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I N T E G R AT E D B U S I N E S S P R O C E S S E S

with E R P S Y S T E M S

S I M H A R . M A G A L J E F F R E Y W O R D

J O H N W I L E Y & S O N S, I N C.

Grand Valley State University SAP AG Manchester Business School

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Vice President & Executive Publisher Don Fowley Acquisitions Editor Beth Lang Golub Production Manager Dorothy Sinclair Senior Production Editor Anna Melhorn Marketing Manager Christopher Ruel Creative Director Harry Nolan Senior Designer Wendy Lai Editorial Assistant Elizabeth Mills Executive Media Editor Thomas Kulesa

This book was set in 10/12pt Times Ten by MPS Limited, a Macmillan Company, Chennai, India and printed and bound by RRD/Jefferson City. The cover was printed by RRD/Jefferson City.

Copyright © 2012 Simha R. Magal and Jeffrey Word. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions.

Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfi ll their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifi cations and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/citizenship.

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Printed in the United States of America

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To Kajal, Anushka, and Vandana —SRM

To Chelsi, Benton, Davis and Maggie —JBW

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1 Introduction to Business Processes 1 The Functional Organizational Structure 2 Business Processes 4 Global Bike Incorporated (GBI) 15 How to use This Book 16

2 Introduction to Enterprise Systems 23 Enterprise Systems 23 Data in an Enterprise System 29 Reporting 37

3 Introduction to Accounting 49 Organizational Data 51 Master Data 52 Key Concepts 58 Processes 61 Reporting 72

4 The Procurement Process 83 Organizational Data 84 Master Data 89 Key Concepts 95 Process 102 Reporting 119

5 The Fulfillment Process 127 Organizational Data 128 Master Data 139 Process 145 Credit Management Process 167 Reporting 170

6 The Production Process 179 Master Data 182 Process 196 Reporting 215

vii

Contents

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7 Inventory and Warehouse Management Processes 221 Inventory Management 222 Organizational Data in Warehouse Management 234 Master Data in Warehouse Management 239 Processes in Warehouse Management 242 Reporting 257

8 The Material Planning Process 269 Master Data 271 Process 285 Reporting 304

9 Process Integration 315 Procurement, Fulfi llment, and IWM Processes 318 Procurement, Fulfi llment, Production, and IWM Processes 332

Index 349

viii Contents

*Additional Chapters available on WileyPlus

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ix

Preface

As more and more businesses around the world adopt enterprise systems, it becomes increasingly important for students to develop a more process-centric perspective that refl ects the realities of the modern business environment in which they will work. Because business operations and enterprise systems are so tightly integrated, we have designed Integrated Business Processes with ERP Systems to refl ect the ways in which real-world business processes are man- aged and executed in the world’s leading enterprise resource planning (ERP) system, SAP® ERP. Students, regardless of their functional discipline, will be able to apply the real-world concepts discussed in this text immediately upon entering the workforce and will be better prepared to succeed in their careers.

Integrated Business Processes with ERP Systems covers the key processes supported by modern ERP systems. This textbook is designed for use as both a reference guide and a conceptual resource for students taking ERP-focused courses at schools that are members of SAP University Alliances program (http://uac.sap.com). It examines in depth the core concepts applicable to all ERP environments, and it explains how those concepts can be utilized to execute business processes in SAP systems.

KEY FEATURES INTEGRATED PROCESS APPROACH

Integrated Business Processes with ERP Systems approaches ERP topics using an integrated process perspective of the fi rm. Each process is discussed within the context of its execution across functional areas in the company, with special emphasis on the role of data in managing the coordination between activities and groups. Students will gain a deep appreciation for the role of enterprise sys- tems in effi ciently managing processes from multiple functional perspectives.

ACTIVE LEARNING

Consistent with the focus on the process perspective of business operations, this book and the accompanying online supplements are designed to actively engage students through multiple learning activities. Students will be required to apply the concepts covered in the text to real-world situations and to the running case study used in their hands-on exercises. In this way, students can experience what the each employee in a process must do, what data they need, and how their actions impact other people in the company.

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x Preface

RUNNING CASE STUDY

Many key examples, demonstrations, and assignments incorporated through- out the book are based on a fi ctional company, Global Bike, Incorporated (GBI). GBI exists virtually in the GBI ERP system, which is used to provide students with hands-on experience with executing the various processes in SAP ERP. Students will become intimately familiar with GBI’s operations and will develop a deep appreciation for the real-world importance of the process concepts in the course.

REAL-WORLD EXAMPLES

In addition to the integrated approach and the GBI case study, Integrated Business Processes with ERP Systems includes multiple scenarios from compa- nies in diverse industries that demonstrate how businesses actually utilize ERP capabilities. Real-world experiences associated with enterprise systems—both positive and negative—are integrated throughout the chapters to illustrate the key concepts.

GLOBAL APPROACH

The textbook content, GBI running case study, and real-world examples have all been designed from a global perspective. Differences between U.S. and European business practices are highlighted within the context of process execution to illustrate the global capabilities of ERP systems. In addition, the real-world stories are based on familiar global companies.

SAP® ERP SOFTWARE This textbook and its associated demos and exercises were prepared using the most current version of the software, at the time of printing: SAP ERP 6.0, Enhancement Pack 4. The key concepts contained in this textbook are unlikely to change in any signifi cant way. Nevertheless, as SAP continues to innovate and update the core SAP ERP solution, it may become necessary to adjust classroom content in minor ways to better refl ect the capabilities of the lat- est version of the software. Please speak with your SAP University Alliances contact to obtain additional information on utilizing SAP ERP software in your classroom.

PEDAGOGICAL STRUCTURE Consistent with this textbook’s focus on the integration of business processes with ERP systems, we have divided the book into two key areas. The fi rst area, which consists of Chapters 1–3, focuses on the integrated nature of business processes and the enterprise systems that businesses use to manage them. Chapters 1–2 introduce the foundational concepts, which are subsequently developed in the process chapters in the remainder of the book. Chapter 3 examines the basic concepts in fi nancial and management accounting, which are integrated into the subsequent chapters.

The second part of the book contains the process chapters, which are structured based on a standard template that is comprised of two main parts.

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Preface xi

The fi rst part of each chapter discusses the organizational and master data associated with the process, and the second part examines each step of the process in detail. Each chapter concludes with a discussion of the reporting capabilities needed to manage the process effi ciently.

Links to online demonstrations and additional online learning materials are embedded throughout each chapter to reinforce and expand on the most important concepts.

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xii

WileyPLUS

WileyPLUS is a research-based, online environment for effective teaching and learning. WileyPLUS is an integral part of the learning experience for this textbook. For this reason we have made it available to students 24/7 from any- where they connect to the Internet. WileyPLUS contains a wealth of supple- mental learning materials designed to enhance students’ understanding of the concepts introduced in the course. Plus, instructors can use these materials to customize the course to meet their particular objectives. Students will complete and submit their hands-on assignments and quizzes through the WileyPLUS environment. In addition, the authors have taken full advantage of the rich multimedia learning environment in WileyPLUS to provide demonstrations of each process step discussed in the text. We have also embedded videos of real- world examples that highlight the key concepts in each chapter.

WileyPLUS can complement the printed textbook. Alternatively, stu- dents can purchase the full textbook and additional materials digitally through WileyPLUS.

Hands-on Exercises Hands-on assignments are provided to students online. Students will access the assignments via WileyPLUS and complete them in a live SAP system (GBI 2.0). They will then submit the exercises digi- tally to the instructor for easy grading.

Demonstrations: Recorded demonstrations of each key process activ- ity in every chapter are available on WileyPLUS for both instructors and stu- dents. Instructors can use the demonstrations in class discussions to illustrate key aspects of the content. Students can also access the demonstrations on WileyPLUS either while they are reading the chapters, to enhance their com- prehension of the material, or when they are completing the hands-on exer- cises, to refresh their memory of the activity.

INSTRUCTOR’S SUPPLEMENTS

This text is supported by many valuable tools to help instructors prepare and deliver engaging lectures and robust testing for conceptual understanding. Instructor supplements are accessible via WileyPLUS and via the Instructor’s Companion Site at www.wiley.com/college/magal. Supplements include the following:

Instructor’s Manual: The Instructor’s Manual is the distillation of more than a decade of classroom experience in teaching an integrated process approach to ERP systems. It contains in–depth pedagogical materials designed

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WileyPLUS xiii

to help instructors prepare their courses and deliver an engaging, multi-modal learning experience.

Classroom Presentation Slides: Each chapter includes detailed class- room presentation slides with key concepts, lecture notes, textbook graphics, and discussion questions.

Test Bank: A detailed test bank for each chapter is provided on the Instructor’s Companion Site. Each chapter contains multiple-choice, fi ll-in- the-blank, and true/false questions with multiple levels of diffi culty for each question type.

FEEDBACK The authors and publisher invite students and instructors to ask questions, provide comments, and communicate directly with the textbook team on the following Web site: www.extrabandwidth.com/forum

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xiv

“Innovation is a team sport.” Tom Kelley, IDEO

Integrated Business Processes with ERP Systems is the fi nal product of thousands of hours of work, including invaluable contributions from a diverse group of people located around the world. The authors wish to acknowledge the following individuals for their assistance in preparing and reviewing the book.

The authors are extremely grateful for the collaboration and technical efforts of Stefan Weidner and his team at the SAP University Competency Center at the Otto-von-Guericke-Universität Magdeburg to bring the GBI 2.0 system to life.

Faculty and students in the ERP program in the Seidman College of Business at Grand Valley State University (http://www.gvsu.edu/business/erp/) were also instrumental in developing the GBI system. In particular, we would like to acknowledge the contributions of the following Seidman students: James Anderson, Philipp Claus, Kevin Coolman, Jacob DeLuca, Morgan Hickman, Corey Holstege, Michael Martin, Steve Merritt, John Morrissey, Brandon Stickel, Alice Yamada, and Sandell Wall. We also appreciate the technical assis- tance provided by Chris Gillespie. Particularly helpful was Prof. David Cannon, who patiently clarifi ed numerous concepts in accounting.

We are very grateful for the efforts of Robert Weiss, our development editor, who tirelessly reviewed and edited our work and provided invaluable guidance in improving it. We also wish to thank the “super” reviewers and reviewers for their efforts to ensure that this book achieved the high standards we set for it.

“SUPER” REVIEWERS:

• Anthony Pittarese, East Tennessee State University

• Jane Fedorowicz, Bentley University

• Paul Hawking, Victoria University

• Rod Sager, Grand Valley State University

• Robert Szymanski, University of Central Florida

Acknowledgments

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Acknowledgments xv

REVIEWERS:

• Donna Everett, Morehead State University

• William Mackinnon, Clarkson University

• Earl McKinney, Bowling Green State University

• Jeff Mullins, University of Arkansas

• Al Pilcher, Algonquin University

• Pamela Schmidt, University of Arkansas

• Felicitas Ju Huang Seah, National University of Singapore

• Venkataramanan Shankararaman, Singapore Management University

• Catherine Usoff, Bentley College

• Bindiganavale Vijayaraman, University of Akron

• William Wagner, Villanova University

• Tom Wilder, California State University, Chico

A very special thanks to Lou Thompson at the University of Texas- Dallas, who helped to create the instructor’s manual and supplements, and to Ross Hightower from Texas A&M, who assisted us greatly with the Material Planning chapter.

Finally, we wish to recognize the efforts of Beth Lang Golub, Mike Berlin, Elizabeth Mills, and their colleagues at Wiley for keeping us moving and get- ting this book completed.

Writing a book can be stressful at times, especially for the authors’ fami- lies. Their patience and encouragement throughout this long and arduous pro- cess have been invaluable. They have our deepest gratitude and appreciation.

We are very grateful to Don Bulmer and Bob Lobue for their executive support for this book at SAP, with an extra special thanks to Charla Pachucki from SAP Education for ensuring that we stayed true to the SAP material.

The authors and publisher gratefully acknowledge SAP’s kind permis- sion to use its trademarks in this publication.

This publication contains references to the products of SAP AG. SAP, R/3, SAP NetWeaver, other SAP products and services mentioned herein are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius and other Business Objects products and services mentioned herein are trademarks or registered trademarks of Business Objects in the United States and/or other countries.

SAP AG is neither the author nor the publisher of this publication and is not responsible for its content, and SAP Group shall not be liable for errors or omissions with respect to the materials.

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xvi

Simha R. Magal, Ph.D., is professor of management (MIS) and director, ERP initiative, in the Seidman College of Business at Grand Valley State University. He received his doctorate from the University of Georgia. His pri- mary research interests include e-business and enterprise systems. Dr. Magal’s articles have appeared in such publications as MIS Quarterly, Journal of MIS, and Information and Management, among others, and he has served on the editorial boards of several journals. He also served as co-chair of the inaugural conference of the Midwest Association for Information Systems (MWAIS) in 2006 and as president of MWAIS during 2008–2009.

Dr. Magal has taught courses related to business processes and enterprise systems that utilize SAP for more than a decade. He is an SAP-certifi ed associ- ate consultant and a TERP10 academy instructor.

Jeffrey Word, Ph.D., is vice president of product strategy at SAP AG. He is responsible for defi ning SAP’s future product strategy and for fostering prod- uct innovation within SAP. Dr. Word has worked for several Global 1000 com- panies in the high-tech industry for nearly 20 years, specializing in business consulting and IT strategy. At SAP, he has driven the evolution of the com- pany’s enterprise technology strategy, with a special focus on corporate process improvement initiatives and services-based IT architecture design.

Dr. Word earned his Ph.D. in information systems at Manchester Business School in England. His research focused on event-driven process design and next-generation enterprise architecture. He previously earned an MBA in international management from the Thunderbird School of Global Management and a BA in European studies and Spanish from the University of Oklahoma.

Other books by these authors:

Magal, S. and Word, J. (2009). Essentials of Business Processes and Information Systems. John Wiley & Sons. Hoboken, NJ.

Word, J (ed.) (2009). Business Network Transformation: Strategies to Reconfi gure Your Business Relationships for Competitive Advantage. Jossey-Bass (Wiley), San Francisco, CA.

Woods, D., and Word, J. (2004). SAP NetWeaver for Dummies. Wiley Publishing Inc., Indianapolis, IA.

Author Biographies

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C H A P T E R 4 The Procurement Process 1

1

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Defi ne the functional organizational structure, and explain why this structure creates problems for modern businesses.

2. Describe key business processes in an organization.

3. Identify the main integration points between and among processes.

4. Understand the cross-functional nature of processes and their relationship to organizational areas.

5. Adopt and apply an integrated perspective to business processes.

6. Describe organizational structure of Global Bike Incorporated.

7. Explain how the SAP® ERP system promotes an integrated approach to business processes.

A t this point in your university career, you have probably begun taking courses in accounting, operations, MIS, and other disciplines. These courses have introduced you to some basic business concepts and exposed you

to different aspects of how a business operates. You have also begun to master several technology tools that will be very useful in your future career, such as offi ce productivity tools to create spreadsheets, presentations, and docu- ments. The course for which you are using this textbook deals with integrated business processes and the enterprise systems (ES) that support them. The con- cepts and skills you will gain from this course are different from what you have experienced previously, and you will need to approach this course with a different perspective.

Introduction to Business Processes

C H A P T E R 1C H A P T E R

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2 C H A P T E R 1 Introduction to Business Processes

T H E F U N C T I O N A L O R G A N I Z AT I O N A L S T R U C T U R E To successfully master the concepts in this textbook, you must fi rst begin to think holistically about the operations of a business. The most common orga- nizational structure you are likely to encounter is the functional structure. Organizations that utilize a functional structure are divided into functions, or departments, each of which is responsible for a set of closely related activities. For example, the accounting department sends and receives payments, and the warehouse receives and ships materials. Typical functions or departments found in a modern organization include purchasing, operations, warehouse, sales and marketing, research and development, fi nance and accounting, human resources, and information systems. The vertical columns in Figure 1-1 identify the key functions in a typical company.

Figure 1-1: The functional structure

Although most companies maintain vertical (or functional) silos to compartmentalize their operational units, the integrated business processes that companies use to perform their work cut across these silos horizontally. Business processes, such as the procurement and fulfi llment processes dis- cussed later in the chapter, consist of activities that occur in different, seemingly unrelated functions or departments. In other words, these processes are cross- functional, meaning no single group or function is responsible for their execu- tion. Rather, it is a shared responsibility among many functional areas. The cross-functional nature of business processes is also illustrated in Figure 1-1. For a process to be successfully completed, then, the company must rely on each functional group to execute its individual steps in the process in a coor- dinated way, which, as we shall see, may not be an easy thing to accomplish.

T H E S I L O E F F E C T

The functional structure served organizations well for a number of years because it enabled them to cope with the challenges generated by their rapid growth. Over time, however, this system developed a serious drawback. Put

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The Functional Organizational Structure 3

simply, people in the different functional areas came to perform their steps in the process in isolation, without fully understanding which steps happen before and which steps happen next. They essentially complete their part of the process, hand it off to the next person, and then proceed to the next task. By focusing so narrowly on their specifi c tasks, they lose sight of the “big pic- ture” of the larger process, be it procurement, fulfi llment, or any number of other common business processes. This tendency is commonly referred to as the silo effect because workers complete their tasks in their functional “silos” without regard to the consequences for the other components in the process.

A key point here is that the silo nature of the functional organizational structure and the cross-functional nature of processes are at odds with each other. That is, while workers focus on their specifi c function, each business process involves workers located in multiple functional areas. A major chal- lenge facing organizations, then, is to coordinate activities among the differ- ent functional areas. Viewing a company from a process perspective requires employees to “think sideways”—in other words, to view the business across functional boundaries and focus on the end-to-end nature of the process and its intended outcomes. Learning to view a process from end to end is essential to understanding how enterprise systems help businesses manage their pro- cesses effi ciently. Not surprisingly, then, this understanding has become a criti- cal skill that companies have come to demand from their employees.

E N T E R P R I S E S Y S T E M S

As you can see from the previous section, business processes span different parts of an organization. In fact, in today’s global economy, the various process steps are increasingly executed by people in multiple locations throughout the world. That is, a company will manufacture its products in different countries, acquire the materials to make these products from different locations, sell the products in many countries, and so on. For example, a bicycle manufacturer may purchase components from Italy, produce bicycles in Germany, and sell those bicycles in the United States. Because the steps in business processes are performed in locations that are geographically dispersed, it is impossible to manage such processes effectively without the use of modern information sys- tems. Systems that support end-to-end processes are called enterprise sys- tems (ES), and they are essential to the effi cient and effective execution and management of business process.

Given the signifi cant impact that enterprise systems have on operational effi ciency (and, ultimately, profi tability), companies have invested enormous sums of capital and effort to plan, implement, and continuously improve enter- prise systems over the past 40-plus years. A great deal of research has con- fi rmed that investments in information technology (IT), particularly enterprise systems, have signifi cantly increased the profi tability, productivity, and com- petitiveness of corporations by removing the barriers to sharing information between functional areas and managing processes holistically.1, 2 The key driver for this productivity and effi ciency is the ability of modern enterprise systems

1 A. McAfee and E. Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,” Harvard Business Review, 86, No. 7/8 (2008): 98–107. 2 E. Brynjolfsson and L. Hitt, “Paradox Lost? Firm-level Evidence on the Returns to Information Systems Spending,” Management Science, 42, No. 4 (1996): 541–558.

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4 C H A P T E R 1 Introduction to Business Processes

to effectively manage a business process from beginning to end in an inte- grated, consistent, and highly effi cient manner. Further, once a business pro- cess is managed by an integrated enterprise system, it can be monitored and improved very easily. As a result, we cannot discuss contemporary business processes without considering the role of enterprise systems. We will discuss enterprise systems in greater depth in Chapter 2.

In this chapter, we begin by identifying the key processes that typically exist in organizations. We then discuss enterprise systems and SAP, the com- pany that produces the most popular enterprise systems globally. We also introduce Global Bike Incorporated, a company that we will use as a case study throughout this textbook to illustrate important concepts in a practical format. We conclude with the plan for the remainder of the book.

B U S I N E S S P R O C E S S E S Organizations exist either to serve some commercial purpose or to achieve some social objective. They differ depending on the purpose or goal they are trying to achieve, their ownership or management structure, and the regula- tory environment in which they operate. Some organizations create and deliver products or services to customers to make a profi t. For example, a bicycle manufacturer produces a variety of bicycles and accessories. It then sells these products to numerous retailers who, in turn, sell them to the fi nal consumers. Other companies provide services, such as repairs to the bicycles. Yet others provide the manufacturer with the parts and materials needed to make the bicycles. Achieving the organization’s objectives involves many different types of work. For example, the manufacturer must design the bicycles, identify what parts it will use to make them, determine where to obtain these parts, produce the bicycles, identify its customers, and market and sell the bicycles to them. In addition, it must determine how to manage its money, its various facilities such as factories and warehouses, and the many people that it must recruit, employ, train, and retain. This work is completed in numerous processes.

Although organizations exist for many different purposes, vary greatly in size and complexity, and operate in many different industries, they all exhibit similarities in the ways that they operate. Regardless of their type or size, suc- cessful organizations and industries use processes and enterprise systems to complete the work needed to achieve their goals. Processes may vary slightly depending on the unique characteristics of the industry or the structure of the organization, but the basic activities can be recognized by anyone who has developed a process view of business. Likewise, companies may employ differ- ent enterprise systems to manage their processes. However, you can apply the principles, concepts, and techniques explained in this textbook to most of the enterprise systems you are likely to work with.

A business process, illustrated in Figure 1-2, is a set of tasks or activi- ties that produce desired outcomes. Every process is triggered by some event, such as receiving a customer order or recognizing the need to increase inven- tory. The columns in the fi gure represent different parts, or functional areas, within an organization, such as sales, warehouse, manufacturing, and account- ing. Thus, the specifi c steps in the process are completed in different functional areas. For example, when a retailer (customer) places an order for bicycles, the manufacturer (seller) uses a specifi c process to ensure that the correct

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Business Processes 5

products are shipped to the customer in a timely manner and that payment for the order is received. These process steps can include validating the order, preparing the shipment, sending the shipment, issuing an invoice, and record- ing the receipt of payment. The sales department receives and validates the customer order and passes it on to the warehouse, which prepares and ships the order. The accounting department handles the invoice and payment steps. This is a very simplistic example. However, it highlights the fact that processes consist of interdependent steps that are completed in different parts of the organization.

Because the various process steps are carried out by different functional areas or departments, effective communication and collaboration among the departments is essential to the smooth execution of these processes. Without this interaction, the process cannot be completed effi ciently and effectively. For instance, if the customer order is not properly communicated to the ware- house, then it cannot be shipped on time. Similarly, if the order and shipment information is not communicated to the accounting department, billing and payment will not be completed effi ciently and accurately. Clearly, complet- ing a process successfully requires more than just communicating information. Close coordination of work among the people involved is also essential. For example, when the salesperson accepts the order, he or she must collaborate with the warehouse to determine when the order can be shipped. Without this collaboration, the salesperson may make promises that the company cannot realistically meet. If this occurs, then, the products will not be available when promised. The salesperson must also collaborate with the accounting depart- ment to verify that the customer is credit-worthy. Accepting orders and ship- ping goods to customers who have not made payments for previous shipments can cause major fi nancial problems for the organization.

An organization uses many processes to achieve its objectives, as illus- trated in Figure 1-3. Three processes are directly related to creating and deliv- ering products and services. They are buy, make, and sell. Organizations use specifi c terms to identify these processes.

• The procurement process (buy ) refers to all of the activities involved in buying or acquiring the materials used by the organiza- tion, such as raw materials needed to make products.

• The production process (make) involves the actual creation of the products within the organization. Whereas the production pro- cess is concerned with acquiring needed materials internally (by making them), the procurement process is concerned with obtaining needed materials externally (by buying them). Each is appropriate for different types of materials, as we will discuss later in the book.

Figure 1-2: A generic business process

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6 C H A P T E R 1 Introduction to Business Processes

• Finally, the fulfillment process (sell ) consists of all the steps involved in selling and delivering the products to the organization’s customers.

Closely related to buying, making, and selling are four processes used to design, plan, store, and service products. Once again, organizations use specifi c terms for these processes.

• The lifecycle data management process (design) supports the design and development of products from the initial product idea stage through the discontinuation of the product.

• The material planning process ( plan) uses historical data and sales forecasts to plan which materials will be procured and pro- duced and in what quantities.

• The inventory and warehouse management (IWM) process (store) is used to store and track the materials.

• The asset management and customer service processes (service) are used to maintain internal assets such as machinery and to deliver after-sales customer service such as repairs.

Going further, two support processes are related to people and projects.

• Human capital management (HCM) processes (people) focus on the people within the organization and include functions such as recruiting, hiring, training, and benefi ts management.

Figure 1-3: Key business processes

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Business Processes 7

• Project management processes (projects) are used to plan and execute large projects such as the construction of a new factory or the production of complex products such as airplanes.

All these processes have an impact on an organization’s fi nance. This brings us to the last two processes, which track the fi nancial impacts of processes.

• Financial accounting (FI) processes (track–external ) track the fi nancial impacts of process steps with the goal of meeting legal reporting requirements—for example, the Internal Revenue Service (IRS) or the Securities and Exchange Commission ( SEC).

• Management accounting or controlling (CO) processes (track–internal ) focus on internal reporting to manage costs and revenues.

Each of these processes can include numerous subprocesses. For exam- ple, each of the components of HCM, such as recruiting and benefi ts manage- ment, is itself a process. Similarly, IWM can include complex processes for receiving materials from a vendor and shipping products to a customer. In addition, each process can impact other processes, as illustrated by the arrows between the processes in Figure 1-3. These arrows represent process integra- tion. For example, the procurement of raw materials has an impact on what can be produced and when. Similarly, the production process has an impact on what goods are available to sell and when. Going further, the arrows indicate that all processes have an impact on the organization’s fi nancials, a concept we explore throughout this book.

Clearly, then, in addition to understanding the details of how each process works, it is essential to understand the interrelationships among the processes. Signifi cantly, to prevent Figure 1-3 from becoming cluttered with arrows, we did not include every possible integration point. Instead, we highlighted only the key points.

In the next section, we briefl y describe the various business processes. We subsequently consider each process at length in separate chapters, where we also examine the linkages among the processes.

P R O C U R E M E N T — B U Y

The procurement process includes all of the tasks involved in acquiring needed materials externally from a vendor. A very simple example of a procurement process is diagrammed in Figure 1-4. As the fi gure illustrates, procurement is comprised of fi ve steps that are completed in three different functional areas of the organization.

The process begins when the warehouse recognizes the need to procure materials, perhaps due to low levels of inventory. The warehouse then docu- ments this need in the form of a purchase requisition, which it sends to the pur- chasing department. In turn, the purchasing department identifi es a suitable vendor, creates a purchase order, and sends it to the vendor. The vendor ships the materials, which are received in the warehouse. The vendor then sends an invoice, which is received by the accounting department. Accounting then sends payment to the vendor, thereby completing the process.

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8 C H A P T E R 1 Introduction to Business Processes

In the preceding discussion a low inventory of materials was the trig- ger for the process. This discussion illustrates the link between procure- ment and the inventory and warehouse management process illustrated in Figure 1-3. Figure 1-3 shows, however, that procurement could be triggered by activity in other processes as well. The fi gure suggests at least three alternative scenarios.

1. The material planning process could indicate that the company needs to procure materials based on a forecasted demand for products.

2. The asset management or customer service process could trigger the procurement of a part needed to repair a machine or a product previously purchased by a customer.

3. A customer order (fulfi llment process) could trigger the need to buy something, such as raw materials or component parts needed to manufacture the product.

P R O D U C T I O N — M A K E

In the preceding discussion the company met the need that triggered the pro- cess via external procurement; that is, it purchased the needed materials from a vendor. Other times, however, a company uses the production process to acquire needed materials internally. As we explained in the previous paragraph, a customer order can trigger the production process. Alternatively, the mate- rial planning process can trigger in-house production. Figure 1-5 illustrates the case where the warehouse notices that its inventory of products is low. Subsequently, it will request production. In turn, the production department will approve the request. The approval authorizes the warehouse to release the materials needed to complete production. Once the production depart- ment has completed its task, the warehouse places the fi nished goods into stor- age. Note that this last step in the production process, which is concerned with the storage of the fi nished goods, could trigger IWM processes.

Figure 1-4: A procurement process

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Business Processes 9

F U L F I L L M E N T — S E L L

Fulfi llment (Figure 1-6) is concerned with effi ciently processing customer orders. It is triggered by a customer purchase order that is received by the sales department. Sales then validates the order and creates a sales order. The sales order communicates data related to the order to other parts of the organization, and it tracks the progress of the order. The warehouse prepares and sends the shipment to the customer. Once accounting is notifi ed of the shipment, it creates an invoice and sends it to the customer. The customer then makes a payment, which accounting records.

As this scenario illustrates, fulfi llment triggers processes in IWM where the materials are stored. Of course, in many cases the ordered materials are not available in the warehouse. In such cases fulfi llment will trigger external procurement and/or production.

Figure 1-5: A production process

Figure 1-6: A fulfi llment process

M AT E R I A L P L A N N I N G — P L A N

The term material encompasses all the products, components, parts, and so on that an organization uses. Businesses use and produce many types of materi- als. For example, material planning in a bicycle manufacturer would include: (a) fi nished goods, such as bicycles, that are sold to customers; (b) semifi nished goods, such as wheel assemblies, that are used to make the fi nished goods; and

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10 C H A P T E R 1 Introduction to Business Processes

(c) raw materials, such as the tires, tubes, and wheels that are used to make the wheel assemblies. We examine the major material types in greater detail in Chapter 2.

The purpose of material planning is to match the supply of materials with the demand. The demand for fi nished goods is based on external factors such as customer tastes and preferences, economic conditions, and competitors’ actions. The demand for the other materials is dependent on the demand for fi nished goods. Consequently, organizations use different data and processes to plan for different types of materials.

The supply of materials is a function of many internal and external fac- tors. For example, the supply of materials procured externally (e.g., raw mate- rials) depends on availability from vendors as well as the lead time, which is the time between placing the order and receiving the shipment. Internally, the supply depends on available production capacity in the factories.

The outcome of material planning is the development of strategic and operational plans that match supply with demand as closely as possible. Excess supply will result in increased inventory costs, which are the expenses associ- ated with storing materials. Insuffi cient supply will result in a situation called stock-out in which the company cannot meet its customers’ demands. Both situations can undermine a company’s productivity and profi ts.

Material planning is infl uenced by the fulfi llment process, which provides sales data that companies use to forecast demand for fi nished goods. It is also infl uenced by procurement and production, which provide data on lead times and capacities, and by IWM, which provides data on material availability. In turn, material planning will trigger procurement and production processes to ensure that demand is met and IWM processes to ensure that materials are stored until needed.

I N V E N T O RY A N D WA R E H O U S E M A N A G E M E N T — S T O R E

Inventory and warehouse management (IWM) is concerned with the storage and movement of materials. For a business to operate effi ciently, it is essen- tial that materials be stored so that they can be quickly and easily located when needed. This is especially true for large warehouses where thousands of different materials are stored in large quantities. In addition, companies must be able to move the materials quickly and effi ciently to wherever they are needed.

