Types of ERP systems explained

What is ERP?

An ERP system is a software that helps businesses automate, manage, and streamline different business processes on a unified platform.

It helps increase productivity and reduce human errors while ensuring that a business has the best available opportunities and tools to scale, boost revenues, and nurture relationships at any time.

It eliminates most repetitive tasks and unburdens employees from manual work so that they can focus on more demanding chores. Different kinds of ERP products are available on the market, which vendors classify in several ways.

Classification of ERP systems

As with most tech-based products, the classification of ERP may vary. However, these classifications can generally be filtered into three main types:

Deployment-based classification

ERP deployment is a complex process that ensures your chosen ERP system works as intended according to specification, in line with other business technologies, and is available for its intended users.

It can be installed locally on your on-premises servers, deployed as an online or cloud service, or a combination of both. In a hybrid environment, some aspects are deployed locally, while others are delivered via cloud on a Software-as-a-Service (SaaS) model.

• Cloud-based ERP systems are accessible through an internet connection and do not require local installation. This offers increased flexibility across various parameters like scalability, accessibility, and maintenance. It also allows for seamless updates and easier integration with other emerging technologies.
• On-premise ERP solutions are installed on a company's local servers, which requires an internal IT department to maintain them. These solutions offer enhanced data control and privacy.
• A hybrid ERP allows businesses to keep certain functionalities on-premise while accessing the rest over the cloud. However, this, too, requires an in-house IT team to manage the locally deployed modules.

Functionality-based classification

An ERP can also be classified based on its functionalities. Most ERP systems have specific functionalities that can be easy to pinpoint. However, an ERP is a complex software with multiple features, uses, and functionalities.

For business owners, the sheer range of features and functionalities can feel overwhelming unless they know what their objectives are. A patient and knowledgeable vendor can also help make the right decision.

• A Core ERP includes fundamental functions such as CRM, HR, finance, sales, marketing, and inventory management.
• Many businesses require more advanced modules to eliminate the need to integrate with third-party software tools. These tools can be described as “Extended ERP solutions.” They often include supply chain management, business intelligence, manufacturing, and more.
• Certain businesses require a completely customized approach toward their ERP architecture. These are often referred to as “Vertical ERP solutions” as they cater to industry-specific niches such as retail, healthcare, or manufacturing.

Size-based classification

Every business has unique needs and goals, which may differ based on size. For instance, the technology requirements of a Tier 1 corporation are vastly different from those of a small retail chain operating within a single city.

• Multinational companies and large corporations with multiple geographical locations usually require Tier I ERP solutions. These solutions often feature extensive functionalities and support multiple business processes.
• Tier II ERP solutions usually target small and midsize businesses. These ERP systems are easier to manage and offer the flexibility to add more modules as and when the company needs to grow.
• Tier III ERP solutions are usually basic and simple to implement. Small businesses often use these to manage their everyday operations without an in-house IT team.

3 Types of ERP systems deployment

1. On-premises ERP systems

An on-premise ERP system is installed locally on an organization's physical servers. The company's in-house IT staff usually upgrades, manages, and maintains it.

Unlike cloud ERP solutions, maintaining, upgrading, and ensuring bug fixes falls on the in-house team, making on-premise system maintenance a complex, expensive, and often lengthy endeavor. However, certain benefits make them popular among some organizations.

• Benefits: The organization has more control over the data and its processing, which results in better security and privacy. Many companies with stringent security and compliance requirements may prefer on-premise solutions.
• Concerns: On-premise solutions are expensive and require extensive hardware upgrades, necessitating high up-front costs. In addition, they need a dedicated IT team to maintain and manage it, which can be a financial burden.
• Best fit for: On-premise solutions are best suited for companies bound by strict laws and regulations. Examples include governmental and military organizations, finance and healthcare entities, and highly regulated industries.

2. Cloud-based ERP systems

Cloud ERP is software delivered over the Internet. It allows organizations to access their critical data remotely and often offers advanced scalability and licensing flexibility.

They can access every module of an ERP product on any device, in any location, as long as there is internet connectivity. Most cloud ERP software solutions are delivered via a SaaS billing model, which allows businesses to upgrade or downgrade depending on their evolving needs.

• Benefits: Cloud-based ERP systems have low initial costs as they do not require upfront hardware installation fees. In addition, businesses can pick and choose the modules they need and add features when required, helping them scale at a lower cost. Most importantly, cloud-based ERP products feature automatic, vendor-delivered updates that are quick and efficient.
• Concerns: Long-term costs may be high due to the accumulation of periodic payments, which requires businesses to evaluate their growth trajectory and weigh short-term convenience against long-term expenses.
  Additionally, businesses may find it challenging to operate a cloud-delivered model if internet connectivity is unstable.
• Best fit for: Cloud-based ERP solutions are perfect for businesses that are not subject to rigorous compliance practices. A cloud-based solution is a good choice unless an organization has a specific requirement for storing all ERP files locally. It also offers organizations the flexibility to integrate with multiple third-party apps without the need for extra customizations.

