Enterprise resource planning (ERP) systems play a pivotal role in helping businesses achieveoperational efficiency. By integrating core business functions in the form of individualcomponents into a single, unified platform, an ERP helps provide a real-time view into thebusiness while supporting day-to-day processes and workflows. This article examines eightmain components of ERP systems and how each one contributes to streamlined operations,better data management and closer collaboration — plus some additional features commontoERP systems and how they can be leveraged to further enhance operations.
What Are ERP System Components?
ERP system components, also known as modules in modular ERP systems, are specializedapplications that handle specific business functions. They’re the building blocks of acentralized ERP system database, designed to seamlessly work together to provide acomprehensive view of an organization’s data and processes. Rather than relying onseparatesoftware for different departments, an ERP system integrates the various components into asingle platform so that all stakeholders are analyzing the same information.
Common ERP components include accounting and financial management, human resources (HR),customer relationship management (CRM) procurement and supply chain management (SCM). Eachcomponent collects data from and supports the processes of its respective businessdepartment. The ERP system then consolidates and centralizes data from these discretemodules. This unifies business data to improve end-to-end business coordination, enhanceorganization-wide efficiency and support decision-making.
Key Takeaways
- ERP system components, also called modules, are versatile building blocks of acentralized ERP system database.
- These components are dedicated to discrete business functions, including HR, CRM,procurement, manufacturing and logistics management, and warehouse management.
- Modular ERP solutions allow businesses to add and remove ERP components according totheir needs.
- ERP components plug into the ERP system to create a single source of data that helpsbusinesses streamline workflows, save time and boost profitability.
ERP Systems Components Explained
Each component of an ERPsystem is designed to address a distinct business function. Components, which can bethought of as subsystems, plug into a central database and work together so that everydepartment has access to the same real-time data and visibility into their performance.Accounting and financial management components, for example, assist in planning, budgetingand financial reporting. HR components simplify workforce management and HR services. CRMcomponents improve client and prospect interactions and drive sales growth. Other keycomponents include business intelligence (BI), SCM, manufacturing and logistics management,inventory management and warehouse management.
All-in-one ERP systems come packaged with a full suite of components, such as those mentionedabove. This approach may be useful for mature businesses ready for a comprehensive solution.Modular ERP software, on the other hand, offers greater flexibility by enabling businessesto select and combine only the components — or modules — relevant to theirneeds, operationsand challenges, and then scale over time. A medium-sized ecommerce company, for example,might prioritize inventory management and warehouse management, whereas a smallservice-based organization might focus on CRM and project management modules.
With the right mix of ERP components, businesses can create an ERP system tailored to meettheir unique needs and goals.
8 Main Components of ERP to Know About
Any business looking to harness the full potential of an ERP system to meet its goals anddrive business performance should have a solid understanding of ERP components. Here’salook at eight core ERP modulesand how they assist businesses by simplifying processes and offering extensive, real-timeinsights.
Accounting and Financial Management
Serving as a centralized platform for managing all financial activities, accountingand financial management is generally considered to be the most important componentof an ERP system. Within this component are tools that businesses can use to track,store and analyze various financial elements, including accounts payable (AP),accounts receivable (AR), the general ledger (GL), budgets and forecasts. In somecases, an accounting and financial management module can also perform advancedtasks, such as tax management, fixed assets management and multicurrencyreconciliation.
Given the interconnected nature of an ERP system, the accounting and financialmanagement component can integrate with other core ERP components to provideaccurate, business-wide financial information — a key consideration given thefactthat financial leaders need to track and use data from various departments to makeinformed decisions about cash management, funding sources and financial controls.
An ERP system also simplifies the complex process of managing, organizing andplanning finances by handling tasks like billing and invoicing, revenuerecognition and financial reporting. In doing so, manual data entry is minimized,decreasing the likelihood of errors and letting employees focus on other tasks—like closingthe books on time. Additionally, financial planning and analysis teams willhave up-to-date financial data to prepare key reports and financialstatements.
Human Resources (HR)
Humanresources, or human capital management (HCM), is essential to managing abusiness’s workforce. The HR component of an ERP system offers tools thatstreamlineHR tasks, such as recruitment, hiring, employee management, performance evaluationand payroll processing — the last of which may also be part of the financialmanagement component, depending on the ERP provider.