Figure 1-7 depicts four scenarios related to material storage and move- ment. Quadrant A (top left) shows a request for materials that will be used in the production process. These materials must be located and then issued to the production fl oor. In Quadrant B, the warehouse receives materials from the production process and then prepares them for storage. This process can include such steps as sorting and determining an appropriate storage location. Finally, the materials are moved into the selected locations. A similar process is used for materials that are received from a vendor via the procurement pro- cess (Quadrant C). Finally, when a customer order is processed by the fulfi ll- ment process, the warehouse must locate the materials and prepare and send shipments to the customer (Quadrant D).

These examples also clearly illustrate the integration between IWM and procurement, production, and fulfi llment. We will discuss integration points with other processes in later chapters.

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Business Processes 11

L I F E C Y C L E D ATA M A N A G E M E N T — D E S I G N

A successful organization must constantly improve its products and create new and innovative products that refl ect changes in customer tastes and preferences. Lifecycle data management provides a set of tools to manage product design and improvement throughout the lifecycle of a product. The product lifecycle begins with idea or concept development; progresses through production, marketing, and service; and concludes when the product is discontinued from the market. It can range from a few months for fad items to many years or even decades for products such as automobiles and bicycles. Products in the latter category typi- cally undergo small but continual improvements over the course of their lifecycle.

Lifecycle data management enables an organization to optimize its prod- uct development process, from design to market, while ensuring that it complies with industry, quality, and regulatory standards. At the same time, it provides users—that is, the organization’s employees—with access to product data at any point in the product’s lifecycle. This capability, in turn, enables the organization to react more quickly to take advantage of market and competitive opportunities.

A S S E T M A N A G E M E N T A N D C U S T O M E R S E RV I C E — S E RV I C E

Asset management is concerned with both the preventive and corrective main- tenance of an organization’s equipment. Preventive maintenance is performed periodically—for example, the routine maintenance of a machine in a factory.

Figure 1-7: Inventory and warehouse management processes

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12 C H A P T E R 1 Introduction to Business Processes

In contrast, corrective maintenance is done as needed—for example, repair- ing a machine when it breaks down. Figure 1-8 illustrates a simplifi ed main- tenance process. The trigger is a maintenance request, which can be either preventive or corrective. Production approves the request, and the mainte- nance is performed. The fi nal stage, settlement, involves an internal charge for the work done.

Figure 1-8: An asset management process

A similar process is used for service requests from customers, for exam- ple, to repair a product they purchased (Figure 1-9). In such cases, different functional areas may be involved. Sales receives a service request, which it approves and forwards to the department responsible for completing the repairs. Settlement will depend on whether the service is covered by a warranty. If it is, then the organization will absorb the cost of the repair. Otherwise, the organization will send an invoice to the customer and then record payment, similar to the steps in the fulfi llment process.

Figure 1-9: A customer service process

H U M A N C A P I TA L M A N A G E M E N T — P E O P L E

Human capital management (HCM) consists of numerous processes related to all aspects of managing people in an organization. Examples of HCM processes are recruitment, hiring, training, compensation and benefi ts management, and

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Business Processes 13

payroll administration. In our brief discussion of processes in this chapter, we focused on tasks and the functional areas where they are completed. Clearly, however, it is the people in the functional areas who actually perform the tasks. Consequently, HCM touches every process in the organization. Moreover, it is not uncommon for people in different functional areas to complete many of the tasks in HCM processes. For example, the trigger for recruitment and hiring is a need for people with the requisite skills to complete process tasks. Consequently, the functional area in need of new employees will be involved in this process.

P R O J E C T M A N A G E M E N T — P R O J E C T S

Most business processes are ongoing or repetitive. For example, the lifecycle data management process spans the life of a product, and the procurement and fulfi llment processes are repeated frequently. In contrast, a project is temporary in nature and is typically associated with large, complex activities, such as the construction of a factory or an aircraft. As we discussed earlier, project manage- ment refers to the processes a company uses to plan and execute large-scale proj- ects. It involves the use of tools and techniques for managing complex projects.

Projects can be internal or external depending on the recipient of the fi nal outcome. For internal projects, such as constructing a plant, project man- agement is concerned primarily with costs. This is because the outcome of the project benefi ts the organization and is not sold to a customer. Because no sales are involved, no revenues are created. In contrast, external projects such as building an aircraft for a customer generate both costs and revenues.

Projects rely on resources and capabilities available in other processes. For example, building an aircraft involves purchasing materials (procurement process), making components from these materials (production), supervising people (HCM), and so on. External projects are also integrated with selling to customers (fulfi llment). Figure 1-10 illustrates a simplifi ed project manage- ment process. The diagram does not identify the specifi c functional areas in which the work needed to complete the project is performed because this will vary depending on which other processes are involved.

In the planning phase the scope of the project is defi ned, and the mile- stones and deadlines are set. The budgeting phase triggers the accounting pro- cesses to calculate and allocate the resources needed to execute the project. The project is not executed until management approves the budget. During

Figure 1-10: A project management process

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14 C H A P T E R 1 Introduction to Business Processes

the execution phase the needed processes (e.g., procurement and production) are triggered. In addition, accounting processes are used to keep track of costs and revenues and, for external projects, to issue customer invoices. Finally, throughout the life of the project and at the end of the project an accounting process called settlement is periodically carried out to assign costs and revenues to the appropriate parties.

F I N A N C I A L A C C O U N T I N G — T R A C K F O R E X T E R N A L R E P O RT I N G

Financial accounting is concerned with tracking the fi nancial impacts of processes with the primary goal of meeting legal and regulatory reporting requirements. Thus, it is externally focused. Common reports include the income statement or profi t and loss (P&L) statement and the balance sheet. The income state- ment indicates the organization’s fi nancial condition within a specifi ed period of time. It identifi es revenues, expenses, and net profi t (or loss) for the period. In contrast, a balance sheet indicates the fi nancial condition of an organiza- tion at a given point in time. It identifi es assets, liabilities, and shareholders’ equity. All of these reports must comply with prescribed standards, such as the generally accepted accounting principles (GAAP) in the United States and Handelsgesetzbuch (HGB) in Germany. These reports must be submitted to regulatory agencies at prescribed times, such as annually or quarterly. Finally, these reports are country specifi c. Therefore, an enterprise that operates in multiple countries must track fi nancial data separately for each country, using that country’s prescribed standards.

Various steps in the different processes introduced earlier in this chapter have an impact on an organization’s fi nancial status. Organizations analyze this impact using four key processes based in fi nancial accounting: general ledger, accounts receivable, accounts payable, and asset accounting. The general ledger process records the impacts of various process steps on a company’s fi nancial position. The impacts are recorded in a number of accounts in the general ledger that represent an organization’s income, expenses, assets, and liabilities. These accounts are used to store accounting-relevant data from process steps. Accounts payable is associated with the procurement pro- cess and is used to track money that is owed to vendors. Similarly, accounts receivable is used to track money owed by customers. Accounts receivable and accounts payable automate the general ledger entries associated with the procurement and fulfi llment processes so that the fi nancial impact of these processes is recorded automatically. Finally, asset accounting is concerned with tracking fi nancial data related to assets such as machinery and cars.

M A N A G E M E N T A C C O U N T I N G — T R A C K F O R I N T E R N A L R E P O RT I N G

Whereas fi nancial accounting is concerned with external reporting that is man- dated by laws and regulations, management accounting, or controlling, is concerned with tracking costs and revenues for internal reporting that is intended to help management control costs and revenues and assess the profi tability of various products and market segments. Management creates these reports to support its decision making. Unlike fi nancial accounting reports, management

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accounting reports are produced as needed and can contain any information that management deems necessary.

Among the major costs management accounting tracks are materials costs, labor costs, and overhead costs. Management takes these costs into account when it establishes prices for its products or services. It then combines these data with information concerning revenues to determine the profi tability of various products and services in different market segments. Ultimately, management utilizes all of this information to make key strategic decisions that affect the organization’s prod- ucts market mix as well as tactical decisions that infl uence day-to-day operations.

G L O B A L B I K E I N C O R P O R AT E D ( G B I ) GLOBAL BIKE INC.

Throughout this book, we will use the case of Global Bike Incorporated (GBI) to illustrate important concepts, processes, and techniques. GBI is a fi ctional company, and its operations have been greatly simplifi ed to make its business processes and its SAP ERP system easier for you to work with. Although GBI might seem complex as you progress through the chapters of this textbook, rarely will the business operations of a real-world company be as simple as those found in GBI.

Much the data used in this textbook are based on GBI and represent the many aspects of its fi ctional suppliers, customers, employees, and materials. In addition, all of the hands-on exercises are intended to be completed in a func- tioning (live) SAP ERP system that is confi gured with GBI data. (Enterprise Resource Planning, or ERP, systems integrate a company’s various functional and cross-functional business processes. We explain ERP systems in greater detail in Chapter 2.) It is very important that you quickly become familiar with GBI and their business operations in order to master the key concepts in this course and to complete your course assignments.

The following paragraphs provide a brief overview of GBI. However, you must retrieve the detailed GBI Annual Report from the WileyPLUS course site (explained later) or the SAP University Alliances Community (SAP UAC) at http://uac.sap.com to learn the full story of how GBI came into existence and to familiarize yourself with the specifi cs of the company’s operations. The SAP UAC is a free site for all university students who are enrolled in an SAP course. The registration process is very simple and is free. In addition to the detailed GBI information on the SAP UAC site, you will also gain access to several SAP career services, including certifi cation information and internship and job opportunities. Your instructor can show you where to access the GBI Annual Report on the SAP UAC site once you have registered.

GBI was founded in 2001 following the merger of two bicycle manufac- turers, one based in the United Sates and the other in Germany. GBI has three lines of business: deluxe and professional touring bikes, men’s and women’s off-road bikes, and bike accessories. GBI sells its bikes to a network of spe- cialized dealers throughout the world, and it procures its raw materials from a variety of suppliers globally.

GBI has two manufacturing facilities, one in the United States and one in Germany. It also has three additional warehouses, two in the United States and one in Germany. GBI has more than 100 employees globally. The organization uses SAP ERP to support its processes. Figure 1-11 illustrates GBI’s enterprise structure.

Global Bike Incorporated (GBI) 15

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16 C H A P T E R 1 Introduction to Business Processes

H O W T O U S E T H I S B O O K This edition of Integrated Business Processes with ERP Systems does not cover all of the processes introduced in this chapter. Chapter 2 is an introduction to enterprise systems, and Chapter 3 discusses fi nancial accounting. Chapters 4-8 address the key logistics processes: procurement, fulfi llment, production, warehouse management, and material planning. Finally, a concluding chapter discusses all of these processes from an integrated perspective. In addition, the exercises and demonstrations included in this book are available online via WileyPLUS.

C H A P T E R S T R U C T U R E

As the previous paragraph indicates, most chapters will focus on a specifi c process, such as procurement, fi nancial accounting, and production. Most of these chapters share a common structure. Each chapter begins with a review of the simple presentation of the process introduced earlier in this chapter. The chapter then segues to a detailed discussion of data, key concepts, and process steps. General concepts related to data—organizational data, master data, and transaction data—will be introduced in Chapter 2. Each subsequent chapter will focus on the specifi c concepts and data that are relevant to the process discussed in that chapter. Most chapters require you to understand a few fun- damental concepts, which are discussed next. Note that many of the concepts related to organizational and master data are relevant to more than one pro- cess. In such cases, we do not repeat the discussion of these concepts. Rather, we refer you to previous chapters where they were discussed.

The third main component of each chapter consists of a detailed discus- sion of the various steps involved in the process. Each process step will be discussed using the following framework:

• Triggers: the event(s) that cause(s) the process step to be initiated

• Tasks: the specifi c steps needed to complete the process step

Figure 1-11: GBI enterprise structure

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How to use This Book 17

• Data: the information associated with each process step

• Outcomes: the specifi c products or consequences of the process step

The fourth component of each chapter is reporting. This section exam- ines how the data generated during the process steps are converted into meaningful information. It also provides examples of the types of reports that can help managers improve process performance.

Going further, each chapter employs three pedagogical tools— demonstrations, real-world cases, and exercises—to reinforce the material. Demonstrations illustrate either a particular concept or the execution of a pro- cess step in the SAP ERP system. These demonstrations are in the form of ani- mations that can be viewed multiple times. Real-world cases are vignettes from actual companies that illustrate a concept or demonstrate how that company executes a process. Exercises to be completed in an SAP system confi gured with GBI data provide a fi nal reinforcement of the chapter’s key concepts.

S A P S O F T WA R E

SAP (pronounced by saying each letter individually, like IBM or ABC) is the pioneer in enterprise systems. SAP was the fi rst company to build a packaged enterprise system, which means that it designed a single piece of software that is used by many companies. Prior to that time, software developers had to cre- ate customized software for every company, which was prohibitively expensive.

SAP introduced the fi rst integrated, end-to-end enterprise system, called SAP® R/3, in 1992. The “R” in R/3 stands for “real time.” Prior to the develop- ment of enterprise systems, companies typically employed a number of differ- ent systems, each of which supported a single function or department. Thus, there were sales systems, accounting systems, manufacturing systems, and so on. These systems were not integrated, so sharing data between and among them was problematic. As you might expect, this architecture regularly expe- rienced delays in executing business processes because data had to be trans- ferred from one system to the next as the process was being performed.

SAP R/3 was designed to eliminate these ineffi ciencies by executing an entire process from start to fi nish and consolidating all of the process data in a single database. Consequently, regardless of which individuals were completing a step in the process, all of the data were available to them in real time. In addition, everyone else in the company could see the status of the process in real time as well. In today’s age of Twitter and RSS feeds, this development might seem trivial. At the time, however, it was a crucial innovation. SAP R/3 was quickly adopted by one major corporation after another, and it catapulted SAP software onto the “must do” list for nearly every large company. By 2010, SAP had more than 110,000 customers in over 120 countries, including nearly every Fortune 1000 company. In 2008, SAP’s market share in the ERP category was equivalent to the market share of the next four largest ERP vendors—combined.3, 4 Today, more than 75% of SAP’s customers are small and medium-sized businesses.

3 C. Pang, Y. Dharmasthira, C. Eschinger, and K. Motoyoshi, Market Share: ERP Software, Worldwide, 2008, July 2008, Gartner. 4 A. Pang, Worldwide ERP Applications 2009–2013 Forecast and 2008 Vendor Shares, October 2008, IDC.

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18 C H A P T E R 1 Introduction to Business Processes

Enterprises of every size, in every industry, all over the world use SAP software to manage their business operations. Regardless of where you live, nearly every major corporation, government entity, and nonprofi t organization you are famil- iar with runs the same SAP software that you will use in this course.

Before you start to think that this book is a marketing brochure for SAP, you should understand why we have explained SAP’s strategic importance in business and have selected SAP ERP as the reference system for this textbook. One of the most lucrative and rewarding careers in the IT industry for nearly 20 years has been that of an SAP consultant.5 Contrary to what you may have heard, most SAP consultants are not programmers. Rather, they are MIS and business majors who have developed a process perspective on business and have become competent in a specifi c capability of the SAP ERP system. However, even technical programmers who wish to work with SAP must have a deep understanding of how business works in order to program applications that enable business processes to operate more effi ciently. In other words, they are people just like you who have mastered the material in this textbook.

Integrated Business Processes with ERP Systems will incorporate a num- ber of demonstrations, examples, and hands-on exercises using SAP ERP. Several other companies offer enterprise systems that have similar capabili- ties, but it would be very diffi cult to explain how processes are executed in each of them. We have chosen to include the most prevalent and widely used ERP system that you are likely to encounter in your career. Although some of the concepts in this textbook are specifi c to SAP ERP, you can easily trans- fer nearly everything you learn to whichever system is used in the companies where you will work.

When SAP fi rst introduced R/3, almost anybody could claim to be an R/3 expert and thus become a highly paid consultant. Unfortunately, this practice led to quite a few well-publicized project failures. In response, SAP introduced certifi cations for the various modules and technical skills required to be a properly trained consultant. This arrangement enabled consultants who participated in SAP training programs and demonstrated a high degree of skill to distinguish themselves for potential employers. Today, SAP provides more than 100 certifi cation types, classifi ed by solution, focus area, and role. Each certifi cation type specifi es three levels of skill: associate, professional, and master. It can take many years and tens of thousands of dollars to progress up to master-level certifi cation. SAP is very proud of the high level of knowl- edge and skills that are required to earn certifi cation. As you probably suspect by now, the SAP testing process is extremely rigorous. Because an SAP cer- tifi cation is such a highly valued credential, once you have earned one, SAP provides you with a certifi cation number that can be listed on your resume or CV and verifi ed by potential employers—the thousands of consulting com- panies that implement SAP software and the more than 110,000 (in 2010) companies that run SAP software.

As an added benefi t to students enrolled at universities or technical schools that are members of the SAP University Alliances Program, SAP offers special certifi cation academies on campuses around the world where students can earn the same certifi cation as professionals at a reduced cost. This textbook and the additional online materials are based on the content in the

5 J. Sahadi, Hot 6-fi gure jobs now, 2007 [Online], CNN/Money. http://money.cnn.com/galleries/ 2007/pf/0708/gallery.hot_six_fi g_jobs_now/index.html.

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How to use This Book 19

SAP course, which results in an offi cial SAP Associate Application Consultant certifi cation and can be used as a supplement to the SAP course materials. Alternatively, students who master the concepts in this textbook and the additional online materials can take the SAP certifi cation exam at one of over 8,000 global testing centers without participating in a certifi cation academy.

Students who pass the exam will receive the same offi cial SAP certifi ca- tion as working professionals who complete an SAP-sponsored training pro- gram. Earning this certifi cation is the fi rst step toward a successful and perhaps lucrative career as an SAP application consultant. Speak with your instruc- tor, and consult the certifi cation information on the SAP University Alliances Community and WileyPLUS for more details.

W I L E Y P L U S

WileyPLUS is an important online supplement to this book. It includes four key components: hands-on exercises, SAP ERP system demonstrations, online chapters, and information about preparing for the SAP certifi cation exam.

The hands-on exercises found on the WileyPLUS companion site for this textbook will guide you through the execution of the process steps found in each chapter. You will complete these exercises in a live SAP ERP system based on Global Bike, Inc., which you will become very familiar with through- out the chapters. In essence, you will assume the role of the various employees of GBI and complete their tasks in the SAP ERP system, as if you were doing their job. In this way, you will see the processes executed from multiple view- points and thus further develop your “process perspective” of the fi rm. Your instructor will provide you with login information and the SAP interface to complete these exercises in the SAP ERP system. We anticipate that you will encounter some diffi culties while completing the exercises. Nearly every stu- dent does, so don’t become discouraged if this happens to you. Your instructor or lab assistant can provide some help if you are working in an on-campus lab. You can also seek help from fellow students in your class. One of the most valuable sources of assistance is the SAP University Alliances (SAP UAC) discussion forum for this textbook. Go to www.extrabandwidth.com/forum, which will redirect you to the SAP UAC forum, where you can ask questions about the text and the exercises. Students and professors around the world will quickly assist you. If you receive a helpful answer, you can award points to the person who helped you. Not only is this a nice form of recognition, but it helps the community reinforce its focus on mutual support and knowledge sharing.

Throughout each chapter you will see references to demonstrations that will illustrate how a particular concept, task, or data is presented in the SAP system. These demonstrations are meant to enhance your conceptual under- standing of the topic by providing you with a visual and physical represen- tation of how the system executes or displays a particular component of the process being discussed. We advise you to follow the demonstrations on the WileyPLUS website while reading and reviewing the chapter in the printed textbook. For the online version of the textbook on WileyPLUS, the demon- strations are linked directly from the references in the chapter for easy access. Going further, the demonstrations are very similar to the activities required in the exercises. Therefore, it will be helpful to review the demonstrations prior to attempting the exercises so as to familiarize yourself with the navigation, key data, and activities required to complete the process steps.

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20 C H A P T E R 1 Introduction to Business Processes

Asset management and customer

service processes

Business process

Controlling

Enterprise systems (ES)

Financial accounting (FI) processes

Fulfi llment process

Functional structure

Global Bike Incorporated (GBI)

Human capital management (HCM)

processes

Inventory and warehouse

management (IWM) process

Lifecycle data management process

Management accounting or

controlling (CO) processes

Material

Material planning process

Procurement process

Production process

Project

Project management processes

Silo effect

C H A P T E R S U M M A R Y

This chapter introduced the key concepts related to common business processes

in organizations, the typical functional structure that companies employ to man-

age their operations, and the benefi ts of adopting a holistic view of integrated

business processes and their role in effectively translating corporate strategy

into operational effi ciency.

Most companies are organized according to functional departments,

which group together related activities and assets under specialized manage-

ment controls. Although this approach enables companies to focus resources

on specifi c activities, it also creates communication diffi culties and delays

between the highly specialized groups. Business processes cut across the verti-

cal barriers (silos) that characterize the functional structure. For this reason they

require cross-functional communication and collaborative execution.

Enterprise systems allow companies to effectively manage business pro-

cesses across functional areas and institutional boundaries. They perform this

task by removing barriers to sharing and accessing information, thereby provid-

ing a holistic platform to execute integrated business processes consistently

and effi ciently. One of the key benefi ts to managing business processes with

an integrated enterprise system is that process data are collected throughout

the execution of each step of the process. Managers can then use these data to

monitor and improve the organization’s processes. Enterprise systems enable

companies to achieve operational effi ciency through transparency across func-

tional areas, and they provide consistent information for managerial decision

making. All business processes have an impact on the organization’s fi nancial

status, and the real-time impact of process execution can be monitored and

analyzed through the use of an integrated enterprise system.

K E Y T E R M S

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Review Questions 21

R E V I E W Q U E S T I O N S

1. Describe the functional organizational structure. Why do you think this structure is so widely used?

2. What is the silo effect? Why does it exist? What problems does it create? How can an organization reduce or eliminate the silo effect?

3. What is a business process? Why is adopting a process view of organiza- tions essential to becoming a successful manager?

4. Briefl y describe the key business processes included in this chapter in terms of their key steps.

5. Explain the interrelationships among the key processes included in this chapter. Why are these interrelationships important?

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C H A P T E R 4 The Procurement Process 2 3

2 3

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Discuss the evolution and key business benefi ts of enterprise systems.

2. Explain the role of enterprise systems in supporting business processes.

3. Differentiate the different categories of data within SAP® ERP.

4. Identify and analyze the major options for reporting.

I n Chapter 1 we discussed the key processes executed in organizations. We saw that there is a high degree of integration and interdependence among pro- cesses. Even within small organizations it is diffi cult to execute these processes

effi ciently using manual techniques. Thus, organizations invariably rely on the use of enterprise systems to ensure that these processes are executed effi ciently and effectively. In this chapter we discuss key concepts in enterprise systems, par- ticularly SAP ERP. We begin by expanding on the introduction to enterprise systems and SAP ERP provided in Chapter 1. We follow this discussion with a brief history and evolution of SAP ERP. We then explore the different types of data utilized in SAP ERP. Finally, we conclude the chapter by examining various reporting options enabled by enterprise systems (ES).

E N T E R P R I S E S Y S T E M S Enterprise systems are one of the most complex and powerful information systems in use today. As we explained in Chapter 1, this book will cover the world’s most popular ES—SAP ERP—in great depth. Although you might have studied enter- prise systems in a previous course, we provide a quick review of the key concepts to refresh your knowledge and to place these concepts in an appropriate context for the rest of this course. In this section we briefl y discuss the architecture of enter- prise systems, the SAP® Business Suite, SAP ERP, and the technology platform— SAP® Netweaver—that forms the foundation for these applications.

Introduction to Enterprise Systems

C H A P T E R 2C H A P T E R

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24 C H A P T E R 2 Introduction to Enterprise Systems

A R C H I T E C T U R E O F E N T E R P R I S E S Y S T E M S

The architecture of an enterprise system refers to the technical structure of the software, the ways that users interact with the software, and the ways the soft- ware is physically managed on computer hardware. Most modern ES have either a three-tier client-server architecture or a service-oriented architecture. There are many different ways to deploy ES in these two architectures. Both models offer distinctive technical and cost benefi ts, and both models have drawbacks. Nevertheless, the impact of these two models on the management of business processes is largely the same. We examine both types of architecture below.

Client-Server Architecture

Think of a desktop application that you routinely use, such as word process- ing, spreadsheet, or presentation software. These applications consist of three components, or layers: (1) how you interact with the application (using menus, typing, and selecting); (2) what the application allows you to do (create for- mulas or charts, compose an essay); and (3) where the application stores your work (on your hard drive or fl ash drive). These layers are the presentation layer, application layer, and data layer, respectively. In the desktop appli- cations mentioned above, all three layers are contained in one system. In con- trast, the three-tier client-server architecture separates these layers into three separate systems, as illustrated in Figure 2-1.

Figure 2-1: Three layers of the client-server architecture

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Enterprise Systems 25

Much of the work you do on the Internet uses a three-tier architecture. Your browser is the presentation layer. Through your browser, you connect to many systems (websites) that provide a variety of capabilities (e-mail, pur- chasing goods, information sharing). These websites contain the applications that execute the request you send through the browser (via HTTP), and they retrieve and store data in a connected database.

The shift to the three-tier client-server architecture dramatically reduced the costs of acquiring, implementing, and using an ES while signifi cantly increasing the scalability of the systems. Scalability refers to the ability of the hardware and software to support a greater number of users easily over time, typically at a decreasing cost per user. These two benefi ts transformed ES from a capability that only a few large companies could afford into a technology that tens of thousands of companies now utilize.

Service-Oriented Architecture

In the early 2000s, companies began to Web-enable their three-tier applications so that users could access the systems through a Web browser. During these years companies also benefi ted from new technologies that could help link, or integrate, many different client-server systems together in new and valu- able ways. These new technologies are collectively labeled service-oriented architecture, or SOA. The fundamental concept behind SOA relates to the technical capabilities that allow systems to connect with one another through standardized interfaces called Web services. By using Web services, companies could now integrate multiple client-server applications and create enterprise mash-ups, or composite applications. Composite applications and mash-ups rely on Web services to send and receive data between and among ES in a standardized way, which eliminates a great deal of cost and complexity from integration projects. In addition, they execute newer and more specifi c pro- cesses than are typically found in the standard ES.

Companies such as SAP have invested billions of dollars to service-enable their applications so that these systems can be exposed—that is, their function- ality can be made visible to users—and can be connected to a great number of composite applications. By using SOA to integrate and expose the business processes and data inside an ES, companies can now create new composite applications quickly and inexpensively. In essence, SOA enables companies to build composite applications on top of their existing three-tier client-server applications without changing the underlying applications. This capability gives companies an entirely new level of fl exibility at an extremely low cost.

E N T E R P R I S E R E S O U R C E P L A N N I N G ( E R P ) S Y S T E M S

Enterprise resource planning (ERP) systems are the world’s largest and most complex ES. ERP systems focus primarily on intra-company processes— that is, the operations that are performed within an organization—and they integrate functional and cross-functional business processes. Typical ERP systems support Operations (Production), Human Resources, Finance & Accounting, Sales & Distribution, and Procurement. As we discussed in Chapter 1, SAP was the fi rst company to create a fully integrated and global ERP system, SAP® R/3, which could manage end-to-end processes for com- panies that operated in many different countries, with multiple languages and

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26 C H A P T E R 2 Introduction to Enterprise Systems

currencies. Figure 2-2 shows the solution map for the current version of the system developed by SAP, known as SAP ERP.

The solution map identifi es the functionality and processes supported by the system. Notice that many of the functional capabilities in the solution map are similar to the business processes that were defi ned in Chapter 1. In addition, several areas of SAP ERP overlap with functional groups within the company. These overlaps are a result of the tight integration of ERP and the processes that it manages. As companies have adopted more and more ERP capabilities and begun to view their companies from more of a process per- spective, the ES world and the functional world have begun to merge. Given the scope and size of the SAP ERP system, we will focus on the core ERP functional modules in this book.

Although companies are moving toward a process view of organizations, and our book takes a process view of business operations, the functional view still persists in many organizations. The capabilities of an ERP system are often described in terms of modules or specifi c capabilities, and it is still quite com- mon to see or hear SAP ERP referred to in terms of module abbreviations in job advertisements or industry discussions. Figure 2-3 lists the more common

Figure 2-3: SAP ERP modules

Figure 2-2: The SAP ERP solution map. Copyright SAP AG 2011

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Enterprise Systems 27

modules in SAP ERP and the abbreviations that are typically used for them. For example, a person with expertise in the fi nancial accounting and manage- ment accounting modules of SAP ERP is typically called a FICO expert based on the abbreviations of the two modules.

As more companies acquired ERP systems, the next step in the evolu- tion of ES was to connect these systems so they could support inter-company processes—that is, processes that take place between and among companies. Examples of inter-company systems are supply chain management (SCM) and supplier relationship management (SRM) systems, which connect a company’s ERP system to those of its suppliers. SCM connects a company to other companies that supply the materials it needs to make its products. Typical SCM systems help companies plan for their production requirements and optimize complex transportation and logistics for materials. SRM systems typically manage the overall relationships with the materials suppliers. SRM systems contain functionality to manage the quotation and contracts processes. These systems act as extensions to the procurement and material planning processes of ERP systems.

On the other side of the manufacturing and sales processes, customer relationship management (CRM) systems connect a company’s ERP sys- tem to those of its customers. CRM systems provide companies with capa- bilities to manage marketing, sales, and customer service. These systems are an extension of the fulfi llment process of ERP systems. Product lifecycle management (PLM) systems help companies administer the processes of research, design, and product management. In effect, PLM systems help com- panies take new product ideas from the virtual drawing board all the way to the manufacturing facility.

The collection of these inter-company systems and the underlying intra- company ERP system is called an application suite. Suite vendors, such as SAP and Oracle, provide fairly comprehensive collections of applications that offer an enormous amount of functionality and cover most of the standard business processes.

Figure 2-4 identifi es the various capabilities that are part of an applica- tion suite and illustrates how they connect to other members of a company’s business network. It is important to note that one of the key benefi ts of utiliz- ing a complete suite of software is that the data and processes are integrated among the systems in the suite. That is, although they are separate systems, they are designed so that they work together in an integrated manner.

Figure 2-4: The ES application suite

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28 C H A P T E R 2 Introduction to Enterprise Systems

The focus of this textbook is on core intra-company processes and ERP systems. Keep in mind, however, that the emergence of inter-company busi- ness capabilities is one of the most important developments in the modern business environment. A fundamental understanding of the key business pro- cesses and ERP systems is a prerequisite to studying advanced topics such as supply chain management and customer relationship management because those processes are extensions of the core ERP-enabled business processes.

A P P L I C AT I O N P L AT F O R M S

Another critical component of ES is application platforms. Much like the role of the operating system for your personal computer, application platforms serve as a type of “enterprise operating system” for a company’s ES landscape by allowing all of the various systems to communicate seamlessly with one another as well as with systems outside the company. SAP introduced its application platform, SAP NetWeaver, in 2003. SAP NetWeaver is now an integral part of SAP ERP and the SAP Business Suite. It contains the SOA capabilities needed to integrate SAP systems with non-SAP systems. In addi- tion, it provides companies with a toolset to build new composite applications or to plug in independent software vendor (ISV) applications on top of their core ERP and suite applications. Figure 2-5 illustrates how SAP NetWeaver interacts with the SAP Business Suite of applications.

