What is an ERP system?
An ERP system is software that helps companies to manage their business processes – from finance to purchasing to production. All data is centralized so that processes become more efficient and decisions can be made on a reliable basis. The aim is to provide resources exactly when they are needed.
What does ERP mean?
ERP stands for “Enterprise Resource Planning” and refers to the company-wide planning and control of all resources and processes. The aim is to optimize and harmonize all processes – from procurement to production and sales.
Essentially, it is about having the right resources available in the right place at the right time and in the right quantity. To achieve this, information from all areas of the company must be brought together, evaluated and made available in real time. ERP thus creates a “single source of truth”: a database for well-founded decisions and efficient processes.
ERP (Enterprise Resource Planning) has its origins in production planning. Today, it encompasses the entire spectrum of operational functions. It is, so to speak, the central hub and backbone of digital transformation in companies.
What is an ERP system?
An ERP system is a comprehensive software solution that bundles all of a company’s business-relevant functions into a single application. It integrates data and processes from different areas such as finance, sales, purchasing, production and human resources. It enables the efficient management of all company resources.
The ERP system is usually the most important application in corporate IT. The majority of all data flows together here and is in turn made available to other solutions from there.
Structure and functional scope of modern ERP systems
Modular design
ERP systems have a modular structure, i.e. they consist of different modules for different areas of the company. Although these modules can be used independently, they interlock seamlessly. Together, they form an integrated overall solution.
Depending on the provider and industry, the design and names may vary. However, most ERP systems cover the following core functions:
Finance and controlling
The finance module is at the heart of every ERP solution. The first ERP systems were primarily developed for financial management. This module includes functions such as bookkeeping, cost accounting and controlling. This is where all financial transactions come together, from payment transactions and dunning to the annual financial statements. Planning, budgeting and reporting are also integrated.
Human Resources
The HR module is all about the human factor: employee master data, contracts, time recording, payroll accounting and travel expense management. In some cases, functions such as recruiting, talent management and training are included. The aim is to manage all personnel-related processes efficiently.
Procurement and warehousing
This module supports the entire procurement process, from requirements planning to supplier selection and order processing. It enables transparent management of purchase prices, framework agreements and delivery conditions. Warehousing, including inventory management and stocktaking, can be controlled in the ERP system.
Production and manufacturing
The production module is specially tailored to the requirements of manufacturing companies. It helps with the planning, control and monitoring of production, including parts lists, work schedules and capacity utilization. Topics such as quality management, maintenance and post-calculation are part of the functional scope.
Sales and Marketing(CRM)
The modules for sales and marketing are designed to support the sales side of the company. It can be used to manage most sales-related processes, from lead generation to quotation creation and order management. Functions such as campaign management, customer segmentation and service management are also often integrated.
Also interesting: How to link your ERP and CRM system
Expandable
In addition to their own modules, ERP systems can usually be flexibly expanded. Additional software solutions can be connected via interfaces (APIs), for example for document management, business intelligence or e-commerce. This allows the system to grow with requirements and adapt to new circumstances.
The advantages: Why is an ERP system important?
Central data storage: “Single source of truth”
All business-relevant data is stored and managed centrally in an ERP system. Instead of being scattered in departmental silos and isolated solutions, they are available anytime and anywhere. This “single source of truth” creates a reliable basis for decisions: The data is always complete and up-to-date. It also reduces the costs of data maintenance and storage.
Automation of routine tasks
Many manual, time-consuming activities can be automated by ERP systems – recently often supported by AI algorithms. Examples include the creation of invoices, reminders, orders and reports or the posting of documents. Data transfers between departments are also carried out automatically. This relieves employees and allows them to concentrate on value-adding tasks.
Optimization of business processes
ERP systems map business processes consistently and across departments. This reduces interfaces and media disruptions and speeds up processes. At the same time, best practices can be established and rolled out uniformly throughout the company – all departments then work according to the same, optimal processes. Adherence to compliance requirements is also made easier.
Increased transparency and improved basis for decision-making
By integrating all company data, ERP systems open up new possibilities for analysis and reporting. Key figures such as turnover, costs or throughput times can be evaluated in real time and visualized in meaningful dashboards. Predictive analytics can be used to create more accurate forecasts. This makes bottlenecks, deviations and optimization potential quickly visible and enables well-founded decisions to be made.
Reducing costs and increasing productivity
Thanks to the effects described above, companies can use ERP systems to reduce their costs and increase their productivity. Examples of this are the automation of routines, the avoidance of errors and duplication of work, the reduction of stock levels and the shortening of throughput times. The lower costs for IT maintenance and integration also pay off.
