What is ERP system, part 2

So. This is continuation of my previous article. First part can be read https://www.dhirubhai.net/pulse/what-erp-system-part-1-yuriy-zaletskyy/.

Some clients say ?we have developed our ERP-system?. I don't like to disappoint people, but quite often I've seen not ERP, but some semblance of it that spreads out of some specialized system. For example, they started working at CRM, and then they added a warehouse module, configured data exchange with accounting programs, etc. Or started with an accounting system and a site, and also - performed integration, coded the modules, and somehow "connected" all of them together.

This is not an ERP system. The main difference between ERP and any of such programs is that ERP is initially created as a constructor from the platform and modules, which can be connected as needed. A variety of options are already available. 

ERP is a product that was originally created, on the one hand, for scalability, and on the other, to maximize opportunities.

In the ERP system, the boundaries of the modules are very clearly separated. And disconnecting any of them (except some basic guides and features) will not affect the work of the rest. In self-written systems that grow out of specialty, as a rule no such architecture is provided. And if you turn off features like salary calculation or HR, probably, the program will cease to work or will not work correctly. It will require the intervention of a programmer and considerable refinement. Such software products typically use common documents and the components are intertwined. ERP is a really modular architecture. And that’s very important to understand.  

So, if you choose an ERP system, you get a single system for automating various divisions of your company, plus a wide range of development opportunities. You won’t need to change the software product for a very long time. It will be enough to call specialists who will help to select and plug in ready-to-use modular solutions. And there are a lot of them for all kinds of business and peculiarities of work.

 What is the ERP system used for?

The implementation of any ERP system allows you to get certain advantages and features. Let's take a closer look at who needs ERP implementation and why.

The principle of a single database: control, management, accuracy and efficiency

To understand this principle, let’s imagine a company before and after the introduction of the ERP. Let’s say the organization has its own production. Production is most likely recorded in Excel tables or in a specialized program. Warehouse records run on their own accounting system. Accounts department works in theirs. The transfer of data from department to department is carried out in the form of paper documents, and sometimes even orally, after which it is manually entered into the required accounting system. 

This approach is highly dependent on the human factor, as a result, there are delays, often quite significant. Distortions and errors are common and, in some cases, data are not available at all due to the human factor, which causes a malfunction, the need for regular reconciliations, etc. Moreover, any error and subsequent correction could lead to significant losses. For example, an error in the code or size when transferring data from the design department for production ends up very sadly, because what is produced is not what was ordered and designed. There are downtime, write-offs or surplus of goods in the warehouse, missed deadlines under an agreement with a client, etc.

If the ERP system is implemented, a single database will be created, where all the information used by the various units is collected. In this case, the error rate decreases significantly, since data is entered into the system once by a specialist, and is automatically read by offices in the required format and coding. 

In addition, the speed of data transmission becomes instantaneous when using a single database. That is, immediately after the designers or sales specialists had placed the order, design department or the production department can see it. Also, the payment mark appears on the order immediately after the accounting department receives information from the bank. The number of errors related to the human factor decreases, and those that do emerge are eliminated much faster.

Therefore, an ERP system is necessary for companies for which the speed and accuracy of data transfer between departments is a critical factor.

Flexibility of the company to respond to market changes

 If the company aims to meet the ever-changing market conditions and client needs, it simply needs to share data quickly between units and the speed with which management decisions are taken.

A small company in the case of atypical orders or changes in purchase volumes, of course, it can do without the ERP system. When all employees work in one small office, you can always coordinate actions with each other, and form an order based on data from orders, even in Excel tables.

In a medium-sized business, where there are several divisions, branches, perhaps, their own production, a single database and prompt data exchange in the face of changing customer needs become critical. It is important that all information is collected in a short time, timely purchases and operational changes are made to the production and supply plan. Here, one cannot do without a single system with a common database.

Complex business processes: integration no longer helps

 Another case when one cannot do without an ERP system is companies in which, as they grow and develop, complex processes emerge that require high data exchange volumes. At some point, integration between several software systems becomes difficult, cumbersome and unprofitable. The ERP system becomes the solution to this problem.

What business gets from ERP implementation

ERP is, first of all, the ability to combine all business processes in one powerful and convenient system, and therefore the advantages of the solution can be listed for a long time. Below I have highlighted only a few that I consider to be the most significant:

Data accessibility. Once entered data becomes available within the whole system, and no reconciliation, additional approvals and checks are required.

Consistency of data. The use of a common database avoids reconciliation and reconciliation steps. For example, if the design department has made and approved a project, the Procurement Division can use the data from this project immediately, without an additional confirmation step.

