Advantages and Disadvantages of ERP Systems
Discover the advantages and disadvantages of utilizing ERP systems to drive efficiencies and cost savings in procurement.
By Eric Edwards | April 11, 2023
In the world of business software applications, few are bigger and more expansive than enterprise resource planning applications, also known as “ERP” systems. These customizable application suites allow businesses to integrate and manage their most important divisions, departments, processes, and functions from one platform.
Why use an ERP system?
An ERP’s strength lies in its centralized database, which integrates various business departments and processes using the same data. This allows for better coordination and communication among different departments within a company. The ERP “one source” database contains all the information needed to run the business, as well as various modules that correspond to different business functions, such as finance, manufacturing, human resources, customer relationship management, and procurement. All the company’s departments and divisions link to the ERP and can track a myriad of business resources including spending, purchasing, raw materials, production capacity, and inventory.
When a user enters data into the ERP system, it is stored in the central database, which can then be accessed by other users and departments as needed. This helps to ensure that everyone in the organization is working with the same up-to-date information. Levels of access security ensure that only designated employees can enter or edit data into the database, while others will have only read access, or no access, depending on their job function.
ERPs often use automated workflows and business rules to streamline processes, reduce errors, and increase efficiency. They also typically provide analytics and reporting tools that allow managers to monitor performance and make data-driven decisions in real time. Once established, a properly used and functioning ERP can lead to an increase in revenue margins and efficiencies while improving communication across the company.
ERP systems are customizable application suites that allow businesses to integrate and manage their most important divisions, departments, processes, and functions from one platform.
Benefits of ERP systems
The benefits of using an ERP system can be quite compelling for an organization. Some of the key advantages include:
- Improved efficiency: ERP systems can automate many routine tasks and streamline business processes, making them more efficient and reducing the need for manual intervention.
- Better data management: With all the data stored in a centralized system, an ERP can provide better visibility into key business metrics and performance indicators.
- Enhanced collaboration: With a common platform for all departments, an ERP system can facilitate better collaboration between teams, leading to increased productivity.
- Better decision-making: ERP systems can provide real-time data and analytics, enabling managers to make better-informed decisions.
- Scalability: ERP systems are designed to grow with a business, making it easier to add new features and functionality as needed.
- Improved customer service: With better data and processes in place, an ERP system can help organizations provide better customer service and respond to inquiries more quickly and in greater detail.
- Regulatory compliance: Many companies must adhere to federal and state regulations. A properly functioning ERP will have up-to-date records that are easily accessible, and customizable reporting tools that are beneficial to auditors.
- Drives cost savings: Automating repetitive tasks, optimizing processes, and improved forecasting are a few of the advantages that can give a company a competitive advantage when using an ERP system.
The ERP marketplace
The ERP marketplace continues to grow exponentially with the projected market size to be $49.5 billion by 2025. ERPs can be on-premises, in the cloud (SaaS), or a hybrid of the two. The most popular ERP systems are backed by some of the world’s biggest companies including Oracle, SAP, Microsoft, Workday, Infor, and Epicor to name just a few.
Here are the five biggest ERP companies listed by their latest reported revenues are:
- SAP SE (€27.34 billion in 2020)
- Oracle ($40.48 billion in 2021)
- Microsoft Corporation ($168.1 billion in 2021)
- Infor ($3 billion in 2020)
- Sage Group (£1.85 billion in 2020)
Drawbacks to using an ERP system
ERP companies are quick to tout the plethora of advantages their systems offer often glossing over some of the obstacles. Many CEOs and CTOs who adopted an ERP system consider it to be comparable to a marriage. But, it’s rarely smooth sailing during an ERP implementation phase. Even if the implementation phase goes well, unforeseen challenges may be on the horizon that could derail the marriage just as quickly.
Here are a few potential disadvantages to using an ERP:
- Cost: Implementing an ERP system can be costly, both in terms of the software itself and the time and resources needed for implementation and training across all departments and locations.
- Complexity: ERP systems can be complex, and users may require extensive training to be able to use the system effectively. This can lead to a steep learning curve and a period of adjustment for users, some of whom may feel threatened by the new system.
- Customization: ERPs are not off-the-shelf products. Customizing an ERP system to meet the specific needs of an organization can be expensive and time-consuming. Also, customizations can make it difficult to upgrade the system to new versions or switch to another application in the distant future. Many ERP procurement models do not allow to easily configure for approval flows. This may be a huge drawback for companies requiring multiple processes and stakeholders.
- Maintenance: Maintaining an ERP system can be a significant ongoing expense. This includes costs for hardware, software, and personnel to maintain the system. This is why cloud-based ERPs are often preferred today.
- Integration: Integrating an ERP system with other software applications or legacy systems used by a company can be extremely challenging. This can lead to difficulties in sharing data across different systems and processes, defeating some of the advantages of using an ERP.
- Dependence: Organizations can become heavily dependent on their ERP system, and any downtime or problems with the system can have a significant impact on overall operations, especially if the company operates on a 24/7 basis.
- Implementation: The implementation process can be a complex and lengthy process, sometimes taking years to complete. This can have a huge negative impact on company morale.
- Change management: Implementing an ERP system requires significant change management, including changes to business processes, workflows, and organizational structure. This can be a challenging process and requires a significant investment of time and resources.
ERP systems with procurement modules
Most modern ERP systems have a procurement module, including SAP Ariba, Oracle NetSuite, Workday, Microsoft Dynamics 365, Infor CloudSuite, and Epicor ERP, among others. These procurement modules are designed to help organizations streamline and automate their procurement processes, from sourcing and purchasing to payment and supplier management.
There is no clear consensus on which ERP systems have the best procurement modules as different businesses have different needs and priorities. Most ERPs began life as a finance, accounting, or human resources application with procurement and supply chain management being a much later addition.
However, some popular ERP systems with robust procurement modules include SAP Ariba, Oracle NetSuite, and Workday. These systems offer a range of features such as supplier management, purchase order management, invoice management, and inventory management. Ultimately, the effectiveness of a procurement module in an ERP system will depend on the specific requirements of the business, how well the system is configured and implemented, and how well the company employees adapt and adopt the new application.
These are a few advantages and disadvantages of ERP systems. All these systems are customizable, which is a plus, but if the implementation is rushed, can have a sizable negative impact on the company. The promise of improved efficiencies and cost savings entices many companies to take the plunge, but the disruption ERPs can cause a company may offset any perceived advantage of the new system.
For that reason, the decision to purchase an ERP should be made with thorough research by a committee of company stakeholders who are experts in their departments. Do not shortchange training on how to use the application, or mistakenly think your IT department can handle it, either.
As the Workday commercial says, you may think you work with rockstars, but are they really? If you are not prepared to be married to an ERP and the commitment it involves, then they might not be ready to rise to the occasion.
Finding the right procurement software solution can seem daunting. Download a free copy of Una’s Ultimate Guide to Procurement Software Solutions to help identify which type of tool would be right for your organization.