Article

Deepak Juneja
Deepak Juneja 24 November 2022
Categories B2B, Technology

How ERP Systems Reduce Costs and Improve Profits for SMEs

This article will first give you a general overview of ERPS systems and how they operate. Then, it will highlight how they can help SMEs in their drive to cut costs and boost profits.

Enterprise resource planning is a term usually heard in the context of large companies and corporations. The very inclusion of the word enterprise in the definition suggests that these solutions are designed for organizations of a certain size. 

Yet while this may have been true years ago, ERP systems are becoming increasingly popular among small and medium-sized businesses. Statistics provided by Eurostat show that 33% of EU small businesses now use ERP systems to improve the flow of data between different functional areas, thus boosting overall efficiency.

In addition to SMEs discovering the benefits of these solutions, ERP providers now cater to their needs by offering cost-effective, cloud-based solutions that include flexible features and can be quickly learned by the company’s workforce. This means that small and medium-sized businesses are now fully equipped to benefit from business automation processes once accessible only by large organizations.

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What are ERP Systems?

Most companies organize their activities into different functional areas. Examples of essential business functions are accounting, finance, purchasing, manufacturing, human resources, marketing, and sales. 

Traditionally, each area would create and optimize its own system to manage and execute operations more efficiently. The advent of ERP software brought the concept of optimization to the next level by allowing each function to share data easily with the rest of the organization in order to improve coordination and eliminate inefficiencies.

For example, ERP systems allow a company’s finance department to quickly access data available in the accounting division and use them in their financial analyses and forecasts. Similarly, inventory managers can receive real-time data on orders received both online and in-store orders and use this information to better coordinate their activities with the purchasing department.  

Not to mention that ERP systems also improve the flow of information and facilitate coordination across business units. Purchasing managers at a company’s California business unit may want to access inventory data for the Nevada unit. This could help them minimize overstocking and understocking across the broader organization. 

The level of coordination needed to obtain significant savings and improve business performance can hardly be obtained through a mix of spreadsheets, emails, and phone calls. 

Can Small and Medium-sized Enterprises Benefit from ERP Systems?

A common misconception is that ERP platforms only make sense when running a large-scale organization. That’s because they are usually associated with high implementation and training costs. According to this view, only large businesses have the necessary financial means to boost their ROI through the adoption of ERP systems.

However, small and medium-sized businesses have the strongest need for faster and sharper processes if they want to compete with larger players. For example, while big companies can lower prices by taking advantage of significant economies of scale, a small firm can do so only by cutting inefficiencies down to the minimum.

To achieve this goal, SMEs need to ensure that every functional area receives the necessary information at the exact time when it’s required to generate the desired action. 

You don’t want a depletion in your stock due to a sizable in-store purchase to impact the delivery time of an online order. Just as you want to avoid your financial projections being based on incomplete sales data from the last quarter. It all must flow as seamlessly as possible to allow your business to minimize wastage and optimize performance.

How Can ERP Systems Help SMEs Reduce Costs? 

Years ago, the high investment required to adopt ERP systems made them a prohibitive choice for small and medium-sized businesses. Nowadays, providers offer affordable plans that include only the basic features required by SMEs, plus extra options when specific needs arise.

Look for an ERP software solution that offers the following four essential features:

  • Live inventory management
  • Real-time master planning
  • Production planning
  • Integration with your existing accounting and ecommerce platforms.

Another great inclusion in ERP software is batch tracking and multi-currency support, as well as extra warehouses and users. 

With many ERP solutions costing around $100 or less a month, they are extremely affordable to most SMEs, plus the synergies obtained by the increased coordination and automation of different functions can lead to significant and sustainable cost reductions.

How Can ERP Systems Help SMEs Improve Profits?

Cutting costs is one way through which ERP systems help your business boost its profit. That’s because lower expenses allow you to either increase your unit contribution margin or lower your prices (thus improving your overall turnover).

However, the process optimization generated by ERP solutions can also lead to better relations with your customers. This can happen in a variety of manners, including:

  • obtaining product improvements thanks to a better understanding of customer needs
  • increasing service quality and speed thanks to more streamlined processes 
  • optimizing CRM thanks to a more efficient flow of information.

Improved customer relationships mean more satisfied customers, increased loyalty, and, ultimately, higher profits.

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