What Is Enterprise Resource Planning (ERP)?

Enterprise resource planning (ERP) is a process whereby a company manages and integrates the important parts of its business. Many ERP software applications exist to help companies implement resource planning by integrating all of the processes it needs to run a company into a single system. An ERP software system can integrate planning, purchasing inventory, sales, marketing, finance, human resources, and more.

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Enterprise Resource Planning (ERP)

Understanding Enterprise Resource Planning

You can think of an enterprise resource planning system as the glue that binds together the different computer systems for a large organization. Without an ERP application, each department would have its own system optimized for that division's particular tasks. With ERP software, each department still has its own system, but all of the systems can be accessed through one application with one interface.

ERP applications also allows the different departments to communicate and share information more easily with the rest of the company. It collects information about the activity and state of different divisions, making this information available to other parts, where it can be used productively.

ERP applications can help a corporation become more self-aware by linking information about production, finance, distribution, and human resources together. Because it connects different technologies used by each individual part of a business, an ERP application can eliminate duplicate and incompatible technology that's costly to the corporation. This involves integrating accounts payable, stock-control systems, order-monitoring systems, and customer databases into one system.

ERP offerings have evolved over the years from traditional software models that make use of physical client servers to cloud-based software models that offer remote, web-based access.

Special Considerations

[Important: 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 also 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.

Key Takeaways:

  • ERP software can integrate all of the processes it needs to run a company.
  • ERP offerings have evolved over the years, and many are now web-based applications that users can access remotely.
  • An ERP system can be ineffective if a company doesn't implement it carefully.