Figure 2-5: SAP NetWeaver. Copyright SAP AG 2011

The SAP Business Suite, which includes SAP ERP, SAP® CRM, SAP® SCM, SAP® PLM, and SAP® SRM, runs on SAP NetWeaver. You can think of the relationship between the SAP Business Suite and SAP NetWeaver in terms of the relationship between Microsoft Offi ce and the Microsoft Windows oper- ating system. The SAP Business Suite consists of the applications that com- panies use to manage and execute their business processes, just as Microsoft Offi ce contains the applications that you use to accomplish tasks such as creat- ing a presentation, a document, or a spreadsheet. SAP NetWeaver orchestrates the communication among the applications, transporting the master data and technical information needed by the applications at different points in the pro- cess. Similarly, Microsoft Windows is an operating system that the Microsoft Offi ce applications use to communicate with one another and to access other

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capabilities and tools. SAP NetWeaver also contains several technical tools to help companies extend the SAP Business Suite applications, integrate with other non-SAP applications, and build (compose) new applications. In essence, SAP NetWeaver is the “operating system” for a company’s entire range of business processes.

D ATA I N A N E N T E R P R I S E S Y S T E M As we discussed earlier, a central component of any ERP system is the com- mon database that stores data related to all the processes. Without this func- tion, integrating the various processes would be diffi cult, if not impossible. Therefore it is essential to understand how data are organized in an ERP system. We address this topic in the following section. We then introduce the different types of data that are stored in an ERP system, and we identify basic data elements that are common to many processes. We will develop these top- ics and introduce additional data elements in later chapters that discuss spe- cifi c processes. For the purposes of this chapter we will restrict our discussions to the procurement and fulfi llment processes introduced in Chapter 1.

Data in an ERP system are used to represent the physical system in which process steps such as creating a purchase order and receiving goods are carried out. These steps generate data, which represent the outcomes of the steps. There are three types of data in an ERP system: organizational data, master data, and transaction data.

O R G A N I Z AT I O N A L D ATA

Organizational data are used to represent the structure of an enterprise. Examples of organizational structure are companies, subsidiaries, factories, warehouses, storage areas, and sales regions. The three organizational data elements discussed in this chapter are client, company code, and plant (see Figure 2-6). Note that the terms organizational data, organizational levels, and

Figure 2-6: Organizational data

Data in an Enterprise System 29

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30 C H A P T E R 2 Introduction to Enterprise Systems

organizational elements are often used interchangeably, depending on the con- text. These data are relevant to many of the processes discussed in Chapter 1. We will introduce additional organizational data as needed in the various pro- cess chapters.

Client and Company Code

A client is the highest organizational level in SAP ERP. It represents an enter- prise consisting of many companies or subsidiaries. Each company within the enterprise is represented by a company code. Each company code represents a separate legal entity, and it is the central organizational element in fi nancial accounting. That is, fi nancial statements required for legal reporting purposes are maintained at the company code level. A client can have multiple company codes, but a company code must belong to only one client.

Figure 2-7 shows organizational data for GBI. Recall from Chapter 1 that GBI consists of two companies, one in the United States and one in Germany. GBI is represented by a client, and each of the two companies is represented by a company code, US00 and DE00, respectively.

Figure 2-7: GBI organizational data

Plant

A plant is an organizational element that performs multiple functions and is relevant to several processes. It is essentially a facility in which the following functions are performed:

• Products and services are created.

• Materials are stored and used for distribution.

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• Production planning is carried out.

• Service or maintenance is performed.

A plant can be a factory, a warehouse, a regional distribution center, a service center, or an offi ce. It can be a part of a building, an entire building, or a collection of buildings. In addition, a single building can house multiple plants. Consider, for example, a company that has several offi ces in a build- ing. Different services or activities, such as processing customer returns and providing technical support to customers, are performed in these offi ces. Each of these offi ces is defi ned as a separate plant. Just as a client can have multiple company codes, a company code can contain multiple plants. However, a plant can belong to only one company code.

As illustrated in Figure 2-7, GBI operates fi ve plants for the manufacture and storage of bicycles and accessories. Three plants are located in the United States—in Dallas (DL00), San Diego (SD00), and Miami (MI00). The Dallas plant is a manufacturing facility, whereas the other two are distribution centers from which products are shipped to customers. The Dallas plant ships prod- ucts to customers as well. The other two plants are located in Germany—in Hamburg (HB00) and Heidelberg (HI00). The Heidelberg plant operates as both a manufacturing facility and a distribution center, while the Hamburg plant is exclusively a distribution center.

Coca-Cola Enterprises provides us with a good example of a company that has several types of plants. Coca- Cola operates factories that produce both raw materials and fi nished goods. Some factories produce the syrup that forms the basis of the Coca-Cola products you are familiar with. Other factories combine the syrup with carbonated water during the bottling process to make the fi nished Coca-Cola products. The fi nished goods, which consist of cases of bottles and cans of Coca-Cola

products, are then shipped to regional distribution cen- ters for storage until they are transported to end cus- tomers, such as retailers. The syrup factory, the bottling factory, and the distribution center are all considered plants in Coca-Cola’s SAP ERP system.

Source: Coca-Cola Company Reports & CCE CIO presentation

at SAP Sapphire 2008.

Business Processes in Practice 2.1: Coca-Cola® Enterprises

M A S T E R D ATA

Master data represent entities associated with various processes. For exam- ple, processes involve buying materials from vendors and selling materials to customers. In this example, customers, vendors, and materials are represented in an ERP system using master data.

The most commonly used master data in an organization is the material master. Materials are used in numerous processes. They are purchased, sold, produced, and planned for. They are used in maintenance and service, and in projects. Consequently, material master data are some of the most com- plex and extensively utilized data in an ERP system. In contrast, other master

Data in an Enterprise System 31

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32 C H A P T E R 2 Introduction to Enterprise Systems

data are relevant only to certain processes. For example, vendor master data apply to procurement, and customer master data are utilized in fulfi llment. This chapter will focus exclusively on material master data. We will consider other master data in the appropriate process chapters.

Material Master

Although materials are relevant to many processes, each process uses the materials differently. For example, the procurement process buys materials, the production process makes materials, and the fulfi llment process sells mate- rials. Each process, therefore, requires data about the material that may or may not be needed by other processes. For example, the procurement process requires data concerning who is responsible for purchasing the material and how much should be ordered. Similarly, the fulfi llment process utilizes data concerning product availability and shipping conditions.

It should be evident that because the material master is used in numer- ous processes, it must include a large amount of data. To manage these data, the material master groups them into different categories or views, each of which is relevant to one or more processes. Figure 2-8 illustrates the major views of data in the material master. Basic data, such as material number, description, and weight, are relevant to almost all processes. The other views are relevant only to certain processes. For example, purchasing data are rel- evant to the procurement process and sales data to the fulfi llment process. The data in each of the views will be explained in detail in the appropriate process chapters.

Material Types

Another factor that infl uences the type of data or view needed is the type of material. Materials are categorized into different material types based on the

Figure 2-8: Material master data

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way they are used in the fi rm’s operations. Each material type has different characteristics and is used for different purposes and in different ways. The material type determines which business processes are permitted to use the material. This, in turn, determines which types of data must be maintained for the material. Therefore, the data in the material master will vary for dif- ferent types of materials. Specifi cally, material type determines, for example, the screens that appear in the material master record, the department or function-specifi c data that must be maintained, how the material numbers are determined, the appropriate procurement types (in-house or external), and the general ledger accounts that need to be updated. Table 2-1 provides a list of commonly used material types.

Material Type Description

DIEN Services

ERSA Spare parts

FERT Finished goods

FHMI Production resources/tools

HALB Semifi nished goods

HAWA Trading goods

HIBE Operating supplies

IBAU Maintenance assembly

KMAT Confi gurable material

LEER Empty containers

NLAG Nonstock, nonvaluated material

PROD Product group

ROH Raw materials

UNBW Nonvaluated, stocked material

VERP Customer returnable packaging

WETT Competitive products

Table 2-1: SAP material types

The four most common material types are raw materials, semifi nished goods, fi nished goods, and trading goods. We describe and discuss these mate- rial types below. The terms in parentheses following the names are the SAP ERP abbreviation for that material type. These abbreviations are based on the German term for each type. GBI’s product structure (fi nished goods and trad- ing goods) is presented in Figure 2-9. Table 2-2 lists GBI materials grouped by material type.

Data in an Enterprise System 33

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34 C H A P T E R 2 Introduction to Enterprise Systems

Figure 2-9: GBI product structure

• Raw materials (ROH) are purchased from an external source—a vendor—and used in the production process. Typically, raw materi- als are not sold to end-customers. Consequently, the material mas- ter will contain data related to procurement and production but not fulfi llment. Examples of raw materials utilized by GBI are frames, wheels, tires, and tubes.

• Semifinished goods (HALB) are typically produced in-house from other materials (e.g., raw materials) and are used in the production of a fi nished good. Consequently, data related to production must be maintained for semifi nished goods. Front wheel assemblies are

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Data in an Enterprise System 35

Raw Materials Semifi nished Goods Finished Goods Trading Goods

• Derailleur gear assembly

• Wheel assembly • Deluxe touring bike (3 colors)

• Professional touring bike (3 colors)

• Men’s standard off-road bike

• Women’s standard off-road bike

• Elbow ads

• Knee pads

• Off-road helmet

• Road helmets

• Repair kit

• Air pump

• Water bottle cage

• First aid kit

• T-shirt

• Frame

• Seat kit

• Handle bar

• Pedal assembly

• Chain

• Brake kit

• Warranty document

• Packaging

• Tire

• Tube

• Wheel

• Nuts and bolts

Table 2–2: GBI material list

an example of semifi nished goods from GBI. GBI purchases tires, wheels, and tubes and then uses these raw materials to create wheel assemblies.

• Finished goods (FERT) are created by the production process from other materials, such as raw materials and semifi nished goods. They are generally not purchased. As a result, the material master for fi nished goods will include data related to production and ful- fi llment, but not procurement. An example of a fi nished good from GBI is the deluxe touring bicycle, which is produced from raw mate- rials (e.g., frames) and semifi nished goods (e.g., wheel assemblies).

• Trading goods (HAWA), like raw materials, are purchased from a vendor. Unlike raw materials, however, trading goods are resold to customers. Signifi cantly, the company does not perform any addi- tional processing of the material prior to reselling it. Therefore, the material master for trading goods will include data related to pur- chasing and selling but not production. An example of a trading good from GBI is a helmet. GBI simply purchases the helmets from a sup- plier and resells them to its customers; no other steps are involved.

Material Groups

Related to material type is the concept of a material group, which includes materials with similar characteristics. For example, all of the materials used in the production of bicycles, such as tires and tubes—which are raw materials—and wheel assemblies—which are semifi nished goods—can be included in one material group called production. As another example, all bicycles, which are

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36 C H A P T E R 2 Introduction to Enterprise Systems

generally fi nished goods but can also be trading goods, can be placed into one group called sales. Alternatively, bicycles can be grouped based on how they are used, such as touring and off-road. In the retail industry, material groups repre- sent merchandise categories such as footwear, clothes, and beverages. Materials are grouped so that they can be managed collectively. For example, planning for off-road bicycles is performed for all of the bikes in that material group rather than for individual bikes or brand names.

Organizational Level

A fi nal factor that determines the type of data included in the material mas- ter is organizational level. Materials can be defi ned differently for different organizational levels. For example, the same material can be used in multiple plants, but the ways it is used can vary from one plant to another. If a company exports materials from only one of its plants, for instance, then data related to exporting that material must be included in the material’s defi nition for that plant. These data are not necessary, however, for the other plants. As another example, GBI may choose not to ship bikes to customers from its Dallas plant. Rather, it sends the bikes to its two distribution centers (Miami or San Diego), which then ship them to customers. In this case, sales-related data for the bikes are included in the material master’s defi nition for the Miami and San Diego plants but not for the Dallas plant.

Demo 2.1: Review material types

Demo 2.2: Review material master data

T R A N S A C T I O N D ATA

Processes are executed in the context of organizational levels, involve mas- ter data, and result in transaction data. Transaction data refl ect the conse- quences of executing process steps, or transactions. Examples of transaction data are dates, quantities, prices, and payment and delivery terms. Thus, trans- action data are a combination of organizational data, master data, and situ- ational data—that is, data that are specifi c to the task being executed, such as who, what, when, and where. The composition of transaction data is illustrated in Figure 2-10.

SAP ERP uses several different types of documents to record transac- tion data. Some of these documents are created or utilized as the process is being executed; others record data after the process steps are completed. We refer to the fi rst category as transaction documents. Examples are purchase orders, packing lists, and invoices. A purchase order communi- cates the company’s order to its vendor. A packing list accompanies the shipment sent by the vendor, and an invoice is a request for payment for materials shipped.

Documents that record data generated after the process steps have been completed include financial accounting [FI] documents, management

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Reporting 37

accounting or controlling [CO] documents, and material documents. These three documents are “virtual” documents in that they reside in the enterprise system and are printed only occasionally as needed. FI and CO documents record the fi nancial impact of process steps. For example, when a company receives a payment from a customer, there is a fi nancial impact, and an FI document is created. Material documents record materials movements, such as when materials are received from a vendor or shipped to a customer.

Documents typically consist of two sections, a header section and a detail or line item section. Figure 2-11 illustrates the concept of headers and items using an example of a purchase order, which is a type of transaction document. The top part of the document is the header. The three materials included in the purchase order—knee pads, elbow pads, and off-road helmets—are the line items. The header includes data such as purchase order number, date, and payment terms that are relevant to all line items, meaning that these data are relevant to the entire document. In contrast, the data in the line items, such as quantity and price, are specifi c to each item. A document can include multiple line items, as illustrated in the fi gure.

Demo 2.3: Review a purchase order

R E P O RT I N G As you have probably concluded from the discussions of master data, organi- zational data, and transaction data, enterprise systems produce and consume massive amounts of data in the day-to-day execution of business processes. In fact, it is not uncommon for companies to have several terabytes (trillions of bytes) of “live” data passing through their ERP systems on a weekly basis. More importantly, after data are no longer needed for process execution, they

Figure 2-10: Transaction data

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38 C H A P T E R 2 Introduction to Enterprise Systems

Figure 2-11: Purchase order

then become historical data and must be archived securely and made available for many types of data analysis. This process generates many more terabytes of historical data that are stored in complex data repositories called data ware- houses. With such a massive volume of data to deal with, how can a company extract the meaningful information it needs to make better decisions and oper- ate more effi ciently?

At the most basic level, every enterprise system contains transaction and historical data in its main database. Transaction data relate to processes that are currently in use or have been completed recently, within days or weeks.

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Reporting 39

Conversely, historical data are typically comprised of transaction data for pro- cesses that have been completed within months or years. Reporting is a general term used to describe the ways that users can view and analyze both transac- tion and historical data to help them make decisions and complete their tasks. Reporting capabilities range from simple lists of information for basic users to analytical tools that can perform powerful statistical analysis and advanced cal- culations to produce extremely detailed information for specialist users. The data used in the different types of reporting are the same, but the ways in which they are extracted, fi ltered, and presented differ greatly and involve varying lev- els of complexity and expertise, depending on how employees plan to use them.

SAP ERP provides two reporting options—simple lists of data and docu- ments and analytics. Before we examine these options, however, we need to distinguish between the transactional environment and the analytic environ- ment of SAP ERP (see Figure 2-12). The transactional environment of SAP ERP is an online transaction processing (OLTP) system, which, as the name suggests, is designed to capture and store detailed transaction data. The primary function of OLTP is to execute process steps quickly and effi ciently; it is optimized for this purpose. OLTP is not used to generate sophisticated reports because it lacks the computing power to parse through and analyze the vast stores of data that most companies accumulate. Consequently, businesses employ OLTP to generate only simple lists and reports.

For detailed data analysis, SAP ERP includes an online analytic processing (OLAP) environment in the form of information systems. Instead of using detailed transaction data, these systems use information structures to provide analytic capabilities. Information structures capture and store specifi ed transaction data in an aggregated and summarized form that enables users to analyze the data as needed. Each information structure in the OLAP environment is defi ned in terms of three features: characteristics, key fi gures, and period defi nition (Figure 2-13). Characteristics are the objects for which

Figure 2-12: Reporting options within SAP ERP

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40 C H A P T E R 2 Introduction to Enterprise Systems

Figure 2-13: Components of information structures

data are collected. These objects are typically organizational data such as plant and sales organization and master data such as materials, vendors, and cus- tomers. An information structure can include up to nine characteristics. Key figures are performance measures, such as quantities and counts that are associated with the characteristics. Examples are number of orders, quanti- ties ordered, order value, and invoice amounts. Thus, instead of recording the details of orders and invoices, key fi gures maintain only statistical summaries, such as the total number of orders placed by a customer. This is one level of aggregation of transaction data, and it is qualitative in nature because the selec- tion of key fi gures is subjective. Finally, data are collected or aggregated for specifi ed time periods, such as daily, weekly, and monthly, which are specifi ed in the period definition. In contrast to key fi gures, period defi nition represents a quantitative aggregation of data. Thus, information structures can be defi ned as aggregated and summarized forms of transaction data that are periodically updated.

In sum, then, the OLTP environment provides reporting in the form of lists, and the OLAP environment provides reporting in the form of analyt- ics via information systems. Going further, lists fall into two categories—work lists and online lists.

W O R K L I S T S

Work lists identify tasks that are scheduled to be completed in a process. In the fulfi llment process, for example, once customer orders are recorded in the system by the salespersons, warehouse personnel can retrieve a list of orders that are ready for picking. Picking is the fi rst step in preparing a shipment. It involves retrieving, or picking, materials from storage. A picking due list (Figure 2-14) identifi es all customer orders that must be prepared for delivery so that they can be shipped in a timely manner. The user selects the appropri- ate data, such as shipping location, due dates, and other relevant parameters (see inset in Figure 2-14). The resulting work list shows three orders that must be picked to ensure that they will be delivered on time. The user will select one of the orders and complete the picking task.

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Reporting 41

Figure 2-14: Work list—picking due list. Copyright SAP AG 2011

Demo 2.4: Review a work list

O N L I N E L I S T S

Online lists display lists of master data—such as materials, vendors, and pur- chasing info records—and documents—such as transaction documents, FI, CO, and material documents—that are generated during the execution of a process. The content and appearance of these lists are defi ned using selec- tion parameters and scope-of-list parameters. Selection parameters determine which documents will be included in the list, while the scope-of-list parameters defi ne which data will be included for the selected documents. In addition, numerous other parameters such as dates, master data (e.g., vendors), and organizational data (e.g., plant) can be used to narrow the data in the report. Figure 2-15 shows the initial screen for the display of purchasing documents. The inset shows choices for the selection parameters.

The reports are displayed in one of two available formats—a standard list format using the SAP list viewer or a grid format using the ABAP list viewer (ALV) grid control. Examples of these formats are provided in Figure 2-16 and Figure 2-17, respectively.

The list viewer and grid control provide several options for displaying the report output. These options are illustrated in Figure 2-18 and are explained as follows.

• The select detail allows the user to select a line on the report and drill down for more details.

• The set fi lter option is used to limit the list to only those items that meet specifi ed values. For example, the list can be restricted to purchase orders where the quantity ordered (one of the columns) exceeds a specifi ed value.

• Lists can be sorted in ascending or descending order in a selected column.

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42 C H A P T E R 2 Introduction to Enterprise Systems

Figure 2-15: Online list—list display for documents. Copyright SAP AG 2011

Figure 2-16: Online list—report using SAP list viewer. Copyright SAP AG 2011

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Reporting 43

Figure 2-17: Online list—report using ALV grid control. Copyright SAP

AG 2011

Figure 2-18: Functions of the list viewer and grid control

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44 C H A P T E R 2 Introduction to Enterprise Systems

• The total values and create subtotals options enable users to calcu- late totals and subtotals for selected columns, respectively.

• The layout options allow users to change the appearance of the dis- play. The layout option displays a list of available fi elds that can be included in the report. Fields appear as columns in the report and can be added or removed as desired. The modifi ed layout can be saved as a variant of the report, which can be used to re-create the report at a later time.

• Several options are available to export the data in various formats, such as MS Word, Excel, and HTML. In addition, the data can be e-mailed using the system’s messaging capabilities.

Demo 2.5: Review an online list

I N F O R M AT I O N S Y S T E M S

Numerous information systems are available within SAP ERP to support most of the processes that we will discuss in this book. Information systems (IS) can be divided into three broad categories: logistics information systems (LIS), fi nancial information systems (FIS), and human resources information systems (HRIS). Logistics information systems support all of the logistics processes. Recall from Chapter 1 that logistical processes are concerned with acquiring, storing, creating, and distributing materials. The components of LIS include purchasing IS, sales IS, inventory control IS (IWM processes), quality man- agement IS, plant maintenance IS, and shop fl oor IS (production processes). The fi nancial information system supports reporting related to the general led- ger (e.g., balance sheet, income statement, statement of cash fl ows), accounts receivable, and accounts payable. The HRIS is used to retrieve information about different HR components such as personnel, positions, and jobs.

Recall that information systems are part of the OLAP component of SAP ERP, and they utilize information structures to provide analytic capabili- ties. There are two types of information structures—standard and user-defi ned. Standard information structures are predefi ned in the SAP ERP system, and they collect the data needed to generate the most commonly used reports. SAP ERP also enables users to defi ne their own structures, known as user- defined information structures, to meet specifi c reporting requirements.

Finally, information structures enable users to conduct two types of anal- ysis—standard and fl exible. Standard analysis provides predefi ned analytics for data in standard information structures. This type of analysis is suffi cient for most analytic requirements. When standard analysis is insuffi cient, users can conduct fl exible analysis to customize the reporting. In contrast to stan- dard analysis, flexible analysis allows users to defi ne the content and format of the analysis. Specifi cally, it enables users to combine available characteris- tics and key fi gures as needed and to create new key fi gures using user-speci- fi ed formulas. It also provides users with several layout options.

To summarize, the OLTP component of SAP ERP offers reporting in the form of work lists and online lists that are based on detailed transaction data. In contrast, the OLAP component offers reporting via information systems,

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Reporting 45

based on aggregated data in information structures. These capabilities are lim- ited to data within the SAP ERP system. Today, however, companies need even more powerful reporting capabilities that combine data from multiple sources. This is the domain of business intelligence, which we discuss next.

Demo 2.6: Review SAP ERP reports

B U S I N E S S I N T E L L I G E N C E

Business intelligence is a general term that refers to the overall capabilities a company uses to collect and analyze data from a variety of sources to bet- ter understand its operations and make better managerial decisions. As we sug- gested in the previous paragraph, the OLAP environment within SAP ERP cannot perform the powerful analytic capabilities needed to provide business intelligence. For these purposes, businesses utilize SAP® Business Warehouse (SAP BW) (Figure 2-19).

SAP BW is a separate system that receives data from the SAP ERP sys- tem, other SAP systems such as SAP CRM and SAP SRM, and other non- SAP systems. These data are stored in the SAP BW database. Whereas the

Figure 2-19: Reporting using SAP BW

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46 C H A P T E R 2 Introduction to Enterprise Systems

SAP ERP system is used to execute process steps, the SAP BW system is designed and optimized for processing large quantities of data to provide pow- erful analytics. Unlike the OLAP environment in SAP ERP, SAP BW is not a real-time or an online system. That is, the data used in BW reporting are not tied to transactions and therefore are not the most current data available.

C H A P T E R S U M M A R Y

This chapter explains the evolution of enterprise systems in terms of the pro-

cesses they manage and the technical capabilities they possess. In addition, it

examines the different types of data that ES collect and utilize to execute pro-

cesses and enable managerial decision making.

Enterprise systems evolved from the custom-built mainframe applications

of the 1960s and 1970s into the three-tier client/server systems of the 1990s.

They were then rebuilt to take advantage of the new technical capabilities of

service-oriented architectures to expand their reach and value as business

platforms. The largest and most complex ES are integrated ERP systems. ERP

systems initially managed only intra-company processes. However, their capa-

bilities were later extended to incorporate external or inter-company processes,

such as customer relationship management and supply chain management.

The combined collection of inter-company process-based applications and

intra-company process-based systems forms an ES “application suite.”

Enterprise systems generate and consume vast quantities of different

types of data in their operations. Data in enterprise systems can be classifi ed

into three major categories: organizational data, master data, and transaction

data. Organizational data represent the structure of the enterprise. Examples are

company code, plant, and storage location. Master data represent the various

entities or materials that are associated with processes. Materials master data

contain information needed to procure, store, manufacture, ship, and invoice

physical goods and services. Transaction data are collected during the execu-

tion of a process and contain information such as dates, quantities, prices, and

payment and delivery terms.

Reports include organizational data, master data, and transaction data

and are used to support process execution and for managerial decision mak-

ing. ERP systems provide multiple options for extracting and analyzing the dif-

ferent types of data for different purposes. Information systems (IS) combine

the various types of data for specifi c functions in the enterprise. IS also enable

employees to easily access relevant data in ways that facilitate effi cient decision

making and operational oversight.

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Review Questions 47

R E V I E W Q U E S T I O N S

1. Describe client-server and services-oriented architectures. What are the advantages and disadvantages of each architecture?

2. What is an enterprise system application suite? Describe the capabilities of the individual components of the application suite.

3. Discuss the three types of data in an enterprise system and how they are related.

Application layer

Application platforms

Application suite

Architecture

Business intelligence

Characteristics

Client

Company code

Customer relationship management

(CRM)

Data layer

Enterprise resource planning

Financial accounting (FI) documents

Finished goods

Flexible analysis

Information structures

Key fi gures

Management accounting or

controlling (CO) documents

Master data

Material documents

Material group

Material types

Online analytic processing (OLAP)

Online lists

Online transaction processing (OLTP)

Organizational data

Period defi nition

Plant

Presentation layer

Product lifecycle management

(PLM)

Raw materials

Reporting

Semifi nished goods

Service-oriented architecture (SOA)

Standard analysis

Standard information structures

Supplier relationship

management (SRM)

Supply chain management (SCM)

Three-tier client-server architecture

Trading goods

Transaction data

Transaction documents

User-defi ned information

structures

Work lists

K E Y T E R M S

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48 C H A P T E R 2 Introduction to Enterprise Systems

4. Explain the relationship among client, company code, and plant in SAP ERP. What are these organizational levels typically used to represent?

5. Why is material master one of the most complex types of data in an ERP system? Provide some examples of data typically included in a material

master.

6. What are material types? Identify the four common material types in SAP ERP, and provide an example of each.

7. What are material groups? How are they different from material types?

8. How are transaction data created in an ERP system?

9. Explain the document concept in SAP ERP. What are the functions of the four types of documents in SAP ERP?

10. Discuss the typical structure of documents in SAP ERP.

11. What are the reporting options available in SAP ERP? How do they differ from one another? How do they differ from the reporting options avail-

able in SAP BW?

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 4 9

4 9

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Explain the differences between fi nancial accounting and man- agement accounting.

2. Describe the organizational data related to fi nancial accounting.

3. Discuss and analyze the key types of master data involved with fi nancial accounting.

4. Explain and apply basic accounting concepts.

5. Execute key processes in fi nancial accounting.

6. Identify key integration points between fi nancial accounting and other processes.

7. Prepare reports in fi nancial accounting.

I n Chapter 1 we briefl y introduced numerous processes that most organiza- tions typically perform, such as fulfi llment, production, and procurement. A common feature of many—but not all—of these processes is that they

have consequences for the organization’s fi nancial position. The role of accounting processes is to record the fi nancial consequences of the various process steps. In turn, the organization uses this fi nancial information to plan and manage these processes.

Accounting processes are broadly divided into two main categories: fi nancial accounting and management accounting. Financial accounting (FI) is concerned with recording the fi nancial impacts of business processes as they are executed. Businesses use these data to generate fi nancial statements to meet legal or regulatory reporting requirements. For example, in the United States, the Securities and Exchange Commission (SEC) requires that all pub- licly traded companies periodically submit fi nancial statements in a prescribed format. Further, certain regulated industries, such as energy and health care, have additional reporting requirements imposed by their respective regulat- ing agencies. These reports are externally focused, meaning they are intended

Introduction to Accounting

C H A P T E R 3C H A P T E R

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50 C H A P T E R 3 Introduction to Accounting

primarily for audiences outside the organization, such as the SEC. However, they are also useful for internal management purposes.

In contrast, management accounting, or controlling (CO), is internally focused, meaning that it provides the information the organization needs to effectively manage the various processes. Management accounting processes, like FI processes, use fi nancial data recorded during process execution to gen- erate reports. Specifi cally, CO reports focus on costs and revenues which man- agement uses to achieve basic business objectives such as increasing revenues, minimizing costs, and achieving profi tability. In contrast to FI, however, the content of these reports is not prescribed by any external entity. Rather, CO reports are based entirely on management’s needs. Figure 3-1 highlights the key differences between FI reports and CO reports.

Figure 3-1: Financial accounting vs. management accounting

From an ERP perspective, fi nancial accounting is the “heart” of the system because it must accurately refl ect the fi nancial status of the fi rm at any given point in time. As you learn about processes in later chapters, it is essential that you understand the fi nancial impact of these processes. For this reason, we have included this chapter on accounting early in the textbook. At the same time, however, fi nancial accounting is closely inter- twined with management accounting. Consequently, we introduce a few basic management accounting concepts in this chapter.

The key processes in fi nancial accounting are:

• General ledger accounting

• Accounts receivable accounting

• Accounts payable accounting

• Asset accounting

• Bank ledger accounting

The general ledger (GL) is used to record the fi nancial impacts of busi- ness process steps; it contains much of the data needed for fi nancial reporting. Accounts receivables accounting is associated with the fulfi llment process and is used to manage money owed by customers for goods and services sold to them. Conversely, accounts payable accounting is associated with the pro- curement process. Companies use accounts payable accounting to record and

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Organizational Data 51

manage money owed to vendors for the purchase of materials and services. Asset accounting is used to record data related to the purchase, use, and disposal of assets such as buildings, equipment, machinery, and automobiles. Finally, bank ledger accounting is concerned with recording data associated with bank transactions.

As previously stated, the fi nancial data recorded in the general ledger are used to generate the fi nancial statements needed for external reporting. Typical fi nancial statements are the balance sheet, income statement, and statement of cash fl ow. A balance sheet is a snapshot of the organization at a point in time. It identifi es assets, liabilities, and equity. In contrast, an income statement, also known as a profit and loss statement, indicates the changes in a company’s fi nancial position over a period of time. It identifi es revenues, costs, and profi ts or losses. Finally, a statement of cash flow dis- plays all cash receipts and payments over a specifi ed period of time. We begin this chapter by examining the organizational data and master data relevant to fi nancial accounting.

