Jostling for competitive advantages, the desire to cut operational costs, maximize profits or improve efficiency is a rat race that can lead businesses down rabbit holes of schemes, strategies, and technologies.
Anecdotally, you’ve probably heard an Enterprise Resource Planning (ERP) system can be a silver bullet. True…but only if you make the right choice.
You also aren’t quite sure they are worth all the fuss. So you’re out seeking answers yourself. And we get it.
Investing in any enterprise software isn’t a minor decision, especially when said software will be the focal point of your business operations.
Not to mention the stakeholders that may need convincing. You need to justify the amount required to adopt the software and the changes within the business that this new tech will demand.
Although you’re curious, you don’t need a post that only spotlights the benefits of ERPs.
What will serve you just fine is a balanced presentation of the positives and negatives of ERPs so that you can decide if an ERP is suitable for you.
And this article is precisely that.
What Does ERP Stand For & What Is an ERP System?
ERP stands for enterprise resource planning. An enterprise resource planning system is an application that enables organizations to manage their day-to-day activities using several connected tools.
Let’s unpack this.
Typically, businesses have core departments that keep them running:
- From accounting
- To customer relationship management
- Inventory management
- And human resource management
Several departments need to operate seamlessly for your business to function at the highest level as a well-oiled machine.
At its core, an ERP system helps you keep an eye on all these departments from one platform, get accurate data from their operations and automate specific processes.
You can think of ERP systems as central command centers and data hubs for businesses.
With a well-deployed ERP software, departments can access the data they need from other sections of your business anytime from a centralized database.
This eliminates tedious paperwork, repetitive data entry, and even crippling bureaucracy.
Instead, it facilitates swift collaboration and data sharing between departments, more accurate resource and operation planning and forecasting, and greater efficiency.
If you’re wondering how ERPs function, here’s a simple explanation without delving into the core mechanics.
Since ERPs are designed to help manage different business operations, they include modules dedicated to each business aspect.
For example, you’d have a financial management module, supply chain management module, etc.
The individual modules not only coordinate their corresponding business sector but also communicate with each other and send data to a single platform.
Standard ERP modules include:
- Supply chain management
- Inventory management
- Financial management and accounting
- Customer relationship management
- Manufacturing
- Human resources management
- Professional services automation
- Reporting and analytics
The Evolution of ERPs
Although ERPs are now available to companies across several industries, their functionalities weren’t this broad.
ERPs slowly crept onto the scene in the 1960s as material requirements planning (MRP) systems.
Around this time, J.I. Case, a tractor manufacturer, partnered with IBM to develop what industry commentators widely regard as the first MRP system.
This paved the way for more manufacturers to build similar MRP solutions.
The key functionalities of early ERPs served manufacturing companies majorly.
They helped them track inventory and production and manage raw materials, among other things. But these MRPs were expensive, bulky, and required expert technicians to manage them.
By the ‘80s, when MRPs had become mainstream, the technology powering them improved with the introduction of MRP II.
These new systems had more extensive functionalities that catered to operations beyond inventory and raw materials management.
The core functionalities of the MRP were primarily focused on manufacturing businesses but now enabled these organizations to connect and manage the critical departments involved in manufacturing.
As more industries realized the potential of MRPs, more comprehensive solutions began to crop up.
Gartner coined the term for the emerging solutions, “enterprise resource planning,” in 1990, leading to the creation of ERPs.
Businesses of all sizes and industries could sync and access data and manage operations from one platform.
Beyond the broadening of the features offered, ERPs have also seen an evolution of their deployment options.
From being strictly on-premises systems, leading ERP manufacturers began offering cloud solutions.
These options enabled companies to access data and perform select operations on any internet-enabled device anywhere and anytime.
Not only did cloud-based ERPs improve the efficiency of business teams, but they also paved the way for smaller companies without the resources to host on-premises systems to leverage cloud-hosted ERPs for business growth.
Beyond more nimble deployment options, modern ERPs are now applying the latest technologies to deliver better experiences.
