Growing companies eventually get to a point where spreadsheets no longer cut it. To optimize their procedures and facilitate growth, they conclude that they need some software package. But which one is the best choice? Most business professionals have heard the term “ERP,” but they may not know exactly what enterprise resource planning software is or if this is exactly what they need for their company. Below we explain what ERP is, how it works, and how to choose the right solution for your business.
When you type in google search engine the phrase “manufacturing software”, you are spoilt for choice. Thousands of companies have a wide range of products and services, and after spending hours researching, you are none of the wiser. However, some basic definitions should make things clearer, considering that top google positions occupy large companies selling sophisticated resource planning systems, which might not necessarily be synonymous with what you are looking for.
ERP is an acronym that stands for enterprise resource planning (ERP). It’s a business process management software that standardizes, streamlines and integrates business processes across finance, human resources, procurement, distribution, and other departments. Typically, ERP systems use an integrated software platform operating on a single database, which collects and organizes key business information that helps organizations run lean and efficient operations as they expand.
How does ERP function?
Once information is compiled in that central database, leaders gain cross-departmental visibility that empowers them to analyze various scenarios, discover process improvements and generate major efficiency gains. That translates to cost savings and better productivity as people spend less time digging for needed data.
ERP has evolved from a human resource management application to a tool that spans IT management. That’s why for many users, an ERP is a “do it all” system that performs everything from the entry of sales orders to customer service. In addition, it attempts to integrate the suppliers and customers with the manufacturing environment of the organisation.
ERP belongs to a category of business software, but its systems comprise various modules, each addressing a specific business requirement. The names and numbers of modules in an ERP system provided by various software vendors may differ. The most popular modules of ERP target:
- engineering data control (bill of materials, process plan and work centre data); sales, purchase and inventory (sales and distribution, inventory and purchase);
- material requirement planning (MRP);
- resource flow management (production scheduling, finance and human resources management);
- works documentation (work order, shop order release, material issue release and route cards for parts and assemblies);
- shop floor control and management and others like costing, maintenance management, logistics management and MIS.
Also, the modules of ERP include areas such as:
- Finance (financial accounting, treasury management, enterprise control and asset management). This lays at the basics of the ERP concept.
- Logistics (production planning, materials management, plant maintenance, quality management, project systems, sales and distribution),
- Human resources (personnel management, training and development and skills inventory),
- Workflow (integration of the entire enterprise, with flexible assignment of tasks and responsibilities to locations, positions, jobs, groups or individuals).
ERP in practice
How does it look in practice? For instance, the customer relationship management (CRM) module tracks all communications with clients, assists with lead management, and enhances customer service and boosts sales. Professional services automation plan and track projects, including the time and resources spent on them. It can simplify client billing and encourage collaboration among staff members working on a project. The Working Time Management (WTM) module keeps track of attendance and hours spent at work, and in some systems, can also manage payroll. It can record absenteeism and productivity by department, team and individual employee. The list can go on forever.
Each module pulls information from and pushes information into the central database, a key component of an ERP system. This common data repository provides visibility into all departments. It thus allows leaders to evaluate and compare the performance of different business areas and understand the full impact of decisions.
A brief history of ERP
The ERP system traces its roots from standard inventory control packages to material requirements planning (MRP) in the 1960s. Manufacturers used MRP software to plan production schedules, make sure they had all the necessary supplies for production runs and track finished inventory. It was one of the early business applications that did not belong to the finance and accounting areas. MRP, at its core, is a time-phased order release system that schedules and releases manufacturing work orders and purchase orders so that sub-assemblies and components arrive at the assembly station just as they are required. Some of the benefits of MRP are reduction of inventories, improved customer service, enhanced efficiency and effectiveness.
MRP evolved and expanded to include more business functions such as product costing and marketing. In the early 1980s, MRP expanded from a material planning and control system to a company-wide system capable of planning virtually all the firm’s resources. This expanded approach was MRPII. A major purpose of MRP II is to integrate primary functions (i.e. production, marketing and finance) and other functions such as personnel, engineering and purchasing into the planning process to improve the efficiency of the manufacturing enterprise.
ERP – the term is born
The Gartner Group of Stamford, the USA, coined the term ERP in the early 1970s to describe the business software system that is the latest enhancement of an MRP II system (encompasses all MRP II modules).
A key difference between MRP II and ERP is that while MRP II has traditionally focused on the planning and scheduling internal resources, ERP strives to plan and schedule supplier resources as well, based on the dynamic customer demands and schedules.
Who uses ERP?
