ERP - Enterprise Resource Planning; so ERP software is Enterprise Resource Planning software.

So, what does this software do?

Take the activities of a typical company or 'Enterprise', its purpose can be loosely described as 'to manufacture or procure products for sale'. These products may be tangible or intangible, but basically the company must 'Plan' and 'Control' the use of its entire resource base to meet these objectives. That is what 'ERP software' does, it helps the managers and staff of an enterprise to manage its resources to manufacture/procure the products it sells within one software package.
The single software package 'integrates' its elements or modules into one seamless package to control the enterprise activities. The most common activities being Purchasing, Manufacturing, Sales and Accounting (see diagram).

Lets take an example of the inter-relationship between these basic activities -
- first a customer places an order for a product, this places a demand on stock levels,
- if stock is not on hand, then manufacturing needs to produce the product, this may put a demand on purchasing,
- purchasing places an order with suppliers for the required raw materials and components,
- once acquired they are placed in stock, awaiting the start of the manufacturing process,
- manufacturing uses these stocks and along with labour and machinery produces the semi-finished or finished product,
- the product is then placed in stock, awaiting dispatch to satisfy the initial customer order,
- all of these activities have accounting impact on the business affecting suppliers, stocks, expenses, customers, etc.

E.R.P. software helps management control the business and to monitor each process, so that the limited resources of the company are used in the most economic manner.

E.R.P. software is not new, it has been around for at least 20 years, initially with large international companies. As time has progressed, the size level of companies able to install E.R.P. software has fallen, to a point now, where most companies are in a position to install some form of E.R.P. software.

What are the pitfalls to installing E.R.P. software?

The larger the company and the more functions placed on the same system at the same time increases the risk level, so if things go wrong, it will have a dramatic impact on the financial and operating ability of the company.
However, for smaller companies, which are inherently more flexible with less complicated business processes the risks are still present, but much reduced.
Another disadvantage for large companies and E.R.P. systems is that once installed, they do present a substantial barrier to business process flexibility and change, with the result that many large companies that have installed the same E.R.P. system, end up with very similiar business processes as their competitiors and so look the same to customers and suppliers.

E.R.P. 2 the next generation.

E.R.P. 2 takes standard E.R.P. and extends it by providing for closer relationships between an enterprise and its customers and suppliers. An example of this closer relationship is that an enterprise will allow customers to directly interact with its computer system so allowing them to place orders and investigate the status of its account, outstanding deliveries and orders. Suppliers can be permitted to monitor stock levels and suggest when items need replenishing.
Due to the level of system integration needed between enterprises to achieve E.R.P. 2, this remains, for the moment, the preserve of large companies with the I.T. resources to make it possible.