How Do ERP Systems Work?

  

you have legacy systems that organizations are starting with. And these legacy systems might be anything from an old ERP system. It could be a new system that was deployed 10 or 20 years ago, maybe even longer.

 

Oftentimes, organizations are still using mainframes, believe it or not. If you don't know what a mainframe is, it's something that was used mainly in the 60s and 70s. And they're the big servers, green screens, transaction codes, a lot of stuff I don't need to get into here.

 

But it's a very old, outdated type of technology, but a lot of organizations are still using them. And the number one legacy system in the world, I don't have any data to back this, but it's based on just qualitative experience. But the number one legacy system in the world is Microsoft Excel.

 

So spreadsheets, in other words, organizations that are running their business on spreadsheets, they've got people with a lot of tribal knowledge, and they're trying to document that tribal knowledge on their local machines in Microsoft Excel. So this is where organizations are starting from is their legacy systems. And that's the first thing to understand is what is it we've got today? And then what is it we're going to move toward in the future? And that's what I'll get to next.

 

Now let's shift gears and talk about what ERP systems really are. And the first thing I want to talk about are modules. When you think about an ERP system, which is what we're moving to here, moving from legacy over here to ERP systems, we're going to have a number of modules.

 

And modules are essentially a functional area or a specific business process that can be handled by the ERP system. But it's not just one big massive system, it's a set of modules, almost like a puzzle, you're putting together pieces of a puzzle, and each module handles their own part of the business. So for example, a lot of ERP systems might have a finance module.

 

So this would be more the the reporting and the financial budgeting, things like that. You might have an accounting module, for example, that's a very common one. Another common one would be inventory management.

 

So this is tracking all of the raw materials and goods and materials you might need to run your run your business. Organizations also oftentimes have supply chain management, technical or supply chain management modules, I should say. You might also have CRM, which is customer relationship management.

 

That's what your sales team would use to track their pipeline and potential customers. You might have your human capital management, which is your HR systems. This is how you onboard people, you track their training, their benefits, payroll, all that good stuff.

 

So these are just a few examples. I won't go into all of them. Every ERP system has its own unique mix of modules.

 

But in general, they have dozens, if not more modules that handle different parts of your business. And some of these modules, by the way, especially supply chain management might actually have sub modules within it. So for example, supply chain management might have logistics as a separate module, you might have procurement.

 

For example, you might have logistics, or I already said logistics, you might have transportation management. So those are just a few examples of sub modules. And that's true for all of these finance might have AR, or I'm sorry, accounting might have AR and AP finance might have budgeting, reporting, etc.

 

So you get the idea here, the modules are the ways that ERP systems are built to handle specific functions. And in the past, or in some cases, there are systems out there that only focus on one or more of these modules. But ERP systems, one of the benefits of ERP systems is that they can do all these things within one single system, but still broken out into individual modules.

 

And the key to understanding how these modules all tie together is end to end business processes. So you're going to have end to end processes that start with the individual transactions within each of these modules. But ultimately, you need to tie it all together and provide those end to end processes throughout the entire organization, which is part of the value that ERP systems provide.

 

So these are the building blocks for an ERP system. How do we start to build it? How do we start to deploy it? Well, the first thing we do, or one of the first things we do is we configure each of these modules. They're not just out of the box working a certain way, there's certain decisions you need to make to really configure and personalize the software to fit your needs.

 

And you're going to do this module by module. Typically, you're going to start off at the foundational building block side of things, building out the requirements and the configuration that are needed to get the software to work the way you need it to, to fit the needs of the business. Now, some ERP vendors have a certain amount of best practices or pre-configured business processes.

 

So for certain industries or certain functions, ERP vendors sometimes will have sort of predefined ways of configuring the software for certain instances or certain industries. So that's one way you can sort of speed up this configuration process. But it doesn't change the fact that you have to define what your business needs are, define what your business requirements are, and then configure the software and set it up the way you need to going forward.

 

Now, if for some reason you find that the configuration for any one of these modules is not enough, it doesn't give you the option you need to run your business the way you want to, then your next option is going to be customization. Customization is a little bit different because we're not just checking boxes and clicking buttons to get the software configured a certain way. Customization entails going into the software and actually changing the source code.

 

It's a risky proposition, creates a lot more cost and risk than you might want. But sometimes it's necessary if you can't get what you need out of the basic configuration. The other option is if you find that any one of these modules don't give you what you need within the core ERP system, you might go out there and find another third party technology to bolt onto or integrate to your ERP system.