They use artificial intelligence and machine learning to provide smarter business insights, intelligent predictions, analysis, high-end process automation, etc.
Plus, many of these ERPs can connect businesses with their subsidiaries and partners around the globe for better coordination and management.
Main Benefits of ERPs in Organizations
By taking even a cursory glance at the capabilities of ERPs, it’s easy to see how they can help businesses thrive and perform optimally. But let’s take an in-depth look at some of these benefits.
1. Serves as a One-stop Shop for Reliable Data Across the Organization
Data is one of the most invaluable assets that businesses can leverage.
It gives insights into the current state of things, offers glimpses of what the future holds, and informs decisions that will help create or avert that future.
With ERPs, you get access to critical insights from various business segments, all in one place.
This removes the need to use separate databases that will require constant synchronization and cleaning to ensure accuracy.
Plus, this also provides you with both an overview and a microscopic view of critical business data across the board needed to plan processes, allocate resources and make adjustments intelligently.
For example, it becomes easier for you to maximize available resources by deploying to areas where there will yield the most results.
This centralized database also profits decision-makers at the departmental levels and fosters faster and easier collaboration between departments.
2. Boosts Productivity and Efficiency
Getting the most from the resources at your disposal is vital if your business will thrive.
An ERP system helps with this by automating simple repetitive tasks and freeing up employees to focus on more dynamic activities that are also mission-critical.
This way, you’ll have your employees using their time in the best way possible, and all this adds up to greater output for the business.
An ERP’s automation capabilities also ensure you don’t overlook essential steps in specific business processes.
The system adheres to the workflows once you set the workflows, so nothing slips through the cracks. You cut down on execution errors and can seamlessly and consistently adhere to regulatory demands and industry standards.
And with superior computing, ERPs drive faster execution and provide intelligent and reliable recommendations that can speed up decision-making and improve efficiency.
3. Delivers Comprehensive Reports and Analytics
Apart from giving you access to raw operational data across the organization, modern ERP systems can generate standard and custom reports and analytics on demand.
You often require high-level reporting for purposes ranging from in-house record-keeping and decision-making.
Such reporting may demand that you compare data from different departments or use planning models like scenario forecasting.
These complex and otherwise tedious processes are simplified with model ERPs, and reliable results are available through button clicks.
Depending on your chosen solution, your ERP’s reports and analytics section may even be the only reporting tool you’ll need for your business, as many can communicate the trends and metrics required for high-level reporting and decision-making.
4. Bolsters Collaboration
Departments across your organization need to be in sync to drive the business forward.
For them, being on the same page concerning the company’s goals is one thing. Being able to work together to achieve them effectively is another.
Although this collaboration process should be seamless, an absence of a hub that connects all the departments prevents this. But an ERP solves that problem.
One of the most significant benefits of an ERP system is its ability to level the walls between departments through seamless data sharing.
By creating a centralized database, departments can access relevant data from other sectors on demand and execute based on the insights gleaned.
Progress reports that inform the company’s next moves are also readily available. So each sector within the organization knows exactly when to step in without dealing with the monotony of manually demanding updates from other departments.
As such, decision-making can be more proactive, timely, and effective.
5. Standardizes Business Operations and Ensures Regulatory Compliance
It’s not enough to know how to satisfy your customers. You also have to weave in standard industry hacks and strategies into your processes to stay competitive.
An ERP system is the best tool for organizing these strategies and embedding them in your operation.
ERPs enable you to create and manage custom workflows that reflect industry best practices.
Some industry-specific ERPs even come with these optimized workflows, which you can simply start implementing. Such processes also foster top-notch quality control as they are structured to deliver consistent results.
Beyond facilitating industry best practices, ERPs enable your business to comply with standard stipulations and requirements efficiently.
For instance, many come with built-in financial functionalities and reports that comply with tax laws and various financial reporting standards.
This way, you can deliver automated reports knowing that you’re in full compliance, avoid legal infringements, and save time that goes into repetitive bookkeeping and accounts balancing, tax remittance and reporting, etc.
