Benefits of ERP: Advantages and Challenges for Modern Businesses
Technology is the biggest tool in a small business owner’s arsenal.
What used to take an entire team hours of manual effort can now be completed with a few clicks — or even automated completely. Introducing: ERP software.
Introduction to ERP Systems
Enterprise resource planning is a group of key processes that companies use to manage integral components of their operations. ERP is quite broad, including aspects of:
- Accounting
- Inventory management and procurement
- Human Capital Management/HR
- Customer relationship management (CRM)
- Sales and marketing
- Financial management and forecasting
- And more
An ERP system — sold as either an on-premise solution or a cloud SaaS product — can help synchronize business processes, reduce information silos, and help trim costs.
Key Advantages of ERP Systems
The specifics of an ERP solution can vary depending on the type of company and its operational complexity. That said, the main benefits of ERP solutions for most businesses are listed below.
Improved Efficiency and Productivity
ERP systems can improve productivity by centralizing operations, giving you insight into business-wide performance, and automating many previously manual processes.
The data here is fairly bulletproof: ERP implementation led to business process improvement for a whopping 95% of businesses, while 49% of firms reported improvements in ALL business processes.
To illustrate why, consider just a few of the—excuse the buzzword—synergies that ERP systems bring about:
- By syncing accounting and inventory management systems, teams reduce manual accounting and procurement procedures and make more informed sourcing decisions in real time. For example, after implementing a cloud ERP solution, eCommerce retailer Fulton & Roark was able to eliminate the need for external accountants and increase sales by 50% YoY without expanding headcount.
- By automating manual processes, teams can free up time for higher-value activities. For instance, by creating a purchase order automation in your ERP system, you could have each purchase order automatically sent to the relevant stakeholders for approval, then automatically sent to vendors for processing — and synced with your accounting system in real-time.
- By creating a single source of truth enterprise-wide, teams can cut down on manual back-and-forth, internal comms, and duplicated efforts — and avoid potentially costly mistakes.
Over the ERP system's history, it's developed into a centralized command station for your entire business. With it, teams can stitch together typically distinct systems for greater efficiency and productivity.
Enhanced Data Analysis and Reporting
Having a centralized data system is one of the top three ERP benefits that businesses reported (alongside increased collaboration and reduced process time).
ERP solutions centralize key processes that are often siloed in different departments, workflows, and even geographic locations. This gives managers a better top-down view of all business data, along with powerful machine learning features to optimize data analysis.
A few examples of how ERP systems can enhance analysis and decision-making:
- By combining systems for CRM, sales and marketing, and inventory management, teams can better identify upsell opportunities and/or overstocked items that could be discounted to targeted customers.
- By analyzing real-time data from sales, inventory management, and production departments, manufacturers can better optimize inventory levels, raw material sourcing, and production schedules to match shifting demand patterns.
- By centralizing enterprise-wide financial data, you can make real-time data-informed decisions on everything from workforce planning to capital deployment strategy.
A properly implemented ERP system is like a superhuman manager that has access to most or all of your company data, an AI-powered brain, and no need to eat, sleep, or go on vacation. Combined with effective (human) management, ERP solutions can drive better data-informed decision-making.
Better Financial Management
ERP systems can enable better financial management and cost-saving optimizations. Though they can be pricey, ERP typically drives positive ROI: On average, surveyed businesses saw a positive ROI within 2.5 years of ERP implementation.
Some examples of how ERP can enable financial management efficiency:
- By automating manual processes, from expense management to payroll processing, companies can eliminate human errors while also reducing manual workflows. This can directly cut costs by reducing reliance on external accountants or consultants, and prevent costly mistakes.
- By syncing data from multiple company locations, firms can more efficiently manage payroll, timesheet management, and workforce planning. For example, when N&N Moving Supplies expanded from 1 to 3 locations and 4x’ed its workforce, the implementation of an ERP solution allowed the company to reduce payroll processing time by 84%, improve the accuracy of timesheets and vacation hour accrual, and monitor location-specific labor-cost trends at each location.
- By viewing enterprise-wide financial data in real-time, managers can extract more timely insights into their company’s financial health. If you add on AI/ML-powered forecasting, FP&A practices become both more efficient and more accurate.
An ERP system is like a financial whiz that’s kept constantly up to date — not only with your own company’s data but also with global standards for regulatory and accounting compliance.
Understanding the Disadvantages of ERP Systems
It’s not all sunshine and rainbows. ERPs do present some notable downsides, not least of which is the relatively high cost of many solutions. The primary ERP disadvantages are listed below.
High Costs
ERP systems can be costly, both to implement and on an ongoing basis.
What is the average cost of implementing an ERP system? It varies, but
- Large businesses (>$1b in revenue) tend to see ERP costs at around 2-3% of annual revenue
- Midsize firms see that figure at closer to 3-5% of annual revenue
- On average, firms budgeted around $9,000 per user for ERP implementation
Small businesses can cut costs by opting for SaaS ERP systems, as the total cost of ownership for cloud systems is around 50% lower than traditional on-premise systems, but costs can still be significant.
However, keep in mind that ERP systems should be replacing other paid subscriptions and software solutions. So, managers must weigh the costs of ERP implementation against the current costs of the systems they’re running already.