More specifically, HR modules play a vital role in centralizing and maintainingemployee records and benefits information, as well as tracking hours worked, paidtime off and sick days used, among other pertinent employee details. Thisconsolidation of data eliminates the risk of duplication or errors common todisparate spreadsheets and software.
A well-rounded HR component also enables businesses to organize and optimize theirworkforces by enabling HR departments to transition from solely focusing onadministrative tasks to acting as strategic business partners. For example, abusiness can tap into employee performance metrics to identify opportunities toimprove engagement or productivity and even nurture employee growth. Additionalstrategic HR functions could include workforce planning and succession planning, twobusiness processes that ensure the right employee is in the right position at anygiven time. Both rely on analyzing HR data, from current employee demographics toforecasted staffing needs — all of which is made easy with the real-time andhistorical data collected in an ERP system.
Customer Relationship Management (CRM)
The CRM component of an ERP system collects, organizes and analyzes customer andprospect information, such as contact details, sales history and service records, inone centralized repository. This data can then be used to enhance interactions withcustomers, improve relationships, automate key processes and provide importantinsights. It can also be fed into other ERP components, such as accounting andfinancial management, or combined with additional features, such as sales ordermanagement and marketing management.
For example, sales and marketing teams can use the CRM component to access real-timecustomer information to shape their understanding of consumer behaviors or salespatterns. The component can also highlight areas in need of improvement — forinstance, if there’s an influx of negative reviews or support tickets. Thisincreased level of customer awareness supports business-to-client relationships,boosting trust, supporting customer satisfaction and ultimately leading to higherprofitability. Like a standalone CRMsystem, the CRM component can also automate tasks, such as managingleads and monitoring the sales pipeline.
See AlsoWhat Are ERP Applications? | Enterprise Resource Planning Application Definition 2023The 4 Phases of the ERP Implementation Lif... | Acupower LTDUnderstanding ERP System Implementation and Strategies7 Steps of a Successful ERP Implementation ProcessMeanwhile, customer service representatives can use the CRM component to access eachcustomer’s full history, which helps them better respond to service requests.Support tickets can be automatically assigned to available representatives, withprogress and resolution times automatically tracked. This aspect of a CRM module canensure the business addresses customer concerns promptly, again leading to highercustomer satisfaction and increased brand loyalty.
Business Intelligence (BI)
A business intelligence (BI) component makes it easy for businesses to analyze largevolumes of raw data from various sources within an ERP system, from financialmanagement to warehouse management and everything in between. This broad perspectiveenables them to track correlations and dependencies among different aspects of theirorganizations to support organizational alignment. Decision-makers can then drawupon the real-time financial and operational insights and trends to make faster,smarter decisions.
Ideally, the businessintelligence should go beyond historical reporting by incorporatingpredictive models and analysis so that businesses have a complete view of past,present and potential future performance. Resulting data is then automaticallyprocessed and presented in a meaningful, accessible way. Using an ERP system thatsupports BIdashboards, for example, decision-makers can quickly access visualrepresentations of key performance indicators (KPIs) and other relevant metrics anddata needed to run the business. Simplified data analysis combined with clean, cleartakeaways make it easier to detect areas of concern, paving the way for companies toproactively adapt to potential changes and maintain a competitive edge.
BI can also provide valuable insights into customer behavior, market trends andcompetitor performance, for instance. This information can then be used to informmarketing strategies and product development — with the end goal of improvingcustomer satisfaction and business growth.
Supply Chain Management (SCM)
Supply chain management encompasses all of the activities involved in turning rawmaterials into finished products and delivering them to partners or customers. In anERP system, an SCM component tracks the movement of materials and goods throughoutthe supply chain, from procurement to last-mile delivery. SCM components can alsomanage product returns, refunds and replacements.
Since supplychain management is such a broad field, ERP systems may divide SCM intoseveral more specific components so that companies have more granular control. Forexample, the SCM component of an ERP system might include specialized tools forprocurement, manufacturing and logistics management, inventory management, warehousemanagement and even order management.
In a modular environment, companies can activate the components most relevant totheir supply chain needs. Businesses with a dedicated purchasing department, forinstance, can leverage a procurement module to track vendor performance,automatically process invoices and manage purchase requests and POs — all inonecentrally managed system.