O R G A N I Z AT I O N A L D ATA The organizational data associated with fi nancial accounting are client, com- pany code, and business area. We discussed both client and company code in Chapter 2. Recall that a client is the highest organizational level in the sys- tem; it represents an enterprise that consists of multiple companies. Therefore, even the largest enterprise can have only a single client. The various companies within an enterprise are represented by a company code. Applying this sce- nario to GBI, the global GBI enterprise is represented by a client, while the two companies, GBI US and GBI Germany, are represented by company codes US00 and DE00, respectively. Financial statements are generally prepared at the company code level. Thus, GBI US and GBI Germany will generate sepa- rate fi nancial statements to meet the regulatory requirements of each country.1

Business areas are internal divisions of an enterprise that are used to defi ne areas of responsibility or to meet the external reporting requirements of an enterprise segment. A segment is a division of an enterprise for which management monitors performance (revenue, costs, profi tability, etc.) sepa- rately from other segments. Financial statements are generated for each busi- ness area within the enterprise. A business area is often based on either the enterprise’s product line or its geographic division, across company codes. Figure 3-2 illustrates two hypothetical business areas for GBI. The upper part of the fi gure identifi es three companies within the GBI enterprise—GBI US, GBI Germany, and GBI Australia.2 It also defi nes two business areas based on product lines—bicycles and accessories. GBI generates fi nancial statements

1 Although the International Accounting Standards Board (IASB) has created a global standard for fi nancial reporting called the International Financial Reporting Standards (IFRS), not all countries have adopted this standard. In addition, local regulatory requirements still mandate that companies maintain fi nancial data in different ways. Consequently, there continues to be a need to generate different fi nancial statements for different countries. 2 GBI currently only has companies in the United States and Germany. The companies referred to in this section and in Figure 3-2 are only included to facilitate a discussion of business areas.

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52 C H A P T E R 3 Introduction to Accounting

Figure 3-2: Business areas

for both business areas across all three companies. In contrast, in the lower part of the fi gure, business areas are defi ned in terms of the geographic loca- tions of the individual companies. Thus, fi nancial statements are generated for all companies in North America and Europe.

Apple Inc. provides a familiar example of business areas and segments in global public companies. Apple has four main business areas: the Americas, Europe, Japan, and Retail. The Americas business area includes two segments, North America and South America. The Europe business area includes the European countries as well as the Middle East and Africa. Finally, the Retail business area includes all Apple Stores across the globe, which are managed as a separate business area.

Within each business area, Apple operates vari- ous units for products, such as Mac computers, iPods, iTunes, and iPads. Thus, Apple must report its fi nancial

results in both business areas and product segments so that investors have a great deal of transparency into the company’s operations. Were you to examine Apple’s annual report, you could locate total sales by business area (e.g., the Americas), by product segment within each business area (e.g., Mac desktops within the Americas), and by product segment globally (e.g., global Mac sales). This level of transparency is critical for investors and regulatory groups to properly analyze and monitor Apple both as an individual company and by comparison with its competitors in the industry.

Source: Apple company reports.

Business Processes in Practice 3.1: Apple Inc.

M A S T E R D ATA As previously stated, the goal of fi nancial accounting is to record the fi nancial impact of business activities. These data are recorded in the company’s gen- eral ledger. More specifi cally, the general ledger includes many accounts that companies use to record fi nancial data. Each account tracks different types of fi nancial data. For example, some accounts record sales revenues, whereas others record the costs associated with producing and selling products. A list of accounts that can be included in a general ledger is called a chart of accounts. In this section we take a closer look at charts of accounts and general ledger accounts.

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Master Data 53

C H A RT O F A C C O U N T S

A chart of accounts (COA) is an ordered listing of accounts that comprise a company’s general ledger. There are three types of charts of accounts: opera- tive COA, country-specifi c COA, and group COA. The operative or opera- tional COA contains the operational accounts that are used to record the fi nancial impact of an organization’s day-to-day transactions. It is the primary COA maintained by an organization.

The accounts in the operative COA are mapped to alternative accounts in country-specifi c charts of account. Companies create these alternative accounts to meet special country-specifi c reporting requirements. Figure 3-3 illustrates a scenario in which both GBI US and GBI Germany use the INT COA, while each company also maintains its country-specifi c COA—CANA (North America COA) and GKR (German COA).

Figure 3-3: Charts of accounts and company codes

Finally, a group chart of accounts contains group accounts that multiple companies within an enterprise use to consolidate their fi nancial reporting. When an enterprise includes several companies, then, in addition to creat- ing fi nancial statements for each company (company code), it must also cre- ate fi nancial statements for the enterprise as a whole. This consolidation is necessary because the enterprise, which is itself a separate legal entity (e.g., parent or holding company), has reporting requirements. Using a group chart of accounts makes it easy to generate consolidated fi nancial statements. Otherwise the enterprise must rely on more complex methods of consolida- tion. All enterprises must maintain an operative COA in order to record fi nan- cial data. In contrast, group and country-specifi c COAs are optional.

G E N E R A L L E D G E R A C C O U N T S

The accounts in the general ledger are defi ned based on the selected COA. The general ledger is an instantiation of the COA for a particular company and can include some or all of the accounts in the COA. Like most master data, the data in general ledger accounts are segmented by organizational level (Figure 3-4). COA account data include a COA or client segment and a company code segment.

The COA segment typically includes an account number, short and long text, an account group, and an indication as to whether the account is a balance sheet or a profi t and loss account. Each account is assigned a unique account

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54 C H A P T E R 3 Introduction to Accounting

number to distinguish it from other accounts in the COA. Each account also includes a long text (description) and short text (brief description) of the account. Designating the account as either a balance sheet or a profi t and loss account has implications for the ways the balances in the accounts are treated at the end of the year. Specifi cally, balances in balance sheet accounts are car- ried forward into the same account, whereas balances in the profi t and loss accounts are carried forward into different, specifi ed accounts.

In the beginning of the chapter we explained that balance sheet accounts include assets, liabilities, and owner’s equity (Figure 3-5), whereas profi t and loss accounts include revenue and expenses (Figure 3-6).

Figure 3-4: General ledger account data

Figure 3-5: Balance sheet accounts

Figure 3-6: Profi t and loss accounts

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Master Data 55

• Assets are what the company owns, such as cash, inventory of materials, land, buildings, and money owed to the company by its customers (receivables).

• Liabilities are what the company owes to others, including money owed to vendors (payables) and loans from fi nancial institutions.

• Owner’s equity refers to the owner’s share of the company’s assets.

• Revenues are the monies the company earns by selling its products and services

• Expenses are the costs associated with creating and selling those products and services.

GBI has created a custom COA—GL00—which it uses as the operative COA for all the companies in its enterprise. GBI currently does not utilize a country-specifi c or group COA. A complete listing of all the accounts in GL00 is provided in Appendix 3A of this chapter. A detailed explanation of these accounts is beyond the scope of this book. Instead, we discuss relevant accounts in the various process chapters.

The fi nal data element in the COA segment is the account group, which groups together accounts with similar characteristics. For example, all bank and cash accounts are consolidated in one account group called liquid assets. Accounts within each group are numbered within a specifi ed number range. For example, accounts in the liquid assets group are located between 100000 and 110300. Further, accounts in different account groups require dif- ferent types of data when they are used in a company’s general ledger. The data contained in account groups can include dates, tax-related data, and orga- nizational data. These data can be designated as either required, optional, dis- play only, or hidden when the accounts are created.

Demo 3.1: Review chart of accounts

Although the accounts in a COA can be used by more than one company, each company uses the account in different ways. For example, the currency used and the tax-related data in different countries can be different. Therefore, the general ledger account requires certain company code-specifi c data in addition to the COA data. The typical company code data in general ledger accounts consist of the following elements (refer back to Figure 3-4)

• Account currency

• Tax-related data

• Field status groups

• Open item management

• Line item display

• Reconciliation account data

Account currency determines the currency in which all the transactions are recorded. For example, GBI US uses US$ (USD) as the account currency,

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56 C H A P T E R 3 Introduction to Accounting

while GBI DE uses Euro€ (EUR). Further, each country has to comply with distinctive tax laws that require it to include different tax-related data in its general ledger accounts. The fi eld status group determines both the screen lay- out for document entry and the status of each fi eld on the screen. The available fi eld status options are suppress, display, required, and optional. If a fi eld is suppressed, then it is hidden; that is, it is not displayed on the screen. A fi eld with the display status is displayed and cannot be changed. The user must pro- vide data for required fi elds, whereas data entry is optional for fi elds with the optional status. Different fi eld status groups can be defi ned for different types of accounts such as liquid asset accounts and expense accounts.

Figure 3-7 illustrates the two segments for GBI’s bank account. The chart of accounts segment indicates that the bank account (account #100000) is part of the GL00 COA. Both GBI US and GBI DE use this account, but the two companies use it differently, as specifi ed in their company code segments. For example, the two companies have different company codes (US00 and DE00) and different currencies (USD and EUR).

Figure 3-7: General ledger account segments

Another element in the company code segment of a general ledger account is open item management. If open item management is enabled, then each item in the account is marked as either “open” or “cleared.” An item is designated as open until an offsetting (debit or credit) entry is posted to the account. At that point its status is changed to cleared. For example, when a company ships a product to a customer, the amount owed is recorded in a specifi c account. This item remains open until the company receives a pay- ment. The payment offsets the open item, which is then marked as cleared. Typically, the open item management indicator is set for clearing accounts, which are temporary accounts that hold data until these data are moved to another account.

Finally, when line item display is enabled, a link to the line items that are included in account balances is maintained. Line items are the specifi c debit and credit entries in the account. Maintaining links to the line items is necessary

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Master Data 57

when the company wants to include the specifi c debit and credit entries in reports. We discuss reporting at the end of this chapter. In the next section we shift our focus to subledger and reconciliation accounts.

S U B S I D I A RY L E D G E R S A N D R E C O N C I L I AT I O N A C C O U N T S

Some fi nancial data are not directly maintained in the general ledger. For example, customer accounts, which track the amounts customers owe and the payments they have made, are maintained separately for each customer. Although it is necessary to track sales and payments separately for each cus- tomer, it is not necessary to include each customer account in the general led- ger. Similarly, data about each vendor and asset, such as an automobile, are maintained in separate accounts. Vendor accounts track purchases from and payments made to them. Asset accounts are used to track the purchase price as well as increases and decreases in the asset’s value over time. Such accounts are maintained in subsidiary ledgers or subledgers, and they are not part of the general ledger.

Although customer and vendor accounts are not part of the general ledger, the data in these accounts must be refl ected in the general ledger. Companies accomplish this task by posting the data from subledger accounts into special accounts in the general ledger called reconciliation accounts. Reconciliation accounts are general ledger accounts that consolidate data from a group of related subledger accounts, such as customers and vendors. The reconciliation account for customers is accounts receivable, and the rec- onciliation account for vendors is accounts payable. Because the general led- ger can include multiple reconciliation accounts, it is necessary to indicate which subledger each reconciliation account is associated with. This informa- tion appears in the reconciliation account for account type fi eld in the gen- eral ledger account master data. These concepts are related to the accounts receivable and payable accounting processes introduced at the beginning of the chapter. These processes will be explained in greater detail later in this chapter.

One special characteristic of reconciliation accounts is that it is not possible to post data directly into them. Rather, data must be posted to sub- ledger accounts, at which point they are automatically posted to the corre- sponding reconciliation account as well. Thus, when a company sells products or services to a customer on credit, the amount owed is noted in the custom- er’s subledger account and is also posted to the corresponding reconciliation account (accounts receivable). Likewise, when the company owes money to a vendor for purchases it made on credit, this amount is noted in the ven- dor’s subledger account and is simultaneously posted to the corresponding reconciliation account (accounts payable). The balance in the reconcilia- tion account (e.g., accounts receivable and accounts payable) is the sum of the postings in the related subledger accounts (e.g., customers and vendors, respectively).

We will consider subledger and reconciliation accounts in greater detail in the process section of this chapter. We now turn our attention to the key concepts involved in fi nancial accounting, beginning with accounting documents.

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58 C H A P T E R 3 Introduction to Accounting

Demo 3.2: Review general ledger accounts

K E Y C O N C E P T S Before we turn our attention to the processes involved in fi nancial accounting, we need to explain two key fi nancial accounting concepts: accounting docu- ments and parallel accounting. We also need to introduce a few key concepts related to management accounting. You must become familiar with these con- cepts to understand the processes we discuss later in this chapter and in other chapters.

A C C O U N T I N G D O C U M E N T S

We introduced the concepts of documents in Chapter 2. In this chapter we elaborate on fi nancial accounting documents. A financial accounting docu- ment (FI document) records the impact (fi nancial data) of a transaction step on fi nancial accounting. As Figure 3-8 illustrates, an FI document consists of a header section and a detail or line item section. The header includes data that apply to the entire document, such as document number, document type, various dates, company code, currency used, and a reference number. A docu- ment type is a two-character code that identifi es the specifi c business process step that generated the document. Commonly used document types include customer invoice (DR), customer payment (DZ), goods issue (WA), and goods receipt (WE). A document type determines the document number range and the account type (explained below) associated with the posting.

Figure 3-8: Structure of an FI document

The detail section typically consists of two line items: a debit item and a credit item. Each line item includes the account number from the general ledger, a description of the account, an indication of whether the account is debited or credited, and the amount. The debit or credit is indicated by a post- ing key, which is a two-digit code that determines how a line item is posted. Specifi cally it identifi es the account type, indicates whether the line item is a debit or credit posting, and specifi es the fi eld status of additional data needed to post the item. Examples of account types are customer (D), vendor (K), asset (A), material (M), and general ledger accounts (S). Examples of additional data are cost centers and business areas. Figure 3-9 includes several examples

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Key Concepts 59

of posting keys related to debit and credit postings to customer, vendor, and general ledger accounts.

Demo 3.3: Review an FI document

PA R A L L E L A C C O U N T I N G

The general ledger is based on the operating chart of accounts. In fact, an organization can implement multiple ledgers in parallel and use each ledger for different purposes. This practice is called parallel accounting. In a typical arrangement, an enterprise will implement one set of accounting principles for all companies (company code) in the enterprise (client). These global prin- ciples are consolidated in a single ledger known as the leading ledger. A lead- ing ledger is required, and all transaction data are posted to it. In addition, the enterprise will defi ne nonleading ledgers for each company (company code) based on local accounting practices, such as US GAAP and German HGB.3

GBI has implemented a leading ledger based on the GL00 COA. GBI does not maintain additional ledgers. However, Figure 3-10 illustrates how parallel accounting would be implemented within GBI should the enterprise choose to do so at a later date. In addition to the leading ledger, each of the two GBI companies has a nonleading ledger based on local accounting standards. GBI uses the leading ledger to consolidate its fi nancial statements for the global enterprise and the nonleading ledgers to meet local reporting require- ments in Germany and the United States.

Figure 3-9: Posting key examples

3 Most countries have their own standards for fi nancial reporting. In the United States, generally accepted accounting principles, or GAAP, are used to prepare fi nancial statements. In Germany, the German commercial law, German Handelsgesetzbuch (HGB) is the standard. A global stan- dard, the international fi nancial reporting standard (IFRS), is available, but it is not adopted by all countries.

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60 C H A P T E R 3 Introduction to Accounting

C O N C E P T S I N M A N A G E M E N T A C C O U N T I N G

At the beginning of the chapter we explained that fi nancial accounting and management accounting, or controlling (CO), are very closely related. In fact, most of the data used in management accounting are derived from fi nancial accounting. Therefore, we pause here to introduce a few a key concepts in management accounting.

As the name suggests, a key function of management accounting is to manage and allocate costs. Companies incur these costs as they carry out vari- ous business processes. For example, the fulfi llment process involves costs related to selling products and services, and the production process involves costs associated with manufacturing products. Other costs include supplies, maintenance, and equipment that are consumed by various processes.

To properly allocate and track costs, the organization is divided into cost centers. A cost center is associated with a location where costs are incurred. Cost centers can be associated with departments, such as marketing and fi nance; with locations, such as plants; and with individuals. In essence, a cost center is something that absorbs costs that are generated when companies execute pro- cesses. For example, when the company purchases supplies, it assigns the costs of the purchase to a cost center. Thus, if the marketing department purchases offi ce supplies, the company assigns or charges the cost of the supplies to the marketing cost center. Periodically, the company reviews and further allocates these accumulated costs. Think of a cost center as a container or bucket that accumulates costs.

In Chapter 1 we introduced numerous processes in simple terms. One of the common themes across most processes is the need to “authorize” the execution of these processes. This authorization often takes the form of “orders.” For example, in introducing the procurement process, we noted that the authorization to acquire materials is typically a purchase order. Likewise, the authorization to fi ll a customer order is a sales order, and the authorization to produce something is a production order. Like cost centers, costs incurred during processes can be allocated to or absorbed by these orders. Collectively, these orders and cost centers are called cost objects. As we discuss various processes beginning with Chapter 4, we will illustrate how companies use cost objects to accumulate costs as they execute these processes.

Figure 3-10: Parallel accounting

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Processes 61

P R O C E S S E S In the preceding sections, we discussed the master data and key concepts rel- evant to fi nancial accounting. In this section, we examine the actual processes that companies use in fi nancial accounting. Specifi cally, we explore general ledger, accounts receivable, accounts payable, and asset accounting.

G E N E R A L L E D G E R A C C O U N T I N G

General ledger accounting is based on the double entry accounting system, where every transaction has both a debit entry and a credit entry. Recall that accounts are divided into balance sheet accounts (Figure 3-5) and income (profi t and loss) statement accounts (Figure 3-6). Balance sheet accounts are grouped into assets, liabilities, and equity, while profi t and loss accounts are divided into revenue and expenses. Figure 3-11 illustrates how postings are debited and credited to these accounts using a “T” account. Debits are displayed on the left side of the T account, and credits on the right side. An increase in an asset account or an expense account results in a debit posting, whereas a decrease results in a credit posting. Conversely, an increase in revenue or liability results in a credit posting, whereas a decrease generates a debit posting. Below we present several examples involving GBI to illustrate and clarify the concept of postings. Please refer to Appendix 3A at the end of this chapter for the specifi c accounts that are included in the examples.

Figure 3-11: Debits and credits

Consider the following scenario. A venture capitalist invests $50,000 in GBI US on January 10, 2010, which GBI deposits into its bank account. In exchange, the investor receives GBI common stock at $1 per share. How is this transaction recorded in the general ledger? The fi rst step is to identify the relevant accounts. For this transaction the appropriate accounts are bank (#100000) and common stock (#329000). The transaction will generate an increase in both accounts. Because the bank account is considered an asset, there will be a debit posting, while common stock, a liability, will receive a credit posting. This transaction is illustrated in Figure 3-12.

Figure 3-12: Posting example 1: Investment in company

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62 C H A P T E R 3 Introduction to Accounting

Consider another example. GBI purchases offi ce supplies for $500 with a check. Offi ce supplies are expensed; that is, they are defi ned as money spent rather than treated as an asset upon purchase, even if some of the sup- plies remain unused. In this case, the relevant accounts are bank and supplies expense. This posting is diagrammed in Figure 3-13.

Figure 3-13: Posting example 2: Purchase of supplies

with cash

Figure 3-14: Posting example 3: Purchase of supplies on credit

Next, consider a scenario in which GBI purchases $1,000 of offi ce sup- plies, but on credit rather than with cash. In this case the purchase and payment are recorded separately. One account is supplies expense, which is debited by $1,000. The offsetting account is payables–miscellaneous, which is credited by $1,000. Payment is made using the bank account ($1,000 credit). Finally, the payables–miscellaneous account is cleared ($1,000 debit). This transaction is illustrated in Figure 3-14.

If a company purchases supplies from multiple sources or vendors, it records all the payable data in one account, payables–miscellaneous. One prob- lem with this arrangement is that the company cannot determine how much money it owes to each vendor. If the company needs to track the money it owes to individual vendors, then it uses a separate process known as accounts pay- able accounting, which utilizes subledger accounts. Accounts payable account- ing is typically used in conjunction with the procurement process. In the next section we examine accounts payable accounting in simple terms. We provide a more detailed discussion in Chapter 4.

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Processes 63

Demo 3.4: Post general ledger entries

A C C O U N T S PAYA B L E ( A P ) A C C O U N T I N G

In the section on master data we explained that organizations use subledgers to track money owed to individual vendors. We further explained that sub- ledgers are not part of the general ledger but instead are associated with special accounts in the general ledger known as reconciliation accounts. In accounts payable accounting, the accounts payable subledger consists of individual ven- dor accounts. The subledger account number is created when the vendor master record is created. The vendor master record and the vendor subledger account share the same account number. The associated reconciliation account is a general ledger account that is designated as the reconciliation account. The association between the vendor account and the reconciliation account is established in the defi nition of the vendor master record. We discuss vendor master data and its link to the general ledger in the context of the procurement process in Chapter 4.

In the GBI general ledger, account #300700, accounts payable recon- ciliation, is the designated account. Let’s consider a scenario in which GBI purchases offi ce supplies from three vendors. Each vendor has a designated vendor account number that is also the subledger account number. The pur- chases are as follows: $2,000 from Vendor 1, $1,000 from Vendor 2, and $4,000 from Vendor 3. Further, GBI makes these purchases on credit and then pays the vendors at a later date via a check. As illustrated in Figure 3-15, Steps 1–3 record the purchases from each vendor. Each purchase results in a debit to the supplies expense account and a credit to the appropriate vendor account. Postings to the vendor accounts are automatically posted to the reconciliation account, accounts payable reconciliation, as indicated by the arrows. Note that the AP reconciliation account does not track the details of each transaction; rather, it maintains only the total values. Payments, recorded in Steps 4–6, result in a credit posting to the bank account and a debit posting to the appro- priate vendor account. Again, these debit postings are also automatically made to the reconciliation account, accounts payable reconciliation.

Demo 3.5: Review reconciliation and non-reconciliation AP accounts.

A C C O U N T S R E C E I VA B L E ( A R ) A C C O U N T I N G

Whereas accounts payable accounting is concerned with vendors, accounts receivable accounting is concerned with customers. When businesses need to track money owed by each customer separately, they create an account in the accounts receivable subledger for each customer with a corresponding des- ignated general ledger account (the reconciliation account). The customer subledger account is created when the customer master record is created, and they share the same account number. The association between the cus- tomer account and the reconciliation account is established in the defi nition of the customer master record. We discuss this procedure in the context of

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64 C H A P T E R 3 Introduction to Accounting

Figure 3-15: Accounts payable accounting

the fulfi llment process in Chapter 5. For GBI, the designated reconciliation account is accounts receivable reconciliation (#110100).

Let’s consider a scenario in which GBI sells bicycles to two customers on credit for $5,000 and $3,000, respectively, and then receives payment at a later date. These purchases are Steps 1 and 2 in Figure 3-16. The relevant accounts are sales revenue and the individual customer accounts. Sales revenue is cred- ited by the amount of the sale, and a corresponding debit is made to the appro- priate customer account. This debit is also automatically posted to the accounts receivable reconciliation account as indicated by the arrows in Figure 3-16.

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Processes 65

As in the case of the AP reconciliation account, the AR reconciliation account does not track the details of the transactions. When payment is made (Steps 3–4), the bank account is debited, and the appropriate customer account is credited. At the same time, a corresponding automatic credit is posted to the reconciliation account, accounts receivable reconciliation.

Figure 3-16: Accounts receivable accounting

Demo 3.6: Review reconciliation and non-reconciliation AR accounts

A S S E T A C C O U N T I N G

An organization may possess a variety of assets, including tangible, intan- gible, and fi nancial assets. Tangible assets have a physical form, whereas intangible assets are nonphysical. Examples of tangible assets are computers, machinery, and buildings. Examples of intangible assets are intellectual prop- erty, patents, and trademarks. Financial assets include a variety of fi nancial instruments such as securities, long-term notes (debts), and mortgages.

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66 C H A P T E R 3 Introduction to Accounting

Companies use asset accounting to track the fi nancial consequences asso- ciated with the entire lifecycle of an asset, from acquisition to disposal. In this section we discuss asset accounting as it relates to tangible assets, which can be further categorized as fi xed assets, leased assets, and assets under construc- tion. A discussion of how the other types of assets are accounted for is beyond the scope of this book.

Asset accounting is complex, and a thorough discussion is beyond the scope of this book. However, we discuss some key concepts next. Assets are assigned to a company code and, by virtue of this assignment, all asset-related transactions are posted to the general ledger associated with the company code. This arrangement ensures that asset transactions are properly refl ected in the company’s fi nancial statements. Recall from our previous discussion that fi nancial statements can be created for business areas as well as company codes. Therefore, assets are also assigned to a business area. Finally, assets are associated with cost centers. We explained earlier that companies employ cost centers to accumulate the costs incurred in various processes. In asset account- ing, the primary cost is depreciation expense, which is the loss in value of an asset over time. When a company incurs a depreciation expense, it must allo- cate that expense to a cost center.

Accounting data about each asset are maintained in asset subledger accounts. These data include acquisition costs and depreciation. Like other subledger accounts (such as customer and vendor accounts), asset subledger accounts are created when the asset master record is created. The subledger account and the master record share the same account number. As in the case of customer and vendor accounts, asset accounts are associated with a reconciliation account in the general ledger. However, in contrast with customer and vendor accounts, the association between an asset account and a reconciliation account is not straightforward. Rather, it depends on which asset class the asset belongs to. An asset class is a grouping of assets that possess similar characteristics. For example, all computing equipment such as computers, printers, and monitors can be included in one asset class. Each asset class is associated with a specifi c reconciliation account in the general ledger account. The fi ve reconciliation accounts related to assets that are included in GBI’s general ledger are listed in Figure 3-17. Finally, each asset class includes

Figure 3-17: GBI reconciliation accounts for assets

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Processes 67

a variety of parameters that determine how an asset belonging to that class is treated. The two most important parameters are account determination and depreciation. We discuss account determination in the next paragraph, and we consider depreciation a bit later in the chapter.

The reconciliation account for each asset in the asset subledger account is determined by its association with an asset class. This association, referred to as account determination, is illustrated in Figure 3-18. The fi gure shows three of the fi ve reconciliation accounts included in GBI’s general ledger as well as four of GBI’s asset classes. Note that offi ce equipment and offi ce com- puters are associated with the same reconciliation account. Thus, two or more asset classes can be associated with the same reconciliation account. Going fur- ther, asset class vehicles and asset class offi ce computers both have two assets, which in turn have individual subledger accounts associated with them.

GL Account

Figure 3-18: Asset accounts and account determination

Demo 3.7: Review asset classes and asset-related accounts

A company typically acquires an asset and keeps it for a certain amount of time, after which it is no longer useful. A variety of activities or transactions are associated with the asset during its lifecycle. The most common transac- tions types are acquisition, depreciation, and retirement. We discuss these top- ics next.

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68 C H A P T E R 3 Introduction to Accounting

Acquisition

An asset can be acquired either externally or through internal processes (e.g., the production process). For assets produced internally, a special asset class, assets under construction, is used during production, and the costs (materi- als, labor, etc.) are tracked in a corresponding general ledger reconcilia- tion account. For assets obtained externally, three options are available: (1) purchase from an established vendor without using the purchasing process; (2) purchase from an established vendor using the purchasing process; and (3) purchase from a one-time vendor, or a vendor for whom master data (and therefore a subledger account) are not maintained.

In the fi rst scenario, a company purchases an asset from an established vendor but does not employ the full purchasing process. That is, a purchase order is not created. Instead, the accounting impact of the acquisition is manu- ally recorded in relevant general ledger and subledger accounts. The process is similar to the one described in the accounts payable accounting process dis- cussed earlier in the chapter. In this scenario, however, the company uses the vendor subledger account and a corresponding accounts payable reconcilia- tion account instead of the supplies expense account.

In the second scenario, a company purchases from an established vendor using the entire purchasing process, which involves a purchase order, a goods receipt, an invoice receipt, and payment. The accounting impact is very similar to the fi rst scenario, but the impacts are automatically recorded by the steps in the purchasing process. We examine this process more closely in Chapter 4.

In the fi nal scenario, the asset is purchased from a one-time vendor or a vendor for whom the company does not maintain master data. In this case, a vendor subledger account does not exist. The accounting impact of the acquisition is manually recorded using the asset account (subledger), the cor- responding reconciliation account, and a specially designated clearing account. Recall that clearing accounts are used to hold data temporarily until the data are moved to another account.

Figure 3-19 illustrates the acquisition of an asset from a one-time vendor. In this illustration, a company purchases a new desktop computer from the vendor for $5,000, with payment to be made at a later date. As a result of this purchase, asset master data for the new computer (Desktop Computer #14) are created. This is a subledger account that is associated with the offi ce equipment and computers account in the general ledger.

When the purchase is completed (Step 1), the asset subledger account is debited by $5,000, and the asset acquisition clearing account is credited by the same amount. At the same time, the offi ce equipment and computers account in the general ledger, the reconciliation account, is debited. When the com- pany receives an invoice (Step 2), the clearing account is “cleared” with a debit posting, and a corresponding credit is posted to the payables–miscellaneous account. Note that this is not the same account as the one used in the accounts payable process. In that process the accounts payable reconciliation account was used. In this case payables–miscellaneous is not a reconciliation account and therefore can be posted to directly. Finally, when the company pays for the computer via a check (Step 3), the payables–miscellaneous account is debited, and the bank account is credited.

An alternative scenario may involve a loan, in which case there is no accounts payable account or bank account. Rather, a notes payable account is used to clear the asset acquisition clearing account.

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Processes 69

Figure 3-19: Asset acquisition with a clearing account

Demo 3.8: Acquire an asset

Depreciation

The second transaction type is depreciation. Over time, an asset’s value dimin- ishes due to wear and tear. This decrease in value is recorded as depreciation. Thus, the value of an asset is equal to its acquisition value less accumulated depreciation. Depreciation can be ordinary or unplanned. Ordinary depreciation refers to the planned, periodic, and recurring decrease in the value of an asset due to normal usage. In contrast, unplanned depreciation occurs when extraordinary or unforeseen circumstances cause the asset to lose value faster than normal.

The actual amount of asset depreciation depends on several factors, pri- marily the type of depreciation method the company employs, the asset’s useful life, and its residual value. Companies can select from a variety of depreciation methods, for example, straight-line and double-declining balance. In straight- line depreciation, the asset is depreciated by the same amount every year. In declining balance, the asset is depreciated at a fi xed percentage rate each year. In contrast to the straight-line method, then, in this method the amount of the depreciation decreases each year because the value of the asset decreases each year.

Going further, every asset has a useful life, which specifi es how long the company anticipates using the asset. At the end of its useful life, an asset has a scrap or residual value. This is the amount the company expects to receive when it disposes of the asset. Finally, an asset has a book value, which is the value of the asset after it is depreciated.

In the previous section we presented an example in which a company purchases a desktop computer. Let’s use this same example to illustrate depreciation. We will assume that the asset was purchased at the beginning of the year, has a useful life of four years, and a residual value of $1,000. Using the straight-line depreciation method, the amount to be depreciated is the

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70 C H A P T E R 3 Introduction to Accounting

asset purchase price ($5,000) less the residual value ($1,000), which is $4,000. This amount is to be depreciated over four years, resulting in an annual depre- ciation expense of $1,000. This process is outlined in Figure 3-20. The last col- umn in the fi gure is the book value following the depreciation.

Figure 3-20: Straight-line depreciation

Figure 3-21: Double-declining balance depreciation

1,080–80

Figure 3-21 illustrates the double-declining balance method for the same asset. The depreciation rate is equal to double the depreciation rate for the straight-line method. The annual depreciation in the straight-line method is $1,000. Therefore the depreciation rate is $1,000 divided by $5,000, which is 20%. In the double-declining balance method this rate is doubled to 40%. By comparing Figure 3-21 with Figure 3-20, you can see that the double-declining balance method is an accelerated depreciation method that allows the com- pany to expense the asset at a faster rate than the straight-line method. Note that the book value cannot be less than the residual value. Consequently, the depreciation in the fourth year is a fi xed amount ($80) needed to bring the book value to the residual value of $1,000.

