Understanding Corporate IT: What is an ERP?

When you enter the corporate world, you’ll hear about it everywhere, the “Enterprise Resource Planning”. An ERP is the unicorn of corporate IT, and sometimes its trojan horse. Corporate IT is much less fun than product IT, but it has its unique features that bridge developpers work closer to business practices. In this article, we’ll look at what modules an ERP is usually composed of, how does it integrate in the system landscape, and to which business processes it relates to.

Generalities

Let’s start by describing on a very high level what an ERP is. It’s a software, proposed as an on premise solution, as a cloud solution, or hybrid. Major players are SAP and Oracle. Their offer is composed of different modules, some optional, that are supported by a database, API, and file based integrations. It’s most common purpose is to generate the accounting of the company, handle invoice processing (inbound and outbound), manage inventory. Though today we see the rapid emergence of procure to pay solution, procurement functionalities are also available in ERPs.

Though every ERP is different, a common view of ERP functionalities is to refer to them by modules. Let’s have a look at the most classic modules and their function:

Module1: GL (General Ledger)

This module is the core of any ERP. It is a ledger of accounts which will serve as a base for the company financial reporting. An account is basically a journal of transactions which fits that account description. Payment for salaries are booked in a different account than payment for laptops for example. Every spend or revenue is categorized so it ends up in the right journal. This is needed for reporting purposes (regulatory) but also for Financial analysis internally. In addition to the main ledger, sub ledgers can be configured to add granualrity to the spend/revenue reporting.

The GL module generally receives most of its data from AR and AP modules (see later in this article), though some entries can be posted directly to it. It also perform various calculations, but its main function is to serve as a book of accounts.

Nearly all modules interact with it in some way, as most interactions handled by modules have an accounting impact which needs to be reflected in your books, ie in GL module.

Module 2: AR (Accounts Receivable)

Accounts receivable is the module that allows you to book incoming transactions, ie revenues, but also perform customer refunds. It is generally integrating with your CRM or any frontend handling your sales. Once incoming transactions are received, they are booked in the right Revenue account in your GL. It can generate invoices to your customers (if your CRM doesn’t handle it) as well as credit notes. AR handles the lifecycle of your revenue transactions.

Taxes on receivable are calculated by the ERP based on tax codes.

Module 3: AP (Accounts Payable)

Account Payable is the module that allows you to book outgoing transactions, ie expenses. It handles mostly invoices and credit notes. It is receiving its input from your AP team who either manually put invoices in the system, or from a scanning partner who automatically scan with/without OCR and push to the AP module. In newer cases it can receive external invoices from a P2P system. Its output can be either an accounting entry in the GL module, or an approved and validated invoice to your payment system.

Taxes on payable are calculated by the ERP based on tax codes.

Module 4: Inventory

This module handles your inventory. It holds data about your items (accounting details, logistic details, tax details, item class…), about your warehouses, and about your on-hands balance. Basically it will tell you that item X is stored in warehouse Y, you have 15 of it, and it is stored on alley 1 bin 23. Inventory module can handle receiving and inspections of deliveries, but also move orders, ie moving items from one location to another. It could be for example from your main warehouse to a sub warehouse or even a store sometimes.

Some solutions are decoupling the ERP and the SCM (Supply Chain Management). In these cases the inventory is usually managed in the SCM and interface with the ERP.

Module 5: PA (Project Accounting)

PA handles all accounting project related. It holds budgets and track your consumption based on invoices/purchase orders/accruals tagged with project codes.

Module 6: FA (Fixed Assets)

This module handles items which are not meant to be sold or might be sold only on long term. Because you keep these items at hand long time, you need to calculate their depreciation. This is exactly what this module do, tracking these assets and calculating their depreciation.

Module 7: Purchase

This module is used to create purchase orders. It usually takes Inventory items for each purchase order line. These are sent to the supplier to make the order, once goods are sent, then delivered your personnel enters a good receipt, and once invoice comes, it is matched to this purchase order for control and compliance.

Module 8: Payment

Not often part of ERP, the payment module is used to generate payment batches, and receive payment receipts. Some can integrate directly with your bank.

Module 9: Suppliers portal

A newer addition to traditional ERP is the supplier portal. It is basically a more public interface to which each and every of your supplier can login using their own account, and see the orders and invoices that are registered for his account. Some have the ability to convert a purchase order to an invoice in a simple click from that interface. It is pushed forward as a way to transfer the invoice handling burden to your suppliers.

Module 10: Sourcing

This modules usually allows you to do most type of requests (RFI, RFQ, RFP, RFx…). Some also allow to run e-auctions with invited suppliers. In the most advanced sourcing solution you can award a contract automatically and create Purchase Orders from this contract very quickly.

Module 11: Expenses

This module handles employees expenses such as travel, allowances, etc…

Module 12: BI (Business Intelligence)

An ERP contains a lot of data representing your revenues, your spend, your cycles (purchase orders, invoices,etc…), so having a direct way to tap into the ERP database and build dashboard is becoming an essential solution. Among the most usually tracked data you can find spend, PO approval cycle time, invoice approval cycle time, invoice to payment cycle time, contract compliance, PO compliance, invoice channel, etc…

Module 13: Manufacturing

For industry which are producing products, the manufacturing module allows a more granular traceability of your products, itemization and serialization, and tracking of your consumption of raw material or parts.

Module 14: Integration layer

Finally, ERPs are highly integrated platforms, internally as much as externally. Though this is not a module as such, most ERP have an integration layer more or less customizable. They offer REST or SOAP APIs, as well as file based transfer.

Conclusion

There is a lot to say about an ERP, and especially the details of the processes it handle, whether internal processes or business processes. In this article we reviewed the different components an ERP is usually made of and what business area they cover. From accounting to resource management, its extent can be very wide depending on the choices of your company.

I hope this gives you a good introduction to a core system of corporate IT.

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