ERP (enterprise resource planning)

ERP, or enterprise resource planning, is a modular software system designed to integrate the main functional
areas of an organization's business processes into a unified system.
An ERP system includes core software components, often called modules, that focus on essential business
areas, such as finance and accounting, HR, production and materials management, customer relationship
management (CRM) and supply chain management. Organizations choose which core modules to use based on
which are most important to their particular business.
What primarily distinguishes ERP software from stand-alone targeted software -- which many vendors and
industry analysts refer to as best-of-breed solutions -- is a common central database from which the various
ERP software modules access information, some of which is shared with the other modules involved in a given
business process. This means that companies using ERP are largely saved from having to make double entries
to update information because the system shares the data, in turn enabling greater accuracy and collaboration
between the organization's departments.
The changing role of the CIO
ERP implementation options include on premises, cloud and a mix of the two, called hybrid, such as with
platform as a service (PaaS) and infrastructure as a service (IaaS). Although ERP has historically been
associated with expensive, monolithic, end-to-end implementations, cloud versions now enable easier
deployments, which SMBs are taking advantage of in greater numbers.
Some ERP systems also offer next-generation capabilities, such as AI, IoT and advanced analytics, to
foster digital transformation. Businesses typically turn to an ERP system when they outgrow spreadsheets and
disparate, often siloed software systems and need the unifying capabilities of an ERP system to enable growth.
As with many technology products, the specific definition of what constitutes ERP can vary widely from vendor
to vendor.
How ERP works
ERP systems rely on a centralized relational database, which collects business information and stores them in
tables. Having the data stored centrally allows end users, such as from finance, sales and other departments, to
quickly access the desired information for analysis.
Instead of employees in different departments managing their own spreadsheets and reports, ERP systems allow
for reporting to be generated from a single, centralized system. Information updated in one ERP module, such
as CRM, HR and finance, is sent to a central, shared database. The appropriate information in the central
database is then shared with the other modules.
Importance of ERP
Experts list four important business benefits of ERP:
 IT cost savings
 Business process efficiency
 A business process platform for process standardization
 A catalyst for business innovation
While businesses often focus on the first two areas because they’re easy to quantify, the latter two areas can
create greater impact for businesses.
ERP makes real-time business data available throughout the organization, which enables businesses to adapt
quickly and respond to changes. The business data available in ERP systems provides for more informed
decision making within an enterprise. ERP systems can also share data with third party partners and vendors to
improve efficiencies in the supply chain.
Benefits of ERP systems
ERP offers a plethora of benefits, most of which come from information sharing and standardization. Because
ERP components can share data more easily than disparate systems, they can make cross-departmental business
processes easier to manage on a daily basis. They can also enable better insights from data, especially with the
newer technologies that many ERP systems are including, such as powerful analytics, machine
learning and industrial IoT capabilities.
In addition, ERP software:
 boosts efficiencies by automating data collection;
 enables business growth by managing increasingly complex business processes;
 helps lower risk by enabling better compliance;
 fosters collaboration using data sharing and integrated information;
 provides better business intelligence and customer service capabilities; and
 improves supply chain management.
Advantages and disadvantages
Many consider ERP software to be a requirement for enterprises -- especially for core business functions such
as finance -- and the same is arguably true for growing SMBs. The sheer volume of data that companies
generate, along with the complexity of the global business landscape and modern consumer demands, has made
streamlining business processes and managing and optimizing data increasingly critical. An ERP software
system is typically at the core of such capabilities.
That said, there are advantages and disadvantages to implementing ERP.
Advantages:
 Can save money over the long run by streamlining processes.
 Provides a unified system that can lower IT-related expenses and end-user training costs.
 Enables greater visibility into myriad areas of the business, such as inventory, that are critical for meeting
customer needs.
 Enables better reporting and planning due to better data.
 Offers better compliance and data security, along with improved data, backup and the ability to control user
rights.
Disadvantages:
 Can have a high upfront cost.
 Can be difficult to implement.
 Requires change management during and after implementation.
 Basic, core ERP modules may be less sophisticated compared to targeted, stand-alone software. Companies
may require additional modules for more control and better management of specific areas, such as the
supply chain or customer relationship capabilities.

ERP implementations: On-premises ERP vs. cloud ERP vs. hybrid ERP
Legacy ERP systems tend to be architected as large, complex, homogeneous systems that do not lend
themselves easily to a cloud service delivery model. As such, most ERP systems, particularly those from large
legacy vendors, are run on premises.
The deployment of a new ERP system in-house can involve considerable business process re-engineering,
employee retraining and back-end support for database integration, data analytics and ad hoc reporting.