 

So a good example would be supply chain management. Supply chain management oftentimes is such a complex area that some ERP systems can't do supply chain management well. You also see it fairly commonly with CRM as well.

 

There's a lot of best of breed providers out there like Salesforce is the biggest one, Salesforce CRM, which provides really robust, deep CRM capabilities, but it's a standalone system. So you lose the benefit of having a single set of modules that are all tied together. You can still do it, but it's just a different way of approaching any deficiencies that the ERP system might have within these modules.

 

So as we are configuring the software using either some of the pre configurations or configuration we do on our own, we now need to figure out how to integrate the system. The system isn't just integrated out of the box, it provides the tools to integrate, but each of these modules are still somewhat of a standalone system that need to be integrated. So we need to make sure that we're tying together data flows and process flows across these different modules.

 

For example, if we buy some inventory, we need that data, the fact that we just bought some inventory, we need it to tie back to finance and accounting. And that data needs to flow back and forth. Same as supply chain management.

 

We need to make sure that we're buying inventory and we understand the impacts on supply chain management. And of course, it all starts with your with your sales and your customers. So as customers are placing orders that should affect and influence how we manage inventory management, and that data and those process flows need to tie together through integration between modules.

 

Now, if you have a third party standalone system that you're going to bolt on, let's just call it third party system down here. Because I'm creative like that. So third party system, we're gonna do the same thing, we're gonna tie that third party system back to the core ERP system.

 

This is a little bit easier to integrate generally the modules within an ERP system. But if we have to, we can pull in a third party system that's unaffiliated with this ERP system, and tie it in through integration tools. Now, we have to be careful though, because every time we do this, we're diluting the value of a single ERP system, a single platform that we can use might be necessary, maybe you're selective about it.

 

But you don't want to get overly excited about doing too much of this, because then you start to wonder why do you even have a core ERP system if you're going to bolt on a bunch of different systems on top of that. So you can do it, but you just want to make sure you understand some of those trade offs. Now the next thing we do once we've configured the modules, we've integrated the modules.

 

Now we've got to test the processes and the data flows between the different modules. So again, it doesn't just magically integrate, it doesn't just magically work. Now we need to make sure that all the decisions we made in this complex set of modules, we need to make sure that everything's flowing the way it should, data isn't getting corrupt or lost along the way, make sure the processes and the transactions are working the way they need to to support our business.

 

And all of that is done by tying this all together after we've done the integration through testing. And typically, you'll do different types of testing, which I've talked about in different videos on my YouTube channel, so I encourage you to check that out. But I have a whole video that talks about the testing process and the different phases of it and how you do that.

 

And you can check that out in the link here above. But generally, what you want to do is make sure that you're testing across these modules to make sure the processes work, the data works, and ultimately that people are validating within your organization, the people within your organization are validating that the system works the way it was intended to be built. So once we've done a few iterations of that testing process, now we've got to make sure that we get all this data over here, we need to move it all over to the new ERP system.

 

So over the years, we've accumulated and presumably hoarded a bunch of data. We've got our old ERP systems that have been tracking data for decades, or however long you've had the system. Maybe your mainframes have been around for even longer.

 

You've been using Excel spreadsheets all over the place, you've got different employees that are tracking different sets of data. So we need to make sure that we figure out how we're going to consolidate all this data, capture it all, clean it, and then ultimately map this data to the new technology. And when I say map, that's a little bit different than migration.

 

So first is to map the data. So data fields over here might have different names than data fields over here. For example, in our old ERP system, maybe a work order was actually called a service order.

 

But in the new ERP system, it's called work order. So we need to make sure that we map those data fields to the right place from the old system to the new system. And that's just one example.

 

There's tons of different examples of ways we need to map data from old system to new. And it's oftentimes a messy process because new technology, new capabilities make it harder to track or to trace and map the data the way it was back 10, 20, 30 years ago, to the way it is today. So it's not a perfect process, but it is something we need to do.

 

And not only do we need to map the data, but we also need to make sure that this data is accurate. Over years and years of using these old systems, people make mistakes, or they forget to enter things into the system, and this data becomes inaccurate. So we need to go back and clean up this data.

 

And then once we've done that, then we can migrate all that data over here. And then we can complete the testing process with data in the new system. And then ultimately, we can go live with that data.

 

Now, organizations typically don't bring all of their data over, they tend to be forced into some trade offs and prioritization decisions around what data they actually need to bring over versus what they can leave behind. So that data migration process is very important. And it's actually an area that's oftentimes overlooked or underestimated in a digital transformation or ERP implementation.