Monitoring staff performance. In the case when one of the departments enters data, for example, on the consumption (movement) of the goods, the other department immediately receives information about this, and after the actual receipt of the listed items, it puts it as an arrival. In this case, a discrepancy in figures is almost impossible, a common database excludes the likelihood of any misuse, and a manager in real time can identify any discrepancies and their reasons. 

Significant reduction in human error rates. The common system would not allow the goods to be written off from the wrong warehouse, as the common database would indicate that the goods aren’t there. Payments will be transferred to the accounts office and sales department automatically based on data from the bank or cash register, which also rules out mistakes. The technical parameters and data of the project will also be transmitted automatically, without distortion, etc.

A complete set of tools. For example, if the sales department creates an invoice, then it is the basis for the automatic creation of accounting documents, and after payment for expense documents from the warehouse.

A significant number of tools that may be needed in the future. Almost all ERP systems are very powerful and versatile. They have the ability to implement a huge number of processes. Almost always, implementation uses only a part of these capabilities. And as the company grows and develops, modules are connected or purchased in addition, allowing to implement new solutions, connect new divisions of the company to work. And all this is done with a minimum investment of finance and time.

What is important to know when choosing an ERP system

One of the first questions that arise when choosing any software is the choice between SaaS or Stand-Alone, i.e. pay for access to a system located in the "clouds" or buy a "boxed solution". I talked about this choice in detail in the article What are CRM systems and how to choose them correctly?

In the case of ERP systems, there are exactly the same choices as when implementing CRM systems. You can also look at SaaS solutions or buy and implement a “box”. But there is one nuance that is very important to consider. The fact is that ERP is a large system in itself, including a large number of possibilities. In fact, it brings together all the data about the company's work. And in the case of using the "cloud", it will be extremely difficult to change the service if the need arises. Unlike CRM systems, which are very popular in the SaaS version, the data array in ERP is voluminous and cumbersome, and in the case of a transition from one software product to another, the question arises of what to do with them.

Therefore, it makes sense to focus on buying a software product "in a box" and then installing it on your own or rented servers. So, the first things to pay attention to are:

Choosing a team or an implementation specialist. If some software products, for example, CRM-systems for a small company, with a strong desire, can be really implemented even without a specialist or with his minimal participation, then an ERP system without an experienced specialist will remain just another “unclaimed box”. The complexity of the software products of this family is due to the complexity of the tasks that are assigned to them. A single database, integration with other programs, many other nuances of work cannot be configured without the participation of a professional.

An ERP system is not a key to all doors and is not a Swiss knife. Just like other systems, they can be specific and industry-specific. That is, if you are engaged in sales, not production, then you should take ERP primarily for sales. The same goes for modules.

Understanding of business processes. It is very important that the implementation specialist deeply understands not only the features of the software product, but also has a fairly wide range of knowledge in the field of business, since in order to set up the work of the accounting department, it is necessary to understand how and with what an accountant works. To implement ERP in a warehouse, knowledge of warehouse accounting is required. Therefore, the level of knowledge and understanding of the company's business processes by the project manager is especially important here, who will set tasks for technical specialists and monitor their implementation.

Budget. An ERP system as a software product is relatively expensive, regardless of the developer. But successful implementation will require cooperation with experienced specialists. And if the budget is only enough to pay for the program, then as a result the "box" turns out to be unclaimed; the company is wasting a significant amount of money. Calculate your possibilities in advance.

Disadvantages of ERP systems

The disadvantages of this type of software products are a consequence of their advantages. A single database and a single system give rise to a significant number of connections, high complexity of the system itself and high requirements for the hardware (server) part. Therefore, to organize the work of an ERP system, powerful equipment is needed, which entails the corresponding costs.

Another problem that very often arises when implementing an ERP system is data security. Since all departments and employees of the company work in the system, the access rights must be set up for each. And if, when using separate specialized programs, it is usually required to create several levels of access (ordinary employee, head of department, manager), then the system of access rights in ERP turns out to be complicated. Here you need to configure access to modules for different departments, and set up a hierarchy within each department. Such a complex setup often leads to errors and requires additional testing and debugging time.

In addition, the use of a single system with a single database, with all its advantages, also contains a certain problem. If, for one reason or another, the ERP system stops working (power outages or other problems arise on the server), the entire company stops working. Therefore, it is necessary to pay special attention to ensuring the reliability of the server part and timely maintenance.

Also, the ERP system has disadvantages that are common to all complex systems, namely, a high level of entry and, accordingly, a high level of implementation costs.

Summary

In these articles I tried to tell as simple as possible and without unnecessary technical details about what ERP systems are and what benefits they can bring to business. I hope I’ve been able to give you basic knowledge about why such a system might be needed, when it is needed, and where the cost of its implementation, most likely, will not pay off. And understanding what ERP systems can do, and what you want to get from implementation, will help you to make the right choice among software products of this class.