ERPs were originally designed for manufacturing companies but have since expanded to service industries, higher education, hospitality, health care, financial services, and government. Each industry has its own ERP peculiarities. For example, government ERP uses contract lifecycle management (CLM) rather than traditional purchasing and follows government accounting rules. In addition, banks have back-office settlement processes to reconcile checks, credit cards, debit cards, and other instruments.
Different solutions cater to a wide variety of organizations and requirements. For example, industries that use ERP to run their businesses include: advertising and digital media, consulting, education, energy, media and publishing, manufacturing, food and beverage, retail, transportation and logistics, wholesale distribution and many more.
Key features of ERP systems
ERP systems typically cover all aspects of business operations and commonly provide:
- An integrated system
- Common database
- Real-time operation
- Support for all applications/components
- Common user interfaces across application/components.
- On-premise, cloud-hosted, or SaaS deployment.
ERP software has the ability to collect and compare metrics across departments and provide several different reports based on roles or specific user preferences. The data collected synchronize reporting and automation by reducing the need to maintain separate databases and spreadsheets that would have to be manually merged to generate reports. This collection offers valuable insight, such as where to cut costs and streamline processes, providing the information to make real-time business decisions.
How does the ERP system work?
As companies’ needs change and they expand, their systems should keep up with this process. ERP systems work by using a defined, standard data structure. As a result, information entered by one department is immediately available to authorized users across the business. This uniform structure helps keep everyone on the same page. For example, a local printing shop chain has multiple locations that often share stock and personnel. As a quality, sales and employee data from these sites is fed into the ERP system, and it’s formatted to indicate which location it comes from.
Data is then woven into business processes and workflows across departments. For example, leaders can see if one location is doing significantly better than a sister site a few towns over and work to figure out why. Operations can make sure staffing levels align with traffic patterns. Finance can compare sales to rents to help executives decide whether to consolidate.
Different types of ERP systems
Various ERP models address the needs of different organizations, but there are four main types of ERP based on deployment options:
- On-Premise ERP software is implemented onsite and maintained in physical office space within an organization, hosted on the company’s own computers and servers for full control, support and ownership of the entire system once implemented.
- Cloud-based ERP software is a web-based solution, known as Software as a Service (SaaS), where an organization accesses and stores data on any device with an internet connection, usually through a subscription. The software provider ensures continual support, updates, training, and flexible customizations.
- “Hybrid” ERP software refers to a combined implementation of cloud-based and on-premise ERP system solutions. The combination of hosting and deployment services vary – some companies may turn to cloud solutions for certain business needs while sticking with their on-premises systems for other functions. Either way, the cloud systems must be linked to the on-premises platform to ensure a steady flow of information — often easier said than done.
- Open-source ERP: Like other open-source applications, open-source ERP is an inexpensive, and sometimes free, alternative that’s suitable for some companies. Many open-source ERP providers allow businesses to download their software for free and charge a low annual fee only if the customer wants cloud access. With more modern web-based interfaces and a growing number of modules, these solutions have improved, but companies need to understand what they’re taking on with an open-source ERP. Support from the provider will be minimal, and configurations and system improvements will fall on the client. That means you need technical staff with a deep knowledge of how to develop and configure the software.
ERP Systems by Business Size
No single system will be best for every small, midsize or large company respectively. But there are features specific to these segments as well as favoured deployment models.
Small-business ERP: Small firms should map out their requirements before starting a search to avoid software with far more functionality than they need. That’s why cloud ERP is generally the best option for small businesses — it offers the scalability to meet the business’s needs as it grows.
Midsize-business ERP: Midsize companies should demand a platform that can support all their business functions with specialized modules and, like smaller firms, select a vendor capable of scaling to meet future needs.
Enterprise ERP: Enterprises should opt for software that can support different components of their businesses. Corporations require systems that can capture, process and interpret a vast amount of data and handle the demands of many business units.
Benefits of ERP Systems
Today’s ERP solutions have rich feature sets that bring countless benefits to businesses. Here are key universal advantages ERP delivers:
1. Workflow visibility: With all workflows and information in one place, employees with access to the system can see the status of projects and the performance of different business functions relevant to their jobs. This visibility may be precious to managers and leaders, and it’s far faster and easier than searching for the right documents and constantly asking colleagues for updates.
2. Reporting/analytics: Data is useful only if companies can analyze and understand it, and an ERP helps with that. Leading solutions have impressive reporting and analytics tools that allow users to not only track KPIs but display any metrics or comparisons they can dream up. An ERP provides an audit trail by tracking the lifecycle of each transaction, including adherence to required approval workflows
3. Automation: By automating many simple, repetitive tasks, you minimize errors and the need to add employees at the same rate as business growth. Cross-company visibility makes it easier to spot inefficiencies that drive up costs and leads to better deployment of all resources, from labour to inventory to equipment.
