Enterprise Resource Planning - ERP

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What is 'Enterprise Resource Planning - ERP'

Enterprise resource planning (ERP) is a process by which a company (often a manufacturer) manages and integrates the important parts of its business. An ERP management information system integrates areas such as planning, purchasing, inventory, sales, marketing, finance and human resources.

ERP is most frequently used in the context of software. As the methodology has become more popular, large software applications have been developed to help companies implement ERP.

BREAKING DOWN 'Enterprise Resource Planning - ERP'

Think of ERP as the glue that binds the different computer systems for a large organization. Typically, each department would have its own system optimized for that division's particular tasks. With ERP, each department still has its own system, but it can communicate and share information easier with the rest of the company.

The ERP software functions like some a central nervous system for a business. It collects information about the activity and state of different divisions of the body corporate and makes this information available to other parts where it can be used productively. Information on the ERP is added in real time by users. Any authorized user with a valid password and access to the network can access the system any time.

ERP resembles the human central nervous system. Its capacity transcends the collective ability of the individual parts to form what is known as consciousness. It helps a corporation become more self-aware by linking information about production, finance, distribution and human resources. ERP connects different technologies used by each individual part of a business, eliminating duplicate and incompatible technology that is costly to the corporation. This involves integrating accounts payable, stock-control systems, order-monitoring systems and customer databases into one system.

The first ERP system to be developed was SAP, a software firm that was established in 1972 by three software engineers based in Mannheim, Germany. SAP's goal was to link different parts of a business by sharing information gathered from those parts to help the company operate more efficiently.

Why ERP Systems Fail to Achieve Objectives

A company could experience cost overruns if its ERP system is not implemented carefully. An ERP system doesn't always eliminate inefficiencies within the business. The company needs to rethink the way it is organized, or else it will end 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 that are incompatible with the software. Some companies are reluctant to let go of old software that worked well in the past. Prevent ERP projects from being split into many smaller projects, which can result in cost overruns.