Networking with business partners
Suppliers, customers and service providers can be connected directly to the company’s own processes via standardized interfaces. This creates consistent, seamless processes across the entire supply chain. Companies are increasingly dependent on each other. By working more closely together, they can all increase their efficiency, flexibility and quality.
Also interesting: Advantages of an ERP system: Is the investment really worth it?
When does a company need an ERP system?
A company is ready for an ERP system if it wants to digitalize, network and optimize its processes end-to-end. This need usually arises from two situations: 1. a company grows and can no longer manage the many, more complex processes without a central software solution. 2. a company realizes that it is falling behind the competition, for example because its processes are inefficient, many errors occur or decisions are made too slowly.
ERP systems are not only intended for large companies, even if they were originally developed for them. Small companies also benefit from them. Nowadays, every company can find a suitable solution with a range of functions and costs that suit them.
On-premise vs. cloud ERP
Anyone deciding on an ERP system is inevitably faced with the question: on-premise or cloud? Both options have their strengths and areas of application. Which is the right one depends on the individual requirements and framework conditions.
On-premise ERP
In the classic on-premise variant, the ERP software is operated on the company’s own servers. This means that the company buys licenses, procures the necessary hardware and takes care of installation, operation and maintenance itself (or commissions a service provider). Although this requires initial effort and IT expertise, it also offers a high degree of control and customizability.
Advantages of on-premise solutions:
- Full control over data, security and performance
- Possibility of deep integration and individualization
- Manageable running costs thanks to one-off license fees, regardless of usage
Disadvantages of on-premise solutions:
- High initial costs for licenses, hardware and implementation
- Longer implementation times due to on-site installation and customizing
- Continuous effort for operation, maintenance and updates of the systems
- Risk of security gaps and system failures due to inadequate IT management
- Risk of technological obsolescence in the absence of investment
On-premise systems are particularly suitable for companies with complex, specific requirements, high data volumes or special compliance requirements. This model can also benefit those who want to make long-term calculations or already have a high-performance IT infrastructure.
| Advantages of on-premise solutions | Disadvantages of on-premise solutions |
| Full control over data, security and performance | High initial costs for licenses, hardware and implementation |
| Possibility of deep integration and individualization | Longer implementation times due to on-site installation and customizing |
| Manageable running costs thanks to one-off license fees, regardless of usage | Continuous effort for operation, maintenance and updates of the systems |
| Risk of security gaps and system failures due to inadequate IT management | |
| Risk of technological obsolescence in the absence of investment |
Cloud ERP
Cloud or SaaS ERP systems are not operated within the company, but in external data centers. Instead of buying the software, you rent it in an “all-inclusive” subscription model and access it via the Internet.
Advantages of cloud ERP solutions:
- Fast implementation without large IT investments
- The provider takes care of operation, maintenance, IT security and updates
- Access from anywhere and easy connection of external systems and partners
- Transparent, usage-based costs
Disadvantages of cloud ERP solutions:
- Fewer customization options than with on-premise systems
- Less control over data and access security
- Possibly higher total costs in the long term with intensive use (depending on the price model)
- Potentially higher effort for integration with existing on-premise systems
Cloud ERP is recommended for companies that want to start flexibly and quickly without having to build up their own IT resources. The cloud is also a good choice for those who value constant up-to-dateness, use many other cloud solutions or work with partners worldwide.
| Advantages of cloud ERP solutions | Disadvantages of cloud ERP solutions |
| Fast implementation without large IT investments | Fewer customization options than with on-premise systems |
| Provider takes over operation, maintenance, IT security and updates | Less control over data and access security |
| Access from anywhere, easy connection of external systems and partners | Possibly higher total costs in the long term with intensive use (depending on the price model) |
| Transparent, usage-based costs | Potentially higher effort for integration with existing on-premise systems |
Hybrid models
Hybrid ERP models are also becoming increasingly popular. These combine on-premise and cloud components, for example by keeping core functions in-house and moving peripheral processes to the cloud. Alternatively, companies can purchase software and operate it themselves in a private cloud.
How does the selection of an ERP system work?
Anyone who decides on an ERP system will use the software for the next 10 to 20 years. Accordingly, the right system should be selected carefully. The following steps are necessary:
Needs analysis and requirements definition
The first question is: What should the ERP system do? Which processes should it support, which problems should it solve? This involves analyzing the current situation, identifying weaknesses and defining the target state. It is important to involve all relevant stakeholders, from management and specialist departments to users. The requirements are defined in the form of a specifications summarized.
