Enterprise Resource Planning (ERP) systems primarily integrates various business operations and functions such as management, finance, procurement, supply chain management into a single data base.
ERP aims to improve efficiency, streamline process, reduce manual labor and provide real-time data to make informed decisions.
ERP have been around for several decades now and have become an integral part of many businesses across various industries.
According to Oracle Netsuite, ERP market is estimated to grow up to $49.5 billion by 2025. With this rapid expansion, nearly 50% of companies will be implementing ERP in the coming years. In 2019 a survey was conducted that revealed that 67% of manufactures considered their ERP implementation successful.
But there is still a significant number of organizations where ERP implementation did go well.
Therefore, like any other technology, there are advantages and disadvantages of ERP system that need to be taken into account before its implementation.
This blog post aims to provide a background of ERP and also a comprehensive overview of the advantages and disadvantages of ERP.
Let’s start with some basic concepts and history of ERP for having more understanding.
What is Enterprise Resource Planning (ERP)?
ERP refers to a type of software application that integrates various business functions and processes into a single, centralized system. The goal of ERP is to provide organizations with a comprehensive and integrated view of their operations, which can help improve decision making, increase efficiency, and streamline business processes.
ERP systems typically include modules for finance and accounting, human resources, procurement and supply chain management, customer relationship management (CRM), and other functions.
The data collected and managed by ERP systems is stored in a centralized database, which can be accessed by authorized users from different departments and locations.
ERP implementation is about making change in a big way so that’s why it is implemented carefully and organizations must follow ERP implementation best practices so they can achieve maximum benefits and reduce the risks associated with its implementation.
Brief History of ERP
The history of ERP can be traced back to the 1960s, when large manufacturing companies started using mainframe computers to manage their operations. Over the years, the technology evolved and became more sophisticated, leading to the development of ERP systems as we know them today.
The first ERP systems were introduced in the late 1980s and early 1990s, and they were primarily used by large corporations. However, with advancements in technology and the rise of cloud computing, ERP systems have become more accessible and affordable, and they are now widely used by organizations of all sizes, across a variety of industries.
In the early days of ERP, the focus was on automating back-office operations, such as accounting and financial management. As the technology evolved, the scope of ERP expanded to include other functions, such as supply chain management, human resources, and customer relationship management. Today, ERP systems have become even more sophisticated, and they offer a wide range of capabilities, from real-time data analysis to advanced automation and machine learning capabilities.
Advantages of ERP
Here are some of the key advantages of ERP that would contribute to improving organizational performance:
1. Centralized data management
With an ERP system, all data related to various business functions is stored in a single, centralized database. This makes it easy for authorized users to access the data they need, when they need it, from any location. The centralized nature of the data also makes it easier to ensure the accuracy and consistency of information, as there is only one source of data for each business function.
Centralized data management can also help improve the efficiency of business processes, as users no longer have to waste time searching for information in different databases or manually entering data into multiple systems.
2. Improved decision making
With an ERP system, managers and executives can access up-to-date information on the financial performance of the company, the status of projects, and the availability of resources, among other things. This information can then be used to make informed decisions on a variety of issues, such as resource allocation, marketing strategy, and product development.
ERP systems also provide powerful reporting and analysis tools that can help organizations analyze data and identify trends and patterns. This information can then be used to make better decisions on issues such as pricing, inventory management, and cost control.
3. Increased efficiency
ERP systems automate many routine tasks, such as invoicing, purchasing, and payroll processing, which can reduce the amount of manual labor required and free up employees to focus on more strategic tasks. The centralized nature of ERP systems also means that data only needs to be entered once, which can help reduce the risk of errors and increase the accuracy of information.
ERP systems lead to improved supply chain management, better resource allocation, and more effective decision making, all of which can contribute to increased efficiency.
For example, ERP systems can help organizations better manage their inventory, which can reduce the need for excess stock and minimize the risk of stockouts.
4. Better data security
ERP systems typically have advanced security features, such as user authentication, access control, and encryption, which can help prevent unauthorized access to the system and sensitive data. In addition, many ERP systems are hosted in secure, off-site data centers, which can provide an extra layer of protection for sensitive information.
