How Do You Define Your ERP System?

Editor’s Note: Norman Katz, president of supply chain consultancy Katzscan Inc., writes a monthly column for Supply Chain Management Review. Katz’s column appears on the third Monday of each month.

We are still not too far removed from the COVID pandemic that shook up worldwide supply chains and revealed to companies how far out-of-date their legacy supply chain systems really were—and for many, still are—in being able to support sudden interruptions and seismic shifts in events and customer behavior.

Many supply chain systems are rather straightforward to define: EDI (electronic data interchange); WMS (warehouse management system); TMS (transportation management system); YMS (yard management system); LMS (labor management system). These software applications are focused on specific functions and play defined roles within the supply chain.

But the ERP (enterprise resource planning) system, from my experience, has been defined differently depending upon the viewpoint. And while everyone is certainly entitled to their opinion, I think that the definition also defines the implementation perspective and the use, and this is where I believe that there needs to be more clarity about what the ERP system really is, especially in terms of where the ERP system sits in today’s modern suite of supply chain systems.

Several definitions of an ERP are:

• The system source of truth

• The accounting system

• The business system of record

• A collection of integrated applications for managing a business

The problem with these definitions is that none of them—at least in my opinion—really tell the tale of what an ERP system actually is. My own definition of the ERP system is: “The system that accounts for how a business operates.”

An ERP system, from my perspective, is essentially two complementary sides of the same software. Inasmuch as I could remove the accounting functions from an ERP system and still operate my business, (think on that for a moment), I wouldn’t be able to produce any meaningful financial analysis, and so I wouldn’t know if I had a profitable or money-losing organization on my hands. I could remove the operations functions of my ERP system, but then there would be nothing to account for, so no real reason to even have the software.

The two sides—accounting and operations—need to work together, one without necessarily superseding the other, but both conceding that the other has its place and purpose, which is not always going to be an even split or share. Remember: if there is no company to operate, there is nothing to account for. And ideally, we want to be able to account for a lot in all the right and good ways.

The ERP system sits at the center of the other supply chain systems and the overall connectivity. As the source of truth, this is where the foundational data should be stored. Establishing how the data in the ERP system is set up, and how the ERP system is to be used, needs to be taken from an operational or supply chain approach. As long as we can still account for what is going on, or have improved how this function is done, based on generally accepted accounting principles (and if there are specific requirements for public accounting, regulated industries, or non-profits, etc.), this side of the ERP system meets financial processing and reporting requirements.

Just because one department writes and signs the checks doesn’t give that department the right to compromise the entire company when it comes to ERP functionality. Nor should the ERP software vendor or reseller skew the implementation because they are more of an accounting firm rather than a supply chain software consultancy. Brands, for example, whether selling direct to consumer or to and through retailers, are in business to produce, sell, and distribute their products. As such, they need supply chain systems and operation solutions. Accounting advice they can get from their account firms. ERP systems interface with other supply chain systems like those aforementioned, not with other accounting systems.

The ERP system is both an accounting system and a business operations system. These two functions are complimentary within the ERP system, but complimentary doesn’t necessarily mean evenly divided, or uniformly important based on perspective. The ERP system is the core supply chain system that the company will rely on and that all of the other supply chain systems the company uses will interface to. The first focus of the ERP system is that it must support the supply chain functions of the company. And yes, in terms of both the operations and the accountability.

About the author

Norman Katz is president of Katzscan Inc., a supply chain technology and operations consultancy that specializes in vendor compliance, ERP, EDI, and barcode applications. Norman is the author of “Detecting and Reducing Supply Chain Fraud” (Gower/Routledge, 2012), “Successful Supply Chain Vendor Compliance” (Gower/Routledge, 2016), and “Attack, Parry, Riposte: A Fencer’s Guide To Better Business Execution” (Austin Macauley, 2020). Norman is a U.S. national and international speaker and article writer, and a foil and saber fencer and fencing instructor.

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