What is ERP and Why SMBs Need It

Enterprise Resource Planning (ERP) is a class of software that integrates all core business processes — manufacturing, inventory, sales, purchasing, accounting, human resources, and compliance — into a single, unified system. For small and medium businesses (SMBs) in manufacturing, an ERP replaces the patchwork of spreadsheets, paper registers, and disconnected software tools that typically accumulate as a company grows.

This chapter traces the evolution of ERP, explains what it does in practical terms, and makes the case for why manufacturing SMBs — especially those operating in India — cannot afford to ignore it.

What You Will Learn

• The historical evolution from MRP to modern cloud ERP
• What an ERP system actually does and the modules it encompasses
• Why SMBs hit a growth ceiling without integrated systems
• How ERP compares to spreadsheet-based management
• Common myths about ERP adoption and the reality behind them

Prerequisites

No technical prerequisites. This chapter is conceptual and intended for business owners, operations managers, and anyone evaluating ERP for the first time.

A Brief History of ERP

The roots of ERP lie in manufacturing. Understanding this history helps explain why ERP systems are structured the way they are and why manufacturing remains the domain where ERP delivers the most value.

1960s — Material Requirements Planning (MRP). The earliest precursor to ERP emerged when manufacturers needed a systematic way to calculate raw material requirements based on production schedules. MRP systems answered a simple but critical question: given a production plan and a bill of materials, what materials do we need to order, and when? These early systems ran on mainframes and were accessible only to large corporations.

1980s — Manufacturing Resource Planning (MRP II). MRP evolved into MRP II by expanding scope beyond materials. MRP II incorporated capacity planning, shop floor scheduling, and basic financial tracking. A factory could now plan not just what materials to buy, but how to allocate machine time, labour, and capital. This was the first step toward integrating the factory floor with the back office.

1990s — Enterprise Resource Planning (ERP). The term "ERP" was coined by the Gartner Group in 1990. ERP extended MRP II to cover the entire enterprise: sales, purchasing, human resources, accounting, and more. Software vendors like SAP, Oracle, and Baan built monolithic systems that promised a single source of truth for every business transaction. These systems were powerful but expensive, often requiring years of implementation and millions of dollars in licensing and consulting fees.

2010s — Cloud ERP and the SMB Opportunity. Cloud computing changed the economics of ERP. Software-as-a-Service (SaaS) models eliminated the need for on-premises servers and large IT teams. Vendors began targeting SMBs with simpler, more affordable solutions. Open-source ERP projects emerged, further lowering the barrier to entry. Today, a 50-person factory can run a capable ERP system for a fraction of what a large enterprise paid in the 1990s.

What Does an ERP System Do?

At its core, an ERP system provides a shared database and a set of integrated modules that cover every major business function. When a sales order is created, the inventory module knows to reserve stock. When production consumes raw materials, the accounting module records the cost. When an invoice is generated, the tax module calculates GST. Every transaction flows through the system in real time, eliminating manual data entry and reconciliation.

The core modules found in a typical ERP system include:

Why SMBs Need ERP

Many SMB owners believe ERP is only for large enterprises. In practice, the problems ERP solves are felt most acutely by growing SMBs. Here are the core pain points:

Data silos. Production data lives in one spreadsheet, inventory in another, and accounting in a third. No one has a unified view of the business. When the sales team promises a delivery date, they have no way to verify whether raw materials are available or whether the factory has capacity.

Manual errors. Every time data is copied from one system to another — or from a paper register to a spreadsheet — errors creep in. A transposed digit in a stock register can cascade into incorrect purchase orders, wrong invoicing, and GST filing mismatches.

Compliance burden. Indian SMBs face a dense regulatory environment: GST with its multiple return types, TDS obligations, PF and ESIC contributions, and e-way bill requirements for goods movement. Managing compliance manually is not just inefficient — it is risky. Penalties for late or incorrect filings can be significant.

Growth ceiling. There comes a point where spreadsheets and manual processes simply cannot scale. A factory running 10 production orders a week might manage with spreadsheets. At 50 orders a week, the system breaks down. Orders get missed, materials run out unexpectedly, and the owner spends more time firefighting than running the business.

ERP vs. Spreadsheets

The following comparison illustrates why growing SMBs outgrow spreadsheets:

Benefits of ERP for Manufacturing SMBs

Single source of truth. Every department — from the shop floor to the accounts team — works with the same data. When production reports output, inventory updates automatically, and the cost flows into the general ledger without manual intervention.

Automated workflows. Purchase orders can be generated from material requirements. Invoices can be created from delivery notes. Salary slips can be calculated from attendance and statutory rules. Automation reduces labour, speeds up processes, and eliminates transcription errors.

Real-time visibility. Dashboards show current stock levels, pending production orders, outstanding receivables, and cash positions. Managers can make decisions based on what is happening now, not what happened last month when the spreadsheet was last updated.

Compliance readiness. With GST calculations built into invoicing, TDS sections mapped to vendor payments, and PF/ESIC rules embedded in payroll, the system generates compliant documents and returns as a by-product of normal operations.

Scalability. An ERP system that works for 20 employees works for 200. Adding new product lines, opening a second warehouse, or onboarding more customers does not require rebuilding the system — it requires adding data.

Common ERP Myths Debunked

Tips & Best Practices

Tip: Start by mapping your current pain points — late deliveries, stock mismatches, GST filing delays — and evaluate how an ERP addresses each one specifically. This keeps the evaluation grounded in real business needs rather than feature checklists.

Tip: Involve your shop floor supervisor and your accountant in the ERP evaluation process. These are the people who will use the system daily, and their buy-in is critical for successful adoption.

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