Introduction: What Is Enterprise Resource Planning?
Enterprise resource planning (ERP) is a software solution that handles organizational needs by integrating and monitoring multiple business functions like inventory, human resources, accounting, CRM, etc. It is a shared database that promotes communication and proper streamlining of information among different departments to reach organizational goals.
The software links each involved in the organization, whether it be an employee, a business unit, or a procedure, with accurate information. A real-time system even provides the flexibility to connect and work from anywhere in the world.
The ERP value chain has four stages of stakeholders wherein each adds value to the final ERP solution:
- Element Provider – They do the market research on the key elements needed in the software.
- Software Vendor – They develop applications.
- Distribution Channel – They make the desired add-ons to the core system and distribute the software.
- End Users – They further configure the ERP system to suit organizational requirements.
Value of ERP Systems
More and more companies are implementing ERP for the following values they are deriving from the software system:
- Breaks down barriers between business units and helps employees do their jobs efficiently
- Coordinates reporting and brings automation to business operations. These actions save departments from manually merging reports of their respective databases to generate a final report.
- Provides real-time and accurate facts, which aid companies in practical decision-making
- Builds customer rapport with faster billing and relationship follow-up
- Removes unnecessary procedures and software solutions
- Reduces cost and increases operational proficiency
- Coordinates changes between systems for a smooth flow
The Outcome of These Value Additions by ERP Systems
Panorama Consulting reports that the percentage of small-to-midsize companies hitting the total annual revenue mark under $300 million has increased from 43% in 2015 to 59% in 2016. Though the past few years showed a decrease in the satisfaction levels, this year’s report proves that 74% of respondents are ready to reuse the same software.
The Growth Trends of ERP Usage
- As mentioned before, many small-to-midsize companies are opting for ERP systems, as there are multiple options available in the market to have crisper and cost-effective versions as well as reduced operating costs, decreased inventory, and improvisations in planned compliance. Allied Market Research suggests an SME contribution of 7.9% CAGR (compound annual growth rate) by 2020.
- Compared to last year, Panorama Consulting finds a 16% increase in the usage of cloud-based ERP systems over their on-premise counterparts. Additionally, Allied Market Research predicts a 10% growth of cloud-based ERP systems by 2020. However, the break-even point for an on-premise solution is 5 to 7 years, after which it is going to cost less as no continuous subscription cost will be levied in the future.
- There are two approaches to cloud-based ERP solutions: Software-as-a-service (SaaS) model and private-cloud model. SaaS model is a multi-tenant version wherein all the organizations are sharing the same version but company-specific data is secluded and protected. The private-cloud ERP software is a hybrid model owned and customized to suit the buyer company, but someone else hosts it on behalf of the company. Though CFOs and CIOs look down on customization, no ERP system can fit an organization perfectly without understanding the core areas where it should focus on. According to a CFO.com article, 9 out of 10 organizations customize their ERP solutions, and this is going to happen more often in the future.
- Allied Market Research in its study has projected $41.69 billion ERP market growth in sales by 2020.
- ERP vendors are launching products that can be accessed through mobiles and tablets, a very useful functionality for those working remotely.
- Asia-Pacific has shown a rise in the usage of ERP software systems in 2013, according Allied Market Research. While the region is going to contribute to a projected market growth of $9.77 billion, North America is going to be the highest revenue-generating location by 2020.
When Do Companies Need ERP Systems?
- When a company is in its most productive stage and is buckling under a huge pile of spreadsheets and myriads of departmental systems
- When nobody has real visibility or accurate information about where the organization is heading toward
- When the sales forecast is more of a guesswork than a ground research
- When the amount of inventory in the warehouse is problematic to determine
- When the company is gasping under a mountain of pending orders
Why Do ERP Systems Fail?
The time taken for ERP implementation depends on the size of the organization, the number of business units involved in the process, the degree of customization per organization, the extent of the desired change, and the customer support to the project. Thus, to choose the right ERP solution for an organization is not child’s play. Depending on the organization size, ERP systems can be expensive. Once bought, there is the hugely time-consuming task of data transfer, customization according to the organizational needs, and training the employees. It can take months or years to make ERP systems workable. The following are a list of things that can make an ERP system seem like a costly liability rather than a star performer:
- Incongruent homegrown applications
- Applications that cannot meet current business needs
- Long-standing or technically challenged ERP solutions
- Underused or half-implemented ERP
- Numerous divisions on several ERP solutions and/or releases
- Many add-ons with inadequate coordination among applications
- No master data management process
- Unsatisfactory business intelligence development or execution
- Insufficient vendor and in-house resource support
- Rising total cost of ownership
- Exorbitant system solutions
- Erroneous choice of systems
- Impractical expectations from ERP implementation
ERP, a term coined by Gartner back in 1990, is becoming a manager’s salvation now. An ERP system can be one of the most life-changing investments an organization makes. With the power to integrate accounts, finance, sales, manufacturing, and other key functions, the ERP solution can take an organization to a whole new level of growth, efficiency, and productivity. However, companies should not rush through the decision of buying an ERP software even if it is the norm of the industry. Weighing the pros and cons based on strategies incorporated by companies will help them make a better stand on the usage of an ERP system.