Manufacturing and Logistics Management
Although manufacturing and logistics management may fall under the wider topic ofsupply chain management, it’s a common component of an ERP system. Forexample, ERPsystems generally offer some type of manufacturingoperations management software, such as production management systems,demand planning capabilities or third-party logistics managers. These tools helpmanufacturing teams plan and monitor production runs according to forecastedrequirements, manage product assembly and quality assurance, plan and trackdistribution, and monitor the fulfillment process through delivery.
For manufacturers, one use case for such a component is to ease the creation of a billof materials (BOM) — essentially the “recipe” for making aproduct. ManualBOM prep and management is prone to errors, especially for products that arecomposed of hundreds of parts, or for companies that manufacture hundreds ofproducts. The manufacturing component of an ERP system, however, can automaticallygenerate BOMs based on product designs, reducing errors and the time it takes tomove from the design phase to production. Companies can create standardized BOMtemplates that all follow the same structure and format, making them easier tounderstand and work with. And any changes to BOMs can be tracked in real time— withversion control.
Inventory Management
The inventory management component of an ERP system also falls under the greater SCMumbrella, but with a focus on helping companies optimize inventory levels andminimize excess stock. Real-time inventory data is leveraged to provide greatervisibility and control over item quantities, locations and even the performancehistory of various raw materials or stock-keeping units (SKUs). Heightened awarenessinforms purchasing and reordering decisions, which can cut carryingcosts and prevent stockouts.
By integrating financial data and data from suppliers, warehouse operations andmanufacturing processes, inventorymanagement modules offer decision-makers a more comprehensive look atmetrics like cost of goods sold (COGS), inventory turnover rates and shrinkage.These analytics can inform decisions about how to improve inventory efficiency toenhance profitability.
In addition, inventory management modules can often automate replenishment, cyclecounts and demand forecasts — all of which can tighten inventory controlswhilereducing human error.
Warehouse Management
Similar to inventory management, warehouse management encompasses processesassociated with storing, reordering and managing stock. The difference is that warehousemanagement focuses on the movement of stock, whereas inventory managementlooks at inventory from a high level. In an ERP system, the warehouse managementcomponent aims to streamline the organization, storage and movement of productswithin a company’s warehouse. Key factors addressed by warehouse managementmodulesinclude warehouse layout, material handling and labor productivity.
Incorporating a warehouse management module in an ERP suite enables businesses to runtheir warehouses more efficiently, reduce costs and fulfill orders faster.Specifically, warehouse-related modules can analyze warehouse operations data toidentify bottlenecks and inefficient processes, such as poor or disorganizedwarehouse layouts that increase worker travel time. These data points can givecompanies ideas about how to optimize warehouse processes and minimize waste.
Warehouse management modules can also inform core warehousing operations, such asreceiving, put away, picking and packing. As a result, warehouse employees canbetter locate, move and track goods throughout the warehouse. Goods are then packedand shipped, boosting warehouse productivity and enabling customers to get theirgoods sooner.
Other Features
Although the preceding eight components are common to most ERP systems, supplementary ERP features, such as riskmanagement, marketing management and advanced planning and forecasting capabilities, cansignificantly enhance a business’s operations and decision-making capabilities.
Event Management
Event management, or workflow management, refers to the ERP system’s ability to supportandstreamline a variety of key business processes, also known as “events.” Morespecifically, asequence of tasks or steps are automatically tracked and monitored; when a task isaccomplished, the next operational step is triggered until the workflow is complete.It’simportant to note that an “event” refers to a particular business process oroperation, nota social gathering such as a conference or trade show.
Events and tasks managed within a workflow will depend on the business’s requirementsand canbe automated or conducted manually. With event management tools, it’s possible tocreatecustomized workflows that automate processes, such as sales discount approvals or purchaseorder requests, while adhering to any required stipulations or conditions. For example, saya purchasing agent creates a purchase order to acquire raw materials. The agent enters thePO information in the ERP, which triggers the system to alert the approval manager, who thenapproves the request. The PO is then automatically released to the vendor and theprocurement system is updated to reflect what’s on order, in real time.