However, for a number of reasons, an ever-increasing number of companies are moving to cloud ERP,
especially SaaS and hybrid ERP -- where part of the ERP software suite runs on premises and part runs in the
cloud. Cloud-based ERP modules are built to be loosely coupled, which can reduce the cost and complexity of a
deployment. Because cloud ERP does not require the hardware and infrastructure necessary for on-premises
implementations, it can save on costs, both in terms of the technology purchases required and the IT staff
required to manage it. Cloud ERP may also be more efficient with automatic upgrades and easier scaling.
Perhaps most importantly, ERP vendors have focused on their cloud products to enable powerful data
processing capabilities, IoT, machine learning, blockchain, advanced analytics, 3D printing and other new and
emerging technologies that can help companies achieve digital transformation and better compete in the
changing global marketplace.
Some companies are reluctant to put mission-critical systems and applications in the cloud for a variety of
reasons, including perceived security risks or loss of data control. Other companies in highly regulated
industries or government agencies may be restricted by where systems and data is located geographically. In
addition, on-premises ERP provides greater customization options, which can be important.
What Is Supply Chain Management (SCM) and Why Is It Important?
Supply chain management (SCM) is the broad range of activities required to plan, control and execute a
product's flow from materials to production to distribution in the most economical way possible.
SCM encompasses the integrated planning and execution of processes required to optimize the flow of
materials, information and capital in functions that broadly include demand planning, sourcing,
production, inventory management and logistics -- or storage and transportation. Companies use both business
strategy and specialized software in these endeavors to create a competitive advantage.
Supply chain management is an expansive and complex undertaking that relies on each partner -- from suppliers
to manufacturers and beyond -- to run well. Because of this, effective supply chain management also requires
change management, collaboration and risk management to create alignment and communication between all
the participants.
In addition, supply chain sustainability -- which covers environmental, social and legal issues, in addition
to sustainable procurement -- and the closely related concept of corporate social responsibility -- which
evaluates a company's effect on the environment and social well-being -- are areas of major concern for today's
companies.
Benefits of supply chain management
Supply chain management produces benefits such as new efficiencies, higher profits, lower costs and increased
collaboration. SCM enables companies to better manage demand, carry the right amount of inventory, deal with
disruptions, keep costs to a minimum and meet customer demand in the most effective way possible. These
SCM benefits are achieved through choosing effective strategies and appropriate software to manage the
growing complexity of today's supply chains.

Importance of supply chain management

SCM has significant impacts on both the enterprise and the consumer.
Supply chain management activities can improve customer service. Done effectively, they have the ability to
ensure customer satisfaction by making certain the necessary products are available at the correct location at the
right time. By increasing customer satisfaction levels, enterprises are able to build and improve customer
loyalty.
SCM also provides a major advantage for companies by decreasing operating costs. SCM activities can reduce
the cost of purchasing, production and the total supply chain. Lowering costs improves a company's financial
position by increasing profit and cash flow. Furthermore, following supply chain management best practices can
minimize overuse of large fixed assets -- such as warehouses and vehicles -- by allowing supply chain experts
to redesign their network, for example, to maintain customer service levels while operating five warehouses
instead of eight, reducing the cost of owning three extra facilities.
Perhaps lesser known and underappreciated is SCM's critical role in society. SCM can help ensure human
survival by improving healthcare, protecting people from climate extremes and sustaining life. People rely on
supply chains to deliver necessities like food and water as well as medicines and healthcare. The supply chain is
also vital to the delivery of electricity to homes and businesses, providing the energy needed for light, heat, air
conditioning and refrigeration.
SCM can also improve quality of life by fostering job creation, providing a foundation for economic growth and
improving standards of living. It provides a multitude of job opportunities, since supply chain professionals
design and control all of the supply chains in a society as well as manage inventory control, warehousing,
packaging and logistics. Furthermore, a common feature of most poor nations is their lack of developed supply
chains. Societies with strong, developed supply chain infrastructures -- such as large railroad networks,
interstate highway systems and an array of airports and seaports -- can efficiently exchange goods at lower
costs, allowing consumers to buy more products, thus providing economic growth and increasing the standard
of living.
Supply chain management processes
Each major phase of a product's movement through the supply chain -- from materials to production and
distribution -- has its own distinct business processes and disciplines. Most of them began decades ago as paper-
based methods but now are usually handled in specialized software.
The SCM process starts with figuring out what products customers want -- the early stages of supply chain
planning, traditionally considered one of the two overarching categories of SCM, along with supply chain
execution.
Supply chain planning starts with demand planning, a process for gathering historical data, such as past sales,
and applying analytics and statistical modeling to create a forecast or demand plan that the sales department and
operational departments -- such as manufacturing and marketing -- can agree on. The forecast determines the
types and quantities of products to be manufactured. Some companies perform demand planning as part of a
formalized process called sales and operations planning (S&OP), which prescribes an iterative process of data
gathering, discussion, reconciling of demand plans with production plans and management approval. Some
companies include S&OP in a broader process called integrated business planning (IBP) that incorporates other
departments' plans in a single, companywide plan.
