Financial and Strategic Management

What is Enterprise Resource Planning?

ERP, or enterprise resource planning, is a modular software system designed to integrate the main functional areas of an organization’s business processes into a unified system.

An ERP system includes core software components, often called modules, that focus on essential business areas, such as finance and accounting, HR, production and materials management, customer relationship management (CRM), and supply chain management. Organizations choose which core modules to use based on which are most important to their particular business.

What primarily distinguishes ERP software from stand-alone targeted software which many vendors and industry analysts refer to as best-of-breed solutions — is a common central database from which the various ERP software modules access information, some of which is shared with the other modules involved in a given business process. This means that companies using ERP are largely saved from having to make double entries to update information because the system shares the data, in turn enabling greater accuracy and collaboration between the organization’s departments.

ERP implementation options include on-premises, cloud, and a mix of the two, called hybrid, such as with platform as a service (PaaS) and infrastructure as a service (IaaS). Although ERP has historically been associated with expensive, monolithic, end-to-end implementations, cloud versions now enable easier deployments, which SMBs are taking advantage of in greater numbers.

Some ERP systems also offer next-generation capabilities, such as AI, IoT, and advanced analytics, to foster digital transformation. Businesses typically turn to an ERP system when they outgrow spreadsheets and disparate often siloed software systems and need the unifying capabilities of an ERP system to enable growth.
As with many technology products, the specific definition of what constitutes ERP can vary widely from vendor to vendor.

History of ERP

Gartner coined the term “enterprise resource planning” in 1990. ERP is preceded by Material Requirements Planning (MRP), developed by IBM engineer Joseph Orlicky as a system for calculating the materials and components needed to manufacture a product.

In 1983, management expert Oliver Wight developed an extension of MRP called MRP II, which broadened the planning process using a method that integrated operational and financial planning. MRP II added other production processes, such as product design and capacity planning.

ERP emerged as an expansion of MRP II, extending its scope beyond manufacturing to cover business processes such as accounting, human resources, and supply chain management, all managed from a single,
centralized database.

ERP has expanded to encompass a growing set of business-critical applications, such as business intelligence, sales force automation (SFA), and marketing automation. While MRP and MRP II applied to the manufacturing industry, ERP is used by a wide range of industries today.

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Shreya Kushwaha

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