Fundamentals of ERP

PostedOn: 2016-11-09 11:18:50

Enterprise Resource Planning plays a grave role in business, requiring people to have a general understanding of the key components of Enterprise Resource Planning to function well in any organization. Businesses have been transitioning to computer technology at an escalating rate since the advent of the desktop computer in the early 80’s. The focus of computer technology in business has always been to augment efficiency through information management. Since the introduction of the Internet and advances in networking technologies and software, businesses must implement some form of computer technology to automate common tasks like word processing, accounting, and Internet access by employees, to more advanced software applications causing all or most of an organization’s business processes. These advanced software applications, generally known as ERP, capitalize on computer technology and enable businesses to have detailed perspectives into a wide range of business operations, allowing them to share information quickly between organizations, departments, and personnel for better management. 

ERP is a loosely used term first and foremost describing software but encompass hardware and software systems used by an enterprise to gather, store, retrieve, and use information flows through an enterprise. The term ERP, therefore, can apply to a single microcomputer using an bookkeeping package to track sales, account, billing and accounting, to more complex ERP systems that automate business processes across the supply chain from manufacturing, sharing, retail, service and, finally, the customer, who may be either downstream or upstream in the supply chain. These functional abilities of ERP are in general grouped into software categories known as Supply Chain Management (SCM) and Customer Relationship Management (CRM) and can be implemented in small, medium, or large businesses using various hardware and software configurations. Complex ERP systems can be designed (hardware and software architecture) to service large multi-national corporations using the Internet, Intranets, and Extranets in their business operations. An Intranet functions like the Internet; however, it is limited to the organization and its users and denies access to the public. An Extranet, on the other hand, is a mechanism that allows certified persons to access portions of an enterprise’s Intranet (over the Internet) with a username and password. For example, a manufacturer may allow dealers to access their Extranet to view product and pricing data, proprietary information limited to authorized dealers only.

ERP is an extremely complex subject best understood by looking at the major components of an Enterprise Resource Planning system including hardware, software, and primary areas of concern for business owners and managers. By looking at these major components from a conceptual viewpoint, we can sidestep technical jargon allowing for a greater understanding of the purpose of ERP and its importance in business and the workplace.


The size of an association dictates the type of hardware used in an ERP system. For small businesses, the hardware component of an ERP system could be a single microcomputer or a few microcomputers connected together over a local area network (LAN). In the case of a small LAN, one of the microcomputers would act as a server, which is simply a dedicated computer with the primary task of acting as a centralized data warehouse where data is stored. The server accepts data inputs, processes those inputs and “serves up data” to other software applications, or, provides output in various forms counting screen information, print output or other types of digital output.

Typically, in larger ERP environments, an enterprise will use an enthusiastic server, which, in most cases, is a mini-computer. Mini-computers have greater in commission and storage capacity than desktop computers and can service many users at one time. Users access the server via either dumb terminals (a monitor and keyboard) or a smart terminal (a fully functional desktop microcomputer) networked to the server via a Local Area Network (LAN). How the server and the new (or existing microcomputers, known as legacy systems) are associated lays the foundation for the hardware component of the system architecture. How these systems are connected to the server and, to each other, form the topology (or layout) of the system throughout an organization.

One of the primary concerns facing many businesses; new computer hardware acquisitions, has a twofold dimension; on one hand, it is critical to acquire state of the art computer equipment that will not become old-fashioned quickly by changes in technology while, on the other hand, attempting to interface older, existing systems into the ERP system. This is especially important if the existing legacy systems perform many business processes, making the transition to ERP, and systems integration, more difficult.

There are many technical issues involved with hardware configurations, requiring the expertise of Information Technology (IT) Specialists. User-operators of an ERP system rarely deal with these technical issues, have little or no input concerning system configurations and rely on technical support personnel to handle technical issues, training, and support.

In summary, the hardware component of an ERP system is comparable to the skeletal system of the human body; it is the framework, or platform, which the software “rides “on and provides the interface for users interaction.


ERP software encompasses most business processes and, according to the Department Of Defense, U.S. Enterprise Solutions Competency Center:

The activities supported by Enterprise Resource Planning systems include all core functions of an enterprise, including financial management, human resources management, and operations. Increasingly, ERP vendors are offering “bolt-on” products that provide specialized functionality to augment the core, such as Advanced Planning and Scheduling (APS), and Customer Relationship Management (CRM).

ERP software design uses a “best business practices” approach that helps ensure data accuracy and integrity. For example, all accounting software design forces users to enter financial data according to the rules of usually acceptable accounting practices (GAAP) standards. This GAAP standard helps ensure that financial statements and reports reflect the true financial condition of an enterprise. Accounting software achieves this conformity by controlling the entry of financial information into the software program. Similar types of strict standards used in ERP software conform to manufacturing standard business practices throughout the ERP software, including bolt-on products.

Companies can learn from lessons of past implementations. Many programs were overly focused on IT functionality at the expense of business process development. As a result, their expected benefits were compromised or delayed. Conversely, the best performers ensured that process management, governance, and other nontechnical issues were addressed properly.

One of the primary considerations of ERP software is whether a business’s processes and practices will conform to ERP software (best business practices) standards without radical modification of the software. This can, and often does, mean that a business will have to change its business processes to conform to the software, rather than the reverse. This is practical for a number of reasons; first, software modifications can be cost prohibitive to smaller companies and secondly, software modifications can put data integrity at risk, jeopardizing the very purpose of ERP. Additionally, software modifications can make software upgrading, even with the same vendors and software application (ERP2.0 to ERP 2.1, for example), extremely complex and costly.

One of the key considerations in selecting an ERP software system is how well the business processes will fit into the best business practice standards of an ERP program and potential integration with present and future bolt-on programs. This is a complex issue well outside the scope of this document and requires a thorough analysis of the individual software packages on the market in conjunction with senior management working with IT consultants who represent the ERP software vendors.

In summary, the software component of an ERP system is the heart of business information and is comparable to the arterial system of the human body, data flows through it, the lifeblood of the organization.

Software Vendors

The major players in ERP software are Oracle/PeopleSoft and SAP and both companies are highly respected in the ERP industry. While there are competitors, these two companies dominate the market with nearly 20 billion in combined annual revenue, with Oracle at $10 billion and SAP at $9.7 billion. This does not mean these two software companies represent the best ERP solution for every business. Indeed, one of the most important elements of acquiring an ERP system is due diligence to find the right application software fo