What is an EPR system and how to choose the best one

In today's dynamic business environment, information systems play a key role in ensuring effective management and competitiveness of small, but especially medium and larger enterprises. One of the most important and comprehensive information systems is the so-called ERP system (Enterprise Resource Planning) - software for enterprise resource planning.

What is an ERP system?

An ERP system is an integrated information system designed to plan, manage and monitor all key processes and resources in an enterprise. In addition, it streamlines, refines, and above all automates business processes. It includes - or at least can include - basically all divisions or departments of a company such as finance, warehousing, manufacturing, human resources, distribution and others. An ERP system is used to collect, store, process, and analyze data, allowing a company's management to gain a better overview of its operations and manage them efficiently - and therefore reduce costs.

But let's move from general - and somewhat abstract - definitions to a more practical and illustrative description of an ERP system. You can think of it as a complex relational database with linked forms, in which users (employees) process part of the business agenda by entering data into the ERP or retrieving and using it for their other work. Each organizational unit (department or division) of a company usually needs its own application or software to ensure that the needs of that unit are met. With an ERP system, each department gets its own de facto application, with added value: it can communicate and share data with everyone else in the company. All of these "applications" are part of the ERP system, or are modules of it. The modules typically cover the following business agendas and processes:

•     production and warehousing,
•     electronic invoicing and controlling,
•     purchasing and logistics management,
•     sales and marketing,
•     equipment maintenance,
•     project management,
•     HR and personnel management
•     and more.

In principle, it can be stated that an ERP system "full-fledged" (i.e. with full integration and with all modules, including any customized modules) can comprehensively cover all business agenda and processes.

Another - already mentioned in passing - benefit of an ERP system is the centralization of data in one place. All data and information for company management is thus entered only once and can then be used by all relevant departments in a very simple way. This avoids errors that occur when different dedicated applications are used instead of the ERP system, which are not integrated and do not communicate with each other. And vice versa: a change or update that a user enters in one of the ERP system modules is written in real time to the other modules and then displayed to all relevant employees, who can be sure that they are always working with the correct and up-to-date data.

Historical window - ERP systems yesterday and today

We explained what an ERP system is and what its advantages are. But how long have ERPs been with us and what has been their evolution? The first interesting thing is the complexity and computational complexity of current ERP systems - it is at such a high level that until the 1990s it was not possible to implement such software at all, or to run it on ordinary commercial hardware. Thus, the emergence and massive expansion of ERP systems has been driven by the rapid development of hardware, the development of the vision of an integrated information system, and especially the willingness of companies to adapt to the type of business processes for which ERP systems are optimised.

A kind of ancestor or original development phase of ERP was the so-called MRP systems (Material Requirements Planning) in the 1970s. Interestingly, the spiritual father of MRP was Joseph Orlicky, a Czech who emigrated to the USA after World War II. MRP was a software designed for manufacturing companies that used inventory levels, production schedules and BOMs to recalculate data and generate "recommendations" for purchasing parts and starting production. An improved version of MRP II followed in the 1980s, which eventually evolved into the current ERP systems in the 1990s. According to Gartner, these had to meet quite demanding criteria for the time:

• system based on a relational database,
• graphical user interface (GUI),
• development on fourth-generation hardware (i.e. nowadays classic PCs with microprocessors, no mainframes)
• and portability between hardware from different manufacturers.

The very first system was from the German SAP and its first user was the chemical company ICI.

Based on relatively recent history, there were approximately 16,000 ERP systems implemented in the country in 2007:

• 2.5 thousand implementations in large enterprises,
• 5.5 thousand implementations in medium-sized enterprises
• and over 7 thousand in small enterprises.

Currently, the most widely used and proven ERP systems in the Czech Republic and worldwide are those from Oracle.

Advantages of ERP system implementation

The implementation of an ERP system brings a number of benefits to businesses that can contribute significantly to their success and competitiveness. Let's go through the main ones:

• Reduced costs and increased efficiency - ERP systems enable process automation, which leads to a reduction in the frequency of routine manual activities and errors. Through better planning and inventory optimization, cost savings and increased efficiency in the production process can be achieved. For example, companies that have implemented ERP systems from Oracle often report up to 20% cost reductions and 15% efficiency improvements in their manufacturing operations.
• Process automation and workflow management - as mentioned above, ERP systems enable centralized management of business processes and information flow within the enterprise. This facilitates collaboration between departments, speeds up approval processes and again reduces errors. By automating and standardizing processes, businesses achieve better project management.
• Electronic invoicing and financial management - Electronic invoicing in ERP accounting modules makes it easier to manage and track financial transactions. This makes it easy to monitor and plan financial flows, issue invoices, track payments and manage cash flow.
• Supply chain management and inventory management - with a perfect overview of the stock status, ERP systems make supply chain management easier. This helps to reduce inventory, minimize losses and improve delivery, and most importantly, reduce the risk of acute stock shortages or overstocking. Not forgetting the optimization of warehousing and distribution processes with advanced route planning algorithms and automatic shipment tracking.
• Warehouse automation - ERP systems allow integration with technologies for automating warehouse processes, such as robots, barcode scanners or warehouse automation platforms. This results in greater accuracy, speed and efficiency in warehousing.

