What is ERP and how does it work?

Enterprise resource planning (ERP) software gathers all of an organization’s business tools in one virtual room to facilitate workflow and solidarity between departments. An ERP system helps to improve business performance through a number of different functional modules such as finance, sales, manufacturing, supply chain management, and human resources.

According to Gartner, the Enterprise Resource Planning market grew 8.8% to a value of $38.8 billion in 2019. As businesses grow and find the need to improve efficiency while maintaining a certain quality of service, ERP software becomes an attractive option. However, ERP systems can be costly and complex, and it is not uncommon for businesses to struggle with adoption and thus experience negative business impacts.

For these reasons it’s important to understand what an ERP is, the features these systems offer, and the tradeoffs your organization can expect from adopting one.

What is an ERP system?

An ERP system is a type of software used to plan and manage a range of business processes and tasks. Looking back at the history of ERP, these systems have evolved from paper-based scheduling models to today’s multi-modular computer-based systems.

Early history of ERP

The first recognized ERP was the Economic Order Quantity (EOQ) designed by Ford W. Harris in 1913. The EOQ was an inventory review protocol intended to help companies reorder at the right time to reduce inventory management costs. While brilliant at the time of development, this model assumed that demand, ordering, and holding costs all remained constant. Of course, no such assumptions are possible in today’s business environment.

ERP vs. MRP

MRP stands for Material Requirements Planning. This was the next major development in the history of ERP, when toolmaker Black and Decker computerized Joseph Orlicky’s MRP model in 1964. MRP was used to calculate the material and components needed to manufacture products.

In 1983, Manufacturing Resource Planning, or MRP II, came into use. As an extension of the original material resource planning model, MRP II software integrates other business functions such as general accounting, cost control, machine capacity, raw materials procurement, and demand forecasting.

Finally, in the 1990s, Gartner coined the term Enterprise Resource Planning to indicate the next evolution of enterprise planning software. Gartner defines ERP as a suite of business applications that share a common process and data model, covering a broad range of operational end-to-end processes. – Read more

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