ERP systems also provide audit trails, which can help organizations track changes to data and monitor the actions of users. This information can then be used to identify potential security risks and take corrective action, if necessary.
5. Improved collaboration and communication
ERP systems provide a single source of truth for all data related to a particular business function, which can help eliminate duplication of effort and ensure that everyone is working from the same set of information. In addition, ERP systems typically provide tools for collaboration, such as project management and task tracking, which can help teams work together more effectively.
Improved communication and collaboration can lead to a number of benefits, such as faster resolution of problems, more efficient use of resources, and better customer service. In addition, improved collaboration can help organizations respond more quickly to changing conditions and achieve their business goals.
6. Increased visibility and control
ERP systems provide real-time information on all aspects of the business, such as financial performance, project status, and resource availability. This information can then be used to monitor performance, identify areas for improvement, and make informed decisions.
In addition, ERP systems typically provide tools for managing and monitoring key business processes, such as supply chain management, inventory control, and project management. These tools can help organizations take more control over their processes and ensure that they are running smoothly and efficiently.
Disadvantages of ERP
There are also some disadvantages of ERP that must be considered before making decision about introducing ERP in an organization.
1. High implementation cost
ERP implementation typically requires significant investments in hardware, software, and consulting services, which can make it difficult for organizations with limited budgets to implement these systems. In addition, the cost of ERP implementation can be further increased by the need for customizations, training, and ongoing maintenance and support.
In addition to the direct costs of implementation, organizations may also incur indirect costs, such as lost productivity, while employees are trained on the new system and during the transition to the new system.
2. Complexity and Inflexibility
ERP systems often require specialized knowledge and skills to implement, use, and maintain, and may require significant resources, such as IT staff and specialized consultants. In addition, many ERP systems are built to meet the needs of large organizations and may not be suitable for smaller organizations or those with unique business processes.
ERP systems can also be inflexible, as they may not be able to accommodate changes to business processes or accommodate new technologies. This can limit organizations’ ability to respond to changing conditions and evolve their processes to meet their evolving needs.
3. Dependence on technology
If an ERP system experiences downtime or technical issues, it can have a significant impact on an organization’s operations and productivity. In addition, organizations may become dependent on their ERP systems for key business processes, such as financial management and inventory control, which can increase their risk if the system fails.
ERP systems also require ongoing maintenance and support to ensure that they are functioning correctly and to address any issues that may arise. This can add to the cost of ownership and increase the risk of downtime.
4. Resistance to change
Employees may be resistant to change if they are familiar with the current systems and processes, and may feel that the new system is too complex or difficult to use. In addition, employees may be concerned about job security, as the implementation of an ERP system may result in changes to their roles and responsibilities.
Customers and stakeholders may also be resistant to change, as the implementation of an ERP system may result in changes to the products and services that an organization offers, or to the way that they are delivered. This can lead to changes in customer and stakeholder behavior, and may result in decreased loyalty or reduced demand for an organization’s products and services.
5. Integration challenges
ERP systems may also have difficulty integrating with legacy systems and software that an organization has been using for many years, as these systems may have different data structures and protocols. In addition, ERP systems may have difficulty integrating with new technologies and systems that are being introduced after the ERP system has been implemented.
In some cases, organizations may need to make significant changes to their existing systems and processes in order to integrate them with an ERP system. This can result in significant costs, disruption to operations, and delays in implementation.
6. Potential data quality issues
In some cases, organizations may enter duplicate data into an ERP system, which can result in confusion and incorrect reporting. In addition, organizations may enter data into the system that is not in a standard format, which can result in difficulty in analyzing and using the data.
Organizations may also struggle to keep the data in an ERP system up-to-date, as the system may be used by many different departments and employees, each of whom may have different data entry and updating processes. This can result in data that is outdated or inconsistent, which can negatively impact decision-making and reporting.
Given the advantages and disadvantages of ERP, organizations need to carefully consider whether an ERP system is right for them or not. They should conduct a thorough need assessment to determine the specific business requirements and goals that an ERP system is expected to meet. In a same way, a careful cost and benefit evaluation is required before implementing an ERP system. By following this process, they should choose an ERP system that meets the organization’s specific needs and requirements, and that has a proven track record of delivering the desired outcomes.