An Exploration of Enterprise Resource Planning Systems from Inception to Current Day
Enterprise Resource Planning (ERP) systems are comprehensive business software solutions that integrate all of the processes essential to running your business, including finance and accounting, inventory and supply chain management, sales, order management, customer relationship management, human resources, and more. As you can imagine, these systems are quite complex, helping companies run more efficiently and effectively. An ERP system’s most important feature is its shared database, which allows different business units to perform multiple functions using a common set of data. For example, staff members in both accounting and sales departments can depend on the same information for their separate, specific needs.
This is, of course, a broad view of ERP. But as you can no doubt tell, it’s vital to the efficiency and ultimate success of a company’s operations. The following is a rundown of the history of ERP systems, a more detailed breakdown of what an ERP does, and the state of the ERP industry today.
A Not So Brief History of the Evolution of ERP Systems
Knowing how ERP systems evolved over time will give you a better idea of their growing importance in the business landscape today. Let’s take a look at what ERP systems looked like in the early days and how they have evolved.
In the 1960s Manufacturing Started Creating Material Requirements Planning Software (MRP)
The foundation of what would evolve into ERP was developed in the 1960s in the form of Material Requirements Planning (MRP) software. MRP was considered a significant innovation at the time considering the fact that before MRP was introduced, business processes were still limited to pen and paper organizational systems. MRP was actually developed as a response to the Toyota Manufacturing Program by Joseph Orlicky. In 1964, Black & Decker became the first company to implement MRP.
What Did Early MRP Software Look Like?
Early MRP software was relatively simple and somewhat limited compared to the capabilities of ERP software today. The earliest MRP software solutions included inventory control, basic scheduling, and bill of material processing. Other aspects of business processes required their own system. Initial MRP systems were quite large and expensive. They also required a technical staff to run and maintain the mainframe computer on which the MRP software ran.
Core Functions of MRP Software
At its essence, MRP is an inventory management system software solution that helps production managers schedule and place orders for items of dependent demand, such as component parts, sub-assemblies, and raw materials.
More specifically, MRP software allowed businesses to input and track data that included the items being created, how many items are required at a time, the quantities of that item needed to meet demand, the shelf life of the stored materials, the inventory status records, the bills of materials (including the details regarding what is required to make each product, such as materials, components, and sub-assemblies), and planning data (which included quality and testing standards, routing, scrap percentages, labor and machine standards, and more).
MRP software allowed for two outputs — recommended production schedules and recommended purchasing schedules. MRP software was also capable of messages and reports, including purchase orders and reschedule notices.
Key Vendors in the Early MRP Era
IBM was the primary vendor of MRP solutions. Most MRP systems were based on early IBM database programs known as Database Organization and Maintenance Processor (DBOMP) or Bill of Material Processor (BOMP) programs. Eventually, IBM would introduce several other MRP programs, including PICS, MAPICS (Manufacturing, Accounting, and Production Information Control System), and COPICS (Communications Oriented Production Information Control System).
The 1970s Saw MRP Systems Develop so Much That the Term MRP II Was Born
The effectiveness of MRP systems became extremely obvious, to the point where it was implemented by more than 700 companies by 1975. Orlicky even wrote a book that same year that was not-so-creatively titled Material Requirements Planning: The New Way of Life in Production and Inventory Management. Within six years, the use of MRP solutions expanded to an incredible 8,000 companies. In 1983, MRP systems would evolve to the next step under the development of Oliver Wright. His new MRP solution was referred to as the “MRP II.”
The Term MRP Became Known More Commonly as Manufacturing Resource Planning
The MRP II, the acronym of which was changed from Material Requirements Planning to Manufacturing Resource Planning to better represent the software’s new capabilities and focus, became so popular that it accounted for one-third of the software sold to American industry (estimated to be $1.2 billion worth of software).
