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What Is An ERP System—How Do They Work & Why Use One?

People managing people in modern businesses of all sizes have to juggle several business functions. These include human resources, supply chain management, customer relationship management (CRM), and manufacturing resource planning, among other operations. It can be overwhelming to manage all these business aspects manually or independently.
It is, therefore, understandable why systems like enterprise resource planning (ERP) are growing more popular. ERP systems are designed to integrate all business functions, creating workflows and decision-making processes that are easier to manage. This leaves organizations with more time to concentrate on their core business.
Studies show that an ERP platform can bring several benefits to any business. Hamidreza Vakilifard, Shahla Abbaszadeh Meinagh, and Mohammad Reza Khataee conducted a study published by the European Online Journal of Natural and Social Sciences.
The study results “indicated that ERP systems have had an impact on organization performance.” They note that ERP implementation results in “more real-time and accurate information.”
In this article, I define ERP systems and how they work. I also look at why managers who desire automation, improved functionality in areas like the back-office, product customization, accounting, financial management, CRM, and procurement, might consider enterprise resource planning software.
The Main Characteristics Of The ERP System
An enterprise resource planning system has four primary characteristics: modular design, flexible, open and centralized database, and automatic generation of information. This software system operates in real-time, from a general database that supports all software. This results in a consistent look and feel across every ERP module.
The primary goal of an ERP software solution is to bring all units of the business operations together to achieve operational goals quickly. All enterprise processes are integrated across all the business units into a complete approach to streamline processes and information across the whole organization.
Accountwell provides an excellent example of how ERP uses real-time data to integrate various business processes. He uses the example of a business that requires customers to make online orders. As soon as a new order is completed, ERP automatically checks the price and initiates a credit check, if needed. It checks if the product is available and notifies the unit that will schedule the delivery. As soon as the order is delivered, an invoice is sent, and the bookkeeping unit can update its accounts.
Types Of ERP Systems
There are basically three different ERP systems: on-premise software, cloud-based software, and hybrid software. The specific type any organization needs depends primarily on the enterprise's size, available computing gadgets, and the system’s ability to meet the enterprise’s needs.
Let's take a closer look at the three types:
On-Premise ERP Software
As the name implies, on-premise ERP software is deployed onsite. It is controlled mostly by your enterprise after installation or by an ERP consultant. This is the ERP solution you need if you want to be in total control of your ERP system’s security. However, implementing this type of ERP application will require that you have dedicated IT resources on your premises to handle application and server maintenance.
On-premise ERP software comes with several advantages, including:
• Your confidential data does not have to be handled by a third party.
• Every ERP module can be customized to your specific business need.
• Provides strong integration options with your other systems (including your CRM software).
Cloud-Based ERP System
This type of ERP system is often referred to as Software as a Service (SaaS), implying that a third party manages the service. The flexible design allows your staff to store and surf through data via any gadgets with an internet connection. Usually, pricing is based on a periodic subscription.
The main disadvantage of this type of ERP implementation is that you have to trust an ERP vendor to handle some of your sensitive data. However, it has several advantages. For example, you don't need to make a substantial initial investment to get the system. You also don't need specialized equipment or skills before implementing the system.
Hybrid ERP System
The hybrid ERP system is sometimes called a two-tier ERP system. It allows your company to combine cloud based ERP and on-premise ERP systems. This is a system you would choose if you want to enjoy the best of both worlds. For example, you can use the expertise of the ERP consultant without the need to allow them to access all your information.


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