What is Enterprise Resource Planning?
Enterprise Resource Planning (ERP) is a software system that integrates the different functions of a business into one connected system.
→ Instead of departments using separate systems, ERP allows information to be shared across the business.
→ Common functions connected by ERP include:
- Production
- Purchasing
- Inventory
- Sales
- Finance and accounting
- Human resources
- Marketing
- Supply chain
Main purpose of ERP
→ Collect information from different departments
→ Store it in a central database
→ Share updated information across the business
→ Help managers coordinate activities and make better decisions
→ Reduce duplication, delays and errors
Example:
A customer places an order online.
→ Sales records the order
→ Inventory is automatically updated
→ Production receives information if more goods are needed
→ Purchasing can identify whether more materials are required
→ Finance records the sale
→ Management can see the effect on sales, inventory and cash flow.
Main Features of an ERP Programme
Integrated system
→ Different departments use one connected system.
→ Information entered by one department can be available to other authorised departments.
Example: A sales order can automatically update inventory and finance records.
Central database
→ Business information is stored in a shared database.
→ This reduces the need for each department to maintain separate records.
→ Managers can access more up-to-date information.
Real-time information
→ Information can be updated as transactions occur.
→ Managers do not have to wait for departments to prepare separate reports.
Example: Inventory levels can be updated immediately when goods are sold or received.
Automation
→ Routine activities can be completed automatically.
→ Examples include:
- Updating inventory
- Generating invoices
- Recording sales
- Processing payroll
- Creating purchase orders
- Producing financial reports
→ This reduces repetitive administrative work.
Modules for different business functions
→ ERP systems usually contain modules designed for different functions.
→ Examples:
- Finance and accounting
- Human resources
- Inventory management
- Production
- Purchasing
- Sales
- Customer relationship management
→ These modules are connected so information can flow between them.
Reporting and management information
→ ERP systems can produce reports using information collected across the business.
→ Managers can monitor sales, costs, inventory, production, employees and financial performance.
Security and access controls
→ Different employees can be given different levels of access.
→ Sensitive information, such as payroll or financial information, can be restricted to authorised employees.
How ERP Improves Business Efficiency
Inventory Control
ERP can improve the management of raw materials, work-in-progress and finished goods.
→ Real-time inventory records show how much stock is available.
→ Sales automatically reduce recorded inventory.
→ Purchases and deliveries can automatically increase inventory records.
→ Managers can identify when stock needs to be reordered.
→ Inventory data can be linked with sales forecasts and production schedules.
Result:
→ Less risk of running out of stock
→ Less excess inventory
→ Lower storage costs
→ Less capital tied up in inventory
→ Fewer production interruptions
→ Better customer service
Example:
If an ERP system shows that raw materials are approaching the reorder level, the purchasing department can order more before production is interrupted.
Costing and Pricing
ERP provides information about the costs involved in producing and selling products.
→ It can combine information about:
- Raw materials
- Labour
- Overheads
- Production
- Distribution
- Inventory
- Other operating costs
→ Managers can calculate the cost of producing a product more accurately.
→ More accurate costs can help managers set appropriate prices.
Result:
→ Better cost control
→ More accurate product costing
→ Better pricing decisions
→ Improved profit-margin analysis
→ Easier identification of high-cost activities
Example:
→ ERP identifies that the cost of producing Product A has increased because raw-material and labour costs have risen.
→ Management can review the selling price, supplier contracts or production process.
Capacity Utilisation
Capacity utilisation measures how much of the business’s available production capacity is being used.
→ ERP combines information about:
- Orders
- Production schedules
- Machinery
- Labour
- Inventory
- Available production capacity
→ Managers can compare planned production with available capacity.
→ Underused resources can be identified.
→ Overloaded production facilities can also be identified.
Result:
→ Better use of machinery and employees
→ Less idle capacity
→ Fewer production bottlenecks
→ Better production scheduling
→ Improved productivity
Example:
→ ERP shows that one factory is operating at 95% capacity while another is operating at 60%.
→ Management may transfer production to the underused factory or adjust production schedules.
Responses to Change
Businesses must respond to changes in:
→ Customer demand
→ Competitor actions
→ Technology
→ Supplier availability
→ Raw-material prices
→ Economic conditions
→ Government regulations
ERP gives managers current information across different departments.
→ A change in sales can quickly affect production plans.
→ A change in inventory can affect purchasing decisions.
→ A change in production requirements can affect workforce requirements.
→ Managers can therefore respond more quickly.
Example:
→ Demand for a product suddenly increases.
→ ERP shows the increase in orders.
→ Inventory levels are checked.
→ Production capacity is checked.
→ Additional materials can be ordered.
→ Employee schedules can be adjusted.
→ Production can increase more quickly.
Result:
→ Faster response
→ Better coordination
→ Less delay
→ Reduced risk of lost sales
→ Greater flexibility
Workforce Flexibility
ERP can help managers match employees and skills with changing business requirements.
→ Information about employees can be linked to:
- Skills
- Availability
- Working hours
- Shifts
- Training
- Departments
- Workload
→ Managers can identify where additional employees or particular skills are required.
→ Work schedules can be changed according to production requirements.
→ Training needs can also be identified.
Example:
→ Demand increases for a particular product.
→ ERP shows that the production department needs additional workers during certain shifts.
→ Managers can adjust schedules or allocate trained employees from another area.
Result:
→ Better use of employees
→ Greater flexibility
→ Reduced labour shortages
→ Better workforce planning
→ Improved productivity
Management Information
ERP provides managers with information from across the business rather than information from only one department.
→ Managers can monitor:
- Sales
- Costs
- Profitability
- Inventory
- Production
- Capacity
- Employees
- Orders
- Cash flow
- Supplier performance
→ Information can be used to identify problems and opportunities.
→ Managers can make decisions using more complete and up-to-date information.
Example:
→ Sales data shows that demand for a product is increasing.
→ Inventory data shows that stock is falling.
→ Production data shows spare capacity is available.
→ Management can decide to increase production.
Result:
→ Better decision-making
→ Faster decisions
→ Improved coordination
→ Problems identified earlier
→ More effective planning and control
Overall Impact of ERP
→ One integrated system
→ Information shared across departments
→ Less duplication and fewer errors
→ Faster flow of information
→ Better coordination
→ More efficient use of resources
→ Faster response to change
→ Better management decisions
→ Potentially lower costs and higher profitability
A useful exam chain
ERP integrates business functions → information is shared in real time → managers have accurate and up-to-date information → resources can be coordinated more effectively → efficiency and responsiveness improve → costs may fall and profitability may increase.