Market overview and longlist
The ERP market is diverse and confusing. In order to maintain an overview, a market analysis is recommended first. Which providers are there, which systems are relevant for your own industry? Independent comparisons, references and user reports help with the pre-selection. A so-called longlist is drawn up from all potential providers.
Shortlist
This is followed by a detailed evaluation. The ERP systems must be examined for the following criteria, among others:
- Functional scope and industry suitability: Does the system cover all required processes? Are there industry-specific functions and best practices?
- Technical architecture and integration capability: Does the technology fit into the existing IT landscape? How can the system be linked with other solutions?
- Customization and expansion options: Can the system be adapted to individual requirements? What interfaces and expansion options are available?
- User-friendliness and acceptance: Is the software intuitive to use? Are users optimally supported in their daily work?
- Implementation methodology and support offer: What support does the provider offer for implementation, training and operation? How quickly and competently does the support respond?
- Future viability and investment security: What is the provider’s market position and innovative strength? What roadmap and development prospects are there?
The shortlist then contains, in the best case, two to three candidates who appear to be the most suitable. After intensive discussions and workshops with the providers, a well-founded decision can be made.
Also interesting: ERP selection guide: 7 steps to the right ERP (+practical tips)
Success factors for ERP implementations
Once the decision for a system has been made, the actual introduction begins. A few factors are particularly important to make this a success:
- Clear goals and responsibilities: Everyone involved must know where the journey is going and who is responsible for what. Tight project management is essential.
- Careful process analysis and optimization: Existing processes should be analyzed and optimized before the system is introduced. Because even the best software cannot cure bad processes.
- A step-by-step approach and realistic time planning: It is better to start small and then scale up than to try to do everything at once. Buffer times for tests and rework should also be planned in.
- Intensive training and involvement of users: The better the employees are prepared for the new system and the more they can get involved, the greater the acceptance and success of the project.
- Consistent change management and expectation management: An ERP project means change at all levels. Open communication, expectation management and dealing with resistance are therefore essential.
Typical stumbling blocks during ERP implementation
Time and again, we hear about failed ERP projects in companies. However, this is due to specific mistakes that are made. These include
- Unclear or different goals, lack of coordination between business and IT
- Underestimated complexity and resource requirements
- Excessive requirements and too much customizing
- Inadequate data management and poor data quality
- Lack of user involvement and training
- Lack of process orientation and adoption of old processes
Current trends in ERP systems
New technologies, business models and customer requirements are driving development, including in ERP systems. Many trends such as cloud and SaaS models or mobile use can be observed everywhere and are no longer a special feature. However, the following two trends are dramatically expanding the capabilities and areas of application of ERP systems:
Artificial intelligence (AI)
Intelligent algorithms can already provide support for a wide variety of tasks. Examples of AI applications in ERP are
- Intelligent forecasts of sales, cash flow or resource requirements based on historical data and patterns
- Automatic classification and allocation of documents using machine learning
- Optimized production planning and control through simulated scenarios and real-time data
- Proactive maintenance of machines and systems (predictive maintenance)
- Intelligent chatbots and digital assistants for information and support requests
The potential is enormous and only the next few years will show what is possible. Companies can use it to automate processes, improve decisions, minimize errors and gain completely new insights. However, this requires a solid database and the necessary expertise in using the technologies.
Also interesting: These AI trends are dramatically changing ERP systems
Linking with IoT and big data (Industry 4.0)
The Industrial Internet of Things (IIoT) is increasingly merging the physical and digital worlds. Machines, products and entire factories are becoming intelligent, networked and communicate with each other in real time. Machine data, process parameters and quality information can be seamlessly fed into the ERP system via sensors and interfaces. Conversely, control commands can be transmitted directly to machines and systems.
The result: a real-time picture of the entire value chain, from development to production and delivery. This enables companies to react more quickly to changes, optimize processes and offer new data-based services. ERP systems are thus evolving from a pure management tool to a driver of digital transformation.
FAQ on ERP:
Which companies need an ERP system?
Which companies need an ERP system?
What is the difference between ERP and merchandise management system?
What is the difference between ERP and merchandise management system?
What are the benefits of an ERP system in everyday life?
What are the benefits of an ERP system in everyday life?
Does an ERP system also make sense for small companies?
Does an ERP system also make sense for small companies?
How much does an ERP system cost?
How much does an ERP system cost?
Interesting facts from the blog
The top requirements for ERP systems for SMEs
How to write the perfect ERP specifications
