Top ERP Software Terms and Definitions You Need To Know

Written By: Eric Kimberling
Date: January 18, 2023

In order to be successful in the ERP software industry, there are a number of key terms and definitions that you need to understand. What exactly are those terms and definitions? That's what I'm going to talk about here today.

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As part of helping our clients with digital transformations, oftentimes we're helping them with ERP software implementations. Over the years, I've learned that there's a lot of different terms, buzzwords and definitions that are really important to understand in order to be successful. So today we want to talk about key terms and definitions that are really important for you to understand when embarking on an ERP software implementation or if you're just trying to learn more about ERP software in general. 

ERP

First and perhaps the most fundamental term to understand is the term ERP itself. What does the term ERP mean? Well, the acronym itself stands for Enterprise Resource Planning, which that in and of itself, doesn't tell you what it means but the term Enterprise Resource Planning is really a way to describe technology that ties together an entire business. The reason the term ERP came to be is because in the past, companies would deploy multiple technologies to do different things throughout an organization, so ERP systems were invented to really create a single, enterprise-wide technology that could do everything from cash and financial management to inventory management to customer service and order management, warehouse management manufacturing, basically anything that an organization needed could be handled by an ERP system. Enterprise Resource Planning is a term that defines and alludes to the fact that it's a system that ties together an enterprise wide set of of business processes.

Order to Cash

Another very common term that builds on the Enterprise Resource Planning term is Order to Cash. Order to Cash is a term that refers to an end-to-end business process that ties together multiple workflows and functions throughout a business. It all starts with a customer order and ends with collecting cash from the customer. Everything in between are the steps that happen along the way so if you think about an order to cash process, typically what happens is the customer calls, you place the order, you capture the order in the system and usually that order will trigger a whole set of downstream activities that will be managed in the ERP system. Events such as managing inventory or making sure you order the right raw materials to satisfy that customer order, making sure that you generate an invoice to ensure that the customer pays once the customer pays, you track the money that comes in and much more. There's a whole host of things that happen from the time the order comes in until you actually collect cash from the customer. This will also include things like warehouse management, the manufacturing process, the planning process for manufacturing really everything that goes into making your product a service and delivering that product to service to your customer and ultimately collecting cash from your customer.

Procure to Pay

Similar to order to cash, you also have another end-to-end business process called Procure to Pay. Procure to Pay is a different from Order to Cash in that it's more focused on procuring the materials you need to run your business and ultimately paying for those materials. It's sort of the opposite of Order to Cash, in that Order to Cash is focused on fulfilling a customer order, whereas Procure to Pay is more focused on what an organization itself needs to procure and pay for to run its business.

If you're an organization that manufactures widgets and you need to acquire raw materials, you're going to Procure and Place orders for those raw materials. You'll receive the raw materials and ultimately you'll pay for those raw materials. Sounds simple enough but there's a lot of steps in that process and a lot of nuances that organizations go through when they're going through their Procure to Pay process. The reason that this is such an important process is because when we look at the end-to-end business processes within your ERP, you have your Order to Cash and Procure to Pay, which are really your two major end-to-end business processes that relate to any ERP system.

Even though ERP systems are meant to be single integrated systems, the reality is that ERP systems are typically one big system that's comprised of a number of different individual modules that ultimately integrate, tie together and provide that end-to-end visibility in that end-to-end processing that ERP systems provide. So, every ERP system is a little bit different, has different modules, different names for the modules and so on but if you think about the functional pieces of a business, most functional pieces of a business are going to have a module that relates to that part of the business.

For example, in Finance and Accounting you have your accounting and your general ledger module, you might have your financial planning module, you have your accounts payable module, your accounts receivable module. Many of the different pieces within Finance and Accounting might have different modules or sub modules that provide very specific functionality for a specific part of your business but even though it's providing specific functionality, it's providing that functionality in a way that can integrate with the other modules to provide a complete integrated, end-to-end, business process flow within that technology.

Business Requirements

The beauty of modern ERP software is that they can provide a lot of flexible, different types of business processes. Even though they have a standard way of working, a standard way of functioning, within the nuances of how that software works, they can be configured and tailored to meet the needs of different business requirements.

So business requirements are what the needs are of the organization the needs that determine how we're going to configure and set up the ERP software to accommodate the needs of the organization and I'm going to come back to this concept of configuration later in this article, that's another term we'll get to but for the time being it's important to understand what business requirements are and typically what happens is each function or each department within an organization has its own set of business needs, business requirements that it will define as a way to select and implement the right ERP software in the right way that best aligns with and meets their needs. Some organizations might have hundreds or even thousands of business requirements that they define as part of their business requirements but they're not all equal there's going to be those that are very high priority things that you must have within an ERP system and then there's lower priority ones that are more nice to have in a perfect world you might have these business requirements that are met and you're going to try and accomplish as many of those business requirements as you can within your ERP system but in general the whole business requirements phase of a project begins early in the process typically even before you've selected an ERP software and oftentimes you're defined those business processes in even more detail once you've selected the software and it's time to go implement the software.