With workflows that automatically outline, schedule and approve tasks within the ERP system,the need for forms and paperwork is eliminated. This reduces manual error and increasesemployee productivity by cutting the time spent on manual review.
Risk Management
In ERP systems, risk management often refers to a feature set within the accounting andfinancial management component. This might include governance, risk and compliance (GRC)capabilities that automate and strengthen financial controls, detect and reduce fraud andensure regulatory compliance. Customized financial workflows, for instance, can be set up toenforce approval processes — with each step recorded and monitored to augment auditingcapabilities.
Risk management can also refer to other features that help a business identify, assess andmitigate different types of risks, including operational and strategic. Ultimately, thesefeatures are designed to safeguard an organization’s assets, reputation and long-termsuccess while enhancing resilience and stability.
Sales Order Management
Sales order management intersects with several core ERP components, including accounting andfinancial management, CRM, inventory management, warehouse management and logisticsmanagement. When integrated, order management features can improve collaboration amongdiscrete business departments. And when real-time data is shared across the organization,sales, operations and finance teams can work together to better meet customer demands.
Order management featuresalso play a key role in streamlining the order-to-cashprocess, meaning the steps between order placement and payment. This includescapturing and fulfilling orders, invoicing and financial reporting and analysis. Automatingthe order-to-cash cycle with an ERP solution can boost cash flow whileenhancing customers’ ordering experiences. Sales order management features also handleothertasks, such as pricing, discounts and tax calculations.
Ecommerce
ERP systems that offer B2B or B2C ecommerce features can generally automatically feed onlineorders into the ERP, as well as various components within the ERP (such as CRM, inventorymanagement and warehouse management). The customer record is automatically updated in theCRM, inventory is updated in real time and warehouse management tools update to prepare theappropriate fulfillment workflow.
An ERP-integrated ecommerce platform therefore simplifies order processing, eliminating theneed for manual data entry, reducing the risk of human error, saving time and getting ordersto customers sooner. Ecommerce features can also clue companies in to customer preferences,shopping behavior, cart abandonment rates and sales trends — metrics that can all beused tomake more informed decisions about how to boost customer engagement.
Marketing Management
Marketing management, or marketing automation, link the company’s marketing effortswith itsoverall business strategy. These tools cover various marketing activities, such as campaigntracking, lead management, marketing segmentation and analytics. A centralized marketingmanagement system within a unified ERP environment amplifies the business’s ability tomeasure campaign performance, allocate resources and identify ways to increase their returnon marketing investment. When integrated with CRM or financial applications, for example,businesses can directly measure the revenue generated by each campaign based on sales datamanaged by the ERP system.
A key function of marketing management is to automatically organize and analyze customerdata, which helps the company detect market trends, target the right demographics and makedecisions that will improve customer engagement and brand loyalty. For example, emailcampaign and social media advertising activities can be tracked and analyzed to determineeffectiveness and highlight potential ways to drive sales.
Advanced Planning and Forecasting
ERP systems usually offer advanced planning and forecasting features — for example, tobetterpredict the materials required to conduct a production run. By analyzing historical data,applying advanced algorithms and running simulations enabled by these features, companiescan make more accurate predictions and plan for demand. This supports the ability to acquireraw materials, manage inventory and adjust production schedules and resource allocation tomatch demand.
Accounting and financial management ERP components might also offer advanced financialforecasting, budgeting and planning capabilities. In this case, the focus ofadvanced planning capabilities shifts from production prep and toward creating more accuratelong- and short-term financial plans that support financial analysis and performance.
Benefits of ERP Software
The benefits of an ERP systemare manifold and can have significant positive impacts on nearly every aspect of a business.With added time savings, streamlined workflows, improved profitability and easy access toexpert knowledge, ERP systems and their individual components work together so companies canthrive. An ERP:
- Saves time: ERP systems automate tasks, consolidate data and providereal-time access to information. Instead of wasting time tracking data acrossspreadsheets or disparate systems, employees can quickly and easily access informationfrom a centralized database. Automated processes, such as invoice generation or payrollmanagement, reduce manual errors and time spent on administrative tasks, freeing upemployees to focus on more strategic or revenue-generating activities.