Key Changes Within MRP Systems
The MRP II wasn’t designed to replace the MRP, nor was it meant to be an improvement on it. Instead, it was an expansion of the original MRP. The ability of the original MRP system to provide valid production schedules was so successful that it became obvious that other resources could also be better planned and controlled using valid schedules. The MRP II expanded the scope of production resource planning to other business processes, including accounting, human relations, purchasing, marketing, and finance.
The 1980s Continue to See Key Business Software Advancements
The quick adoption and success of MRP software throughout the late 1970s led to the development of many key business software advancements throughout the 1980s. It was during this time that businesses saw the obvious value in software technology as being pivotal to their growth and expansion. Not only were there advancements in contact management software, but the use of business software expanded beyond the manufacturing industries.
Significant Advancement of Contact Management Software
The roots of customer relations management (CRM) software was established in the 1980s when Robert and Kate Kestnbaum developed database marketing software that used statistical modeling to collect and analyze customer information. This information could then be used to customize communications with other prospects.
The Concept of the Digital Rolodex
Prior to the 1980s, customer information was kept on physical Rolodexes. While such a contact management method was suitable for smaller businesses, keeping customer information organized and accessible with a physical Rolodex was incredibly inefficient for larger businesses even at that time. Digital Rolodexes allowed that customer information to be stored digitally, thereby making it easier to add new contact information and to search for specific contacts much faster than it would take to flip through a physical Rolodex. The digital Rolodex, as contact management software tools were first referred to, became a game changer.
1986 ACT! Introduces Contact Management Software
In 1986, Pat Sullivan and Mike Muhney founded Conductor Software and developed the contact management software ACT! (which first stood for Active Control Technology but was then changed to Automated Contact Tracking before they finally just settled on using the acronym). ACT! was essentially the first digital Rolodex and was used by businesses to efficiently store and organize their customer contact information. The software was regularly updated throughout the years and although the original company was bought out and sold several times, the digital Rolodex is still used and is currently in its 20th version (although it was recently rebranded as Act! by its most current owner).
Business Management Software Moves Beyond Manufacturing Industries
Although MRP was specifically designed with manufacturing industries in mind, other industries took note of how much more efficient they became due to the use of MRP. The use of the newly developed contact management software also proved beneficial to businesses outside the manufacturing industry for obvious reasons–anyone with customer contact information could benefit from the efficiency and ease-of-use that centralized resource-related software, such as ACT!, could provide.
The 1990s Saw Dramatic Advancements in Business Management Software
There was a real boom in the development of business management software and its adoption throughout the 1990s. This isn’t too surprising considering this was the time during which personal computers became more and more common and the Internet, which although it had been in existence for the better part of two decades, first took the form of the world wide web in 1990 and quickly penetrated the mainstream.
The Closest Thing to a True CRM Platform is Coming to Fruition
Although you could argue that the roots of CRM were established in the 80s, it wasn’t until the 1990s when the real foundation of what would become CRM was established. This occurred as contact management software evolved into sales force automation (SFA).
A Focus on Sales Force Automation (SFA)
Developers like Brock Control Systems combined the features of database marketing and not only automated them, but also combined them with contact management solutions. This allowed businesses to automate certain business and sales tasks, including customer interaction tracking and inventory control.
1993 Tom Siebel Leaves Oracle & Starts Siebel Systems Which Became the Dominant SFA Provider
In the 1980s and early 1990s, Oracle had become one of the major software providers in the world. From 1984 to 1990, Tom Siebel served as an executive of Oracle. He then served as the CEO of Gain Technology until it merged with Sybase at the end of 1992. From there, he founded Siebel Systems in 1993.
During his stint at Oracle, Siebel had pitched the idea of packaging and selling their internal sales application as a product. The idea was dismissed and Siebel would go on to provide SFA solutions with his own company, Siebel Systems, instead. Siebel Systems saw incredible success with their SFA solutions even as more and more developers entered the CRM market, including Oracle. By 2002, Siebel Systems boasted a 45 percent CRM market share.
Acronym Wars Regarding SFA and Contact Management
SFA and contact management solutions developed to the point where they closely resembled what we now know as modern CRM software by the mid-90s. There was competition to these solutions in the form of Enterprise Customer Management (ECM) and Customer Information System (CIS) software, which began to flood the market.
