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What is 'Enterprise Resource Planning - ERP'

Enterprise resource planning (ERP) is a process where 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, with many large software applications having been developed to help companies implement ERP. 

BREAKING DOWN 'Enterprise Resource Planning - ERP'

Enterprise resource planning is the glue that binds together 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 a central nervous system for a business. It collects information about the activity and state of different divisions, making this information available to other parts, where it can be used productively. Information on the ERP is added in real time by users. 

ERP resembles the human central nervous system in that 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 together. 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 was developed by SAP, a software firm created 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's 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. The key is to prevent ERP projects from being split into many smaller projects, which can result in cost overruns.

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