These are just estimates, of course. Almost all ERP systems are priced on a custom basis, so to get an accurate cost estimate, firms should find the best ERP system for their needs, and then contact the vendor for a custom quote.
Complexity and Need for Training
Up to 75% of ERP implementations are deemed a failure by the IT and finance professionals overseeing implementation. It can take a long time, too.
How long does it typically take to fully implement an ERP system? Anywhere from a few months to a few years, depending on the complexity of your systems. Remember, ERPs combine many diverse systems into one, and stitching it all together can take time.
Ultimately, ERPs should simplify operations and make processes more efficient — but there will almost certainly be some growing pains along the way. Learning how to use ERP software can take time.
Beyond implementation challenges, employees will need to be trained in ERP workflows. They may need to abandon familiar platforms (unless they integrate with ERP systems) and learn new processes to fully benefit from the ERP system.
The good news is that ERP vendors provide training modules, certifications, and learning materials — usually for free. Oracle Fusion Cloud, for instance, offers both free and paid training online, ranging from 30-minute beginner orientations to 20+ hr deep dives on specific ERP modules.
Potential for Disruption During Transition
ERP implementation is complex, so much so that many firms choose to bring on external ERP consultants. Remember, ERP solutions rely on integration with nearly every system, software, and workflow in your operational structure.
When you’re migrating to an ERP, there’s significant potential for disruption to your legacy systems. For complex operations, teams often use multi-phase rollouts to minimize disruptions. For example, Western Digital used a 4-phase system rollout that stretched over 4 years to fully implement their new ERP system.
ERP in Different Industries
Enterprise resource planning is used in a variety of applications, industries, and company sizes. There are different types of ERP systems for different industries and use cases.
The following industries are typically the best use cases for ERP.
ERP in Manufacturing
Manufacturing companies are the #1 most common users of ERP platforms (representing around 47% of total demand in one survey).
Given the feature set of ERP systems, this isn’t surprising. Consider that ERP can create efficient workflows for supply chain management, procurement, production planning, CRM, and more.
ERP can unify operations, as well. Syncing manufacturing workflows with sales and CRM systems can help improve planning for seasonal demand shifts, for instance.
Outcomes are also more positive, on average. 67% of manufacturers and distributors reported successful ERP implementations (compared to just 25-50% of companies in other industries).
ERP in Retail
Retailers can benefit substantially from ERP implementation — particularly when multiple locations are involved.
Company-wide data synchronization and inventory planning are among the biggest benefits here. Multi-location retailers can monitor global sales in real-time, fill inventory gaps to keep shelves stocked, and optimize eCommerce fulfillment from both distribution centers and brick-and-mortar stores.
In an increasingly digital world, ERP’s ability to seamlessly integrate with eCommerce is also beneficial. Omnichannel retailers can benefit most from ERP systems.
ERP in Healthcare
ERP also plays a role in healthcare firms, particularly in large hospital settings and medical supply companies.
ERP systems can automate normally time-consuming activities like payroll and order processing. They can also help teams monitor resource consumption and industry levels in every department, ensuring that critical supplies are available where they’re most needed.
Due to patient data management and compliance concerns, most healthcare firms opt for healthcare-specific ERP providers and modules. As always, HIPAA compliance is top-of-mind in choosing tech solutions in healthcare.
Choosing the Right ERP System
There are many different ERP systems on the market. How should firms choose?
We answered this question in dizzying detail in our best ERP software roundup, but to recap, the most important factors to consider are each platform’s:
- Core functionality
- Key features
- Industry-specific functionality
- Usability
- Value for money
- Integrations (with the tools you plan to keep using)
- Data Analytics
Can Small Businesses Benefit from ERP Software?
The type/complexity of your system will also typically scale up with the size of your business. ERP systems are most commonly used in mid-size and enterprise-level firms — but can small businesses benefit from ERP software?
Absolutely. Particularly if the goal is to grow and scale.
In fact, ERP implementation may be simpler for small businesses before operational complexity intensifies. An ERP implementation can be an excellent foundation for future growth.
The Future of ERP Systems
The ERP market is growing — by 2026, the industry is expected to grow to $78.41 billion.
It’s evolving, too. The biggest advancement is (you guessed it) the implementation of generative AI in ERP systems.
AI will affect ERP systems in many ways. Currently, the biggest impact may be in usability and accessibility.
Generative AI allows users to interact with sophisticated tech using natural language; for instance, by asking a system a simple question. Users could instruct systems to “compile 30-day revenue figures from store A and store B”, for instance.
As this tech evolves, ERP systems should become easier and easier to use — for everyone in an organization (not just trained experts).
ERP is also getting cheaper, and implementations faster — a few of the benefits of cloud ERP over on-premises solutions..
ERP Benefits Are Huge — With the Right Tools & Strategy
The potential benefits of enterprise resource planning software are diverse and powerful. Teams can centralize data management, extract better operational insights, reduce costs, and ultimately improve business outcomes.
But like anything else, potential ≠ reality. To benefit from ERP, leaders must first choose the right ERP software for their needs, then invest in the right training and strategic planning efforts to optimize for their specific use case.
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