Enterprise Resource Planning systems are software systems that are used to manage various business processes. These include inventory management, resource planning, financial management, transportation, human resource management, accounting, marketing, sales, distribution, manufacturing, service and maintenance, and e-business. So essentially, what is ERP software?
An ERP software contains various modules that facilitate the transparent integration of modules and allow information to flow independently from one department to another.
The ERP definition is incomplete without "integration" as its component. It's the key to Enterprise Resource Planning software. It destroys organization silos by creating a single repository that employs multiple modules and integrates different departments carrying out varied business functions. In the next paragraph, let's define ERP and see how an ERP functions.
What is ERP and how does it work?
As described above, an ideal ERP software is one that contains a single repository where data is controlled through multiple modules. Following are the various modules that facilitate the flow of information:
1. Manufacturing Module: This module contains functions such as workflow management, bills of material, engineering, capacity, manufacturing process, quality control, etc.
2. Human Resources Module: This module contains functions such as time and attendance, training, benefits, payroll, mandatory compliance, etc.
3. Supply Chain Management Module: This module contains functions such as inventory, supply chain planning, supplier scheduling, claim processing, order entry, purchasing, etc.
4. Financial Module: This module contains functions such as fixed assets, accounts receivable, accounts payable, cash management, general ledger, etc.
5. Project Module: This module contains functions such as Time and expense, costing, activity management, billing, etc.
6. Data Warehouse Module: This module helps different stakeholders — the organization's customers, suppliers, and employees — to communicate with each other and to access business-critical information.
7. Customer Relationship Management Module: This module contains functions such as sales and commissions, marketing, calls center support, service, customer contact, etc.
ERP systems provide benefits to small and large firms alike. Some of them are as follows:
Reduces labor Costs
Improves accounting controls 
Decreases cost of materials
Betters customer service
1. Reduce Labor Costs: ERP software leads to less rework and fewer shortages. Typical studies reveal that they save about 10% of direct and indirect labor costs. It provides better visibility to supervisors that help them achieve set schedules. It also provides them enough time to evolve better methods and enhance throughput.
2. Improves accounting controls: ERP software improves cash availability by developing better collection procedures that decrease the days required for outstanding receivables. It does this by expediting invoice creation, credit checking during order entry, and enhancing the handling of customer inquiries.
3. Decreases cost of materials: ERP software helps decrease the cost of materials by refining the procurement process and improving vendor negotiations.
4. Betters customer service: ERP software helps manage customer contacts, reduce ship lead times, and handle customer grievances appropriately. They check the reasons of demand fall and suggest tried and tested ways to fix them. Typical studies indicate that ERP systems lead to an increase in actual sales by 10% or more.
The data is updated the data in real-time and various departments can access this data through a single software with personalized dashboards. This will minimize the communication required between two parties and maximize the productivity.
Evolution of ERP
ERP is an acronym of Enterprise Resource Planning. Since its introduction in the 1960s, it has evolved into a flexible tiered client-server architecture. The following points describe how ERP systems have evolved over the years.
Today, ERP systems are proving useful to different types of businesses including for-profit and non-profit organizations, non-manufacturing businesses, and governmental departments. ERP has become an all-round software package as it provides Supply Chain Management (SCM), Customer Relationship Management (CRM) along with modules. The ERP system can be modeled keeping in mind the requirements of the company. For example, if a two-wheeler manufacturing company wants to expand its business by making four-wheelers, it can remodel the ERP system quickly and at a low cost.
Costs of implementing an ERP system
ERP implementation costs can be divided into two parts — Annual costs and one-time costs. These costs can be divided into multiple factors including hardware, consulting and training, and time. The major factor responsible for deciding the cost of an ERP system is the number of concurrent users — the number of people who use it at any given time.
- Hardware: The vendor specifies which hardware should be used for the ERP system. From time to time, the hardware should be improved to protect the ERP from wear and tear. Also, with improvements in technology, new hardware components reduce lag, increase data-transfer speed, and improve connectivity.
- Consulting and Training: To make full use of enterprise resource planning software, employees working in a company need extensive training. But it's on the company to decide the amount of training needed. It depends on the following factors: Knowledge of employees working in the company, the complexity of the ERP package, and to what extent external personnel will be required to implement the system. The typical time required to implement ERP in small businesses is about 4-6 months whereas, in the case of large enterprises, it's 9-24 months.
- Implementation Time: This factor determines the time required by the implementation project team to implement the ERP system. Also, it includes the time needed to train various stakeholders — including the Management Information System (MIS) team, executives, and users in different departments — to producing customized reports, developing data, and organizing meetings with consultants.
How can a company calculate One-Time Costs?
It's fairly easy to calculate the One-Time costs. They are calculated using ratios with ERP software costs. Some of them are described below:
- Inventory Turnover costs: Low inventory turnover means overstocking inventory whereas high turnover symbolizes superior materials management. It' calculated using the formula = Cost of Sales/Inventory.
- Days of Receivables: It denotes the average time in days that receivables are outstanding. It's calculated using the formula = (365 * 1/ (Sales/Receivables)).
- Return on Assets: It gauges the effectiveness of management in using the resources accessible to it. It's calculated using the formula = (Profit before Taxes/Total Assets).
How can a company calculate Annual Costs?
Hardware: These costs will be specified by the ERP vendor to run the software.
Software: It depends on the annual customer support agreement — including software upgrades, telephonic, and face-to-face support — with the vendor.
Consulting and Training: These costs depend on factors such as improving business processes, training new personnel throughout the year, upgrading software functionality, etc.
Implementation time: The number of MIS experts required in the facility will depend upon the nature of the ERP software package. For a micro-based ERP package, less number of MIS experts will be required. Whereas for a mainframe ERP package, a large group of MIS experts will be required.