All of these software solutions were similar to one another–it was just that they were all known by different acronyms. At the end of 1995, CRM was essentially named the winner due in part because of Tom Siebel and the success of his software (although some also attribute the final name of the CRM industry to Gartner Inc., a technology research company).
In 1999 Salesforce Becomes the First SaaS CRM Vendor
While many CRM vendors were being consolidated as mergers and acquisitions ran rampant throughout the CRM industry, Salesforce emerged at the end of the decade with the first Software as a Service (SaaS) CRM solution. SaaS is a distribution model in which the vendor provides customers access to software via the Internet.
At first, Salesforce predominantly targeted smaller businesses. Its SaaS service was mostly ignored by larger companies. However, once Salesforce was taken over by Mark Benioff, the company saw massive success, to the point where they would even rival Siebel Systems and other giants of the CRM industry.
Gartner Inc. Coins the Term ERP in 1990s
Gartner Inc. is a global research and advisory firm established in 1979 as a small private company that grew massively throughout the next few decades as it acquired numerous market research firms. They were the ones to coin the term ERP as companies like SAP, Oracle, and Baan began providing a broader suite of services, including emerging applications.
The Term ERP Reflected the Changing Nature of How Industries Relied on These Central Controlling Software Systems
As business demand for CRM solutions grew, these capabilities also found their way into other non-CRM software packages as well. Adding customer relationship management functions to the accounting and production planning capabilities of MRP and MRPII systems resulted in even more comprehensive, truly enterprise-wide platforms. As companies like SAP, Oracle, and JD Edwards began offering such solutions, the term ERP became more popular.
The 21st Century Has Seen Unprecedented Advancements in Business Software
Using the business software and the Internet in the 1990s gave companies an advantage over their competition. Not using the Internet and business software in the 2000s resulted in a serious disadvantage. The use of business software quickly became standard, which means that software updates and advancements were released at a rapid pace, giving companies even more control over their data and business processes than ever before.
ERP in a Post Dot Com Bubble World
The Internet exploded between 1995 and 2000, a period which is now referred to as the dot-com bubble. Usage and adoption of the Internet were massive with Internet-based businesses popping up everywhere. Its rapid growth was too fast and excessive, leading the bubble to burst in 2000, and causing once huge companies to fail. The CRM industry was no exception to this crash with companies like Oracle reporting losses around 25 percent. It was the eCRM vendors that felt the brunt of the crash.
The Rush for More and More Core Functions to Be Covered
Paul Greenberg, who is currently the President of the consulting firm, The 56 Group, published a book in the mid-2000s titled CRM at the Speed of Light. In his book, he explained the need for CRM systems to become more comprehensive so that it could manage all business relationships. This line of thought was quickly adopted throughout the entire industry. Interoperability with older software applications became more sought after as a result.
Two other big events occurred in the CRM world in the mid-2000s. Microsoft entered the industry by releasing Dynamics CRM, focusing on sales, marketing, and service sectors, and Oracle began acquiring many different enterprise application vendors, including Siebel.
The Rise of ERP Cloud Based Solutions
Although the use of the cloud is commonplace these days, it took a few years for it to gain traction as many businesses were hesitant to adopt due to perceived security issues. However, this would quickly change as security issues were addressed. The first cloud-based CRM was introduced by Salesforce on Force.com.
Cloud-based ERP solutions began to integrate more features, including social CRM and customer service. It wasn’t long before they caught on due to their affordability, ease-of-use, flexibility, improved security, and their ability to integrate with new technologies, applications, servers, and systems. Cloud-based ERP solutions could also be more scalable than traditional on-premises ERP systems. This meant that businesses could streamline their business processes more effectively and efficiently.
The Growing Importance of Business Intelligence
Business intelligence has taken on a bigger and more comprehensive role in how companies operate over the years as it has become more obvious how important data is to the operation and strategic planning of a business. Business intelligence includes everything from customer profiling and market research to statistical analysis and inventory control, to name a few of its facets.