- Streamlines workflows: ERP systems standardize processes by bringingtogether all business functions in one unified platform. Countless workflows can betailored to a business’s needs, with data pulled in from various parts of theorganization. Further, this level of integration increases collaboration andcommunication across teams, which in turn enhances decision-making, reduces redundanciesand enables employees to work together toward common business goals.
- Improves profitability: ERP systems help boost profitability byproviding greater visibility into not only financial data, but data across the entireorganization. This comprehensive view makes it easier to quickly identify areas of highexpenses and spot inefficiencies to support data-driven decisions that can positivelyimpact the bottom line. For example, access to granular information about productioncosts, sales data, customer trends and inventory enables businesses to make morestrategic pricing, marketing and product development decisions — ultimatelyboostingmargins.
- Frees up expert knowledge: ERP systems free up expert knowledge in twokey ways:
- By automating tasks and consolidating data, ERP software saves experts timespent on tedious administrative tasks so they can spend more time sharingvaluable knowledge and insights with the organization. This free flow ofexpertise can lead to more innovation, collaboration and a better sense ofalignment across the company.
- With BI modules, ERP systems make real-time data accessible to anyone in theorganization. For example, data dashboards that clearly present key metrics helpdemocratize information; what once required business analysts is now automatedand can be made accessible even to line employees. Expert knowledge can be moreeasily shared across departments, informing decisions and supporting businessperformance.
Increase Efficiency and Profitability with NetSuite
NetSuiteEnterprise Resource Planning (ERP) is acomprehensive, modular solution that unifies various business functions in a single platformthat ensures seamless integration and a holistic overview of business operations. Withautomation capabilities and real-time data accessibility, NetSuite ERP supports workforceproductivity and gives employees more time to focus on value-added tasks.
Growing and established businesses alike get access to NetSuite’s core platform, whichincludes accounting, inventory management, order management and tax management capabilities,as well as the wide variety of components mentioned above. Companies can pick and choose themodules that fit their needs, making it easy to scale on the fly. Further, all NetSuitemodules share a common database. This provides leaders with a full view of the business, inreal time, any time.
ERP components are the various modules or subsystems that make up an ERP system. Commoncomponents include accounting and financial management, CRM, HR, SCM, business intelligence,warehouse management and inventory management. Each component is designed to address aspecific business function, but they all work in harmony to create an integrated,comprehensive system. This integration eliminates data silos, improves data accuracy andprovides a real-time view into business operations, supporting decision-making, increasingefficiency and cutting costs.
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ERP System Component FAQs
Which component is at the center of ERP system?
At the foundation of every ERP system is a central database that collects and storesinformation from various departments within the company. The most important component inthat centralized system depends on a company’s business needs. For many, accountingandfinancial management is at the core because a business’s financial health andperformance iscrucial to longevity.
What is ERP in operations management?
ERP, within the context of operations management, refers to enterprise resource planningsoftware. This software is designed to integrate and manage a business’s coreoperationalprocesses, such as manufacturing and logistics. An ERP system typically includes specializedmodules to support production runs, manage inventory and track products throughout thesupply chain.
What’s the difference between ERP and financials?
Financials refer to the finances or financial situation of a business. Financials generallyinclude documents and statements that reflect a company’s performance, such as thebalancesheet, assets and liabilities, and revenue. ERP is a comprehensive software solution thatcombines various business functions, including financials, into a single system. Financialsare generally a crucial aspect of ERP systems.
What are the 5 components of ERP?
Five common components of ERP systems are accounting and financial management, humanresources or human capital management, customer relationship management, businessintelligence and supply chain management. Robust ERP systems may also include morespecialized components, such as inventory management, warehouse management and manufacturingand logistics management, among other features.
What is an ERP system and what are its major components?
An ERP system is a software application that draws on a centralized database to manage andautomate business processes, provide insights and enhance internal controls. The databasecollects inputs from various components, such as accounting and financial management, supplychain management and human resources. In a modular ERP system, the components considered tobe most important are the ones that align most with the business’s needs.
What are the two key components of an ERP system?
The two key “components” of an ERP system are the specialized softwareapplications and thecentralized database. The specialized software applications, also known as ERP components ormodules, are designed to support and integrate various business functions. The centralizeddatabase is a repository that stores all of the data collected within each module andenables real-time access to organization-wide information.