A company selects a depreciation method based on a variety of factors including generally accepted accounting principles, tax laws, and regulatory requirements, to name a few. Consequently, an asset can be valued differ- ently for different purposes. For example, the same asset can be depreciated using one method to satisfy legal and regulatory requirements but a differ- ent method to address management’s needs. Referring back to the computer purchase, for internal purposes the computer can be depreciated over two years using the double-declining balance method. However, tax laws may require that it be depreciated over fi ve years using the straight line method. Thus, an asset can be depreciated using different methods and assumptions

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Processes 71

simultaneously. This practice is called parallel depreciation or parallel valu- ation of assets, and it is used to support the practice of parallel accounting discussed earlier in this chapter.

These different calculations are maintained in different depreciation areas. Common depreciation areas vary across countries. In the United States, the common areas are book depreciation, cost accounting deprecia- tion, and tax or legal depreciation. Book depreciation is used to prepare fi nan- cial statements for shareholders and to meet regulatory requirements. Cost accounting depreciation is used to allocate the cost of using the asset to a cost center. For example, the depreciation associated with a machine used in a production facility is allocated to the production cost center. Tax deprecia- tion is used to fi le federal and state income tax returns.

Demo 3.9: Depreciate an asset

Retirement

After an asset has completed its useful life, it is disposed of, or retired. Asset retirement may or may not generate revenue. If an asset does not generate rev- enue, then it is scrapped. An asset can be sold to an external entity. The com- pany may choose to utilize a fulfi llment process similar to the one described in Chapter 5 to dispose its assets.

I N T E G R AT I O N W I T H O T H E R P R O C E S S E S

Because fi nancial accounting is concerned with recording the fi nancial conse- quences of process execution, it is tightly integrated with all of the processes in an organization, as illustrated in Figure 3-22. Numerous steps in the different

Figure 3-22: Integration of fi nancial accounting with other processes

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72 C H A P T E R 3 Introduction to Accounting

processes have a fi nancial impact on the fi rm. The key to recognizing these inte- gration points is to “follow the money.” Any time money either leaves or comes into the company—or the company makes an obligation to pay or receive money—there is very likely a fi nancial accounting impact. We have illustrated this point in our examples of fi nancial accounting transactions throughout this chapter. As we discuss the various processes in later chapters, the linkages between fi nancial accounting and these processes will become clearer.

R E P O RT I N G Reporting in fi nancial accounting is broadly divided into two categories: dis- playing account information and generating fi nancial statements.

A C C O U N T I N F O R M AT I O N

Account information can be obtained at three levels—account balance dis- play, line items display, and original FI document. Figure 3-23 shows the bal- ance display for a bank account for the months of September (Period 9) and October (Period 10). The fi gure highlights a drilldown for a credit amount of $19,000 in September. The drilldown reveals a list of line items that comprise the credit amount. One of these items is for the value of $5,000. A further drill- down of the $5,000 displays the data in the original FI document—the original debits and credits—associated with the posting. Note that drilling down to the line item level is possible only if the line item display indicator, which was dis- cussed earlier, is set in the general ledger account master data.

Figure 3-23: Account information. Copyright SAP AG 2011

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Reporting 73

Demo 3.10: Review account information

A S S E T E X P L O R E R

The data associated with assets is complex and includes information concern- ing acquisition, depreciation, and retirement. The simple reporting capabili- ties discussed in the previous section are not adequate for asset accounting. Consequently, companies rely on a reporting tool known as the asset explorer (Figure 3-24). The asset explorer provides an overview of all the activities related to the asset, including acquisition data, planned and posted deprecia- tion for different depreciation areas, and comparisons of data across multiple years. It also enables companies to drill down for details regarding master data, transactions, and documents.

The asset explorer distinguishes between planned values—depreciation amounts that have not yet been posted to the general ledger accounts—and

Figure 3-24: Asset explorer. Copyright SAP AG 2011

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74 C H A P T E R 3 Introduction to Accounting

posted values, which have been posted. Planned values must be periodically posted to the general ledger. Companies accomplish this task by executing a depreciation posting run, which posts the planned values for the specifi ed time period for all depreciation areas to the appropriate general ledger accounts. In addition, it charges the appropriate cost centers with the depreciation expenses incurred.

Figure 3-24 is an example of the asset explorer. The top part of the fi g- ure identifi es the asset and the fi scal year for which the data are displayed (asset #100002, offi ce furniture, and 2010, respectively). The top left part lists available depreciation areas. In the fi gure, two areas are available: book depre- ciation and tax depreciation. Book depreciation has been selected. The tabs in the middle part of the fi gure indicate the types of data that are maintained in the asset explorer. Note that the posted values tab is selected. This tab displays the acquisition value of the asset and depreciation values that were posted by the depreciation run. The planned values tab includes planned depreciation values for all the depreciation areas. The comparisons tab dis- plays data for multiple years, and the parameters tab displays current settings for the parameters associated with the asset, such as the useful life and the depreciation method.

Demo 3.11: Review asset explorer

F I N A N C I A L S TAT E M E N T S

Recall that the primary goal of fi nancial accounting is to report data needed to meet legal and regulatory requirements. This reporting takes the form of fi nancial statements, including the balance sheet and the profi t and loss state- ment. The specifi c accounts that need to be included in these statements are determined by the nature and purpose of the requirements.

Financial statements can be generated for different organizational levels, including one or more company codes and business areas. Financial statements are created from fi nancial statement versions. A financial state- ment version is a hierarchical grouping of general ledger accounts that must be included in the fi nancial statements. A company can defi ne multiple fi nancial statement versions, tailoring each one to satisfy different reporting requirements. Financial statements can be generated from either the opera- tive chart of accounts or the country-specifi c chart of accounts. These state- ments also specify additional characteristics such as currency, format, and level of detail.

Figure 3-25 provides an example of a balance sheet. It is defi ned using a fi nancial statement version that includes relevant balance sheet accounts. It is grouped into two major categories, assets and liabilities/equity, which in turn are divided into account groups such as short-term assets (e.g., raw materials and fi nished goods) and long-term assets (e.g., land and depreciation).

Figure 3-26 displays a profi t and lost statement. It is grouped into rev- enue accounts, expense accounts, and cost of goods sold accounts.

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Reporting 75

Figure 3-25: Financial statement version with balance sheet accounts. Copyright SAP AG 2011

Figure 3-26: Financial statement version—with profi t and loss accounts. Copyright SAP AG 2011

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76 C H A P T E R 3 Introduction to Accounting

Demo 3.12: Generate fi nancial statements

Recall from our discussion of asset accounting earlier in this chapter that in fi nancial accounting an enterprise maintains a variety of deprecia- tion areas simultaneously. As a consequence, the enterprise requires different types of fi nancial statements—for example, one type for external reporting and another type for fi ling taxes. For this reason it maintains different fi nan- cial statement versions, each of which includes the appropriate depreciation- related accounts. Figure 3-27 shows a company that uses two depreciation areas to provide data to different fi nancial statements intended for different audiences. Specifi cally, the company includes book depreciation data in the fi nancial statements presented to shareholders and tax depreciation data in the statements intended for tax authorities.

Figure 3-27: Financial statements based on depreciation areas

C H A P T E R S U M M A R Y

In this chapter, we explored various ways in which a fi rm can use accounting

processes to refl ect the impact of the other business processes (e.g., procure-

ment and fulfi llment) on its fi nancial status. We also considered how the fi rm

can utilize accounting information to better plan and manage its operations.

The two basic categories of accounting processes are fi nancial account-

ing (FI) and management accounting. Financial accounting is concerned with

calculating the impacts of business operations for external reporting, typically

to regulatory bodies and shareholders. In contrast, management accounting, or

controlling (CO), consolidates process data the fi rm utilizes for internal manage-

ment and planning. Both fi nancial and management accounting leverage the

same data from an ERP system, but they do so from different perspectives and

for different goals.

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Review Questions 77

Financial accounting consists of fi ve key processes: general ledger

accounting, accounts receivable accounting, accounts payable accounting,

asset accounting, and bank ledger accounting. These processes are closely

linked with other operational or logistics processes throughout the fi rm, and

they share a great deal of the common master data found in those processes.

Financial accounting uses several unique types of data, such as the chart

of accounts, general ledger accounts, subsidiary ledgers, and reconciliation

accounts, to provide a complete picture of the fi rm’s fi nancial status.

Management accounting focuses primarily on the allocation of costs and

revenues to proper areas within the fi rm. Costs and revenues that are incurred

as the various business processes are executed are accumulated in various cost

objects. Firms then utilize these data to manage the organization.

K E Y T E R M S

Account determination

Account group

Accounts payable accounting

Accounts receivables accounting

Asset accounting

Asset class

Asset explorer

Assets

Balance sheet

Bank ledger accounting

Business areas

Chart of accounts (COA)

Cost center

Cost objects

Depreciation

Depreciation areas

Equity

Expenses

Financial accounting

document

Financial statement version

General ledger (GL)

Income statement

Liabilities

Parallel accounting

Profi t and loss statement

Reconciliation accounts

Revenues

Segment

Statement of cash fl ow

Subledgers

Subsidiary ledgers

R E V I E W Q U E S T I O N S

1. Explain the difference between fi nancial accounting and management accounting.

2. Briefl y describe the key processes in fi nancial accounting.

3. Explain the key organizational data in fi nancial accounting and the rela- tionships between them.

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78 C H A P T E R 3 Introduction to Accounting

4. What are charts of accounts and the general ledger? How are they related?

5. What are subsidiary ledgers and reconciliation accounts? How are they related?

6. What is an accounting document? What role does it serve?

7. Explain parallel accounting. Why do organizations maintain multiple ledgers?

8. What is the purpose of cost objects? Provide several examples of cost objects.

9. An organization purchases supplies for $3,000 and pays for them via a check. Prepare the T accounts to illustrate the impact of this purchase on

the general ledger.

10. An organization purchases offi ce supplies as listed below. The vendor invoices the organization at a later date, and the organization makes pay-

ment via a check. Prepare the T accounts to illustrate the impact of these

purchases on the general ledger.

a. Purchase offi ce supplies for $2,500 from Vendor Z.

b. Purchase offi ce supplies for $1,200 from Vendor Y.

11. An organization sells products to customers as explained below. The cus- tomers are sent invoices at a later date, and they make payment for the

amount of the invoice. Prepare the T accounts to illustrate the impact of

these purchases on the general ledger.

a. Sell products for $3,500 to Customer A.

b. Sell products for $3,500 to Customer B.

12. Explain the relationships among asset accounts, asset classes, and gen- eral ledger accounts.

13. Explain the three transaction types in asset accounting.

14. What are depreciation areas? Why do fi rms maintain different deprecia- tion areas?

15. Explain the components of the asset explorer.

16. What are fi nancial statement versions? Explain how they are created.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 7 9

7 9

Accounts In The GL00 Chart

of Accounts

3AA P P E N D I X

PROFIT AND LOSS ACCOUNTS

Account Number Short Text Long Text

600000 Sales Revenue Sales Revenue

610000 Sales Discount Sales Discount

620000 Misc. Revenue Miscellaneous Revenue

630000 Revenue Deductions Revenue Deductions

640000 G or L-Sale of Asset Gain or Loss on Sale of Assets

650000 Cust. Serv. Revenue Customer Service Revenue

650100 CS Rev Settlement Customer Service Revenue Settlement

700000 Labor Labor

720000 RM Consumpt Expense Raw Material Consumption Expense

720100 FP Consumpt Expense Finished Product Consumption Expense

720200 TG Consumpt Expense Trading Good Consumption Expense

720300 SF Consmpt Expense Semifi nished Consumption Expense

740000 Supplies Expense Supplies Expense

740100 Utilities Expense Utilities Expense

740200 Legal and Prof Expense Legal and Professional Expense

740300 Rent Expense Rent Expense

740400 Ins. Expense Liability Insurance Expense—Liability

740500 Payroll Expense Payroll Expense—Offi ce

740600 Payroll Expense Payroll Expense—Administrative

(Continued )

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80 C H A P T E R 3 Introduction to Accounting

PROFIT AND LOSS ACCOUNTS (CONTINUED)

Account Number Short Text Long Text

740700 Sales Expense Sales Expense

740800 Tax Expense Tax Expense—Property

740900 Tax Expense Tax Expense—Income

741000 Misc. Expense Miscellaneous Expense

741100 Labor Expense Labor Expense

741200 COGS Expense Acc. Cost of Goods Sold Expense Account

741300 IT Expense Account Information Technology Expense Account

741400 PO Var. Expense Acc. Production Order Variance Expense Account

741500 Utilities Utilities (electricity & phone)

741600 Manufac. Output Sett. Manufacturing Output Settlement

741700 Mfac. Output Sett Var. Manufacturing Output Settlement Variance

760000 Purchase Price Diff. Purchase Price Difference

760100 Production Var. Production Variance

780000 R & D Research and Development

790000 COGS Cost of Goods Sold

BALANCE SHEET ACCOUNTS

Account Number Short Text Long Text

100000 Bank Bank Account

101000 Alt Bank Alternate Bank Account

110000 Trade Receivables Trade Accounts receivables

110100 Misc. A/R Miscellaneous Accounts Receivable

110200 Int. Receivable Interest Receivable

200000 Inv-RM Inventory-Raw Materials

200100 Inv-FG Inventory-Finished Goods

200200 Inv-TG Inventory-Trading Goods

200300 Inv-SFG Inventory-Semifi nished Goods

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Accounts in the GL00 Chart of Accounts 81

200400 Inv-PS Inventory-Production Supplies

200500 Inv-SP Inventory-Suspense (Heaven)

200600 Inv-OP Inventory-Operating Supplies

210000 PP Ins Prepaid insurance

215000 PP Rent Prepaid Rent

220000 N/R Notes Receivable

220100 Land Land

220200 Prod Mach/Equip/Fixt Production Machinery, Equipment and Fixtures

220300 Accum. Depr. Accumulated Depreciation-Production Mach. Equip. and Fixtures

220400 Offi ce Furniture Offi ce Furniture

220500 Accum. Depr. Accumulated Depreciation-Offi ce Furniture

220600 Offi ce Equip & Compu Offi ce Equip. and Computers

220700 Accum. Depr. Accumulated Depreciation-Offi ce Equipment

220800 Vehicles Vehicles

220900 Accum. Depr. Accumulated Depreciation-Vehicles

221100 Intangible Assets Intangible Assets

221200 Accum. Amort. - IA Accumulated Amortization-Intangible Assets

300000 Payables-TA Payables-Trade Accounts

300100 Payables-In Taxes Payables-Income Taxes

300200 Payable-Misc Payables-Miscellaneous

300300 Payables-Int Payables-Interest

300400 Payables-ST/N Payables-Short-Term Notes

300500 Payables-LT/N Payables-Long-Term Notes

300600 Payables-Comm Payables-Commissions

310000 GR/IR Account Goods Receipt / Invoice Receipt Account

320000 AT-Output Accrued Tax-Output

321000 AT-Input Accrued Tax-Input

322000 Unearned Revenues Unearned Revenues

329000 Common Stock Common Stock

329100 Additional Paid Capit Additional Paid-in-Capital

330000 Retained Earnings Retained Earnings

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C H A P T E R 4 The Procurement Process 8 3

8 3

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Describe the major organizational levels associated with the procurement process.

2. Discuss the four basic categories of master data that are utilized during the procurement process.

3. Explain the key concepts associated with the procurement process.

4. Identify the key steps in the procurement process and the data, documents, and information associated with these steps.

5. Effectively use SAP® ERP to execute the key steps in the pro- curement process.

6. Utilize SAP ERP to extract meaningful information about the procurement process.

I n Chapter 1 we presented a simple procurement process, which is repro- duced in Figure 4-1. This diagram indicates that the initial step in this process is to create a requisition, which is then converted to a purchase

order and sent to a vendor. When the vendor receives the purchase order, it ships the materials, which the ordering party receives in the receive materials step. The ordering party also receives an invoice from the vendor, and it then makes a payment to the vendor.

This simple process has served GBI well until now due to its small size and closely connected operations. However, as GBI has grown and its opera- tions have become more dispersed and complex, GBI’s management has come to realize that it needs to reevaluate how GBI procures materials so that the company can take advantage of the most effective and effi cient processes. To accomplish this objective, management needs to familiarize itself with the vari- ous options available to GBI for executing the procurement process. In addi- tion, it wants to analyze the process steps and their impact in greater depth. Once management has attained a thorough understanding of the tactical and

The Procurement Process

C H A P T E R 4C H A P T E R

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strategic aspects of this current procurement process, it can then design and implement a new process that best meets GBI’s needs. It can also determine the best way to manage this process using the SAP ERP system.

In this chapter we examine the procurement process, also referred to as the purchasing or requisition-to-pay process. We begin by discussing the orga- nizational and master data relevant to this process. We then examine some of the key concepts inherent in the procurement process. After considering the concepts, we discuss the process steps in greater detail than we did in Chapter 1. We conclude the chapter with a discussion of reporting options.

To illustrate the various concepts and process steps, we will use the fol- lowing scenario throughout the chapter. GBI has discovered that the inventory of t-shirts (SHRT1000) in its Miami distribution center is low. Consequently, the company must procure more shirts before it runs out and begins to lose sales (and perhaps customers). GBI procures all of its t-shirts from a company called Spy Gear. Further, it purchases them in quantities of 500.

O R G A N I Z AT I O N A L D ATA The procurement process is executed in the context of specifi c organizational levels. Organizational levels relevant to the procurement process include cli- ent, company code, and plant. We discussed these levels in Chapter 2. Recall from that discussion that a client represents an enterprise that is comprised of many companies or subsidiaries, each of which is represented by a com- pany code. Most activities in the procurement process occur within a company code. Recall also that a plant fulfi lls many functions in a company. In the con- text of procurement, a plant is the location where the materials are received. Therefore we refer to it as a receiving plant, as opposed to, say, a manufactur- ing plant, where goods are actually produced. Three additional organizational data are relevant to purchasing: storage locations, purchasing organization, and purchasing group. We consider each one next.

S T O R A G E L O C AT I O N

Storage locations are places within a plant where materials are kept until they are needed. A plant can have multiple storage locations, each of which is designated for different purposes (e.g., staging area, inspection area) or stores

Figure 4-1: A basic procurement process

84 C H A P T E R 4 The Procurement Process

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Organizational Data 85

specifi c types of materials (e.g., semifi nished goods). More specifi c storage locations include shelves, bins, cabinets, and trays. Locations range from small bins to entire buildings, depending on the size of the materials being stored. For example, the storage location for nuts and bolts will be a small container, whereas the storage location for an aircraft will be a hanger. Organizations with sophisticated inventory management systems can manage their materials on a more detailed level. We address these systems in the chapter on inventory and warehouse management.

Regardless of the nature of the enterprise, however, a plant must have at least one storage location if it needs to track the quantity and value of materi- als in its inventory. For example, a plant that serves as a production or storage facility must maintain accurate records of the quantity and value of raw mate- rials, semifi nished goods, and fi nished goods. The plant cannot perform this function without storage locations. In other cases, however, this function is not necessary. For example, an enterprise does not typically track the quantity or value of supplies it purchases for a corporate offi ce (a plant). Therefore, a stor- age location is not essential. Signifi cantly, although one plant can have multiple storage locations, each storage location can belong to only one plant.

Figure 4-2 shows storage locations for the fi ve GBI plants. The Dallas plant has four storage locations. It stores raw materials (RM00), semifi nished good (SF00), fi nished goods (FG00), and miscellaneous materials (MI00). The Miami and San Diego plants, which are distribution centers (DCs), both have three storage locations to store fi nished goods (FG00), trading goods (TG00), and miscellaneous materials (MI00). The structure of storage locations in Germany is similar to that of the U.S. company. The manufacturing facility in Heidelberg has a structure similar to that in Dallas, and the Hamburg plant has a structure similar to the plants in Miami and San Diego. Note that although

Figure 4-2: GBI Storage locations

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the labels of the storage locations are the same in different plants—for exam- ple, location FG00 exists in all fi ve plants—they are distinct organizational levels. The combination of plant and storage location must be unique. Thus, the Dallas plant may not have another storage location with the label FG00. It is common to use the same labels across plants and company codes if they rep- resent the same type of storage, such as raw materials and fi nished materials.

P U R C H A S I N G O R G A N I Z AT I O N

A purchasing organization is the unit within an enterprise that performs strategic activities related to purchasing for one or more plants. It evaluates and identifi es vendors, and it negotiates contracts and agreements, pricing, and other terms. An enterprise may have one or more purchasing organizations. Typically, there are three models of purchasing organizations: enterprise level, company level, and plant level. These models range from highly centralized to highly decentralized. We discuss each of these models in greater detail below.

Enterprise-Level Purchasing Organization

The enterprise-level purchasing organization, also known as the cross- company code purchasing organization, is the most centralized model. There is only one purchasing organization for the overall enterprise and all of the plants within the enterprise. Figure 4-3 illustrates the GBI organizational structure using the enterprise-level model. There is only one corporate purchasing orga- nization, GL00, and it handles purchasing for all fi ve plants in both company codes (US00 and DE00). In this model, the purchasing organization is assigned to each plant, but not to the company code.

Figure 4-3: Enterprise-level purchasing organization

86 C H A P T E R 4 The Procurement Process

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Company-Level Purchasing Organization

With the company-level purchasing organization, also known as the cross- plant model, a single purchasing organization is responsible for multiple plants in one company code. Figure 4-4 illustrates such a model for GBI. In the fi gure, there are two purchasing organizations: US00 and DE00. US00 is responsible for all three U.S. plants, and DE00 is responsible for the two German plants. This approach is less centralized than the enterprise-level model. In this model the purchasing organization is assigned to both the plant and the company code. However, a purchasing organization can be assigned only to one company code.

Figure 4-4: Company-level purchasing organization

GBI has one company in the United States and one in Germany, each of which has its own purchasing organization. If GBI had additional compa- nies in other European countries, then each country could have a separate purchasing organization. Alternatively, one purchasing organization could manage purchasing for several countries. In fact, it is fairly common to set up a separate purchasing organization for each country to deal with that country’s distinctive set of laws, taxes, and business practices.

Plant-Level Purchasing Organization

The most decentralized model is the plant-level purchasing organization, also known as a plant-specifi c purchasing organization, in which each plant has its own purchasing organization. Figure 4-5 illustrates a plant-specifi c model for GBI. Note that each plant has its own purchasing organization

Organizational Data 87

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that is responsible for purchasing materials for that plant. As in the case of the cross-plant model, in this scenario the purchasing organization is assigned to both the plant and its company code.

Reference Purchasing Organization

Each purchasing organization model has its advantages and disadvantages. A highly centralized model enables an enterprise to negotiate favorable agreements because it purchases materials in large volumes. However, the enterprise may not be able to take advantage of local practices and rela- tionships with which it is not familiar. In addition, it may not be able to react quickly to changes in local conditions. Conversely, a highly decentral- ized model is preferred when vendors primarily serve a local geographic area and knowledge of local practices and conditions enables the enterprise to make favorable agreements. Ultimately, enterprises frequently adopt a hybrid model that consists of one centralized purchasing organization that can evaluate needs and opportunities for the entire enterprise and nego- tiate global contracts, which purchasing organizations then use across the enterprise. Such a purchasing organization is called a reference purchasing organization.

GBI has adopted a hybrid model to include a single global reference purchasing organization (GL00), as indicated in Figure 4-3, plus multiple com- pany-code-specifi c purchasing organizations, as indicated in Figure 4-4. In the United States, the purchasing organization (US00) is physically located in the Miami facilities, and in Germany the purchasing organization (DE00) is physically located in the Heidelberg facilities.

Figure 4-5: Plant-level purchasing organization

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P U R C H A S I N G G R O U P

Whereas purchasing organizations are responsible for the strategic aspects of purchasing, such as negotiating contracts with vendors, purchasing groups carry out the day-to-day purchasing activities. A purchasing group is an indi- vidual or a group of individuals who are responsible for purchasing activities for a material or a group of materials. These activities include planning, creat- ing purchase requisitions, requesting quotations from vendors, and creating and monitoring purchase orders. A purchase order (PO) is a formal commu- nication to a vendor that represents a commitment to purchase the indicated materials under the stated terms. The purchasing group also serves as the main point of contact with vendors.

A purchasing group is not always an entity within the company. Some businesses outsource the group’s activities. Consider, for example, a case in which a company needs to acquire land or a building. The company most likely will retain a realtor to fi nd the property that best suits their needs. In this case, the realtor serves as the purchasing group. Similarly, many companies use the services of buyer agents to fi nd suitable vendors and buy materials from them because these agents are more familiar with the vendors. GBI has one pur- chasing group for North America (N00) and one for Europe (E00).

Dell Computers and Intel Corporation illustrate how purchasing organizations manage both local and glo- bal procurement strategies. Dell has manufacturing facilities in the United States, Brazil, Ireland, Poland, China, Malaysia, and India. The company purchases vast quantities of Intel microprocessors for its various computer product lines (laptops, desktops, and serv- ers). In turn, Intel maintains a dedicated sales force at Dell’s headquarters to negotiate purchasing contracts and manage the relationship. Dell has a central pur- chasing organization that consolidates procurement requirements globally and negotiates pricing centrally with Intel. However, the actual purchase orders are cre- ated at the local Dell manufacturing facilities in each region. In other words, Dell US purchases chips from Intel US, Dell China purchases chips from Intel China,

and so on. All purchases are based on the global con- tract and pricing terms negotiated between Dell and Intel headquarters, but they are executed locally by the purchasing groups for the various plants. This arrange- ment ensures that Dell receives the best pricing and terms due to the aggregate demand and strategic over- sight of the centralized purchasing organization. At the same time, however, the local manufacturing facilities maintain control over the tactical purchasing activities because the purchasing organization is located on the same premises. Intel also benefi ts from this arrange- ment by gaining global visibility into Dell’s purchasing so that the company can better adjust their manufactur- ing capacity to provide the right amount of chips to Dell when and where they are needed.

Source: Dell & Intel company reports.

Business Processes in Practice 4.1: Dell & Intel

M A S T E R D ATA In Chapter 2 we explained that business processes involve multiple types of master data. The four master data types that are relevant to the purchasing process are material master, vendor master, purchasing info records, and con- ditions. All four types are integrated in various combinations throughout the procurement process.

Master Data 89

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M AT E R I A L M A S T E R

In Chapter 2 we explained that data in the material master are grouped into different views that are relevant to different processes. We also examined one view in detail, namely, basic data, because these data are applicable to many processes. Recall that basic data include material number, description, and weight. Please review Chapter 2 for a complete list of materials that GBI utilizes. In addition to basic data, the views relevant to purchasing are fi nancial accounting, purchasing, and plant data / storage.

Financial Accounting Data

Financial accounting data include the valuation currency, the valuation class, and the price control. Valuation currency is the currency that the mate- rials will be priced in, such as U.S. dollars or euros.

The valuation class identifi es the general ledger accounts associated with the material. The general ledger accounts are used to maintain the value of the inventory in stock and are updated as materials are purchased, sold, or used in production. You may wish to review the appendix in Chapter 3 to familiarize yourself with the material accounts that GBI uses. Valuation class provides an important integration point between purchasing and fi nan- cial accounting because it allows the system to automatically make postings to appropriate stock or inventory accounts in the general ledger. Typically, all materials with similar characteristics are assigned to the same valuation class. Consequently, all fi nancial transactions for these materials are posted to the same general ledger account. For example, because off-road bikes and tour- ing bikes are both fi nished goods, their transactions could be posted to the same fi nished goods inventory account. In some cases, however, materials with similar characteristics are assigned to different valuation classes and therefore to different general ledger accounts. Referring back to the previous example, the bikes could be assigned to the off-road bike inventory account and the touring bike inventory account, respectively. Assigning materials with similar characteristics to different valuation classes is appropriate when a company maintains separate general ledger accounts for different materials. The last and simplest option is to assign materials with different characteristics to the same valuation class and therefore the same inventory account. This strategy is appropriate when the enterprise does not need to track the value of the mate- rials separately, as is the case, for example, with offi ce supplies.

Price control identifi es the method that is used to value the materials. The two options for price control are moving average price and standard price. Both options defi ne the price per unit of materials in stock, such as helmets. In the moving average price option, the total value of the materials is divided by the quantity in stock to determine the average price per unit. For example, if a fi rm has 1000 helmets in stock and they cost $34,000 to purchase, then the moving price is $34 (34,000/1,000). This price is called “moving” because it is updated each time a process step affects the price; it represents an average price of the materials in stock. Thus, if the enterprise purchases an additional 100 helmets for $3,500, then the new moving price increases slightly to $34.09 (($34,000 + $3,500)/(1,000 + 100)).

In contrast, standard price is constant for a specifi ed period of time and does not fl uctuate, even when an event occurs that causes the value of the

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materials to change. The standard price is updated periodically — for example, monthly or quarterly — to account for changes in the value of materials. Thus, in our example above, if the fi rm’s policy is to update the standard price at the end of each month, then it does not make any price changes when it purchases the additional helmets. Instead, it updates the standard price at the end of the month.

Purchasing Data

Another key component of the material master is the purchasing data or view. The key data in the purchasing view are the purchasing group, the goods receipt processing time, and the delivery tolerances. The purchasing group, which we discussed earlier as one of the organizational elements in procurement, is responsible for purchasing the materials.

When a company receives materials from a vendor, it requires a certain amount of time to receive them and place them into storage. For instance, it must unpack the boxes, count the materials, inspect their quality, and physi- cally move them to the appropriate storage location. This is the goods receipt processing time. An estimate of this time is included in the material master. The ERP system utilizes this estimate in planning activities, for instance, to determine when an order should be placed so that the materials are available when they are needed.

It is not uncommon for the shipment from a vendor to include either more or less material than the actual quantity ordered. When this occurs, the receiving organization may or may not accept receipt, depending on its poli- cies and its agreements with its vendors. The delivery tolerances in the mate- rial master specify how much over delivery and under delivery the ordering party will accept. If the quantity delivered is within these tolerances, then the ordering party accepts delivery. If the quantity exceeds the tolerances, then it refuses the shipment and returns it to the vendor.

Some of the data in the material master can vary for each relevant orga- nizational level. In purchasing, the relevant organizational level is the plant. If a company has multiple plants, then the material must be defi ned for all plants in which it is stored. For example, the purchasing group and goods receipt processing time can vary by plant.

Plant Data / Storage

Most materials that are purchased from a vendor or produced in-house ulti- mately are received into inventory. For this step to occur, the plant data / stor- age view must be included in the material master. The plant data/ storage view includes data that are needed to properly store materials. Examples of these data are:

• Environmental requirements such as temperature and humidity

• Special containers that are required for storage

• Shelf life; that is, how long a material can be stored before it becomes obsolete or unusable (common in pharmaceutical and food services industries)

• Instructions for special handling, for instance, if the material is fragile or hazardous.

Master Data 91

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Demo 4.1: Review material master

V E N D O R M A S T E R

Vendor master data include the data needed to conduct business with a vendor and to execute transactions related to the purchasing process. Data in the vendor master are grouped into three segments: general data, accounting data, and purchasing data. The relationships among the three segments and the two departments responsible for the data—accounting and purchasing—are depicted in Figure 4-6. Figure 4-7 highlights the specifi c data that are included in each segment.

