What is ERP?

ERP systems are critical for managing thousands of businesses of all sizes and in all industries. Understand why manufacturers consider ERP systems a key component to drive continuous innovation.
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What is ERP? Why is enterprise resource planning important?

Enterprise resource planning (ERP) is a term that refers to the concept or strategy of integrating and managing various core business activities within an organization. ERP as a concept encompasses the methodologies, principles, and practices that aim to streamline processes and unify data across departments, like finance, HR, and supply chain, to improve efficiency and decision-making. ERP is important because it establishes a foundation for operational efficiency, strategic alignment, and data-driven decision-making across an organization. ERP is the broader business strategy for process integration and efficiency, while an ERP system is the software solution that enables an organization to implement ERP practices.

What is an ERP system? How does it work?

An enterprise resource planning (ERP) system is a software platform that integrates and manages certain core business processes across an organization. It serves as a central hub that unifies data and workflows from various departments—such as accounting, human resources, manufacturing planning, supply chain, procurement, and customer service—into a single system, allowing real-time visibility and seamless communication.
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The history of ERP

ERP began in the 1960s with basic inventory management and control systems. In the 1970s and 1980s, material requirements planning (MRP) software evolved to manage manufacturing processes, expanded by MRP to include more business functions. By the 1990s, ERP emerged, integrating core processes like finance, HR, and supply chain, into unified systems. Cloud ERP gained popularity in the 2000s, offering flexibility and remote access, and ERP systems have since advanced with AI and data analytics to support real-time decision-making.

Types of ERP deployment

ERP deployment types include options like on-premise, cloud-based, hybrid, etc., each offering different levels of control, flexibility, and cost.

On-premise ERP

 On-premise ERP is an enterprise resource planning system installed locally on a company's own servers and hardware. The company fully controls and maintains the system, including data security, any customizations, and updates. This type of ERP often requires a larger upfront investment in infrastructure and IT resources but offers greater control and is preferred by companies with strict data security or regulatory requirements.

Cloud ERP

Cloud ERP is an enterprise resource planning system hosted on a vendor’s cloud platform rather than on the company’s local servers. This type of ERP is accessed via the internet, which enables users to connect to the system from anywhere with an internet connection. In cloud ERP, the vendor handles system maintenance, security, upgrades, and data storage, reducing the need for in-house IT resources. Cloud ERP typically operates on a subscription model, offering flexibility, scalability, and lower upfront costs compared to on-premise ERP systems. This makes it particularly beneficial for businesses looking for quick deployment, remote access, and scalability as they grow.

Hybrid ERP

 A hybrid ERP system is an enterprise resource planning system that combines elements of both on-premise and cloud-based ERP solutions, allowing companies to leverage the benefits of each deployment model. With hybrid ERP, some ERP functions or modules are hosted on the cloud, while others remain on the company’s local servers. This approach offers flexibility, enabling companies to keep sensitive or critical data on-premise, while utilizing cloud capabilities for other operations that require scalability, remote access, or lower IT maintenance. Hybrid ERP systems are particularly suitable for businesses that have unique regulatory, security, or customization requirements but still want the advantages of cloud technology.

Two-tier ERP

 A two-tier ERP is a strategy where a company uses two different ERP systems to meet distinct business needs across its organization. Typically, a main (Tier 1) ERP system is used at the corporate or headquarters level to manage core functions like finance, compliance, and reporting. A secondary (Tier 2) ERP system is then deployed for specific divisions, subsidiaries, or regional locations that may have unique needs or require more flexibility.
This approach is commonly used by large enterprises with complex structures, allowing them to maintain centralized control at the headquarters, while offering customizable, cost-effective solutions at the subsidiary level. Two-tier ERP supports faster implementation, greater flexibility, and reduced costs for divisions that might not need the full functionality of a Tier 1 ERP. It’s especially beneficial for organizations with multiple business units that have varying operational requirements or those expanding into new markets.

What are the benefits of ERP?

The advantages of implementing an ERP system vary depending on the deployment model, but for modern ERP solutions the following benefits apply:

The advantages of implementing an ERP system vary depending on the deployment model, but for modern ERP solutions the following benefits apply:

Enhanced collaboration

By providing a single source of truth, ERP fosters better communication and collaboration across departments, aligning everyone toward common goals.