3. Hybrid ERP systems

Some organizations must adhere to specific security standards for regulatory compliance. That necessitates storing certain files and modules locally. Such organizations can take advantage of the benefits of both cloud and on-premise ERP deployment methods and choose a hybrid deployment-based solution. A hybrid ERP solution ensures that only the most critical modules are deployed locally while the rest remain in the cloud.

• Benefits: Hybrid ERP Systems presents a win-win solution by balancing on-premise and cloud features while ensuring a certain level of architecture customization.
• Concerns: Hybrid ERP deployments can sometimes be as complex as on-premise deployments and require an in-house IT team. In addition, it may require additional customization and intervention of specialized professionals to integrate it with third-party applications.
• Best fit for: Large companies can run on-premises systems at headquarters while deploying cloud ERP for subsidiaries, extending functions with fewer resources. Government agencies may prefer a Hybrid ERP solution to support regulatory needs by separating proprietary data while testing new cloud technologies without disrupting ongoing business operations.

Types of functionality-based ERP

Core ERP systems

A core ERP system is a basic enterprise software solution that helps businesses manage their rudimentary business processes. This often includes modules such as customer relationship management (CRM), finance and accounting, Human Resources, inventory management, and sales and marketing.

However, some vendors may offer a more stripped-down version of core ERP products. They are suitable for small to medium-sized businesses with limited IT resources yet need a tool to automate, manage, and streamline selected processes.

• Key features: Core ERP systems consist of key modules, such as finance, HR, and supply chain management. The specific composition of modules varies depending on the ERP vendor and the customized options they offer their clients. Core ERP tools intended for niche markets can offer a wide range of functionalities and features tailored to meet those industries' specific needs and demands.
• Disadvantages: Despite offering essential “across-the-board” functionalities, Core ERP solutions may not suffice for businesses with advanced, complex operations that require scalable capabilities.
• Best fit for: Not all businesses need an array of advanced ERP solutions. They may only need three or four simple modules. Examples include mom-and-pop stores, small retail chains, coffee shops, and even solopreneurs.

Extended ERP systems

As the name suggests, an extended ERP solution builds on a core solution by adding more features or modules. It can be described as an advanced ERP solution that streamlines multiple business processes to enhance efficiency and productivity. Extended ERP systems may include advanced modules such as advanced production, warehouse management, business intelligence, etc.

• Key features: Extended ERP solutions consist of additional modules for advanced functionalities. As technology evolves rapidly, some may offer predictive analytics, artificial intelligence (AI), and machine learning (ML) to help businesses access rich insights. They also offer customizable functionalities so companies can tweak as necessary instead of integrating multiple third-party tools.
• Disadvantages: Extended ERP systems can be more expensive than core products. They may also be difficult to scale down if deployed locally. Advanced capabilities may require in-house IT teams, which can prove expensive in the long term.
• Best fit for: Extended ERP systems are great for businesses of all sizes. However, they are particularly suited for those with advanced requirements such as access to deep insights, predictive and prescriptive analytics, and niche business processes.

Vertical ERP systems

Vertical ERP systems are called so because they are tailored to address the unique requirements and intricacies of specific niche industries. They effectively meet the specific needs of businesses operating within those niche environments, providing a more tailored and efficient solution compared to generic ERP systems.

• Key features: Vertical ERP systems are designed for niche industries. For example, an ERP designed for manufacturers may include features not found in other standard ERP products, like Bill of Materials (BOM) Management, Material Requirements Planning (MRP), and Production Scheduling and Planning. Similarly, an ERP that caters to the healthcare industry may offer patient management, medical device maintenance, and others.
• Disadvantages: Vertical ERP solutions benefit specific needs but may lack exhaustive streamlining capabilities, leading businesses to seek additional integrations and customizations.
• Best fit for: Vertical ERP solutions are excellent for industry-specific needs and requirements. Restaurants, hospitals, fashion houses, manufacturers, etc., can use specialized ERP tools built for their industry verticals.

Types of size-based ERP

Tier I ERP systems

Tier I ERP Systems are large enterprise-level ERP systems that help multinational companies and large corporations manage their global operations. They encompass all areas of a business and help businesses manage multiple functionalities across locations.