Figure 4-6: Segments of vendor master data

General data include the vendor’s name, address, and communication information such as phone and fax numbers. These data are defi ned at the cli- ent level and are consistent across all company codes and purchasing organi- zations in the enterprise (client). General data are common to the purchasing and accounting departments and can be maintained by either department.

Accounting data include tax-related data, bank data, and payment terms and methods. These data are defi ned at the company code level (recall from Chapter 2 that fi nancial accounting is maintained at the company code level) and are relevant to all purchasing transactions in the company code. The accounting department will typically complete this segment of the vendor master.

92 C H A P T E R 4 The Procurement Process

Figure 4-7: Examples of vendor master data

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Accounting data must also specify the reconciliation account in the gen- eral ledger. Recall from Chapter 3 that a vendor account is a subledger account and that the reconciliation account identifi es the accounts payable account in the general ledger associated with the vendor. If the vendor supplies multiple companies (company codes) within the enterprise, then the data very likely will vary for each company. The reconciliation account will be different if each company uses a different chart of accounts and general ledger accounts. Bank data and payment terms may vary as well. Thus, accounting data are maintained separately for each company code with which the vendor had dealings.

Finally, purchasing data include various terms related to determin- ing prices, creating and communicating purchase orders, verifying invoices, and other steps involved in executing purchases with the vendor. The pur- chasing department will typically complete this segment. Purchasing data are defi ned at the purchasing organizational level and are applicable only to that organization. If an enterprise has multiple purchasing organizations that deal with the vendor, then it must maintain separate data for each one. For example, delivery and payment terms may vary for different purchasing organizations.

Both GBI US and GBI DE have 12 vendors that supply raw materials and trading goods. These vendors are listed in Table 4-1. Appendix 4A pro- vides additional details about these vendors. Note from the appendix that each vendor supplies specifi c materials to GBI.

GBI US Vendors GBI DE Vendors

• Olympic Protective Gear • Boomtown Tire & Wheel • Dallas Bike Basics • Lightbulb Accessory Kits • Space Bike Composites • Night Rider Aluminum Products • Spy Gear • Rapids Nuts n Bolts • Green Blazers Seats • Fun n the Sun Seats n Bars • Sunny Side Up Tire • Redwood Kits

• Burgmeister Zubehör OHG • Pyramid Biking • ABS Brakes GmbH • Flat Tire and More • Gummi Schultze • Lohse Schraube • Thick Spoke • Main Carbon • Shell Gear • Cologne Bike Supplies • Sachsen Stahl AG • Run & Fun

Demo 4.2: Review vendor master

P U R C H A S I N G I N F O R E C O R D S

A purchasing info record is an intersection or a combination of material and vendor data, as illustrated in Figure 4-8. It contains data specifi c to one

Master Data 93

Table 4-1: GBI vendor list

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vendor and one material or material group. Purchasing info records include some data that are in the vendor master and the material master, as well as data that are valid for the specifi c combination of vendor and material. These data are grouped into general data and purchasing organization data. General data are applicable to all purchasing groups and include vendor number, material number (or group), and other data used for communica- tion (e.g., contact information, telephone numbers, and reminders). In con- trast, purchasing data are specifi c to one purchasing organization, and they are based on agreements with the vendor regarding delivery times, delivery tolerances, quantities, and pricing conditions. Companies use pricing condi- tions to determine the cost of purchasing the material from that vendor. The info record typically defi nes a number of different condition types, including gross price, discounts and surcharges, taxes, and freight. It also includes text data that are used for notes and instructions to accompany purchase orders, and it keeps track of the last purchase order for the specifi c material-vendor combination. Finally, the company uses data from the purchasing info record as default values when it creates a purchase order for a specifi c combination of material and vendor.

Figure 4-8: Purchasing info record

Figure 4-9 illustrates a purchasing info record for vendor 107000 and material SHRT1000 for purchasing organization US00. It indicates that Spy Gear takes four days to deliver the t-shirts. Further, Spy Gear charges $15 per shirt, but it offers a discount of 4% for orders greater than $1,000.

C O N D I T I O N S

The fi nal type of master data relevant to purchasing is conditions. These data are very similar to the conditions discussed in the section on purchasing info records, and they are used to determine the appropriate prices, discounts, taxes, freight, and so on for the materials. Unlike the conditions in the pur- chasing info records, however, these conditions are not defi ned for a specifi c combination of vendor and material. Rather, they are based on the overall agreements and contracts in place with vendors. The company uses these con- ditions to determine pricing when it creates purchase orders.

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Demo 4.3: Review purchasing info record and conditions

K E Y C O N C E P T S Before we discuss the procurement process in detail, we pause here to discuss some key concepts that are essential to understanding how the process works. These concepts are related to how the materials are purchased (item catego- ries), how their impact on fi nancials is recorded (account determination), the materials’ usability (stock type), and the movement of the materials as they are received, stored, and shipped to customers (goods movements).

I T E M C AT E G O R I E S

Item categories determine which process steps and data are needed when a company purchases materials or services. Common item categories are stan- dard, consignment, subcontracting, third-party, stock transfer, and services.

Of these categories, standard items are the most common, and the pro- cess used to procure them includes the steps portrayed in Figure 4-1. The ini- tial step is to create a requisition, which is then converted to a purchase order and sent to a vendor. When the vendor receives the purchase order, it ships the materials, which the ordering party receives via the goods receipt step. The ordering party also receives an invoice, and it makes a payment to the vendor. In contrast, when a company purchases materials on consignment, it pays the vendor only when it uses or sells the materials. For this category of materials, therefore, there is no invoice receipt step. Third-party order refers to items

Figure 4-9: Purchasing info record example

Key Concepts 95

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that the vendor ships directly to a customer. Companies employ third-party orders for trading goods, such as helmets, that they purchase and then resell to customers without performing any operations themselves. Because the cus- tomer receives the goods directly from the vendor, there is no goods receipt for the company itself.

Under a subcontracting arrangement, a company sends materials to a vendor, who uses them to create semi-fi nished products. The vendor then sends these products back to the company that initiated the process. In this case, the procurement process includes the additional step of shipping materi- als to the vendor. A stock transfer is the process whereby an organization uses the procurement process to obtain materials from another plant within the same organization. Because the entire process takes place within a single organization, there are no invoice and payment steps. Finally, services — such as janitorial or landscaping services — generally do not involve receiv- ing materials. Instead, a mechanism to record services performed – a service sheet - is necessary.

In our example, GBI will use the standard item category to purchase the t-shirts from Spy Gear.

Demo 4.4: Review item categories

A C C O U N T D E T E R M I N AT I O N

Businesses typically use the procurement process to purchase materials that they place in inventory until they need them. For example, businesses acquire raw materials for later use in the production process and trading goods for sub- sequent sales to customers. Such materials are referred to as stock materials. Recall from the discussion of fi nancial accounting in Chapter 3 that the gen- eral ledger contains multiple inventory accounts, such as raw materials, trading goods, and fi nished goods. How does an ERP system know which of these inven- tory accounts must be updated when materials are received? For stock materials, for which a material master must be defi ned, account determination — the process whereby the system determines which general ledger accounts to use in a given situation — is automatic and is based on data contained in the material master, particularly the valuation class.

Companies also use the procurement process to acquire consumable materials. As the name suggests, these are materials that are acquired to be consumed by or used within the organization. One example of consum- able materials is offi ce supplies, such as pencils and paper, which people in the organization use during the course of their day-to-day work. When a company purchases materials for consumption, the transaction must identify the account assignment object to be charged for the purchase as well as the general ledger accounts to be debited and credited. An account assignment object identifi es the bearer of the cost of the purchase and is the entity for which the materials were purchased. For example, when a company pur- chases offi ce supplies for the marketing department, it debits a consumption account, such as the supplies expense account in the general ledger, and it charges the marketing department cost center for the purchase. Recall that a cost center is a cost object used to accumulate costs for a department. In the

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above example, the account assignment object is the cost center. Companies also use the purchasing process to acquire assets, such as cars, and to obtain materials needed to support processes such as production, fulfi llment, and enterprise asset management and projects such as constructing a new factory. The specifi c accounting data needed are determined by the account assignment category. The typical account assignment categories are described below along with the accounting data — specifi cally, the account assignment object to be charged and the general ledger account number — that are required for each category. The letters in parentheses are the codes used in SAP ERP.

1. Asset (A). A company uses this category when it acquires a fi xed asset, such as a car or land. Recall from Chapter 3 that the value of fi xed assets is tracked in separate subledger accounts with corre- sponding asset master records. When assets are purchased using a purchase order (see Chapter 3 for other ways of acquiring assets), the account assignment object to be included in the purchase order is the asset master record.

2. Order (F). Companies use this category when they purchase mate- rials for different types of orders. An example of an order is a production order that will be used to produce another material. When a company purchases materials for an order, it must include the order number (the account assignment object) and a general ledger account number in the purchase order.

3. Cost Center (K). When a company purchases materials (e.g., supplies) for consumption, then the purchase order must include both the cost center to be charged (the account assignment object) and the appropriate general ledger expense account number (e.g., supplies expense).

4. Sales Order (C). When the purchase is associated with a specifi c sales order (which is part of the fulfi llment process), then the sales order number and a general ledger account number must be provided.

5. Project (P). When the purchase is related to a project, then the project number and a general ledger account number must be specifi ed.

Note that in several of these categories a general ledger account is neces- sary. The system can be confi gured to automatically determine the appropriate account via account determination procedures. It is not always necessary for the user to provide these data.

Figure 4-10 shows the relationship between stock and consumable materi- als and account assignment categories. It shows the several scenarios related to purchasing – purchase of stock material, purchase of consumable material (with and without material master), and purchase of stock material for consumption. The left side of the fi gure shows that for stock material, account assignment is automatic and is based on data (valuation class) in the required material mas- ter. These data determine which accounts (e.g., which stock account) will be used during the procurement process.

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The right side of the fi gure shows that, for consumable materials, an account assignment category and specifi c account assignment objects, such as a cost center, must be provided when the purchase order is created. The data provided by the user determine which general ledger accounts (e.g., consump- tion account) will be used during the process. Consumable materials may or may not have a material master. If material master data exist, then two options are available. In one, the company doesn’t track the quantity of the material in inventory; in the other, it does. It is important to remember, however, that the company can track only the quantity of inventory on hand. The value of inventory cannot be tracked because a consumption account (refer to Chapter 3), such as supplies expenses, rather than an inventory account is used in the purchasing process.

Finally, the middle of the fi gure illustrates the scenario in which materials that are typically purchased to stock are sometimes purchased for consumption. For example, GBI normally purchases helmets to resell to its customers; that is, it purchases them to stock. However, GBI occasionally purchases helmets to be distributed as gifts at trade shows. In these cases the transactions are considered purchases for consumption rather than for stock. Consequently,

Figure 4-10: Purchase for stock vs. consumption

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an account assignment category of K (cost center) is provided to override the data that are included in the material master, which would otherwise defi ne helmets as stock material. Because category K is used, a specifi c consumption account (e.g., advertising expense) and a cost center associated with the trade show are required.

In our example, the t-shirts are purchased to stock. Because material master data for the t-shirts are defi ned in the ERP system, the data needed for account assignment will be obtained automatically from the material master.

S T O C K T Y P E O R S TAT U S

Stock or inventory of materials is classifi ed into different stock types or sta- tuses that determine the usability of materials— that is, how the company can use the materials in its various processes. Four common stock types are unre- stricted use, in quality inspection, blocked stock, and stock in transit. Materials that are classifi ed as unrestricted use—as the name implies—can be used in any manner that management feels will benefi t the enterprise. They can be consumed internally—for instance, to produce other products—or externally, to meet customer demand. In contrast, materials defi ned as in quality inspec- tion or blocked stock can be withdrawn only for sampling or for scrap. A company uses the in quality inspection status when the goods it receives from a vendor must undergo inspection before being released for consumption. Blocked stock is typically used for materials that are damaged or unusable for some reason, such as the when the vendor delivers the wrong materials. Finally, when materials are being moved from one plant to another, they are classifi ed as stock in transit.

G O O D S M O V E M E N T

A process step that results in a change in stock results in a goods movement. The goods movement is associated with receiving materials from a vendor, shipping them to a customer, or otherwise “moving” them from one loca- tion within the company to another. The four common goods movements are goods receipt, goods issue, stock transfer, and transfer posting. The fi rst three movements involve the physical movement of materials from one location to another. The fourth, transfer posting, is used to change the stock type or status of material (e.g., from in quality inspection to unrestricted use) or to reclassify the material into a different material type.

A goods receipt records the receipt of materials into storage, which results in an increase in inventory quantity. A company usually generates a goods receipt when it receives materials either from a vendor or from the production process. The material document created as a result of a goods receipt will show the location (plant and storage location) where the materials are received as well as the specifi c movement type used. The accounting document will identify the various general ledger accounts that are updated.

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In contrast to a goods receipt, a company uses a goods issue when materials are removed from storage, in which case inventory is reduced. A company typically generates a goods issue when it (a) ships materials to a customer, (b) uses them for internal consumption (e.g., to produce another material), or (c) designates them for sampling or to scrap. The material document created by the goods issue will record the location from which the materials were issued as well as the quantity involved. The accounting document will indicate the relevant general ledger accounts and amounts. For example, when GBI ships materials to a customer, it removes the materials from inventory and records a goods issue in its SAP ERP system.

A stock transfer is used to move goods from one location to another within the organization. Materials can be transferred between storage loca- tions, between plants within the same company codes, and between plants across company codes. In all cases, one or more material documents are cre- ated to record the transfer. In addition, for transfers between plants or com- pany codes, accounting documents are also created. Recall that earlier in the chapter we defi ned stock transfer as an item category. So, why is it also a goods movement? The reason is that the procurement process can be used to transfer materials from one location to another. However, materials can be transferred outside the procurement process as well. In these cases the transfer can sim- ply be recorded via a goods movement. This approach is quicker and more direct than using the procurement process, but it has limitations. We discuss stock transfers in greater detail in the chapter on inventory and warehouse management.

Finally, an enterprise uses a transfer posting to change a material’s status or type. For example, it would use a transfer posting to redefine a material from in quality inspection status to unrestricted use or to change a material type from raw materials to fi nished goods. A transfer posting may or may not involve the physical movement of materials from one location to another. In either case, a material document is created to record the status change. For example, when the company receives materials from a vendor, it stores them and designates them as in quality inspection. After they pass inspection, it issues a transfer posting to “move” them to unre- stricted use status. In this situation a material document is created, but an accounting document is not. As with stock transfers, we will examine transfer postings in greater detail in the chapter on inventory and ware- house management.

A goods movement will always result in the creation of a material doc- ument. In addition, a fi nancial accounting document is created if the move- ment results in a change in valuation. As we discussed in Chapter 2, fi nancial accounting documents record the impact of a process or process step on rel- evant general ledger accounts.

A material document records data related to a goods movement, such as the receipt of goods from a vendor. As illustrated in Figure 4-11, the material document consists of a header and one or more items or details. The header includes data such as the date, the name of the person who created the document, and the source of the document, that is, what process step or transaction was used to create it. The items identify the materials involved, quantities, location, the movement type used, and other relevant data.

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Key Concepts 101

Figure 4-11: Structure of a Material Document

Demo 4.5: Review a Material Document

M O V E M E N T T Y P E S

The four goods movements we just discussed can be accomplished through a number of specifi c movement types. Every goods movement requires a move- ment type. The movement type determines which category of movement is being executed (e.g., goods receipt or goods issue), what information must be provided when executing the movement (e.g., storage location), and which general ledger accounts will be updated (e.g., fi nished goods inventory). It also determines how the stock quantity will be affected (e.g., increase or decrease). Because different movement types require different information, they also determine the screen layout used to record the movement. Each movement type has a corresponding cancellation or reversal movement type that is used to reverse its impact. For example, movement type 101 is used to record the receipt of materials for a pur- chase order, and movement type 102 is used to reverse the receipt. Reversals are typically used to correct an error in recording. If the materials are defective and must be returned to the vendor, then a different movement type, 122, is used to record this movement. Table 4-2 lists examples of movement types in SAP ERP.

Goods Receipt 101: Goods receipt for a purchase order

102: Goods receipt for a purchase order - reversal

103: Goods receipt for a purchase order into blocked stock

122: Return delivery to vendor

Goods Issue 261: Consumption for production order from warehouse

231: Consumption for sales order from warehouse

Transfer Posting 321: Quality inspection to unrestricted

350: Quality inspection to blocked stock

Stock Transfer 301: Plant to plant transfer

311: Storage location to storage location transfer

Table 4-2: Examples of movement types

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Demo 4.6: Review goods movements and movement types

P R O C E S S Now that you are familiar with the basic concepts involved in procurement, we shift our focus to the process itself. At the beginning of this chapter we introduced a very simple procurement process that included a few key steps. In this section we discuss a more complete process. We also examine each step in detail.

In this section, we discuss the purchase of a standard item. The steps used to procure standard items are diagrammed in Figure 4-12. The fi gure indicates that the procurement process is triggered by some event that results in a requirement to acquire materials. The trigger is often a result of an event in another process. For example, the company cannot fulfi ll a production order (a step in the production process) until it purchases certain necessary materi- als. Alternatively, the materials planning process may alert the company that it needs to increase its inventory of certain materials. Regardless of the trig- ger, the result is a requirement to obtain materials. This requirement typically takes the form of a purchase requisition.

Figure 4-12: A detailed procurement process

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Once a requisition is created, the company must select a source of sup- ply. This source can be either external (e.g., a suitable vendor) or internal (e.g., another plant in the company). If the source is external, then the selec- tion process may include additional steps such as requesting and receiving quotations. After the company receives the quotations, it evaluates them and selects a vendor. It then submits a purchase order. Upon receiving the order, the vendor confi rms receipt and may provide additional information such as the expected shipment date. The vendor then ships the materials to the company, which receives them into inventory. The vendor also sends an invoice. Once the company verifi es the invoice, it sends a payment to the vendor.

If the source of supply is internal, then the process is somewhat differ- ent. A stock transport order is used instead of a purchase order. We will discuss stock transport orders in greater detail in the chapter on inventory and ware- house management.

The preceding paragraphs convey a very simplistic overview of the basic steps in the procurement process. In reality, procurement is much more com- plex. In the next section we examine the steps illustrated in Figure 4-12 in detail. We discuss each step in terms of its key elements— triggers, data, tasks, and outcomes. A trigger is something that causes the step to be executed. The relevant data typically include organizational data, master data, transaction data, and user input that are specifi c to the process step. Outcomes include new transaction data and updates to master data, all of which are stored in the database. In addition, fi nancial accounting (FI) documents, management accounting or controlling (CO) documents, and material documents are cre- ated. Finally, transaction documents are created or updated.

R E Q U I R E M E N T S D E T E R M I N AT I O N

The elements of the requirements determination step are summarized in Figure 4-13. Requirements for materials arise from a need that is identifi ed either automatically by another process or manually by an individual. The pro- cess that most commonly generates requirements is the materials planning process. (We will discuss this process at length in the materials planning chap- ter.) Requirements are also generated by the production and plant mainte- nance processes. To complete these processes, the company sometimes must purchase non-stock items or services from another organization. In such cases a requirement for the material or service is created. In addition, the need to send materials for external processing during production (e.g., a part to be repaired) will result in a requirement for a subcontracted item.

Figure 4-13: Elements of the requirements determination step

Process 103

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Requirements are also created manually for items that are not included in materials planning. This process occurs when an individual manages inven- tory or when the company needs a nonstock item (e.g., supplies) or a service (e.g., janitorial or repair). Regardless of the trigger or source, the need for materials is documented in the form of a purchase requisition. Note that a purchase requisition is a document that is used for internal purposes—namely, to request needed materials. It is not a commitment to purchase the materials or service. Rather, the commitment occurs when a purchase order is created in the next step of the process.

Data

The data needed to create a purchase requisition are the item category, quan- tity, desired delivery date, and desired delivery location or receiving plant (see Figure 4-14). In addition, a material number is needed for stock items, and an account assignment object may be required depending on the item cate- gory selected. The ERP system uses the material number to obtain additional data from the material master such as description, material group, purchasing group, unit of measure, and valuation price. The delivery date and location are typically provided by the requisitioner, but they can also be obtained from the material master.

Figure 4-14: Data in a purchase requisition

The organizational data needed to create a purchase requisition are the purchasing group and the receiving plant. These data are typically obtained from the material master. User input can provide or override these data as needed.

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Vendor data are optional. When they are included, they indicate a preference for the source of supply. Vendor data include the vendor number and name.

It is also possible to requisition materials that do not have material mas- ter data, but this procedure must be performed manually. Basically, the requi- sitioner provides a description of the material instead of a material number. In addition, he or she provides data that are normally obtained from the mate- rial master, including delivery location, material group, purchasing group, and account assignment category. Further, depending on the account assignment category, additional data such as cost center, asset number, and general ledger accounts can also be included. (At this point you might want to review our discussion of account determination earlier in the chapter.)

Tasks

The only task in this step is to create the purchase requisition using the speci- fi ed data.

Outcomes

The process document that results from this step is the purchase requisition. The system will assign a unique requisition number to this document, which the concerned parties can use to track its progress through the various steps in the process. Signifi cantly, this step does not generate any fi nancial or manage- ment accounting documents because creating a requisition has no fi nancial impact.1 Moreover, because there is no goods movement (that is, no materials are received), no material document is created either.

In our example, the trigger for the procurement process is low inventory of t-shirts. GBI has determined (through material planning, which we discuss in Chapter 8) that t-shirts must be reordered when there are 50 or fewer left in inventory. In addition, the shirts must be purchased in quantities of 500. GBI was alerted to the need to reorder by an employee in the plant who reviews inventory reports that are printed at the beginning of each day. This individual observed that the inventory of t-shirts at the Miami plant had fallen below 50. As a result, he created a purchase requisition for 500 t-shirts to be delivered to the Miami plant by a specifi ed date.

S O U R C E O F S U P P LY D E T E R M I N AT I O N

Once again, a requisition is merely a request for material; it does not represent a legal obligation to purchase anything. In contrast, a purchase order constitutes an obligation to purchase. As Figure 4-15 illustrates, there are three paths to create a purchase order, depending on whether the source of supply is known.

1Although there is no fi nancial accounting impact when a requisition is created, a requisition typi- cally will result in the purchase of the needed materials. To help with planning for anticipated expenses, when purchasing consumable materials, a requisition will result in an internal record of the potential obligation, called a commitment, if the commitment management process in man- agement accounting is in use.

Process 105

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If it is, then the requisition can be converted into a purchase order without additional steps (Path 1). In such cases the company selects a vendor from a list of potential suppliers, called a source list. If the source list con- tains only one source, then the system will automatically assign the vendor to the requisition. However, if the source list identifies multiple sources, then the system will display a list of vendors for the user to choose from. Alternatively, the requisition can be satisfied through outline purchase agreements, which are longer-term agreements between an organiza- tion and a vendor regarding the supply of materials or the performance of services within a specified period according to predefined terms and conditions. Outline agreements are subdivided into contracts and sched- uling agreements. During the contract validity period, certain quanti- ties or services are released (called off) against the contract as and when required through the issue of purchase orders. Such purchase orders are thus termed contract release orders or simply release orders. In some non-SAP systems, they are also referred to as call-off orders. In a schedul- ing agreement, the delivery of the total quantity of material specified in the agreement is spread over a certain period according to a delivery sched- ule. The delivery schedule specifies the quantities with their corresponding planned delivery dates.

Figure 4-15: Converting a purchase requisition to a purchase order

If a source of supply is not known, then the company must send a request for quotations (RFQ) to several potential vendors, receive and evaluate the quotations, and then make a fi nal selection. An RFQ is an invitation to vendors by an organization to submit a quote for the supply of the materials or services. A quotation is legally binding on the vendor for a specifi ed period. It identifi es materials or services for which the total quan- tities and delivery dates are specifi ed. In this case, the organization uses a quotation to create a purchase order (Path 2). Finally, in certain cases the RFQ is directly converted into a purchase order without a quotation (Path 3). This may be the case when a vendor provides a quotation verbally and the company does not consider it necessary to enter the quotation data into the system.

In our example, Spy Gear is the only supplier of t-shirts. This informa- tion is ascertained from a source list maintained in the ERP system. Because there is an established supplier, it is not necessary for GBI to request and eval- uate quotes from potential vendors.

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Demo 4.7: Create Purchase Requisition

O R D E R P R O C E S S I N G

As we previously discussed, a purchase order is a communication sent to a vendor in which a company commits to purchasing the specifi ed materials under the stated terms. Figure 4-16 summarizes the elements of a purchase order.

Figure 4-16: Elements of a purchase order

A purchase order is typically created with reference to a requisition, an RFQ, a quotation, or a previously created purchase order. When reference documents are used to create a purchase order, then much of the necessary data is copied from these documents. In addition, a purchase order can be cre- ated without reference to any document. In this case, all the necessary data are entered manually.

Data

A purchase order includes data from a variety of sources, as shown in Figure 4-17. Besides the source documents, data from several master records, such as material master, vendor master, info records, and conditions, are also included. In addition, data from specifi c agreements and contracts with the selected ven- dor can be incorporated.

Most of the data in a purchase requisition (Figure 4-14) are included in the purchase order. In addition, the purchase order will contain other data depending on how the order is created and which reference documents are used. For example, material characteristics such as weight are included from the material master. Vendor data, such as communication method, contact person, and address, are included from the vendor master or quotation. Pricing data, payment terms, and Incoterms® 2 are included from the quotation, purchas- ing info record, other condition records, or specifi c contracts and agreements with vendors, depending on how the process is confi gured at each company.

2International Commercial Terms defi ne the roles and responsibilities of buyers and sellers with regard to when ownership of materials changes hands and who bears the costs and risks associated with transporting the materials. See International Chamber of Commerce page on Incoterms at http://www.iccwbo.org/incoterms/ for a more detailed explanation.

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If the necessary data are not available from a reference document, then the user must provide this information manually when he or she is creating the purchase order.

As depicted in Figure 4-18, a purchase order document consists of a header section and one or more item details. The header includes data such as the purchase order number, vendor, currency, dates, and payment terms. These data apply to the entire document, including all line items. The item details section includes data specifi c to each item in the purchase order, such as the material number, description, quantity, delivery date, and price.

Figure 4-18: The structure of a purchase order

Tasks

The primary task in this step is to create and send the purchase order to the vendor. In addition, other steps might be necessary, depending on how the order is created. The most common additional steps involve selecting a ven- dor and then communicating with the vendor to confi rm logistics and delivery details.

Figure 4-17: Data in a purchase order

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Outcomes

The main document created in this step is the purchase order. If the purchase order includes data from reference documents, then multiple documents can be used to generate one order. Conversely, a single reference document can be used to create multiple orders. Thus, as you can see in Figure 4-19, one or more requisitions can generate one or more purchase orders. For example, consider the following scenarios. A purchasing manager receives many req- uisitions for the same materials and decides to consolidate them into a single purchase order and send the order to one vendor, perhaps to take advantage of volume discounts. Alternatively, the requisitions may include a number of different materials that must be purchased from different vendors. In this case, the purchasing manager creates a different purchase order for each vendor that includes the relevant materials.

Figure 4-19: Purchase requisition to purchase order

Purchase requisitions are updated to refl ect the purchase order number(s) assigned to them. This process enables the requisitioner to easily determine the status of each requisition. He or she can also click on the PO document number now referenced on the purchase requisition to view the purchase order and its status.

Although the purchase order is an obligation to acquire materials from a vendor, no fi nancial accounting documents are created because this step has no impact on the fi nancial condition of the organization. (Despite the commit- ment to purchase, no money or goods have been exchanged.) Recall, however, our note concerning commitments in management accounting in the case of a requisition for consumable materials. If a purchase order is created without reference to a requisition, then a commitment is created when the purchase order is created. In addition, no material documents are created because no goods movement (goods receipt) has occurred.

Once the purchase order is created, it must be communicated to the ven- dor. This communication is accomplished using the messaging capabilities of SAP ERP, as depicted in Figure 4-20. SAP ERP utilizes a variety of media, includ- ing print, e-mail, EDI, Web services, and fax. Companies also use the messaging capabilities of the system to send reminders and to request that deliveries be sped up. In turn, the vendor uses these capabilities either to accept or reject the order.

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Figure 4-21 shows the various options related to the purchase order step. To summarize, a company creates a purchase order using a variety of source documents (or none) and user inputs and then communicates it either to an external vendor or to another plant in the company via one of several com- munication tools.

Figure 4-21: Purchase order processing options

In our example, the purchase requisition created in the previous step is used as the source document to create a purchase order for 500 t-shirts. The ERP system automatically selects Spy Gear as the vendor from the source list and utilizes the purchasing info record to determine the gross price of $15 per t-shirt. Thus, the total cost indicated on the purchase order is $7,500.

Figure 4-20: Communicating with vendors

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Demo 4.8: Convert Purchase Requisition to Purchase Order

G O O D S R E C E I P T

The next step in the procurement process is goods receipt, which records the receipt of the materials from the vendor. The elements of this step are sum- marized in Figure 4-22.

The materials are accompanied by a delivery document — also known as a packing list—that identifi es the materials included in the delivery and the purchase order. The recipient uses this document to verify that the correct materials have been delivered in the correct quantities.

A single purchase order can result in multiple deliveries. This can occur, for example, when the materials are very bulky or the quantities are too great for a single shipment. Alternatively, the materials ordered in multiple pur- chase orders can be delivered in one shipment. In our example, the vendor, Spy Gear, delivers all 500 t-shirts in one shipment. The accompanying delivery document indicates that there are 5 boxes of 100 t-shirts in the delivery.

When a shipment is received, it is matched against the indicated pur- chase order(s). Checking the shipment against a purchase order offers several benefi ts. First, it allows the receiving company to verify that the materials delivered are what it ordered. Second, the relevant data from the purchase order, such as material data and quantities, are automatically copied into the goods receipt document that is created in this step. This makes the goods receipt step more effi cient and less prone to error. Of course, the data copied into the goods receipt can be edited if the quantity delivered is not the same as what was ordered. A company can accept a delivery without requiring a purchase order. In these cases, however, it will not enjoy the benefi ts identifi ed above.

Figure 4-22: Elements of the goods receipt step

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Data

Most of the data needed to complete the goods receipt task are contained in the delivery document and the purchase order. These data are shown in Figure 4-23. The purchase order provides data about the materials that the company ordered, and the delivery document contains data about the materials that it actually received. Additional data regarding where the materials are to be stored (plant and storage location) and the specifi c movement type are also necessary. The system will suggest values for these data, and the user will make changes to the data as needed.

Figure 4-23: Data in the goods receipt step

Tasks

The essential task in the goods receipt step is to verify and record the materials included in the shipment in the goods receipt document. The user will log into the system and create a goods receipt document by providing the purchase order number. The system will retrieve the purchase order and automatically add the relevant data to the goods receipt document. The user will then verify that the data are correct. That is, the materials and quantities delivered match what the company ordered. As we previously discussed, one purchase order can generate multiple deliveries. In such cases, the user will modify the data to refl ect the materials and quantities that the company actually received. When partial deliveries are recorded, the purchase order can be used again when the rest of the materials are delivered.

