Today, Enterprise Resource Planning (ERP) systems are being adopted not only by large companies but also by small and medium enterprises. An ERP plays a critical role in business processes.
This article explains the need for a centralised information system known as an ERP to beginners.
1. Why is ERP needed?
Every organisation has its own goals, processes and demands. Furthermore, modern organisations need technologies with comprehensive functions that bridge the gap between business processes and people. To operate a business with multiple departments successfully, an ERP system can support business processes by synchronizing all information and communication within the company. ERP systems use software to manage operations effectively. The goal of any ERP solution is to ensure the whole project value chain is aligned and critical progressions are streamlined efficiently.
2. Enterprise system types: decentralized and centralized
To better understand the need for an ERP system, we compare it to a distributed system as opposed to a centralized ERP solution. When focusing on communication and data exchange methods, enterprise systems can be categorized as follows:
2.1 Distributed System:
In this system, data is stored locally in each department within the business. Typically, departments cannot access data from other departments. Of particular concern here is the need for urgent information about the company products. Since Sales cannot obtain information from the Inventory Management department in real time, delays are introduced into simple tasks such as checking product inventory levels. If the Sales department can’t tell a customer if the product is in stock or not, the likelihood is the customer will choose an alternative supplier. Ultimately, this leads to lost revenue and customer dissatisfaction.
For example, if a finished product is showing as “out of stock” Sales may contact the Production Management Department and request more units are manufactured. The Production Management Department checks its own records for raw materials inventory. In this instance, raw material information is stored separately by the Production Management department and the Inventory Management department. Therefore, the data maintenance cost increases and more importantly, the data accuracy is questionable. This double management of data can result in the waste of purchasing raw materials from vendors even though the necessary raw materials are in the warehouse. This increases both raw material and inventory management costs.
The problem creates flow-on effects in other departments. The Manufacturing department is suddenly informed of the urgent need for the product, and is short of manpower. The result is hiring high-cost temporary workers, leading to an increase in labor cost.
In summary, The problems with distributed systems are:
- Maintenance is difficult because many information systems are individually developed at different timings with different priorities.
- It takes time and money to integrate data between departments.
- Data inconsistency, inaccuracy and duplication
- A lack of timely information leads to customer dissatisfaction, loss of revenue, and a decline in reputation.
- Additional material, inventory management, and labor costs
2.2 Centralized System
An ERP system solves the problems of distributed systems. Data is managed centrally and shared with various departments. Departments can access data from other departments. So how does a centralized system overcome the problems of a distributed system? Let’s take a look at the business process.
Necessity of ERP Centralized system
In this example, ALL departments update their information to a central system. This system becomes the single-source of truth for the entire company. If a customer urgently wants to purchase a finished product, sales can get real-time information from the ERP system that has been input by the department with the best knowledge of that data. This enables a quick response, improved revenue and higher customer satisfaction. Data duplication is avoided for the Manufacturing department and Inventory Management department, and accurate data is available to everyone. The HR department knows the required workforce in advance, reducing wasted labor costs. Vendors can also send invoices directly to a centralized enterprise system. The accounting department can also get the information it needs in real time, enabling prompt payment to vendors and improved relationships.
In summary, the advantages of a centralized ERP system are as follows.
- Eliminate duplicate, redundant and inaccurate data
- Information can be shared with every department in real time
- Greater control of various business processes
- Increased profits by improving productivity, inventory management, quality, reduced material costs, more effective human resource management, and reduced overhead costs
- Improved customer interaction, improved productivity, improved customer service
The main advantage of a centralized ERP system is that it not only eliminates data duplication, but also improves productivity and customer satisfaction. For these reasons, enterprise resource planning systems (ERPs) are needed not only by large companies, but any sized business that requires accurate, timely and cost efficient data sharing.
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