6. Improves Customer Service and Interactions
Satisfying and retaining your customers requires you to be on top of your game.
The sales department, for example, needs to be able to effectively manage and use customer information to deliver the best experience.
And a modern ERP system can facilitate this process by centralizing and streamlining accurate customer information with other business data. Plus, it provides a central database that makes customer information readily available to whatever department needs it.
This creates an agile work environment where the absence of restrictive silos improves service delivery to customers.
Using an ERP to track and manage customer activity can also power effective marketing campaigns.
From creating automated lead qualification metrics to setting upselling and cross-selling parameters, several modern ERPs better empower marketing and sales teams to take advantage of sales opportunities.
Disadvantages of ERPs
Seeing all the advantages of ERPs might make installing one for your business seems like a no-brainer. But we all know it’s not that simple.
The essence of good decisions is in weighing the pros and cons of your choices and seeing which tips the scales based on your needs and context.
We’ve seen the positives of ERPs, so let’s see some of their major drawbacks you should be aware of.
1. Cost
Installing ERP software doesn’t come cheap.
Traditional ERPs that require on-premises deployment attract various expenses ranging from the upfront cost of the software to installation and maintenance fees and the cost of upgrading your hardware where applicable.
Businesses just starting may find all this too pricey.
Although opting for solutions that offer software as a service and require monthly or annual subscription fees may be cheaper in the short term, the long-term cost may be daunting. Plus, you may find hidden charges creeping in along the line, such as payments for the quality support, training, etc.
An ERP system is definitely worth its weight in gold. But it’s possible that forking out a hefty sum for one would do more harm than good to your business, depending on your situation.
2. Complexity and Training Requirements
As you’d expect with anything that offers the functionalities that ERPs do, complexity might be an issue.
Even though several solutions claim to be intuitive, they are still head-scratchers for users (especially first-timers). This means a tool you chose to simplify and streamline your operations may create confusion.
The solution? Training, but this also comes with its hitches.
Differing learning capabilities among employees might create an uneven understanding of the platform, which could slow down business operations and defeat the reason you got the system in the first place.
3. Implementation Time
There’s no standard timeline for deploying your ERP as the implementation duration varies based on company size, software complexity, and more.
That said, this process can take anywhere from six months to two years. You read that right.
Although cloud-based ERPs are faster to deploy, setting them up also takes time.
There’s also the time it takes to customize the system to suit your business. This is important if you’re getting a generic system and prefer to modify it to your taste.
So you have to approach this with the knowledge that what you’ve invested a ton of cash in may not begin to function in months.
These ERP Advantages Could Be Too Good to Pass Up
Research processes like this usually end in two ways: you come in as a skeptic and leave as a believer. Or you arrive as a skeptic and leave as an ardent unbeliever.
Either way, something has happened here – you’ve broadened your understanding of the value and drawbacks of ERPs.
But before you make a decision, reflect on these advantages and disadvantages in the context of your business.
For you, having a centralized database or one source of truth for your records may just be worth shelling out decent cash for.
Getting better visibility into your business processes and improving efficiency by automating manual tasks may just be worth the time it takes to implement the system.
The point is, no one knows your business like you.
And all the benefits ERPs bring might just be what your business needs to get to that next level. If you see any or all of these signs, we recommend that you consider adopting an ERP system:
- Poor decision-making due to insufficient internal data
- Relevant data and reports aren’t available on demand and take too long to compile
- Overworked teams that are spread too thin by repetitive tasks that can be automated
- Constant technical issues from disparate systems
- Customer service issues due to inaccurate data like inventory numbers.
Apart from negative signs, positive events can also make adopting an ERP system critical.
For instance, if your business is growing rapidly, you may not be able to keep up using manual methods or separate systems. Plus, an ERP might be well placed to help you scale even faster.
Also, you should know that the highlighted drawbacks vary in intensity based on the ERP solution you opt for. Top players in the industry, such as NetSuite ERP, typically come with milder hiccups.