The ability to collect and analyze such data and actually put it to use creating business strategies has become much easier as business intelligence software has evolved. As a result, the importance of business intelligence has grown–companies that do not leverage business intelligence in their decision-making processes end up taking larger risks and often make inefficient use of their resources. Two particularly helpful features that most business intelligence applications come with include dashboards and report generation.
The creation of dashboards has allowed companies to view vital business intelligence data at a glance. Dashboard tools are displayed on a single screen and provide the ability to customize analytics metrics, Key Performance Indicators (KPI), and other important data in real time.
New business intelligence features also include the ability to automate report generation, meaning that reports concerning key analytics and metrics will be generated when new data arrives, making it easier for companies to make adjustments to their business strategies on the fly.
What Exactly is Enterprise Resource Planning Software (ERP)?
ERP systems are software packages used to manage the day-to-day activities of a business, including finance and accounting, order and inventory management, project management, manufacturing, and more. Essentially, ERP acts as a central nervous system of sorts for businesses that implement it as it allows them to control and monitor all of their business activities from one central source.
ERP is Best Understood by the Various Modules a System May Contain
The modules are basically the components of the central system. Each module focuses on a single business process, such as marketing or accounting. ERP systems consist of multiple software modules that can be individually purchased and implemented based on the specific needs of the business using them.
While there are many different modules offered by different vendors, some of the more common modules include finance and accounting, product planning, marketing, inventory control, material purchasing, HR, and customer management. These days, ERP platforms provide modules that essentially have the same capabilities that the old MRP, MRP II, and CRM software solutions provided.
The Original Module Is Material Requirements Planning (MRP)
MRP was the original module. It focused on the tasks involving the calculation of materials and components needed to manufacture a product by allowing businesses to take inventory, identify material needs, and scheduling production or purchases.
MRP Quickly Became Manufacturing Resource Planning (MRP II )
MRP II was designed as an extension and evolution of MRP. It essentially allowed businesses to integrate additional data into the original MRP software, such as employee and financial data. MRP II was designed to centralize, integrate, and process data that would help businesses with their inventory management, scheduling, and design engineering.
The Next Battle Ground Was CRM or Customer Relationship Management
The success of MRP and MRP II software led to the development of CRM software used by businesses outside the manufacturing industry. CRM focused more on sales, marketing, and services as opposed to the MRP and MRP II’s focus on manufacturing and inventory management.
As These Systems Evolved and Became Known as ERP, More & More Modules Have Emerged
The idea of an ERP system is that it allows a business to have control over all of their business processes from a centralized system. Consequently, more and more modules have been developed and made available for ERP systems. The following are just a few of the additional modules that are available for ERP platforms:
An accounting system module provides complete control and integration of a company’s financial information, allowing executives to make more strategic business decisions. Through the use of an accounting system module, management can track financial accounting data throughout different facets of their business. This includes invoices awaiting payment, the general ledger, accounts payable, asset accounting, and the ability to establish financial parameters. The use of an accounting system module can help to reduce any financial inefficiencies and help provide better control over accounting processes, thereby enhancing productivity and reducing accounting-related errors.
Procurement Systems or SRM (Supplier Relationship Management)
SRM modules help businesses to optimize their procurement process by allowing them to procure materials and services through their ERP. An SRM will allow you to work more effectively with your suppliers, helping to reduce the time span and the cost of your procurement cycle. Many SRM modules offer various functionalities, such as cost management, self-service procurement, procurement activity report creation, contract management, and more.
Production and Manufacturing PLM (Product Lifecycle Management)
The use of a PLM module will allow you to perform a complete audit trail of a product’s life cycle, from its design all the way through its manufacture to the end of its life. To do this, PLM allows businesses to communicate with both suppliers and customers through every stage of the life cycle. This can help reduce development times and costs, reduce the length of time between design and delivery, automate process tracking and approvals, and more.
