What is ERP? A plain answer for factory owners

What ERP stands for, and what it really means

ERP stands for enterprise resource planning. The name is older than most of the software sold under it, and it is not very descriptive. A more useful definition for a plant owner is this: an ERP is the system in which every department records its work against the same order, the same item, the same lot and the same customer, so that nobody has to copy information from one place to another.

Most factories already have the information an ERP holds. It lives in the gate register, the store's inward book, the production supervisor's diary, the quality inspector's sheets, the dispatch file, Tally and a dozen Excel files on the accountant's computer. Each of these is correct for the person who keeps it. The trouble starts when two of them must agree: when stock in the store book does not match stock in Tally, when the quantity dispatched does not match the quantity ordered, or when a customer complaint has to be traced back to the lot it came from.

An ERP does not add work on top of these records. It replaces them with one record that each department adds to. The store's receipt becomes the stock. The production entry consumes that stock and creates finished goods. The dispatch reduces finished goods and raises the invoice. The invoice posts to accounts and to GST. Nothing is typed twice, so nothing can disagree.

How an ERP works: one order through the plant

The easiest way to understand ERP is to follow one order. Take a knitwear unit that receives an order for 2,000 polo shirts.

1. Sales order. The order is entered once, with style, sizes, colours, delivery date and price. Everyone who needs it, from planning to dispatch, reads this same order.
2. Planning. The system works out how much yarn, fabric, trims and packing material the order needs, compares that with stock and open purchase orders, and shows the shortfall.
3. Purchase and gate. Yarn is ordered from the supplier. When the truck arrives, the gate entry is made against the purchase order, so the store knows what is coming before it is unloaded.
4. Store. Each bag or roll is received with its weight and lot. Stock now exists, by lot and by location, without anyone writing it in a book.
5. Production. Yarn is issued to knitting, fabric comes back by weight, goes to dyeing and then to cutting and stitching. Each stage records what went in, what came out and what was rejected.
6. Quality. Inspection results are recorded against the lot. A lot that fails is held and cannot be packed or invoiced until it is released.
7. Dispatch and GST. The packing list, invoice, e-invoice and e-way bill are produced from one dispatch entry. The invoice posts to the customer's ledger and to the GST returns.
8. Reports. The owner sees order status, stock, cost and dues from the same data the floor entered that morning.

Nothing in that list is unusual. Every factory already does each of these steps. The difference ERP makes is that each step continues the same record instead of starting a new one. That is why an ERP can answer questions such as "which lots of yarn went into this shipment?" or "what did this order actually cost?" in seconds.

What an ERP replaces in a typical Indian factory

In the plants our engineers visit, an ERP usually replaces a predictable set of tools. None of them is bad on its own. They simply do not talk to each other.

Accounting software deserves a special mention because it is often confused with ERP. Tally and similar packages are excellent at books, GST and statutory reports. They are not designed to track a lot of yarn through four processes or to settle a job worker's shortage. Our guide on ERP vs accounting software covers where the line falls.

The modules inside an ERP

ERP software is divided into modules, each owning one set of records. The names vary between vendors, but a manufacturing ERP almost always covers the nine below. What matters is not the list but whether the modules share one database. If they do, a sale order flows into planning, purchase, production and accounts without being re-entered.

Each module is explained in detail, with the documents and reports it produces, in ERP modules explained.

Types of ERP: generic, industry-specific, cloud and on-premise

ERP systems differ along two lines that matter to a manufacturer: how much of your trade is built in, and where the software runs.

Generic ERP vs industry-specific ERP

A generic ERP is built to suit any business. It has items, orders, stock and accounts, and expects you or a consultant to configure the rest. That flexibility is useful for a distributor. For a dyeing house it means teaching the software what a shade lot, a recipe and a reprocess are, which takes months and usually ends in a spreadsheet beside the ERP.

An industry-specific ERP, sometimes called a vertical ERP or an edition, ships with the masters, documents and reports of one trade. A knitting edition already knows a knitting programme order (KPO), yarn lots and roll weighing. A fastener edition already knows heat numbers and plating job work. Configuration starts from your trade instead of from zero. We explain the difference in What is manufacturing ERP?

Cloud ERP vs on-premise ERP

Cloud ERP runs on servers managed by the vendor and is used through a browser or app from anywhere. On-premise ERP runs on a server inside your plant. The features can be identical; the trade-offs are internet dependence, upfront cost, backups and remote access. Our comparison of cloud vs on-premise ERP walks through each for Indian conditions such as power cuts and patchy connectivity in industrial areas.

What actually improves after an ERP goes live

Vendors like to quote large percentages. We would rather describe what changes, because the size of the change depends on how a plant runs today. These are the improvements owners mention most often once the system has been live for a quarter:

• Stock is known by lot and rack without a physical count
• Order status is read from a screen, not collected on the phone
• Cost per order is calculated from actual consumption, not estimated
• Job workers are settled on quantities received, not quantities claimed
• Failed lots are held before they reach the customer
• E-invoice, e-way bill and GST returns come from the same entries
• Month-end closing takes days instead of weeks
• The owner can see the business while travelling

Signs your plant needs an ERP

Not every business needs an ERP. A small unit with one product, one machine and one customer can run perfectly well on a register and accounting software. The signs that you have outgrown that setup are practical, not theoretical:

• You cannot say what an order cost until weeks after it was shipped.
• Stock in the books and stock on the floor disagree at every audit.
• Material sent to job workers is tracked in a notebook, and shortages are argued over rather than measured.
• Customers ask for traceability (which lot, which heat, which batch) and you assemble it by hand.
• The same information is typed into Excel, Tally and a register by different people.
• You depend on two or three people who "know where everything is", and work stops when they are on leave.
• Adding a second plant, a new process or a second shift makes the record-keeping, not the production, the bottleneck.

If three or more of these are true, the cost of not having an ERP is already being paid, just in a form that does not appear on any invoice.

What an ERP will not fix

An ERP records what happens. It does not decide what should happen. If issues of material to the floor are not controlled today, an ERP will record uncontrolled issues very accurately. If three people can approve a purchase today, all three will approve it in the ERP. Before any system is configured, the process has to be agreed: who enters what, at which point, and who approves.

This is why a good implementation starts with a process study on the floor, not with software training. Our engineers spend the first week of every implementation listing each register, document and approval in the plant, and deciding with the owner which ones the ERP will replace. That study is covered in ERP implementation, step by step.

How to get started

The path from deciding to look at ERP to running on one is shorter than most owners expect, provided it is done in the right order:

1. Write down your process. List the registers and documents each department keeps today. This list is the real requirement.
2. Shortlist by trade, not by brand. Prefer systems that already know your industry's documents. Our buyer's checklist lists the questions to ask.
3. See a demo with your own data. A demo on the vendor's sample data proves very little. Bring one week of real orders, challans and registers.
4. Understand the full cost. Licences are only one part. Implementation, training, hardware and support matter as much; see how much ERP costs.
5. Plan the implementation. A single plant typically goes live in four to six weeks when the vendor's own engineers do the work on site.

eManage has been building and implementing ERP for textile and engineering plants from Ludhiana since 2000. If you would like to see how your own documents look on it, book a free demo.

Questions buyers ask