Recall from the earlier discussion of stock types that goods can be received and designated as one of three stock statuses: unrestricted use, in quality inspection, and blocked stock. The default option is to receive materi- als into unrestricted use. Receipt into quality inspection status can be accom- plished in several ways. If the materials are usually subject to quality inspection, then the “post to inspection stock” indicator in the purchasing view of the material master is enabled (checked). This will automatically result in a goods receipt into in quality inspection status. It will also cause the stock status to

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be included in both the purchase order and the goods receipt document for the material. If inspection is required only in unusual cases, then the stock status can be specifi ed in the purchase order or during goods receipt. Finally, the materials can be designated as blocked stock if they are not what the com- pany ordered or if they are unacceptable for any reason.

In our example, GBI has received a shipment from Spy Gear. The ship- ment includes a delivery document that states that there are 5 boxes in the shipment, each containing 100 t-shirts. A GBI employee verifi es the contents against the delivery document and records the receipt in the ERP system. He does this by retrieving the purchase order identifi ed in the delivery document and indicating that the ordered materials have been received.

Outcomes

In addition to creating the goods receipt document, the goods receipt step has numerous consequences for multiple areas of the organization. Signifi cantly, it is the fi rst step in the procurement process that has an impact on fi nancials, specifi cally, on general ledger accounts. Figure 4-24 illustrates the fi nancial impact of receiving the 500 t-shirts in our example. The trad- ing goods inventory account is debited by the value of the goods received, that is, $7,500. A corresponding credit is posted to the goods receipt/invoice receipt (GR/IR) account. If the purchase is for a consumable material, then the appropriate consumption account, such as the supplies expense account, is debited rather than a stock account.

Figure 4-24: Financial impact of goods receipt

A material document and an accounting document are also created; they are illustrated in Figure 4-25. In the material document the header includes the material document number, the date, and the associated delivery docu- ment number. The items identify the materials received, the quantity received, the location (plant), and the movement type. In the accounting document the header section consists of the document number, date, currency, and a reference to the delivery document. The item details section shows the two general ledger accounts that are impacted by the goods receipt – a debit in the inventory (trading goods) account and a credit in the GR/IR account. The accounting document is a record of the postings made to the accounts in the general ledger.

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The goods receipt step also results in updates to the purchase order and the material master. The purchase order history is modifi ed to include the material document number. A user is able to retrieve the purchase order (or the purchase requisition, which, if you recall, includes a link to the purchase order) and display the purchase order history. The history will show the mate- rial document number, which the user can access to view details. In the material master, the quantity, value, and the moving average price are updated.

Several optional steps can follow the goods receipt step, including the creation of inspection lots, transfer requirements, notifi cations, and outputs. Signifi cantly, SAP ERP includes certain optional capabilities that enable fi rms to implement these steps. One of these capabilities, quality management, cre- ates an inspection lot from the goods received and triggers various steps in the quality management process. An inspection lot is a request for a quality inspection of the materials received. It includes details such as how many of the materials to inspect and which characteristics to inspect. In contrast, warehouse management, another optional capability, generates a transfer requirement. A transfer requirement documents the need for the warehouse to store or with- draw materials. It therefore serves as a trigger for warehouse management processes. We discuss warehouse management in Chapter 7. An example of a notifi cation is when appropriate persons in the organization, such as the origi- nal requisitioner, are informed that the materials have been received. Finally, an example of an output is a goods receipt slip, which is a document that ware- house personnel use to make certain they store the materials in the correct locations.

Demo 4.9: Receive goods against a purchase order

I N V O I C E V E R I F I C AT I O N

The next step in the process is invoice verification, which is summarized in Figure 4-26. When a company receives a vendor invoice, it verifi es that the

Figure 4-25: Material and accounting documents from a goods receipt

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invoice is accurate before it makes payment. The most common method of invoice verifi cation is a three-way match between the purchase order, the goods receipt or delivery document, and the invoice. The objective is to ensure that the quantities and price in all three documents are consistent. An alterna- tive is a two-way match between a purchase order and the goods receipt docu- ment. This method is not very common, and it requires a high degree of trust and cooperation between partners. In our example, GBI placed a purchase order for 500 t-shirts from Spy Gear. The Miami plant received the Spy Gear shipment of 5 boxes of 100 t-shirts (500 total). Spy Gear sent GBI an invoice for 500 t-shirts. Further, the price in the purchase order and invoice are the same. Thus, GBI can make a three-way match between the 500 units it ordered for $15 each, the 500 units it received, and the 500 units it was invoiced for $15 each.

Data

Figure 4-27 identifi es the data that are needed to complete the invoice verifi - cation step. The data obtained from the invoice include the vendor number, invoice date, invoice quantity, and invoice amount. The data from the pur- chase order include vendor number, materials, quantities, and price. Finally, the materials and quantities received are obtained from the material document created during the goods receipt step.

Figure 4-27: Data needed for invoice verifi cation

Figure 4-26: Elements of the invoice verifi cation step

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Tasks

To complete this step, the user will provide the data from the invoice (ven- dor, date, and amount) and the purchase order number. The system will then retrieve all the needed data from the purchase order (vendor, materials, quantities, and price). It will also retrieve the goods receipt data for the pur- chase order. The user will verify that the data are correct and, if they are, will approve the invoice. Occasionally, there will be discrepancies among the three sets of data. For example, the quantity delivered or price may vary somewhat. Whether these discrepancies are acceptable will depend on the organization’s purchasing and accounting policies, which are specifi ed in the material master or other master data in the form of over- and under-tolerances. If the discrep- ancies are within tolerances, then the invoice is approved for payment. If not, then the invoice will be blocked, and further action from the accounting or purchasing department will be required before it can be released.

Outcomes

As you can see in Figure 4-28, invoice verifi cation has an impact on the gen- eral ledger. The fi gure illustrates the data for our example. Specifi cally, a debit of $7,500 is posted to the GR/IR account, and the vendor account is credited by the same amount. Because the vendor account is a subledger account, an automatic credit posting is also made to the corresponding rec- onciliation account in the general ledger—the accounts payable reconcilia- tion account. A corresponding fi nancial accounting document is created. In addition, an invoice document is created.

Figure 4-28: Financial impact of invoice verifi cation

The purchase order history is also updated, and a link to the invoice document is added. Finally, if the invoice price is different from the price

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in the purchase order, then the material master must be updated to refl ect this discrepancy, if the moving average price is used for price control. Recall that when a goods receipt is recorded, the quantity, value, and moving aver- age price are updated in the material master. When an invoice is received and the price is different from the one listed in the purchase order, the mate- rial value and moving average price must be adjusted to refl ect the new values.

Invoice verifi cation provides the linkage between materials management and accounting. It authorizes payment of the invoice to the vendor, which is the next—and fi nal—step in the procurement process.

Demo 4.10: Receive and verify an invoice

PAY M E N T P R O C E S S I N G

Figure 4-29 diagrams the elements of the fi nal step in the procurement process—namely, paying the vendor. This step is triggered by the receipt and verifi cation of an invoice.

Payments can be made manually or automatically via a payment pro- gram. Typically, an organization will have a number of invoices to pay, and the most common method is to execute a payment program periodically, such as daily or weekly. The program will retrieve all authorized invoices over a speci- fi ed timeframe and automatically create payments.

Data

Figure 4-30 highlights the data needed to process vendor payments. Data from the invoice include the date, the vendor number, and the invoice amount. In addition, payment terms, method, and address are obtained from the vendor master. The dates of the invoices are compared with the payment terms and the date of the next scheduled run of the payment program in order to deter- mine which invoices are due for payment.

Figure 4-29: Elements of the payment step

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Tasks

Processing payment involves several steps: selecting a payment method and a bank, deciding which invoices are ready for payment, calculating payment amounts, posting the payment documents, and printing the payment medium. When making payments manually, the user will select the payment method and the bank and will provide the vendor number and the amount of the pay- ment. The system will then display a list of open invoices for that vendor. The user will next select the invoices that are to be paid. Any applicable discounts based on payment terms are then applied. For example, if the payment term is 2%/10Net 303 and payment is being made within the 10 days specifi ed in the terms, the system will apply a 2% discount. Once the payment is posted in the general ledger, the actual payment can be sent. If payment is made electroni- cally, the system will automatically send the payment. If it is to be made via a printed check, the user will print and send the check to the vendor.

If the company has an automated payment program, then the program will retrieve and process all of the invoices that are due for payment using the parameters specifi ed in the payment program. Users typically become involved only if there are exceptions that require special resolution.

Outcomes

One obvious outcome of this step is payment to the vendor, either electroni- cally or via a check. Appropriate general ledger accounts are also updated, as shown in Figure 4-31, and a corresponding fi nancial accounting document is created. As the fi gure indicates, the bank account is credited by the amount of the payment, and the vendor account is debited, as is the associated accounts payable reconciliation account.

3The term 2%/10Net30 indicates that payment is due within 30 days of receipt of the invoice and that a 2% discount may be taken if payment is made within 10 days of receiving the invoice.

Figure 4-30: Data needed for vendor payment

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Demo 4.11: Make payment to vendor

I N T E G R AT I O N W I T H O T H E R P R O C E S S E S

It should be clear from the preceding discussion that the procurement process is highly integrated with several other processes within an organization. Some of these integration points, such as with fi nancial accounting, were explained in detail, while others were briefl y mentioned. We elaborate on these other inte- gration points in later chapters. Below we briefl y summarize how procurement is linked with the other processes. Figure 4-32 illustrates these linkages.

The vendor master record is jointly maintained by purchasing and accounting. In addition, several steps in the procurement process, such as goods receipt, invoice verifi cation, and payment processing, impact general ledger accounts. Further, when a company purchases materials for consumption, it uses a controlling object such as a cost center — which is related to manage- ment accounting — to charge groups or departments for the purchase.

Activities in materials planning, production, fulfi llment, enterprise asset management, and project management generate purchase requisitions that are processed by the procurement process. Objects in these processes, such as sales orders and production orders, are then charged for the materials purchases. Finally, procurement involves materials movements and quality inspections that are the domain of inventory and warehouse management.

R E P O RT I N G Standard reporting tools in the transactional system are used to generate both online lists based on selected master data and documents and work lists to identify pending work associated with various process steps.

Figure 4-31: Financial impact of vendor payment

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O N L I N E L I S T S

Online lists can be manipulated using the various functions of the list viewer or grid control that were explained in Chapter 2. An example of an online list is provided in Figure 4-33, which displays a series of invoices for a specifi ed date range. Double-clicking on the document number will display the invoice document. Data in the list can be sorted, grouped, and summed, as explained in Chapter 2.

Figure 4-32: Integration with other processes

Figure 4-33: List of invoices. Copyright SAP AG 2011

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W O R K L I S T S

Recall that work lists display work that is to be completed. An example of a work list in purchasing is provided in Figure 4-34. This fi gure shows a list of purchase requisitions that are open. The task to be completed is to assign a source of supply, that is, a vendor who will supply the needed materials.

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Figure 4-34: List of requisitions. Copyright SAP AG 2011

Demo 4.12: Reporting – lists

P U R C H A S I N G I N F O R M AT I O N S Y S T E M S

Recall from Chapter 2 that the purchasing information system (IS) is one of the components of the logistics information system. Purchasing IS provides both standard and fl exible analysis capabilities.

In standard analysis, the characteristics are organizational levels and master data relevant to the procurement process. Key fi gures include quan- tities, such as the amount of a material ordered or delivered; value, such as the value of material ordered or delivered; and counts, such as the number of purchase orders. Companies combine the characteristics and key fi gures over a specifi c time period to generate meaningful information that they can use to evaluate the performance of the process. Examples of this type of information are:

• The quantity of a particular material ordered in the last 30 days

• The quantity of a material delivered by a particular vendor last week

• The number of purchase orders send to a particular vendor last month

• The average time between sending a purchase order and receiving the materials in the last year, for each vendor

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• The average value of purchase orders sent to a particular vendor in the last quarter

Figure 4-35 provides an example of standard analysis using the purchasing information system. In this example, the characteristic selected is purchas- ing group, and the key fi gures are purchase order value and invoice amount, for two months (February and March). The top part of the resulting report shows two purchasing groups (the United States and Europe) and the key fi g- ures (order value and invoice amount) for each one. The fi gure illustrates the drilldown feature, showing that the United States purchased from two ven- dors, Spy Gear and Redwood Kits. It also highlights the data for one of the vendors, Spy Gear, for each of the two months.

Figure 4-35: Standard analysis

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Demo 4.13: Reporting - standard analysis using the purchasing information system

In contrast to standard analysis, fl exible analysis enables the user to defi ne the content and format of the analysis. We explained in Chapter 2 that in fl exible analysis, characteristics and key fi gures can be combined as needed. Figure 4-36 is an example of fl exible analysis using the purchasing information system. The report in the fi gure is based on combining the characteristics of vendor, material, and month with the key fi gures order value and number of items in the order. Vendor and material are displayed in the rows, while the month, order value, and number of order items are shown in the columns.

Figure 4-36: Flexible analysis

C H A P T E R S U M M A R Y

The procurement process involves the activities required to purchase, receive,

and pay for the goods and services that an organization needs for its operations.

A company’s procurement process is typically optimized for both the types of

goods and services it purchases and the location and use of those goods by

other processes, such as manufacturing. Because the procurement process

involves signifi cant amounts of collaboration and commerce with suppliers, it

must be strategically linked with the manufacturing and material planning pro-

cesses to ensure that the proper amount of the correct materials are procured

at the right price for the right time. In addition, given the amount of money

that companies spend during the procurement process, many of the data and

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requirements associated with purchasing are designed to ensure proper fi nan-

cial accounting and controlling compliance.

The procurement process consists of six key steps: requirements deter-

mination, supplier selection, order processing, goods receipt, invoice verifi -

cation, and payment processing. To function properly, procurement requires

organizational data such as plant, storage locations, purchasing organization,

and purchasing group. Master data are also needed to account for the value of

the goods and services that are purchased as well as for controlling purposes

to manage the process effi ciently. Tolerances, controls, and conditions are

predetermined data qualities that enable the procurement process to oper-

ate in a more automated fashion. Materials that have been received by the

company must be assigned to a material account in order to properly record

the fi nancial impact of the procurement and use of the material. In addition,

materials that have been received into stock must be classifi ed according to

their availability status to ensure that they are properly allocated to the pro-

cesses that utilize them.

Likewise, when materials are moved within the organization, either from

one process to another or from one storage location to another, the movement

must be recorded to properly account for the quantity, value, and location of

the goods.

K E Y T E R M S

Account assignment category

Account assignment object

Account determination

Accounting data

Blocked stock

Company-level purchasing

organization

Conditions

Condition types

Consignment

Consumable materials

Contracts

Delivery document

Delivery tolerances

Enterprise-level purchasing

organization

Financial accounting data

General data

Goods issue

Goods movement

Goods receipt

Goods receipt document

Goods receipt processing time

In quality inspection

Invoice verifi cation

Item categories

Material document

Movement types

Outline purchase agreements

Packing list

Plant-level purchasing organization

Price control

Purchase order

Purchasing data

Purchasing group

Purchasing info record

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Purchasing organization

Scheduling agreements

Services

Source list

Standard

Stock in transit

Stock materials

Stock transfer

Stock transfer

Stock types

Storage locations

Subcontracting

Third-party order

Three-way match

Transfer posting

Unrestricted use

Valuation class

Valuation currency

Vendor master data

R E V I E W Q U E S T I O N S

1. Explain the key organizational levels relevant to the purchasing process.

2. Explain the differences between the various types of purchasing organi- zations. Under what conditions is each type appropriate?

3. Explain the data in the material master that are relevant to the purchasing process.

4. Explain the data in the vendor master that are relevant to the purchasing process.

5. What are purchasing info records? What is their role in the purchasing process?

6. What are conditions used for?

7. Explain the relationship between organizational levels and master data in purchasing.

8. What are item categories in purchasing? Explain how each of the follow- ing item categories impacts the purchasing process: consignment pro-

cess, third-party item, subcontracting item.

9. What is the role of account assignment categories in purchasing?

10. How is account determination different when purchasing stock items and consumable items?

11. What are the stock types or statuses based on the usability of materials? What is the signifi cance of these statuses?

12. Explain the four goods movements discussed in this chapter. How are goods movements related to movement types?

13. What is a material document? List some key data included in a material document.

14. Briefl y describe the steps in the procurement process explained in this chapter. What are some possible variations to this process?

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15. Explain the different steps in the procurement process in terms of their triggers, required data, tasks completed, and outcomes.

16. Which steps in the procurement process have an impact on fi nancial accounting? Explain these impacts.

17. During which steps in the procurement process are material documents created. Why?

18. What is meant by source of supply determination? What are the different ways of identifying a source of supply?

19. What are the different paths from a purchase requisition to a purchase order? What determines which path is selected?

20. Figure 4-21 illustrates the different purchase order processing options. Explain this fi gure.

21. A purchase requisition can result in multiple purchase orders, and multi- ple requisitions can be combined into one purchase order. Explain the cir-

cumstances when these two scenarios are possible. Provide examples.

22. What is a delivery document? What is the signifi cance of a delivery docu- ment in purchasing?

23. Explain the outcomes of the goods receipt step of the procurement process

24. Explain the outcomes of the invoice verifi cation step of the procurement process.

25. What is a three-way match? What is its purpose? What documents are involved in a three-way match?

26. Explain how the procurement process is integrated with other processes within an organization.

27. Provide two examples of online lists and work lists. Explain what these reports are used for.

28. Provide two examples of reports generated via standard analysis. Explain what these reports are used for.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 1 2 7

1 2 7

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Describe the organizational levels associated with the fulfi llment process.

2. List and explain the master data associated with the fulfi llment process.

3. Identify the key steps in the fulfi llment process and the data, documents, and information associated with each step.

4. Discuss the role of the credit management process in fulfi llment.

5. Effectively use SAP® ERP to execute the key steps in the fulfi ll- ment process.

6. Explain how and why fulfi llment is integrated with other processes.

7. Utilize SAP ERP to extract meaningful information about the fulfi llment process.

G BI currently uses a very simple process to fi ll customer orders. This process, introduced in Chapter 1, is reproduced in Figure 5-1. The pro- cess begins when GBI receives a customer’s purchase order, which it

validates and authorizes via a sales order. The warehouse then prepares and sends the shipment, after which accounting forwards an invoice. The process ends when GBI receives payment from the customer.

This simple process has worked well for GBI up to this point. Because GBI has grown rapidly, however, the company wants to utilize the new ERP system it acquired to enhance its process for fi lling customer orders. Specifi cally, it wants to make the process more effi cient and customer friendly as well as more transparent by keeping track of the status of every order throughout each step in the process. In addition, it wants to incorporate other sales-related activities, such as developing leads and responding to inquiries, into the new process.

The Fulfi llment Process

C H A P T E R 5C H A P T E R

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128 C H A P T E R 5 The Fulfi llment Process

Figure 5-1: A basic fulfi llment process

In this chapter, we discuss the fulfi llment process in detail, with a spe- cial focus on how an ERP system supports the process. We begin by identify- ing the key organizational levels and the master data related to the process. Next we examine the process steps in detail, and we explain how fulfi llment is integrated with other processes. We conclude by discussing the various reports related to fulfi llment. Unlike the previous chapter, this chapter does not include a separate section on key concepts. The reason for this is that the basic concepts associated with fulfi llment, such as goods movement, have been addressed in previous chapters.

To illustrate the various concepts and process steps, we will use the fol- lowing scenario throughout the chapter. Rocky Mountain Bikes (RMB), a GBI customer located in Denver, Colorado, has placed an order for 40 silver deluxe touring bikes and 100 t-shirts that it plans to sell at two racing events in Colorado Springs, one to be held on May 15 and the other on June 20. Because the bikes represent a signifi cant inventory and storage expense, RMB wants GBI to deliver them directly to the racing location just a few days before each race. Further, RMB anticipates that the May race will attract a much larger crowd, so it expects to sell more bikes and t-shirts at that race. It has therefore requested that GBI deliver 30 of the bikes on May 10 and the remaining 10 on June 10. However, it wants GBI to deliver all 100 t-shirts in May so that it can sell as many as possible at the fi rst race and then sell the remaining ones at the second race. Unlike the bikes, t-shirts are relatively inexpensive and are easy to store between races.

O R G A N I Z AT I O N A L D ATA Several organizational elements are essential to the fulfi llment process. These are client, company code, sales area, plant, storage location, shipping point, and credit control area. Three of these—sales area, shipping point, and credit control area—are unique to fulfi llment. A sales area is a combination of three other organizational elements—sales organization, distribution channel, and division—that are also unique to fulfi llment. We discuss all of these organiza- tional elements in this section.

Some elements—namely, client, company code, plant, and storage location—are also relevant to other processes and have been discussed in

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Organizational Data 129

previous chapters. In this section we have included a discussion of plant and storage locations as they relate specifi cally to fulfi llment. No additional discus- sion of client and company code is necessary.

S A L E S O R G A N I Z AT I O N

A company (company code) is divided into several sales organizations, each of which is responsible for the sale and distribution of goods and ser- vices for a particular geographical area, such as a regional or national market. Specifi cally, a sales organization is:

• Responsible for negotiating terms and conditions of sales for that market.

• Responsible to customers with regard to liability and rights of recourse in cases of disputes.

• The highest level of aggregation in sales-related reporting. That is, sales data can be summarized up to the level of the sales organization.

A company code must have at least one sales organization, although it can have many. The latter arrangement is appropriate if the sales processes are substantially different in the different sales organizations, for instance, to handle regional differences in practices and customs. In other cases a company might use multiple sales organizations simply to make sure that the geographic area covered remains manageable. Although a company can include multiple sales organizations, a sales organization can belong to only one company code. The sales organizations for GBI are depicted in Figure 5-2. As the fi gure indicates, GBI US has two sales organizations, one each for the Eastern and Western US. GBI Germany also has two sales organizations, one each for the Northern and Southern territories.

Figure 5-2: GBI sales organizations

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130 C H A P T E R 5 The Fulfi llment Process

D I S T R I B U T I O N C H A N N E L

A distribution channel (DC) is the means by which a company delivers its goods and services to its customers. Typical channels are wholesale, retail, and online (Internet sales). Just as a company can have multiple sales organi- zations, it can also have multiple DCs. Each channel has its own strategies, approaches, and constraints for getting the goods and services to the customer. More specifi cally, each channel has its distinctive responsibilities, pricing sys- tems, plants from which shipments are made, and other characteristics. For example, a wholesale channel has the following characteristics (among others):

• It does not include sales taxes in calculating prices (in the United States).

• It requires a minimum volume of purchase and offers volume discounts.

• It may designate a specifi c plant or plants from which deliveries are made.

In addition, reporting can be consolidated at the DC level. That is, statis- tics can be summarized and aggregated based on distribution channels. A sales organization must have at least one distribution channel, although it can have more than one. In addition, a distribution channel can be assigned to multiple sales organizations.

Because GBI is a manufacturing organization, it historically has sold its products through the wholesale channel. Its customers are retailers who, in turn, sell the products to the end-consumers. Recently, however, GBI has begun to sell directly to end-customers via the Internet. Although anyone can access the GBI website to purchase a bike, factors such as complex taxes, shipping costs, and import duties make it very diffi cult for GBI to operate a global Internet sales channel. Therefore, GBI manages both the wholesale and Internet sales channels together at the country level, as illustrated in Figure 5-3. This policy ensures that the sales organization that ships the product to the customer is the group that is also the most familiar with the tax laws for that region.

Note that, although all four sales organizations identifi ed in Figure 5-3 are involved with wholesale sales, only two are involved with Internet sales. The Western US sales organization manages Internet sales for the entire United States, and the Northern German sales organization manages Internet sales for all of Germany. If GBI were to venture into retail sales at a later date, it would create a new channel—retail—to manage these sales because the strategies for retail sales, such as pricing, minimum quantities, and taxes, will be different from the other two channels.

Intel Corporation has six independent operating groups that manufacture products, each of which operates four sales organizations: Asia-Pacifi c, the Americas, Europe, and Japan. Intel locates its sales organizations close to their largest clusters of customers. Each of the 24 sales

organizations has two distribution channels, direct and reseller. Thus, there are 48 combinations through which Intel sells its products to its customers globally.

Source: Intel company reports.

Business Processes in Practice 5.1: Intel’s Organizational Structure

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Organizational Data 131

Figure 5-3: GBI US distribution channels

Apple Inc. provides a good example of a company that utilizes multiple distribution channels. Apple sells its products through its online store (Internet), its Apple stores (retail), and third-party retailers (wholesale). Apple uses each of these channels to resolve different issues within the fulfi llment process.

Because Apple places a priority on the customer’s buying experience, it tries to establish either an Apple- owned retail store or a mass-market retail store in every major market. This policy ensures that the majority of consumers in most developed nations live within a short distance of a retail store that sells Apple products.

Although retail stores offer the best opportunity for consumers to examine the products before purchas- ing them, maintaining an extensive network of physi- cal stores entails many major expenses, including real estate, local taxes, and retail staff. Therefore, Apple very carefully evaluates new locations for its stores based largely on the local demographics of those con- sumers who are the most likely buyers.

When it is not feasible for Apple to establish a retail store in an area with a strong potential consumer base, the company must partner with another retailer to resell its products. Although this arrangement eliminates many of the retail costs identifi ed above for Apple, it also reduces Apple’s profi t per unit, because Apple must now share its sales revenues with the reseller.

Online retailing eliminates a great deal of the costs associated with operating physical stores. In addition, because the online channel sells directly to consumers, Apple does not have to share its profi ts with a reseller. However, because online retailers sell to any number of locations around the world, they must deal with ship- ping, taxes, and import costs that the retail channel does not have to. In addition, they must invest in the technical infrastructure that supports a global online retail site. Apple’s online retail operations, including the Apple store and iTunes, are based on SAP ERP.

Source: Apple company reports.

Business Processes in Practice 5.2: Distribution Channels at Apple

A unique combination of a sales organization and distribution channel is called a distribution chain. Some master data, such as material master and pricing conditions, are maintained at the distribution chain level.

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132 C H A P T E R 5 The Fulfi llment Process

D I V I S I O N

Most companies consolidate materials and services with similar characteristics within a unit known as a division. Typically, each division is associated with a company’s product line. A product or material can be assigned to one division only. Each division can employ its own sales strategies, such as pricing agreements with customers. In addition, it is possible to aggregate reports at the division level.

A sales organization must have at least one division. A division can be assigned to multiple sales organizations, and a sales organization can include many divisions.

GBI currently has two divisions, the bicycles division and the accesso- ries division. Recall from Chapter 2 that GBI’s material list includes differ- ent material types. The fi nished goods—that is, bicycles—are managed by the bicycles division, while the trading goods—such as helmets—are managed by the accessories division. In the future, if GBI expands into other product lines, such as skateboards, it will create additional divisions. The divisions for GBI US and GBI DE are illustrated in Figure 5-4 and Figure 5-5, respectively.

Figure 5-4: GBI US divisions

John Wiley & Sons, the publisher of this textbook, has three main divisions that serve different reading mar- kets around the world. Wiley publishes college text- books through the Higher Education division. The Professional/Trade division contains the For Dummies, Frommer’s, Betty Crocker, CliffsNotes, and Webster’s Dictionaries series, as well as several other popular brands. Wiley’s third division is the Scientifi c, Technical, Medical, and Scholarly (STMS) division, which is the world’s largest publisher of professional and scholarly

journals and books. Although the physical products (books/journals) and the geographic regions are similar for all three divisions, the audience, authors, and distri- bution channels for each division vary greatly. Wiley has learned that by grouping its brands and the employees who are responsible for their success into three divi- sions, they can achieve greater synergies and operate more effi ciently.

Source: John Wiley & Sons company reports.

Business Processes in Practice 5.3: Multiple Divisions in a Major Publishing Company

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Organizational Data 133

Figure 5-5: GBI DE divisions

As we discussed in a previous example, Apple sells its products through a combination of online stores, Apple retail stores, and reseller stores. Apple contains several hardware divisions, including Mac computers, iPods, iPhones, servers, and accessories. Apple also operates several sales areas for different types of customers, such as education, government, enterprise, and consumer. Each of these customer segments has unique needs and requires a distinctive sales approach, even though they are buying the same products. Therefore, Apple must

plan its sales strategies by product globally while pay- ing close attention to the unique characteristics of both the channels (retail, online, reseller) and the customer (education, government, enterprise, and consumer). This strategy is typically refl ected in a matrix, which allows Apple to pinpoint opportunities and manage their global sales efforts effectively.

Source: Apple company reports.

Business Processes in Practice 5.4: The Sales Structure at Apple

S A L E S A R E A

A sales area is a unique combination of sales organization, distribution chan- nel, and division. In other words, it defi nes which DC a sales organization uses to sell the products associated with a particular division. A sales area can be assigned to only one company code. All of the documents associated with the fulfi llment process, such as quotations and packing lists, belong to one sales area.

Figure 5-6 illustrates the six sales areas for GBI US. For example, one sales area (UE00�WH�BI) is responsible for the sale of products in the bicycles division for the Eastern US sales organization via the wholesale channel. This sales area is highlighted in the fi gure. A second sales area (UW00�WH�AS) manages the sale of products in the accessories division for the Western US sales organization via the wholesale channel. As a third example, sales area UW00�IN�BI manages the sale of products in the bicycles division for the

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134 C H A P T E R 5 The Fulfi llment Process

Figure 5-6: GBI sales areas

Western US sales organization via the Internet channel. The German com- pany also has six sales areas. They are not depicted in the fi gure, however.

P L A N T

We have discussed plants in previous chapters in the context of other pro- cesses. In the fulfi llment process a delivering plant is a facility from which the company delivers products and services to its customers. In the case of prod- ucts, a plant is typically a manufacturing and/or storage facility. In the case of services, it can simply be an offi ce. A plant can be assigned to more than one distribution chain. Recall that a distribution chain is a unique combination of sales organization and distribution channel. Conversely, a distribution chain can be associated with more than one plant.

In Figure 5-7, plant 1 delivers only for distribution chain 1 and plant 3 only for distribution chain 3. In contrast, plant 2 delivers for all three distribution

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Organizational Data 135

chains. Viewed from a different perspective, distribution chains 1 and 3 use two plants to deliver materials to their customers, whereas distribution chain 2 uses only one plant.

Recall from Chapter 2 that GBI has three plants in the United States and two in Germany. In the United States, the Dallas plant is the sole manufacturing

Figure 5-7: Plants

site, while the plants in San Diego and Miami serve as distribution centers. Finished goods are shipped from the Dallas facility to the other two facilities as needed. In contrast, trading goods are shipped directly to the two regional dis- tribution centers by the vendors. The Dallas plant does not hold an inventory of trading goods. Normally, the Miami plant delivers products to customers in the Eastern United States and the San Diego to the Western United States. However, the Dallas plant serves as an overfl ow facility to the two other plants and can ship fi nished goods anywhere in the country, as needed. In Germany, the Heidelberg plant ships to locations in the South and the Hamburg plant to locations in the North.

S H I P P I N G P O I N T

A shipping point is a location in a plant from which outbound deliveries are shipped. It can be a physical location, such as a loading dock, a rail depot, or a mail room. It can also be a designated group of employees who, for example, handle express or special deliveries. A shipping point is associated with one or more plants, and a plant can have more than one shipping point. A plant must have at least one shipping point from which to process deliveries, although the shipping point does not have to be physically located within the plant.