4. Business insights/intelligence: Because ERPs can access data from across the company, these systems can uncover impactful trends and provide extensive business insights. This leads to better decision-making by organizational leaders who now have easy access to all relevant data.
5. Risk management: ERP technology reduces risk by strengthening financial controls. More accurate data heads off mistakes that could lead to lost sales or fines.
6. Collaboration: ERP solutions make it easy to share information — like purchase orders, contracts and customer-support records — among teams.
Disadvantages of ERP Systems
Although ERP systems have certain values, they have some disadvantages due to the tight integration of application modules and data. In addition, huge storage needs, networking requirements and training overheads are frequently mentioned ERP problems and the major reasons for ERP dissatisfaction. The other shortcomings of the ERP systems include:
- High costs of this system. It is calculated that customers spend between three and seven times more money on ERP implementation and associated services compared to the purchase of the software license or some simple cloud-based manufacturing software solution. ERPs require a time and financial investment hence the technology is much more affordable to larger enterprises. High cost prevents small businesses from setting up an ERP system.
- Specialized training. Lack of trained people may affect ERP’s efficiency. The ERP’s functionality depends on proper training and many of the staff might be resistant to that. An ERP system is loaded with features, and that can be daunting to your workforce. You need to hire a company to direct the implementation process and still the project might be painful, and customisation costly and time-consuming. Not only does a company need an IT staff to handle patches, security and required system upgrades, it often has to pay the vendor or a third-party service provider for its expertise.
- Data. When moving to a new ERP, you may need to convert some data into a format that’s compatible with the new platform. This can lead to unexpected costs and delays, so review your databases, and work with your IT team or an integration partner to identify potential data compatibility issues early on.
- Flexibility. To fully use any ERP software you must feed it a lot of data. That can jeopardize the flexibility, especially in a small company. Unless you enter every single detail into the system, it won’t allow you to make any quick adjustments. So you might feel limited by that.
- Doesn’t solve process and policy issues: If you have error-prone or inefficient processes, an ERP won’t necessarily fix them, even though it may increase accuracy. The same goes for policies that hold the organization back — it’s up to you to adjust those and then configure the system to support better ways of doing business.
- Company culture. You should remember that an ERP system is not just a pure software package to be tailored to an organisation, but an organizational infrastructure that affects how people work. It is as if it imposes its own logic on a company’s strategy, organisation, and culture.
The point is that ERP systems are not the evil of this world, and we criticize them just as competitive solutions. Many companies may benefit from implementing an ERP system, just not a small manufacturing business.
Is an ERP a smart choice for a small manufacturing company?
Suppose you are an owner of a fast-growing manufacturing business you want to keep up with the company needs. You picture yourself as a successful businessman thriving over rivals, leading your manufacturing company into changes and the digital revolution. As a manager, you wish to be like a magician performing in front of the cheering crowd of spectators. The wizard pulls stunt after stunt, and the audience admires his dexterity and mastery. He expertly deals cards in the centre of the stage, and although you don’t believe in magic, nonetheless, feel charmed by his performance. Then, when you think it’s the end of the show, he still manages to surprise you with having an ace upon his sleeve and gathers a round of applause.
You might ask, what’s this got to do with production scheduling and the choice of online software? Managing manufacture is a serious business, after all, not just tricks and fun. Well, let me explain the analogy and show you that having the upper hand proves very practical, in both cases: magician’s performance and surpassing your manufacturing rivals. Thanks to easy-to-use online management software, you can take the centre of the stage and deal with all the cards. How is that possible? Read on.
Once you’ve got a good grasp of what ERP is, it makes sense to discover different ways to help your business stay organized — optimizing your costs and operations to help you make data-driven decisions that improve your business performance.
What manufacturing software ERP / MRP / MES a small company needs for production scheduling and control?
ULTIMATE GUIDE, WHICH HELPS YOU TO CHOOSE MANUFACTURING SCHEDULING SOFTWARE.
Choosing the right system
For the majority of small manufacturing companies, the decision of choosing the right software is critical. Moving from chaos, paper notebooks, and little or almost no traceability/working time management into a paperless, digitized environment is a huge step.
On the other hand, midsize organizations lack large IT teams, sophisticated equipment, big implementation budgets. So, to lower the expenses of the digital revolution, they search for user-friendly, inexpensive solutions designed for a company that has limited technical expertise.
No matter what size is the company, owners and managers generally focus on outcomes — using the information to achieve objectives, like increasing efficiency, reducing costs and responding to changing consumer needs or market conditions.
Purchasing manufacturing software is a big decision, so take the time to evaluate all options thoroughly.