By providing a single source of truth, ERP fosters better communication and collaboration across departments, aligning everyone toward common goals.

Lower operational costs

By improving operational efficiency, reducing errors, and minimizing redundant tasks, ERP systems help organizations save on time and costs in the long run.

By improving operational efficiency, reducing errors, and minimizing redundant tasks, ERP systems help organizations save on time and costs in the long run.

Improved efficiency

ERP automates repetitive tasks, streamlines workflows, and integrates processes, reducing manual work and errors while boosting productivity.

ERP automates repetitive tasks, streamlines workflows, and integrates processes, reducing manual work and errors while boosting productivity.

Centralized data and consistency

ERP consolidates data from different departments into a single, unified platform, ensuring accurate, up-to-date information across the organization.

ERP consolidates data from different departments into a single, unified platform, ensuring accurate, up-to-date information across the organization.

Better business insights

Real-time data and analytics in ERP systems allow leaders to make informed, data-driven decisions and respond proactively to business needs.

Real-time data and analytics in ERP systems allow leaders to make informed, data-driven decisions and respond proactively to business needs.

What is the difference between PLM and ERP?

Product lifecycle management (PLM) manages a product's lifecycle from concept through design and development, focusing on product data, BOM management, and collaboration for all functions that have a stake in the launch, delivery, and continued success of a product, like engineering, quality, manufacturing, and service. Enterprise resource planning (ERP) handles core business operations like finance, procurement, HR, and supply chain, aiming to optimize resources and streamline day-to-day transactional operations. While PLM supports the evolution of the digital product definition, ERP ensures efficient transactions against that definition. Together, they provide end-to-end visibility across product and business processes.
Explore PLM and ERP

The relationship between PLM and ERP

PLM and ERP are really complementary systems. PLM manages product design, development, and lifecycle data, while ERP handles operational functions like procurement and inventory management. The two systems are connected as PLM provides product data (e.g., BOMs) to ERP for production and logistics. Integration ensures smooth data flow between design and operations, improving collaboration, efficiency, and product quality from development to delivery. See the video below on how PLM and ERP work together at Trumpf.

 PLM/ERP Integration Guide
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Advantages of integrating PLM and ERP systems

Improved data accuracy

Integrating PLM and ERP ensures that product data is consistent and accurate across both systems. By automating the data transfer between design (PLM) and operational (ERP) teams, it reduces errors caused by manual data entry. This means that product specifications, bills of materials (BOMs), and design changes are automatically reflected in the ERP system, ensuring that manufacturing and procurement teams are working with the most current and accurate information.

Streamlined processes

Integrating PLM and ERP automates the flow of product data from the design phase through to production and supply chain management. This eliminates the need for manual data entry, reducing the risk of errors and delays. By synchronizing workflows, the integration helps ensure that product designs, changes, and updates are automatically shared across departments, improving overall operational efficiency, minimizing bottlenecks, and ensuring smooth transitions between the development and manufacturing phases.

Faster time to market

By integrating PLM and ERP, organizations can accelerate the transition from product development to manufacturing. As product design and operational teams share real-time data, decisions can be made faster, and production schedules are optimized. This reduces delays caused by miscommunications or outdated information and ensures that products move through the development pipeline more efficiently. The result is a quicker response to market demands and a shorter time to market for new products.

How does the right PLM data get into the ERP system?

The right PLM data gets into the ERP system through integration, where key product details like BOMs, designs, and specifications are automatically transferred for manufacturing and operations.

Step 1 - Manage the right data in the right tool and access the right product master data.

The first step is to identify the appropriate location of your product master data, clean it up, and ensure it isn’t duplicated across multiple systems. For companies that do their own engineering, this master data should reside in PLM. For instance, compared to PLM an ERP system has limited capability to facilitate change management within the full scope of requirements and affected items and automatically propagate changes to derivative material like process plans or work instructions.

By establishing strong digital foundations for PLM and ERP, product development outcomes are automatically transferred to downstream systems. The goal is to ensure the right people are working in the right systems without having to switch or duplicate efforts.

