ERP systems are a management software system which integrate all business functions into one application. The system uses a single database, using a single data entry. Therefore, ERP systems standardize business processes, minimize human error and also, eliminate the time lags to enter data from one system to another.
Contrary to legacy systems which support specific business functions and are process oriented, ERP systems are cross-functional and support a wide range of business functions. Of course, different application controls are applied to users, so that different users have different CRUD (create, read, update or delete) permissions to access data.
ERP systems are designed as a multi-tier technology. For that reason, they combine three main types of technology: 1) relational database, collects and organizes data, 2) interface, how the application presents information to the user, using dashboards and charts, 3) enterprise application, the software program which connects the previous two.
Moreover, ERP systems are built upon industry best practices. ERP vendors already have a broad knowledge of the best techniques, processes and methodologies for a specific industry. There, when companies buy the software, they also buy the practices embedded in it.
ERP systems are designed in modules. Modules are a set of functionalities which support specific business functions. Thus, with the modular design, modules are replicated and combined to better meet customer needs. Following, prices are also created, according to the modules combined.
There are two ways to combine ERP modules: with configuration and with customization.
- Configuration is a term that describes how different switches define the behavior of specific functions. In fact, there are two types of configuration: 1) technical configuration, which defines the behavior of hardware and IT infrastructure and 2) functional configuration which changes defaults of the technology and how the program behaves. Configuration helps the software product support the basic differences between businesses. Generally, it chooses from a limited set of options, like yes, or no, types of users, or specific geographic regions.
- Customization includes changes in the underlying software code. Programmers have to rewrite it to fit organizational needs. With this in mind, customization tailors the system to support unique business functions. However, it is very costly, time consuming and it may affect future system upgrades and improvements.
As we mentioned, ERP systems contain modules. Here are the most common ones:
- Finances and accounting
- Human resources
- Manufacturing and production
We’ll take a look at each of them separately.
Finances and accounting
Each company has a need for a system to manage its finances. Automated financing reduces time and prevents human error in doing calculation. Hence, there are three main types of finance managing in organizations:
Finance accounting produces financial statements, balance sheets, income statement etc. This type of accounting addresses external users: stakeholders, government, the general public… Moreover, in ERP systems, finance accounting uses three sub-modules:
- General ledger: a book which collects information of all accounts. Companies can have one general ledger, different ledgers for different geographical areas, or parallel ledgers which operate at the same time, but have different functionalities
- Accounts payable connect the organization with its suppliers. Thus, it produces documents like purchase orders, supplier invoices, discounts etc. Again, the sum of all balances gives the entire account payable. As a result, the system determines the delivery status, the location of delivery, the quality of goods and group all documents by due dates
- Accounts receivable connect the company with its customers. The account produces documents like invoices, open items, account analysis, credit balances and credit limit. Similarly, the total amount of accounts gives the sum of total balance
Management accounting supports operations in business process design, budgeting and forecasting, implementation and monitoring, analysis of information. Also, it includes cost accounting, which shows the actual cost of doing operations, processes, departments and products. In fact, cost accounting has five types:
- overhead costing – costs that aren’t assigned to a specific operation, product, department (insurance, rent, indirect labor) and can be direct and indirect costs
- product costing – costs from products manufacturing, They help predict costs or measure product performances
- activity-based costing – overhead costs assigned to a specific activity. Thus, they help determine the cause and effects of activities and determine which activities are necessary to the operation and what is their performance
- profitability analysis – any segment of the operation contributing to the profitability of the organization. It can be a profit from product, sales by industries, margins by channel, performance of specific regions
- cost/benefit centers like research and development, marketing, sales, which do not produce direct profits.
Assets management is also a module in financials, since it tracks and controls the property, plant and equipment of the organization. Asset management shows the current market value of the assets, their location, depreciation and maintenance needs. In either case, it consists of eight life-cycle steps:
- planning what kinds of machines to use
- approval of the machines
- budgeting of the costs to acquire the machine
- implementation of the machine in the organization
- capitalization or receiving some benefits from the usage of the machine
- maintenance and keeping the machine into effective usage
- retirement and lowering the effectiveness and efficiency of the machine
- replacement when the life of the machine comes to an end.
Manufacturing and Supply Chain
Manufacturing consist of the modules regulating the entire manufacturing process in the organization:
- production planning assures that all the production elements, like real-time data, KPIs support the decision-making process
- inventory planning takes care of raw materials, finished products and stock items. It shows which of them are disposable at the time
- quality management sets parameters which assure the quality standards of products and their tolerance limits, since it controls the time for testing, errors and rework.
- plant management refers to the availability of machinery, breakdowns, preventive maintenance, downtime and monitoring. Therefore, it assures better allocation and combination with other manufacturing resources.
- service management is the relationship between customers and the existing orders. Thus, this module helps minimize queue time and it increases customer service, customer satisfaction and technical efficiency
- warehouse management shows the movements into, out of, or through the warehouse of the company. It shows real-time information and provides better inventory control
- lean manufacturing is some kind of just-in-time module. Production starts only when a customer purchases a product. Likewise, lean reduces waste time to the minimum and eliminates overproduction and rework.
Human resources are of core value for the organization and include modules which regulate everything from hiring, to retiring. As a result, the data they contain is extremely valuable to the organization, they are intensive in volume, and contains sensitive information. The core modules are:
- personnel management: contains basic information about the employees, CVs, documents, training, compensation, job description
- labor and time management: contains information about specific efforts on activities, projects
- benefits management: contains information about all benefits provided to employee: bonuses, health and medical insurance, vacations
- payroll management: prepares payroll checks for employees
- recruitment management: contains all career opportunities, job descriptions, necessary skills
- learning management: contains information about all learning opportunities provided for the employees
- talent management: retains talented employees rewarding employee contribution
- environmental, health and insurance: takes care of employee insurance, absence, injuries.
As shown above, In ERP systems all these modules are a part of one single system. You can combine them and tailor them according to the needs of your business.
Related article: ERP systems and the benefits for your business