Typical PLM modules can link to your ERP and manufacturing-related information, allowing you to monitor and access design drawings, quotes, inventory, project manager, process cost information, number of rejects, profit/loss reports, customer calls, and more.
Distribution SCM (Supply Chain Management)
The distribution SCM module is important because it covers areas of business forecasting, demand planning, and production planning. The module allows you to control both the product, finance, and information flow across organizations. The use of a distribution SCM module will allow you to analyze supply and demand, forecast business, handle the constraints and capability of cost-based planning, analyze and plan based on the management of order based capacity, and more.
Human Resources HRM (Human Resource Management)
HRM modules help streamline human resources management throughout the company by maintaining a database of employee information that includes contact information, performance evaluations, salary information, and attendance. Besides personnel records, HRM modules also create payroll reports, produce paychecks, and pursue talent management. Cost analysis and efficiency metrics are common features typically available in HRM modules as well.
Corporate Performance and Governance
A Corporate Performance Management (CPM) module is a type of business intelligence that tracks certain organizational KPIs, such as revenue, overhead, ROI (Return on Investment), and operational costs. Most CPM modules provide functions that include forecasting, budgeting, and planning, all of which can usually be displayed on graphical scorecards or dashboards.
Enterprise Asset Management
EAM modules manage the lifecycle of physical assets. For example, you can schedule preventative maintenance, work orders, labor management, financials, compliance, asset registry, or asset procurement using an EAM module. Such a module is typically used by businesses that depend on expensive physical assets; for example, businesses within the manufacturing industry.
Considering how important business intelligence has become over the past few decades, it’s no surprise that business intelligence modules are commonly integrated into ERP systems. Business intelligence modules integrated into ERP systems can provide you with dynamic reporting and allow you to see important KPIs when you want to see them so that you can make more effective business decisions.
Custom Modules Built to Individual Business Specifics
Although there are many different types of modules available, many ERP vendors also offer extensible frameworks which allow custom modules to be developed to your company’s specifications. Industries vary greatly from one another, which is why one company may have completely different needs than another. The flexibility of ERP means you can work with a provider to build custom modules that suit your needs.
The Current State of the ERP Marketplace
Implementation of cloud-based ERP solutions has been at an all-time high over the past few years, and this is a trend that will continue as cloud adoption continues to grow. The ERP market as a whole is expected to exceed $49 billion by 2020. As a result of this growth, not only are there more niche players popping up, but the larger vendors continue to acquire smaller ERP solution providers at a rapid pace. This has resulted in significant consolidation throughout the marketplace and we expect to see further consolidation over the next few years.
The ERP Industry Has Seen Significant Consolidation
Consolidation is something that is happening at a rapid pace throughout the tech industry in general. The lines between hardware, software, and Internet, are blurring to the point where consolidation is occurring across industries. While larger hardware companies will continue to buy smaller software companies (and other mergers and acquisitions will continue to occur within respective industries), recent acquisitions, such as Comcast’s purchase of NBCUniversal, shows that consolidation is occurring across industry lines.
It’s worth noting that in other, more established industries, there are three or four companies that control the majority of the market. Although the ERP industry does have its clearcut leaders, they do not control a significant percentage of the market share — at least, not yet. However, these leaders are still large enough to acquire many of the smaller ERP solution providers out there. Both smaller niche cloud services and legacy vendors are being bought out by larger firms. In most cases, these larger companies are acquiring smaller services in order to gobble up their customer base and not necessarily for access to their technology. As a result, some of the tech being purchased will just be phased out.
There Are 4 Clear Cut Marketplace Leaders
There are dozens of smaller ERP services within the industry, but there is an obvious top tier of providers. This top tier of ERP vendors are the only ones with the capabilities to provide ERP solutions to large enterprises. The following are the four main ERP marketplace leaders:
SAP is a German multinational software corporation with offices in 180 different countries. The company was formed by five engineers from IBM in 1972. Their first software program provided the ability to use centralized data storage. In 2016, SAP had a modest 7 percent market share. Only a year later, they boasted a 20.3 percent market share. This significant leap shows how rampant the consolidation of ERP providers throughout the ERP industry is.