In the next major step, production planning, the company nails down the specifics of where and how the
products called for in the demand plan will be manufactured. (Production planning is also used in other
industries, such as agriculture and oil and gas.) A more fine-tuned variation -- typically automated in specialized
software -- called advanced planning and scheduling seeks to optimize the resources that go into production
and make them more responsive to changes in demand.
Material requirements planning (MRP) is a process dating back to the '60s that most manufacturers use to
ensure sufficient materials and components (such as subassemblies) are available for use in the manufacturing
process by taking inventory of what's on hand, identifying gaps and buying or making the remaining items. The
central document in both MRP and production planning is the bill of materials (BOM), a complete list of the
items needed to make a product.
MRP is sometimes done as part of manufacturing resource planning (MRP II) which broadens the MRP concept
to other departments such as HR and finance. MRP and MRP II were the predecessors of enterprise resource
planning (ERP) software, which is designed to integrate the major business processes of companies in any
industry.
Two complex processes play important roles in most of the major steps of SCM: inventory
management and logistics. Inventory management consists of various techniques and formulas for ensuring
adequate supply -- from raw materials in a manufacturing plant, perhaps managed in an MRP system, to
packaged goods in a retail store -- for the least expenditure of time and resources. Manufacturers are faced with
a variety of inventory management issues, many of which involve coordinating demand planning with inventory
at both ends of the production process. For example, sometimes material requirements planning leads
to more inventory, especially when the system is first implemented and the manufacturer must work to
synchronize MRP parameters with the inventory already on hand.
Logistics is everything having to do with transporting and storing goods from the start of the supply chain, with
delivery of parts and materials to manufacturers, to delivery of finished products to stores or direct to consumers
and even beyond for product servicing, return and recycling -- a process called reverse logistics. Inventory
management is threaded throughout the logistics process.
Procurement, sometimes called sourcing, is the process of finding suppliers for goods, managing those
relationships, and acquiring the goods economically -- along with all the communication, such as sending out
requests for bids, and paperwork, including purchase orders, invoices, etc. It is a major component of supply
chain management, given how much is bought and sold at all points along the chain. Most players in the supply
chain -- suppliers, manufacturers, distributors and retailers -- have dedicated procurement staff.
Strategic sourcing is an elevated and more sophisticated type of procurement that aims to optimize a company's
sourcing process by taking advantage of its consolidated purchasing power and align it with overall business
goals.
Supplier relationship management (SRM), in contrast, addresses sourcing issues by focusing on the suppliers
the company deems most critical to success and systematically strengthening relationships with them while
fostering optimal performance.
Supply chain complexity
The most basic version of a supply chain includes a company, its suppliers and the customers of that company.
The chain could look like this: raw material producer, manufacturer, distributor, retailer and retail customer.
A more complex, or extended, supply chain will likely include a number of suppliers and suppliers' suppliers; a
number of customers and customers' customers, or final customers; and all the organizations that offer the
services required to effectively get products to customers, including third-party logistics providers (3PLs),
financial organizations, supply chain software vendors and marketing research providers. These entities also use
services from other providers.
The totality of these organizations, which evokes the metaphor of an interrelated web rather than a linear chain,
gives insight into why supply chain management is so complex. That complexity also hints at the types of issues
that can arise from demand planning issues, such as a release of a new iPhone that chokes demand for old
iPhone cases, to natural supply chain disruptions, such as the halt of transportation due to extreme winter
weather or droughts that kill crops, to political upheaval, such as labor strikes that throttle movement at a
country's container ports.
In response, companies increasingly use supply chain risk mitigation strategies, such as shoring up
communication with critical suppliers and analyzing their financial stability. Some are employing
specialized supply chain management tools to automate monitoring and assessment of risk.
Supply chain sustainability is the umbrella term for the strategies that organizations use to ensure their supply
chains are sustainable and can withstand the risks coming from many quarters, be they financial, social,
environmental or political. Regulatory compliance issues have grown as supply chains have become more
global, and trading partners face a hodgepodge of local laws. Despite the need, the market in specialized supply
chain sustainability software is fragmented, and most companies use other tools and processes to address the
problem.
Logistics vs. supply chain management
The terms supply chain management and logistics are often confused or used synonymously. However, logistics
is just one -- albeit vital -- component of supply chain management. It focuses on moving a product or material
in the most efficient way so it arrives at the right place at the right time. It manages activities such as packaging,
transportation, distribution, warehousing and delivery.
In contrast, SCM involves a more expansive range of activities, such as strategic sourcing of raw materials,
procuring the best prices on goods and materials and coordinating supply chain visibility efforts across the
supply chain network of partners, to name just a few.