Configuration

Now when implementing ERP software, in order to accommodate the business requirements that have been defined by the organization implementing the software, it needs to go through a process called Configuration. Configuration is really a way to personalize the software and every ERP software has a number of configuration tools, some more flexible than others. Every ERP system out there is going to have a certain amount of Configuration you can do.

A way to think about Configuration is it's a way to customize the software to your needs but not in a way that compromises or changes the way the software was written. In other words, you're not changing the code of the software necessarily, you're not doing development work, you're checking boxes and flipping switches within the software to ensure that it does the right things and goes through the right workflow to match your business processes and your business requirements. Configuration is a mandatory part of any sort of ERP software implementation and it's a key term to understand as you go through your ERP software initiative.

Customization

We mentioned that Configuration is a way to change the software and personalize the software without changing the way the code was built but sometimes an organization has such unique needs or is so different from its competitors that it needs to change the ERP software in some way beyond the limitations of what configuration allows you to do. In these cases, most ERP softwares will give you the tools to actually customize the software and it may sound like very similar terms. Customization is different in that you're actually going in and you're changing the code, you're doing development work, it's a lot heavier lift from a technical perspective and you're actually creating additional risk because now you're changing the way the software was built and you're sort of rewriting some of the code that's been proven and established in working for other organizations.

Oftentimes it's a necessary evil, it's something that organizations have to do in order to get the software to work the way it needs to but other times organizations customize when they don't need to, there might be better ways that they could get what they need simply by configuring, which is less risky and less timely and less expensive than customization. You want to make sure that you customize only in must needed situations, those mandatory business requirements that simply can't be met through configuration, you might look to customization as a way to tailor the software to fit your needs.

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Integration

ERP software is comprised of a number of modules and sub-modules. Those modules and sub-modules are integrated with each other so that you're still using the same system, the same user interface, the same set of data and the data and the processes are flowing throughout those different modules.

However, in order to get these modules to work and to talk to one another, you still have to do integration, you have to ensure that the hooks or the ties between these different modules are there and that the data is flowing and the processes are flowing the way that they should. In addition, most ERP software implementations require that you implement that core ERP software with some other third-party system that's unrelated to the ERP system, even though utopia is to have one system that's used by everyone within the organization, to do everything an organization needs, typically most ERP software is not going to give you a hundred percent of what you require.

Typically, it requires that you have some other standalone systems to support that core ERP software. In these cases, you need to integrate with those third-party systems as well to ensure that the data flows back and forth between your core ERP system and all the modules within it and these third-party systems. 

A good example and a common example of third-party systems that require integration to the core ERP software is going to be in any sort of regulated industry. If you think about pharmaceuticals or the food industry, there's strict government compliance regulations that require that you have certain processes in place and you track information a certain way. Oftentimes, those standards and needs aren't met by simply having an ERP system in place, oftentimes, you need a standalone, separate system to track whatever information or processes you need. Whatever the cause is or whatever the reason is for having these third-party systems, you want to make sure that you build that integration to ensure that the data is flowing between the core ERP system and those third-party systems. Typically, this is done through what's called API’s and API’s are generally the tool or the technology that's used to create the hook or the integration points between the multiple systems.

Enterprise Architecture

Enterprise Architecture is another important term to understand as it relates to ERP software and it ties back to the previous point we made about integration. When we're talking about integration, we need to have a blueprint or a big picture vision of how different systems and different modules within the ERP system are going to talk to one another. In other words, we need to define where the integration points are and how data is going to flow back and forth between those systems.

Where's that ultimate single source of truth going to be in terms of where the data resides. That's a big part of what you define as part of your Enterprise Architecture, so when you hear the term Enterprise Architecture or software or solution architecture, those terms are somewhat interchangeable and refer to basically a visualization and a map of how different technologies and different modules within technologies are going to talk to one another, where those data points are going to be, how the data is going to flow, how different transactions will flow and touch between multiple systems and so that's ultimately what Enterprise Architecture and solution architecture means.

Data Migration

In order for an ERP system to work properly, it needs to have data and it needs to have historic data, so data you've brought over from previous systems that you had in place prior to deploying a new ERP software. Data migration refers to the whole process of cleaning up your data that's in your old system. Oftentimes, the data in the old system is corrupt or it's become dirty and inaccurate over the years. You need to clean up that data and then you need to figure out how those data fields and those data points map to the new system because you might have different naming conventions for different fields and different subjects within the system. Ultimately, deciding how you're going to move that data from the old system to the new one, so that whole process I just described is really falling under the bucket of data migration and so data migration is the way that we clean and map and move the data from our old Legacy systems to our newer ERP software.

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If you are looking to strategize an upcoming transformation or are looking at selecting an ERP system, we would love to give you some insights. Feel free to reach out to me here with any questions you may have eric.kimberling@thirdstage-consulting.com

Be sure to download the newly released 2023 Digital Transformation Report to garner additional industry insight and project best practices. https://www.thirdstage-consulting.com/reports/2023-digital-transformation-r

Author:
Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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