SAP has been focusing on cloud-based products since 2012 and has made several multi-billion dollar acquisitions since then. Their most expensive investment was buying Concur Technologies in 2014 for $8.3 billion. SAP’s most recent purchases include Gigya, an identity management service, and CallidusCloud, the number one vendor for Sales Performance Management. SAP is focused on extending its reach in the cloud by continuing to build its user base after acquiring Concur, Ariba, SuccessFactors, Hybris, and Fieldglass.
Oracle was founded in 1977 under the name Software Development Laboratories. They would rebrand as Oracle in 1982 to align with their Oracle Database software. They have grown massively over the past few decades, becoming the third largest software maker by revenue in the world, behind only Microsoft and Alphabet. They are behind only SAP in terms of ERP market share with 13.9 percent. Using their Autonomous Database, Oracle is striving to build the data center of the future having recently announced numerous products and initiatives for its Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings.
Arguably their largest acquisition came in 2006 when they purchased Siebel Systems; however, they have made a number of acquisitions over the past few years that has firmly established their position as a top-tier ERP provider. In 2005, Oracle expanded their ERP platforms by acquiring PeopleSoft, which included the JD Edwards EnterpriseOne and World applications. In 2016, they purchased NetSuite Inc. In 2017, they purchased Moat (at the time the fastest growing digital measurement cloud company in the world). In 2018, they acquired Aconex, a cloud ERP vendor for construction vertical, for $1.2 billion.
Microsoft is arguably the most well-known technology company in the world and it should come as no surprise that they have staked their claim as one of the top ERP vendors as well. Founded by Bill Gates and Paul Allen in 1975, they are now the biggest software maker in the world as of 2016 and Fortune 500 ranked them 30th this year in their list of top American corporations by total revenue.
Microsoft acquired several companies over the years to build out their ERP product offerings for different customer sizes and segments. Acquisitions include Navision, Axapta, Great Plains, and Solomon. Respectively, these applications were initially rebranded to Dynamics NAV, Dynamics AX, Dynamics GP, and Dynamics SL.
Microsoft’s flagship ERP solution–Dynamics 365–has a market share of 9.4 percent. An major evolution of the Dynamics AX (Axapta) platform, Microsoft rebranded their primary ERP product as Dynamics 365 in 2016. They have two versions available, the business edition being targeted towards companies with fewer than 250 employees and an enterprise edition for companies with more than 250 employees. Since the rebrand of their ERP service, Dynamics 365 revenues increased by 78 percent within the year. Microsoft would also acquire LinkedIn in 2016 for $26 billion, essentially for access to its 500 million users.
Infor hasn’t been around nearly as long as the other leaders in the ERP industry. In fact, they weren’t founded until 2002, when they were called Agilsys. At first, they focused on enterprise software, but they quickly grew as they made one acquisition after another, such as the purchase of MAPICS in 2005 for $347 million and GEAC ERP in 2006 for $1 billion. In 2011, they acquired rival ERP provider Lawson Software for $2 billion.
Infor continued its rapid rise to the top of the ERP industry over the next decade, quickly embracing the cloud as it did so. In 2016, Infor received a $2 billion investment from Koch Industries, allowing them to acquire the cloud-based analytics application developer Birst in 2017. Soon, they would boast roughly 9,000 cloud customers along with 71 million users.
The Vast Majority of the ERP Marketplace is Made Up of Highly Custom Vendors
Although there is a top tier of ERP vendors that include some of the biggest software makers in the world, these are not your only options. In fact, despite the rapid consolidation occurring throughout the industry, the majority of the ERP marketplace still consists of highly custom vendors. You may not need the standard ERP package and the classic modules that are available and commonly used. Instead, you may need a more customized solution to meet your business needs. There are plenty of ERP providers out there that focus on providing more tailored and customized solutions.
In the end, the most important factor in choosing an ERP vendor is whether they can provide an ERP solution to match your company’s specific needs.