• Characteristics: Tier I ERP Systems are comprehensive, high-end solutions specifically built for large enterprises. They consist of advanced business intelligence and reporting modules, allowing users to coordinate, communicate, and collaborate with teams worldwide while automating most manual processes. They support multiple languages, offer local regulatory compliance, and enable a decentralized working method.
• Disadvantages: They can be costly and difficult to manage. In fact, Tier I ERP Systems commonly require in-house management teams to ensure prompt upgrades and bug fixes. In addition, the learning curve can be steep.
• Best fit for: Best suited for global corporations with complex needs. Examples include international e-commerce retailers like IKEA, Amazon, etc., which must ship, provide customer service, and manage other international backend operations.

Tier II ERP systems

Medium and large-sized businesses use Tier II ERP Systems. Examples include global retail chains that cater to specific audiences, domestic stores with a large number of employees, and large manufacturing units with multiple warehouses and distribution centers.

• Characteristics: Tier II ERP systems are perfect for midsize companies with moderate processing needs. They offer the best of both worlds—complex solutions without the bulk.
• Disadvantages: Tier II ERP Systems require extensive maintenance and can have a steep learning curve. They also tend to be expensive, and customizations can result in complexities.
• Best fit for: Tier II ERP products are best for growing companies requiring robust features to scale. If you plan to enter new markets and capture new audiences, a tier II ERP solution is what you need.

Tier III ERP systems

Tier III ERP Systems cater to small businesses with limited technological requirements. These include consultancies, brick-and-mortar stores with a few branches, and small manufacturing units. These entities may have limited requirements and someday have specific needs that can be taken care of by a small Tier III ERP system that is often vertical.

• Characteristics: Tier III ERP solutions are usually ready-to-use. They are simple and convenient for small businesses and are often delivered via the cloud on a SaaS model. They are also affordable and do not deplete a growing business's budgetary constraints.
• Disadvantages: While Tier III ERP solutions are great for small businesses with limited requirements, they can often be severely restricted. They may not allow companies to scale at will, and customizations may be complex. In addition, multiple integrations with third-party tools may create technical issues, which can only be resolved by upgrading to a more advanced ERP solution.
• Best fit for: Tier III ERP systems are perfect for small businesses that require only the essential ERP functionalities. If you are a small business owner looking to streamline your existing business processes or workflow and don't know where to begin, a tier III ERP product may suffice your current needs.

Choosing the right ERP system

Choosing the right ERP system requires careful consideration and decision-making. Obtaining stakeholder buy-in and ensuring unanimous agreement on the objectives is essential.

Here are the four most important factors to consider for your business:

1.Cost and budget

ERP products offer a variety of features and functionalities and also vary in cost. On-premise solutions tend to have a high upfront cost, whereas cloud-based solutions offer a monthly or yearly subscription.

Consider your ERP budget and assess your needs to choose the right solution without it becoming a significant financial liability. You should also factor in integrations, customizations, and licenses, which can all have additional expenses. Have an honest conversation with your vendor so that everything aligns with your budget.

2.Scalability and growth

Although your requirements may be limited now, most successful businesses tend to grow in size and data. With growth, you must ensure you can cater to larger audiences and newer markets.

A future-oriented ERP tool centralizes both historical and real-time data, giving businesses access to a unified and accurate set of information that can be accessed on all connected devices and interfaces. As a result, companies can rest assured that there will be no operational discrepancies or workflow interruptions.

Choosing a scalable and agile tool is essential if you foresee immediate or distant future growth. Otherwise, you will have to replace your ERP system, which is more expensive than upgrading an existing one.

3.Features and functionality

Before choosing an ERP solution, list all the features and functionalities your business requires and separate them into necessary and optional.

For instance, modern ERP solutions usually include tools to help businesses manage their accounts, logistics, finance, sales and marketing, Human Resources, and inventory.

Advanced ERP solutions feature many other modules, such as business intelligence, employee engagement tools, communication platforms, etc.

Speak to the vendor and enquire if it is possible to adopt a modular approach so that you can purchase only the modules you currently need and later upgrade as and when necessary. This will help you reduce initial costs and pay for additional modules when needed.

4.User experience and support

User experience is one of the most crucial factors for successful ERP deployments. This means you must choose an ERP with an excellent user interface.

Next, ensure you have access to adequate support and training so you're not left in the lurch when you need help the most. Enquire with your vendor if they provide training as part of the package so your employees can prepare for dramatic organizational changes. This also allows you to test the product and make improvements alongside it.

Measuring ERP success

The success of your ERP implementation depends on how well you can use it and if it aligns with your initial goals and objectives. Hence, it is essential to conduct a cost-benefit analysis and ensure you are getting a good ROI.

Take hardware costs into account, in addition to consulting fees and training costs. You may also have to pay for customization, maintenance, and upgrades. Next, evaluate the product's benefits and consider making enhancements when discovering gaps. Contact your vendor if you need clarification or are left with questions.

At Priority Software, we take our client's concerns very seriously and are always available to help them. Contact us today to learn how to choose the right solution for your current and future requirements.