The other side of the coin - pitfalls of ERP systems

We don't want to get you drunk on the marketing roll and pretend that ERP systems only bring benefits, positives and certainties despite all their undeniable advantages. So let's take a look at their flip side:

• Too costly - there's no point in disguising the fact that investing in ERP systems is not a low cost expenditure. Yes, ERP systems are expensive. However, you need to consider that they take the place of up to dozens of dedicated applications, and they also reduce costs - especially operational and overhead costs. An ERP system is not an investment for a year, but often for a decade.
• Complex to understand and operate - sure, interacting with an ERP system at an advanced level is not like working with a mace. On the other hand, it's nothing that can't be addressed by systematically training users. Moreover, new versions of ERP systems bring a much more intuitive user interface.
• Overall benefits do not meet expectations - this can happen. The question is what were the expectations and what is the methodology for measuring their fulfilment. Moreover, the benefits and advantages of the system will only become fully apparent over time (a year is a reasonable amount of time) and only if you first thoroughly map all relevant company processes, select the optimal ERP system, implement it correctly and thoroughly train your employees. If these steps go well, you will significantly minimize the risk of unmet expectations.
• Lengthy implementation - the commissioning of such a large-scale information system with impacts on all departments of the company, such as ERP, cannot logically be completed in a few weeks. It takes the same amount of time to build and commission a new production hall, where no one is likely to dwell on the length of construction.
• The need to adapt to the system - along with the ERP system, you also get the manufacturer's "best practices" regarding many business processes. Because of this, you will have to modify and adapt your existing business processes and workflows, otherwise the features implemented in the system will not suit you. On the other hand, many process edges can be "sanded off" during implementation and the system can be modified to suit your business environment.

How to choose an ERP system

You shouldn't get an ERP just so you can tick "enterprise information system implementation" off your to-do list. Be clear about why you want an ERP system. Think about the benefits you will get. When choosing an ERP system, it is absolutely essential to first analyze the needs and requirements of your business. You must consider both the technical aspects (e.g. availability, extensibility) and the functionality and support for specific areas of the business.

We recommend that you take the following steps before selecting an ERP system:

• Define your requirements and needs - identify the main areas where you need to improve your processes. Consider your needs in warehousing, manufacturing, finance, human resources, etc. Identify the key functionalities you require from an ERP system. Are you already using an information system? Then consider whether you want a standalone ERP system or should it be integrated into your existing information system?
• Define the IT infrastructure - do you prefer an on-premise solution or would you rather choose a cloud ERP system? With a cloud-based solution, you get a virtual guarantee of higher cyber security, plus you eliminate the high initial investment and more costly maintenance.
• Conduct market research and identify a system supplier. Global suppliers have been on the market for a longer period of time, but on the other hand, with local suppliers, you don't have to deal with the language barrier. In addition, they are often cheaper, more flexible, easier to get relevant references and easier to agree on a tailored implementation to suit your needs.
• Consult the experts - ask ERP experts or consultants to give you recommendations and advice. Expert advice can help you choose the right ERP system and ensure it fits your needs and future expansion plans.
• Testing and Demo - If possible, ask for testing or demo of the selected ERP systems. This will give you first-hand experience with their user interface, features and capabilities.

Ask potential vendors for a quote or post the request on your website. When selecting suppliers, shortlist them based on an evaluation of each ERP system, taking into account the references provided, the number of times the system has been installed by the supplier and their knowledge and experience. This will limit the number of acceptable systems. An important criterion at this stage is the final cost of implementation, which usually depends on various factors. Among the most important factors are the number of active users and features. Therefore, already in the previous selection process, clearly determine what functions you actually require from the ERP system and how many employees will actually use it.

As we mentioned above, once you have selected an ERP system, it is important to implement it properly and provide sufficient training for your employees. This will help maximize the benefits of the ERP system and ensure its effective use in your business.

One last tip: be patient. Selecting and implementing an ERP system is not a sprint, but a marathon, and using it is not a date, but a partnership for life. At least, that is, until you upgrade.

The future is in ERP

ERP systems are an integral part of modern business and contribute significantly to the competitiveness of companies. Implementing an ERP system allows for process automation, improved management, optimized inventory management, more efficient financial management, and above all, cost reduction. When selecting an ERP system, it is important to consider the needs and requirements of a medium-sized enterprise and choose a reliable implementation partner.

With Algotech, you don't just get a proven supplier and implementer - we share our know-how and decades of experience and knowledge of ERP system implementation. You can trust us - we connect you with companies that provide references before implementation. Contact us, arrange a free consultation and step towards a future where your business runs like a Swiss watch.