Step 2 - Design seamless, bidirectional process flows.

All stakeholders involved in the product lifecycle need access to relevant product information based on their roles, rather than relying on colleagues to provide it. For instance, manufacturing and process planners, plant and tool designers, production managers, and workers need access to up-to-date engineering data. Similarly, design engineers need real-time feedback from the manufacturing team.

With interconnected systems, it's essential to define the boundaries of each system—clarifying where one system's responsibilities end and another's begin. But boundaries of responsibility should not be confused with boundaries of information, the latter leads to siloed systems. Open, integrated systems with clear functional boundaries allow users to gain insights from data that support coordinated decision-making and automate process synchronization in both product development and production.

Step 3 - Create digital functionalities from data and make them available to employees in production.

Once the data is assigned, systems are integrated, and processes are optimized, this unlocks numerous possibilities, such as:

  • Democratizing product data through out-of-the-box apps or user-defined low-code apps, enabling real-time collaboration from production managers to workers.
  • Linking production operations to product development by reporting issues or deviations from standards via terminals in the production area.
  • Connecting work cell use cases to provide a seamless experience for workers, capturing execution data through access to control features, smart tools, and machines.
  • Delivering visual and digital work instructions tailored to each employee’s skill level.
  • Designing production processes with better coordination between production and factory layout, enhancing efficiency.

Challenges in integrating PLM and ERP

Certain activities, often seen as secondary, are crucial to integration success. These include aligning business expectations, offering proper internal training, and involving third-party providers. Key challenges involve managing changes in data formatting and ensuring clean, accurate data for integration. The system must also support version and release management, as updates won’t happen across all components simultaneously. Despite this, the system must remain fully functional during the upgrade process.
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Future of ERP

The future of ERP lies in two key shifts: The first is a move to cloud/SaaS solutions, providing scalability and flexibility, and the second is delegating authority over product data to PLM systems as products and manufacturing operations grow more complex. The best part? These advancements can happen simultaneously, enabling ERP systems to focus on core business processes while seamlessly integrating with specialized tools for product lifecycle management.
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ERP frequently asked questions

What is an example of an ERP system?

An example of an enterprise resource planning (ERP) system is SAP S/4HANA. It integrates core business processes such as finance, supply chain, human resources, procurement, and manufacturing into a single platform. SAP S/4HANA leverages advanced technologies like AI and machine learning to provide real-time insights, streamline workflows, and enhance decision-making. It is widely used by organizations of all sizes to improve efficiency, reduce costs, and adapt to changing business needs. Other popular ERP systems include Oracle NetSuite, Microsoft Dynamics 365, and Infor CloudSuite.

Why do companies use ERP?

Companies use ERP systems to streamline and integrate their core business processes into a single platform. This improves efficiency, reduces redundancies, and enhances decision-making by providing real-time data and insights. ERP systems enable better collaboration between departments, improve resource management, and automate repetitive tasks, leading to cost savings.

Additionally, they ensure data accuracy and compliance with regulatory requirements while supporting scalability and adaptability to changing business needs. ERP systems also enhance customer service by providing quick access to information and improving order accuracy and fulfillment.

What are the five components of ERP?

The five key components of an ERP system work together to streamline processes, improve collaboration, and provide a centralized view of business operations.

Supply chain management

Oversees procurement, inventory, logistics, and vendor relationships to optimize supply chain efficiency.

Customer relationship management (CRM)

Manages customer data, sales, marketing, and support to enhance customer satisfaction and retention.

Human resources

Handles employee-related processes such as payroll, recruitment, training, benefits, and performance management.

Inventory management

Inventory management is a critical component often included within the supply chain management module of an ERP system. It specifically focuses on tracking and managing stock levels, order fulfillment, warehousing, and inventory replenishment.

Business intelligence (BI)

Business intelligence is increasingly integrated as a critical component of modern ERP systems. It focuses on gathering, analyzing, and presenting data from various parts of the business to support informed decision-making. BI tools in ERP systems provide advanced analytics, reporting, and visualization capabilities.
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