get customizable workflows, fields, forms, and reports from ERP systems fairly easily.
*   Consider the ERP system's ability to **integrate seamlessly** with other software applications you may already be using. Think about your CRM, e-commerce platforms, payroll systems, and [business intelligence tools](https://www.investopedia.com/terms/b/business-intelligence-bi.asp). If it's important to you, your ERP can likely communicate with each of them.
*   If you plan on using your ERP often, choose an ERP system with an intuitive and **user-friendly interface** that makes it easy to use. A well-designed interface can help people buy into the software as well as simply make it more intuitive on how to capitalize on all of the ERP features.
*   If it's relevant to you, opt for an ERP solution that offers **mobile accessibility**. Mobile access allows you to perform key tasks, access information, and make decisions in more flexible ways which may be important based on how your business operates.
*   Prioritize **data security** and compliance features to protect sensitive business information. Look for ERP systems with robust security measures, [encryption capabilities](https://www.investopedia.com/terms/e/encryption.asp), access controls, audit trails, and compliance certifications. Note that ERPs can be industry-specific, so some security measures may be more relevant to your industry.
*   Evaluate the ERP system's **analytical capabilities.** This means taking a look at its built-in reporting tools, dashboards, and advanced analytics features. You may also want to think about how real-time information can be pulled in, if that's important to your business.
*   As you work through the selection process, assess the **level of support** and maintenance provided by the ERP vendor. You'll want to make sure you get technical support, software updates, patches, and documentation.
*   Last, consider the **total cost of ownership** of the ERP system over its lifecycle. This is not just the upfront implementation cost. Think about ongoing maintenance fees, training costs, and potential hidden costs like "charge per transaction" instances. You can also think through what future growth and adding additional modules will cost.

## What Is Enterprise Resource Planning?

Enterprise resource planning, or ERP, is an interconnected system that aggregates and distributes information across a company. The goal of an ERP system is to communicate relevant information from one area of a business to another. For example, an ERP system could automatically notify the purchasing department when the manufacturing department begins to run low on a specific type of raw material.

## What Is the Importance of Enterprise Resource Planning?

Enterprise resource planning software offers single-system solutions that integrate processes across the business. These applications allow users to interact within a single interface, share information, and enable cross-functional collaboration. They increase productivity, collaboration, and efficiency.

## What Are the 5 Components of ERP?

The components of an ERP system depend on the organization's needs. However, there are key features that each ERP should include. Generally, packages include finance, human resource, logistics and manufacturing, supply chain management, and customer relationship management.

## What Are the 2 Main ERP Applications?

Which ones are the main applications depends on the business and the industry it operates in. Most companies can benefit from supply chain management, logistics, and financial applications to help them streamline their operations and expenses.

## The Bottom Line

Enterprise resource planning manages and integrates business processes through a single system. With a better line of sight, companies can better plan and allocate resources. Without ERP, companies tend to operate in silos, with each department using its own disconnected system.

ERP systems promote the free flow of communication and sharing of knowledge across an organization, the integration of systems for improved productivity and efficiencies, and increased synergies across teams and departments. However, moving to an ERP system will be counterproductive if the company's culture does not adjust to the change and the company does not review how the structure of its organization can support it.

> **Article Sources**
>
> 1.  Oracle. "[Oracle Enterprise Resource Planning (ERP)](https://www.oracle.com/erp/)."
>     
> 2.  Oracle. "[Oracle for SAP Cloud and Infrastructure Update](https://www.oracle.com/a/ocom/docs/cloud-infrastructure-update-final.pdf)."
>     
> 3.  Oracle NetSuite. "[3 Successful ERP Implementation Case Studies](https://www.netsuite.com/portal/resource/articles/erp/erp-implementation-case-study.shtml)."