Figure 5-8 diagrams a scenario in which multiple plants access one ship- ping point. The fi gure represents a campus for a company that includes a factory and two storage facilities, all of which are plants. Note that the only plant that has a shipping point is the storage facility located by the front offi ce. Therefore, all materials from the factory and the main storage facility must fi rst be moved to this facility and then shipped to their destinations.

In contrast, Figure 5-9 illustrates a scenario in which several plants share three shipping points. Storage facility #1 has one shipping point, and facility #3 has two. Storage facility #2 has none, so it uses the shipping points located in the

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136 C H A P T E R 5 The Fulfi llment Process

Figure 5-8: Shared shipping point

Figure 5-9: Multiple shipping points

other plants. In storage facility #3, one of the shipping points handles normal deliveries, while the other one is reserved for express deliveries or for deliver- ies that require special handling.

In GBI, each of the fi ve plants has a single shipping point. All customer deliveries are shipped from one of these locations. Each shipping point is a loading dock, which is a facility that trucks can back into so they can be loaded. Figure 5-10 illustrates a loading dock. Other facilities that can operate as ship- ping points include rail depots (Figure 5-11) and shipyards or ports (Figure 5-12). In the case of a rail depot, the rail cars are pulled up to the facility and loaded. When the storage facility is located by a waterway, a shipyard serves the same purpose.

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Organizational Data 137

Figure 5-10: Loading dock as a shipping point. ©iStockphoto

Figure 5-11: Rail depot as a shipping point. ©iStockphoto

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138 C H A P T E R 5 The Fulfi llment Process

Figure 5-12: Port as a shipping point. ©iStockphoto

C R E D I T C O N T R O L A R E A

A credit control area is an organizational level that is responsible for cus- tomer credit. Specifi cally, it determines customers’ creditworthiness, estab- lishes credit limits, and monitors and manages the actual extension of credit to customers. An enterprise can choose to manage credit in either a centralized or a decentralized manner. In a centralized system, a single credit control area manages credit for customers across all company codes in the enterprise. This arrangement is particularly useful if customers conduct business with multiple company codes within the enterprise. As an example, Figure 5-13 illustrates a centralized model that GBI employs for customers who purchase bicycles and accessories from both GBI US and GBI DE. In such cases, GBI manages the

Figure 5-13: Centralized credit control area

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Master Data 139

credit limit at the enterprise level, meaning that it assigns all company codes to one credit control area.

In contrast, an enterprise that utilizes a decentralized model maintains multiple credit control areas, each of which manages credit for one or more companies within the enterprise. For example, in the hypothetical scenario illustrated in Figure 5-14, GBI has two credit control areas, one for all com- panies in North America (GBI US, GBI Canada, and GBI Mexico) and one for all companies in Europe (GBI DE and GBI Great Britain). If GBI were to expand operations into the Asia-Pacifi c region, it likely would create a third credit control area to supervise credit for customers of those companies. Even when using a decentralized approach, however, it is possible—and prudent— to establish credit limits for customers at the enterprise level and for each credit control area. This policy ensures that customers purchasing from com- panies belonging to different credit control areas (e.g., GBI US and GBI DE in Figure 5-14) do not exceed credit limits across the enterprise.

Figure 5-14: Decentralized credit control areas

M A S T E R D ATA In Chapter 4 we discussed the material master, pricing conditions, and output conditions from the perspective of procurement. In this section we will explore these master data as they pertain to fulfi llment. In addition, we will discuss master data that are relevant only to fulfi llment, namely, customer master, customer-material information record, and credit management master record.

M AT E R I A L M A S T E R

The key organizational elements in fulfi llment for which material master data are defi ned are client, sales organization, distribution channel, and plant. Recall that material master data are grouped into views and that each view is relevant to one or more processes and defi ned for specifi c organizational levels. The three views relevant to fulfi llment are basic data, sales organization data, and sales plant data.

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140 C H A P T E R 5 The Fulfi llment Process

Basic data, which are relevant to all processes, are defi ned at the client level. Sales organization data are defi ned for combinations of sales orga- nizations and distribution channels. Examples of sales organization data are the delivering plant, sales units, and minimum quantities. The delivering plant is the preferred plant from which deliveries are made for the particular sales organization and distribution channel. Sales units are the units of measure, such as cartons, barrels, containers, cases, pallets, and crates, in which the materials are sold. Quantities include minimum order quantities and delivery quantities. In addition, a link to pricing conditions (discussed later) is avail- able. Because the data are defi ned for each combination of sales organization and DC, each DC can have different values for these data to support different sales strategies. Sales plant data provide details on how the material will be shipped from that plant. Examples are specifi c transportation requirements (e.g., refrigeration) and the methods of loading the material (e.g., a hand cart, forklift, or crane). Note that it is necessary to defi ne materials for every com- bination of sales organization and distribution channel, as well as for every plant if the data are different. Very often, the material data will be unchanged between plants or distribution channels.

Demo 5.1: Review material master

C U S T O M E R M A S T E R

Customer master data include data needed to conduct business with cus- tomers and to execute transactions that are specifi cally related to the fulfi llment process. The data in the customer master are divided into three segments— general data, accounting data, and sales area data. The relationships among these three segments and the two departments in an organization responsible for these data (accounting and sales) are depicted in Figure 5-15.

General data are defi ned at the client level. They are valid for all of a client’s sales areas and company codes. Examples of general data are a cus- tomer’s name, address, and account number. Accounting data are specifi c to

Figure 5-15: Segments of customer master data

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Master Data 141

a company code and include data such as payment terms and the reconciliation account in the general ledger. Recall from Chapter 3 that (1) customer accounts are subledger accounts, (2) subledger accounts are linked to the general ledger via reconciliation accounts, and (3) the accounts receivable account is typically used as the reconciliation account for customers. The accounting department will typically complete this part of the customer master data. Sales area data are specifi c to a particular sales area, which, as we discussed earlier in this chapter, is made up of one sales organization, one distribution channel, and one division. Sales area data relate to sales, shipping, billing, and partner func- tions. Examples are the sales offi ce and the currency in which the transaction is conducted. Shipping data specify the preferred delivering plant, priorities, and methods. They also defi ne delivery tolerances and policies for dealing with partial deliveries. Billing data include billing terms and tax-related data.

If a customer is served by multiple sales areas, then the data must be defi ned separately for each sales area. This arrangement permits a company to apply different terms and conditions for different areas. Figure 5-16 illus- trates this approach for a hypothetical customer with offi ces in both the United States and Germany. The customer purchases materials from both GBI’s US and Germany companies. The general data for the customer apply across both GBI companies—that is, the GBI enterprise that is represented by the cli- ent. However, accounting data for the customer must be defi ned separately for each GBI company. Recall that one piece of data in the customer master record is the reconciliation account, which is based on the chart of accounts. If GBI US and GBI DE use different charts of accounts, then they may have dif- ferent reconciliation account numbers. Further, the currencies and tax-related data are also different. Thus, the accounting data are different for each country (company code).

Finally, the customer purchases materials for its facilities throughout the United States. Consequently, it deals with both US sales organizations (UE00 and UW00). In addition, the customer purchases exclusively on a wholesale basis. Therefore, master data for this customer must be defi ned for two sales areas in the United States UE00�WH� BI and UW00�WH�BI (see Figure 5-16).

Figure 5-16: Multiple defi nitions of a customer

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142 C H A P T E R 5 The Fulfi llment Process

In contrast, the customer in Germany deals only in the northern part of the country and purchases exclusively via the Internet. Therefore, only one set of sales area data is defi ned for that customer.

Customers can play different roles or partner functions in the fulfi ll- ment process. The four required partner functions are sold-to party, ship-to party, bill-to party, and payer. One customer may fi ll all four roles, or each role may be fi lled by a different customer. The customer who submits the order is the sold-to party. This is the primary type of business partner. The order may indicate that the materials should be shipped to a different location or that the invoice should be sent to someone else. These are the ship-to party and bill-to party functions, respectively. For example, the customer may request that the material be shipped to one of its customers. In this case, the party that actually receives the shipment is considered the ship-to party. However, the invoice will be forwarded to the customer that ordered the materials—that is, the bill-to party. Alternatively, the bill-to-party may be another company that processes invoices for the customer. As another example, a large enterprise may be comprised of a number of companies, such as franchises. An order may be placed by headquarters, the sold-to party, with instructions to deliver the mate- rials to numerous franchises, the ship-to parties. The invoice may be sent to headquarters, which also serves as the bill-to party. Finally, the payment may be outsourced to another company, which will be the payer of the invoice.

GBI US has 12 customers, and GBI DE has 7. These customers are listed in Figure 5-17. Additional details of the master data for each customer are provided in Appendix 5A. Rocky Mountain Bikes (RMB), the customer used in our example, is located in Denver, Colorado, and therefore is serviced through GBI’s Western US sales organization. In addition, RMB purchases via the wholesale channel. Therefore, it is associated with the sales area made up of the Western US sales organization (UW00), the wholesale channel of distri- bution (WH), and the bicycle division (BI) (look back to Figure 5-6). Further, because RMB is a small company, its partner functions are usually all located at the same address. However, it is not uncommon for RMB to request that materials be shipped directly to various racing events or to its retail custom- ers. In our example, RMB has requested that the materials be delivered to the RMB booth at the racing location in Colorado Springs, not to its head offi ce in Denver. In this case, RMB is the sold-to party, bill-to party, and payer, but the ship-to party is the racing location. Finally, because the materials are to be delivered in Colorado, they will be delivered from the San Diego plant.

Figure 5-17: GBI customers

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Master Data 143

Demo 5.2: Review customer master

C U S T O M E R - M AT E R I A L I N F O R M AT I O N ( I N F O ) R E C O R D

A customer-material information record is comprised of master data spe- cifi c to one customer and one material. In contrast to data in a material master, which apply to all customers, and data in a customer master, which apply to all purchases made by a particular customer, data in a customer-material info record relate to purchases of a specifi c material by a specifi c customer.

Some data in a customer-material info record are not found elsewhere. One example is the customer material number, which cross-references the company’s material number with the customer’s material numbers. Figure 5-18 provides some examples of material numbers used by GBI and its customer RMB. RMB’s material numbers are noted as the customer material number in the info record. This cross-referencing of material numbers enables the cus- tomer to place an order based on its internal material numbers, which the info record then translates into the company’s material numbers. Remember that most customers also have enterprise systems that manage their procurement process. Consequently, the customer material number is the link between the seller’s master data and the buyer’s master data.

Figure 5-18: RMB and GBI material numbers

In certain cases the data in a customer-material info record supersede data found in other master data, such as the material master and customer master. For example, preferences related to shipping, such as delivering plant, tolerances, and partial deliveries that are included in the customer master apply to all materials purchased by the customer. However, if these preferences vary for different materials, then they are included in the customer-material info record. For example, if deliveries are normally sent to one specifi ed plant but deliveries for a particular material must be sent to a different plant, then this preference is noted in the customer-material info record for that material, not in the customer master.

The customer-material info records for RMB also note that RMB prefers the bikes to be shipped via special ground freight (truck) due to the weight and size of the shipping boxes. In contrast, the company requests that GBI ship the shirts via standard air freight (FedEx or UPS 2-day). Finally, the info records indicate that RMB will accept partial deliveries for shirts but not for bikes, because shirts have a very short lead time and can be reordered quickly if needed.

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144 C H A P T E R 5 The Fulfi llment Process

Demo 5.3: Review customer–material info record

P R I C I N G C O N D I T I O N S

Pricing conditions are master data that companies use to determine the selling prices of their products. Companies create conditions for various components of the fi nal selling price, including gross prices, discounts, freight, surcharges, and taxes. Conditions can be fi xed amounts, percentages, or based on a sliding scale, and they can be either independent of or relative to other conditions. For example, the price of a product can be material specifi c and customer inde- pendent, meaning that the seller charges the same price to all of its customers. Alternatively, the price can be customer specifi c, in which case the company charges different customers different prices, perhaps based on some agree- ments between the company and the customer. Similarly, discounts can be uniform, or they can be based on the quantity or value of the purchase. For example, GBI offers a 10% discount for purchases of between 100 and 500 units and a 20% discount for purchases of more than 500 units. Freight is gen- erally based on the weight of the shipment, and it may be waived for purchases greater than a predetermined amount. Thus, the fi nal price to the customer is a function of, or conditioned on, numerous variables.

Because numerous conditions are defi ned for a product, a company must have a procedure to determine which conditions apply to a particular customer order. This procedure, called the condition technique, consists of identify- ing available condition types (gross price, customer-specifi c price, discounts, freight, surcharges, etc.) and determining which ones apply to the particular circumstances of the order.

Recall that in our example, RMB wishes to purchase 40 bikes and 100 t-shirts. The bikes do not qualify for a discount, so GBI will charge the stan- dard price of $2,800 per bicycle. However, the t-shirts qualify for a 10% dis- count, so the price will be $27 per shirt, reduced from the standard price of $30.

Demo 5.4: Review pricing conditions

O U T P U T C O N D I T I O N S

A variety of outputs that are generated during the fulfi llment process, such as quotations, confi rmations, and invoices, must be communicated to customers. The data needed to perform this task are included in output conditions. The condition technique used to determine pricing is also used to determine how outputs from the process are communicated to the customer.

Output conditions are defi ned separately for the different output types (quotations, invoices, etc.). Data in the condition master include the output medium (e.g., print, fax, EDI), partner function (e.g., sold-to party, ship-to party), and transmission time (e.g., immediately, or periodically using a program).

RMB prefers to receive order confi rmations via e-mail within 4 hours of acceptance or shipment of an order. It also prefers to receive paper invoices. GBI must maintain all of these output conditions in its ERP system.

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C R E D I T M A N A G E M E N T M A S T E R R E C O R D

The credit management master record is an extension of the customer mas- ter record that includes data relevant to managing credit for that customer. The data contained in this record are grouped into three segments: general data, credit control area data, and an overview. The general data segment includes data applicable at the client level, that is, across multiple credit control areas. Examples of general data are address, communication data, and total credit granted to the customer across the enterprise. The credit control area segment includes data applicable to a single credit control area. An example is the credit granted to the customer for companies in a particular credit control area and risk category. Risk category is a classifi cation used to determine how risky it is to extend credit to the customer. Companies use this classifi cation to assess the likelihood that the customer will pay its invoices. Finally, the overview seg- ment includes key data from the other segments from the credit master record. Companies use the overview segment to access the most important data they need to make decisions regarding extending credit to customers.

P R O C E S S Figure 5-19 illustrates the steps in the fulfi llment process. The process begins with presales activities and concludes with the receipt of payment from the customer. Presales activities are optional and are designed to identify and develop customer relationships. Very often, the process begins with sales order processing, which is triggered by the receipt of a customer’s purchase order. As the name suggests, sales order processing involves creating a sales order, which is an internal document used to manage and track the order as it fl ows through the process. After a company creates the sales order, it prepares a shipment and sends it to the customer. The next step is billing the customer for the mate- rials shipped. Finally, the company receives a payment from the customer. As you can see in Figure 5-19, each step involves several tasks. Further, depend- ing on the circumstances, additional steps can be necessary, including activi- ties to be completed by other processes in the organization. Note that in this example, we have not explicitly included credit management. We will assume that the customer has suffi cient credit and that the order will be processed. We will, however, consider credit management activities and their impact in greater detail later in this chapter.

A variety of documents are created during the fulfi llment process. As previously discussed, documents are categorized as material documents, fi nan- cial accounting (FI) documents, management accounting (CO) documents, and transaction documents. Recall that documents can be printed or can exist in electronic form. The data contained in these documents are categorized as organizational data, master data, and transaction data. Some data are provided by the user, while other data are automatically retrieved from the relevant master data and the exsiting transaction documents.

This overview of the fulfi llment process is highly simplifi ed. The follow- ing discussion highlights each process step in detail in terms of its key ele- ments: triggers, data, tasks, and outcomes.

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146 C H A P T E R 5 The Fulfi llment Process

Figure 5-19: Fulfi llment process steps

P R E S A L E S A C T I V I T Y

Presales activity is often triggered by a communication from a customer such as an inquiry or a request for quotation (RFQ). The outcome is a quotation that is sent to the customer making the inquiry. The key elements of this inquiry–quo- tation activity are illustrated in Figure 5-20. An inquiry is a request for informa- tion regarding a potential order that the customer might place with the company. In our example, RMB inquires whether GBI can deliver 40 silver deluxe touring bikes and 100 t-shirts by the specifi ed dates. If so, then RMB requests infor- mation on pricing, shipping costs, and discounts. In response, GBI creates a quotation and forwards it to RMB. A quotation is a binding agreement to sell the customer specifi c products under clearly defi ned delivery and pricing terms. Because these terms can change, a quotation will typically include a validity date, that is, a date up to which the quotation remains in effect.

Figure 5-20: Elements of the presales activity

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Besides sending quotations in response to inquiries, presales activities can include managing customer contacts and creating outline agreements (explained in the next paragraph). SAP ERP provides some capabilities to track data pertaining to established customers, such as their preferences and purchasing history. Companies can analyze these data to create marketing and sales strategies designed to encourage customers to place additional orders. In addition, the system can track potential customers. ERP systems typically manage basic presales activities. Companies utilize customer rela- tionship management (CRM) systems, discussed in Chapter 2, to manage very detailed presales, sales-pipeline, sales prospects, and marketing activities that generate a quotation in the ERP system. The handoff between the presales processes in a CRM system and the quotation-to-cash process in the ERP sys- tem is a critical integration point for most companies because failures, such as missed sales opportunities, can signifi cantly reduce sales revenues.

Just as quotations are binding agreements made by sellers, outline agree- ments are binding agreements made by customers to purchase specifi c quanti- ties or values of materials. An example is a GBI customer who enters into an outline agreement to purchase 1,000 standard touring bicycles over a six-month period for a specifi ed price. Alternatively, the agreement may specify value instead of quantity. In this case, the customer agrees to purchase bicycles val- ued at $30,000 over the next six months. These types of outline agreements are called contracts. Another form of outline agreement includes specifi c delivery schedules. For example, a GBI customer could agree to purchase 1,200 bicycles over the next six months and to accept delivery of these bicycles on a specifi c schedule. In this case, the agreement is called a scheduling agreement.

Data

Several types of organizational and master data are necessary to process an inquiry and create a quotation. These data are presented in Figure 5-21. Particularly important are data concerning the customer, the materials, and pricing. User input consists of the customer number, material numbers, quanti- ties, and dates. The SAP ERP system uses these inputs to obtain the necessary organizational data, such as sales area, from the various master data in the sys- tem. Recall that the material master and customer master are associated with specifi c organizational elements. SAP ERP also uses the customer number to obtain necessary customer data, such as contact information, from the customer master. Finally, the system uses material numbers to obtain availability and pric- ing data from available pricing conditions or customer-material info records.

The preceding paragraph deals with existing customers. If the inquiry is from a new customer, then the system will not contain either master data or a customer-material info record for that customer. In such cases, the company must fi rst create the customer master data in the system. The info record is not essential because pricing data are available via pricing conditions.

The quotation can be created with or without reference to existing docu- ments. If the quotation is created without reference, then all of the necessary data must be provided when the quotation is created. However, if a reference document—such as a previously created inquiry, quotation, sales order, or an outline agreement—is used, then data from these documents are automatically included in the quotation. These data are then updated as needed before the quotation is completed. Figure 5-22 diagrams the process of incorporating existing data into the quotation.

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148 C H A P T E R 5 The Fulfi llment Process

Figure 5-21: Data in a quotation

Figure 5-22: Reference documents for a quotation

Tasks

The key tasks in the presales step are to receive inquiries and to create quota- tions. Additional tasks include tracking customers and their buying patterns and creating long-term agreements with them.

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Outcomes

Presales activity frequently results in the creation of two transaction docu- ments: the inquiry and the quotation. The inquiry document is simply a record of the customer’s inquiry in the SAP ERP system. Although creating an inquiry is not essential, it does provide certain benefi ts. For example, the company can use the inquiry as a reference document when it creates a quotation. Further, it can analyze inquiry data to identify lost potential sales and then devise strate- gies to prevent similar losses in the future.

Presales activity can also generate contract and scheduling agreement documents. No material documents are created because there is no movement of materials. No accounting documents (FI or CO) are created because presales activities have no impact on the company’s fi nancial position.

A fi nal outcome of presales activity is the communication of the quota- tion to the customer. The manner in which the quotation is communicated is determined by the output conditions associated with the quotation. Recall from the discussion earlier in this chapter that the output conditions determine the following elements:

• The output medium by which the quotation is sent (e.g., print, fax, or EDI)

• The recipient, meaning the company with the appropriate partner function who receives the quotation

• The date on which the quotation is sent

In the case of Rocky Mountain Bikes, GBI receives a request for a quota- tion for 40 bikes and 100 t-shirts. In response, it creates a quotation. It chooses not to use any existing documents as a reference. Therefore, it must either input the RMB customer number directly or search for RMB in the list of customers for its sales area. It must also provide a valid-to date for the quotation and then input the material numbers and quantities for the materials that RMB has requested. When the customer and the materials are linked to the quotation, the system automatically imports data from the rel- evant master records—customer, material, pricing conditions, and customer- material information records—into the quotation. When GBI has completed the quotation and is ready to send it to RMB, the output conditions indicate that RMB prefers to receive quotations immediately via e-mail.

Demo 5.5: Create a quotation

S A L E S O R D E R P R O C E S S I N G

One of the goals of the presales activities is to encourage customers to place orders for materials or services. These orders typically take the form of a pur- chase order (PO) sent by the customer to the company. A customer PO triggers the sales order processing step, which results in the creation of a sales order in the SAP ERP system. A sales order is an internal document that con- tains information necessary to fi ll the customer order in a standardized form. Figure 5-23 illustrates the key elements of the sales order processing step.

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150 C H A P T E R 5 The Fulfi llment Process

Figure 5-23: Elements of a sales order

In our example, RMB has received a quotation from GBI and several other suppliers. It has decided to place the order with GBI. Accordingly, RMB prepares a purchase order using its procurement process and communicates it to GBI via e-mail, fax, or other means. Note that had RMB selected another supplier, then the quotation that it received from GBI would have expired on the valid-to date with no impact on either GBI or RMB. The PO represents a commitment to purchase the stated materials under the specifi ed terms and conditions. When GBI receives the purchase order, it will retrieve the quota- tion that was previously sent to RMB and create a sales order using the data in the quotation. As part of this process it will verify that the data in the quotation match the data in the purchase order.

Data

If you compare Figure 5-21 with Figure 5-24 below, you will notice that much of the data contained in the sales order is also found in the quotation. In addition,

Figure 5-24: Data in a sales order

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the sales order includes data related to shipping, billing, partner functions, and, if relevant, data from contracts with customers. Shipping and billing data are obtained from the customer master or the customer-material info record. Partner functions are obtained from the customer master based on the speci- fi ed sold-to party. Recall that contracts are agreements made by customers to purchase a specifi ed quantity or value of materials over a certain time period. Therefore, data regarding quantities, prices, and delivery dates are obtained from contracts. In addition, the delivery plant is obtained from the customer- material info record, the customer master, or the material master, in that order.

Tasks

The key task in this step is to create a sales order. Like a quotation, a sales order can be created using one of several reference documents. The illustra- tion in Figure 5-22 is applicable for a sales order as well. Thus, a sales order can be created with reference to a customer inquiry, a quotation, an agreement, or a previously created sales order. Data from multiple reference documents can be combined to create one sales order. Conversely, a single reference docu- ment can generate several sales orders. Figure 5-25 illustrates this relationship for the case of quotations. In our example, the quotation received from RMB is used as the source document to create the sales order. Further, one sales order is created from one quotation.

Figure 5-25: Relationship between quotations and sales orders

If the credit management capabilities of the ERP system are in use, then a check of the customer’s credit is conducted. If the credit is approved, then the fulfi llment process continues. If not, then additional steps are necessary. The steps related to credit management are discussed later in this chapter. If the sales order is associated with a customer contract then an additional task is to link the customer’s purchases against the terms of the contract. This action allows both the company and the customer to monitor and track sales to ensure that the terms of the contract are met.

Figure 5-26 represents a standard sales order. The left side illustrates the structure of a sales order, and the right side indicates some of the data con- tained in the sales order that GBI created for RMB.

The document header in a sales order includes data that are valid for the entire sales order. Examples are customer data such as partner functions and customer PO number, dates, and order total. Each sales document can

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152 C H A P T E R 5 The Fulfi llment Process

Figure 5-26: Structure of a sales order

include one or more sales document items, which contain data about each item included in the sales order. Examples of item data are material number, description, and quantity. Each item can be associated with a different item category, such as standard item, text item, and free-of-charge item, which determines how the item is handled with regard to pricing, billing, and ship- ping. For example, there is no charge for free-of-charge items. Finally, each document item can include one or more schedule lines, which specify deliv- ery quantities and dates.

Some of the data in our example are illustrated on the right side of Figure 5-26. For example, the fi gure shows the PO date and PO number for RMB’s order. It also indicates two partner functions, sold-to party and ship-to party. RMB is the sold-to party, and the racing location where the materials are to be shipped is the ship-to party. The order consists of two items, one for the 40 bikes and one for the 100 t-shirts. The bikes have two schedule lines, one for 30 bikes to be delivered by May 10 and the other for 10 bikes to be deliv- ered by June 10. In contrast, the shirts have one schedule line because RMB requested that GBI deliver all 100 shirts by May 10.

Outcomes

A sales order is the only transaction document generated by this step. No material or accounting documents are created. If a contract is associated with the sales order, then it is updated to include the quantity or amount of the sale. There are four additional consequences—availability check, delivery schedul- ing, and transfer of requirements—which we consider next.

Availability check is a procedure to determine whether the required mate- rials are available or will be available in time for the desired delivery date (per the schedule lines). Further, if the materials are not available, the availability

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Process 153

check will determine the earliest possible delivery date. The decision to con- duct an availability check, as well as the type and scope of the check, is based on settings in the material master. For example, the system can be confi g- ured to calculate availability based on current stock levels as well as planned receipts of material from either procurement or production. In addition, the system can create a material reservation, which reserves the needed materials so they cannot be used to fulfi ll any other requirements.

The availability check must also take into account the amount of time needed to perform relevant activities such as material staging, transportation planning, loading, and goods issue. Material staging refers to preparing the material for shipment. It involves picking the materials from their storage locations and packing them in suitable containers. Transportation planning is the process whereby fi rms determine how best to transport the materials to the customer based on weight, volume, transportation mode (e.g., truck, rail), and other variables. Loading involves moving the materials from the plant onto the truck. Goods issue is largely concerned with recording the fi nancial impact of shipping goods. We will discuss goods issue later in the shipping step. The time needed to complete these steps is calculated using backward scheduling, in which the company begins with the required delivery date and then works in reverse order to determine when each process step must be performed. Figure 5-27 diagrams the backward scheduling process. Note that loading is preceded by picking/packing and transportation planning, which in turn are preceded by material staging. Signifi cantly, these steps can overlap, as the fi gure illustrates. Consequently, the greater of these two times (transportation lead time and pick/pack time) is included in the calculation.

Finally, creating a sales order can generate a transfer of requirements to the material planning process. These data are used by the material planning process to plan materials procurement and production.

Figure 5-27: Backward scheduling

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154 C H A P T E R 5 The Fulfi llment Process

In our example, after GBI creates the sales order for RMB, the system automatically performs an availability check to determine whether the materi- als can be shipped as requested. In addition, it transfers the sales data to the material planning process to ensure that the materials are available as needed so that they will be shipped to RMB in a timely manner.

Demo 5.6: Create a sales order

S H I P P I N G

The shipping step is triggered when orders become due for delivery. Shipping consists of several tasks that are necessary to prepare and send shipments. Specifi cally, a delivery document is created which authorizes the delivery of orders that are ready to be shipped. Then, the necessary materi- als are picked from storage and placed in a staging area where they can be packed appropriately. If these tasks are completed through the warehouse management process, then additional steps in that process are triggered. After the order is shipped, a goods issue is recorded in the system, which triggers processes in accounting. These elements of the shipping step are diagrammed in Figure 5-28.

Figure 5-28: Elements of the shipping step

Data

The central document in shipping is the delivery document, which identifi es which materials are to be shipped to which partner (ship-to party) and from which plant. The delivery document further identifi es the storage locations for these materials. The data in the delivery document are compiled from multiple sources (see Figure 5-29). Because shipping is triggered when a sales order becomes due for delivery, sales orders—particularly the schedule lines—are one source of data. Other sources are similar to the ones we have seen for pre- vious steps. As we would expect, shipping-related data are the most relevant. In contrast, pricing data typically are not relevant during the shipping step.

Figure 5-30 illustrates the structure of a delivery document (left side) and some of the data in the delivery document in our GBI example (right side). The header includes data applicable to the entire document, such as the

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Process 155

Figure 5-29: Data in a delivery document

Figure 5-30: Structure of a delivery document

ship-to party, shipping address, dates, and totals (weight, number of items). Data about each item in the shipment, such as material number, delivery quan- tity, and weight, appear as separate line items. Each schedule line in a sales order is a line item in the delivery document. Figure 5-31 illustrates the rela- tionship between schedule lines and delivery document items.

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Figure 5-31 displays an order with two items. Item 1 in the sales order has two schedule lines, and item 2 has one. The delivery document includes one schedule line for item 1 and one schedule line for item 2. Note that a delivery can include schedule lines from different orders. We discuss the requirements for combining items from multiple deliveries in the next section.

Figure 5-31: Relationship between schedule lines and

delivery items

In our example, a separate delivery is created for each date. The delivery for May 10, which is re-created in Figure 5-30, shows two line items, one for 30 bikes and the other for 100 t-shirts. Note that the materials are shipped on May 5 so that they reach Colorado Springs by the desired data of May 10. Thus, the items in this delivery are associated with schedule lines from two items in one sales order. This principle is illustrated in Figure 5-31. The other delivery will include only one item—10 bikes—to be delivered by June 10.

Tasks

As identifi ed earlier, the specifi c tasks completed during the shipping step are (1) creating a delivery document, (2) picking, (3) packing, and (4) post goods issue. Creating a delivery document serves as an authorization for delivery. As Figure 5-32 illustrates, schedule lines from multiple sales orders with similar characteristics can be combined into one shipment or delivery. Specifi cally, the

Figure 5-32: Relationship between sales orders and deliveries

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Process 157

sales orders must have the same ship-to address, shipping point, and due date. Conversely, items in one order can be split into more than one shipment.

The picking step is optional and is part of the warehouse management pro- cess. We will discuss warehouse management in Chapter 7. However, although picking is a part of the warehouse management process, it is triggered dur- ing the shipping step when a delivery document is created. The delivery docu- ment serves as a request for picking. The delivery document is converted into a transfer order in warehouse management, and the transfer order is then used to complete the physical movement of the materials needed for the shipment.

Items from multiple delivery documents can be included in a single transfer order, as illustrated in the left side of Figure 5-33. This approach can optimize the work of the pickers in the warehouse by grouping requests for materials that are located in the same area. Alternatively, a deliv- ery document can generate multiple transfer orders, as illustrated in the right side of the fi gure. Data from the delivery documents are copied to the transfer order, as illustrated in Figure 5-34. The delivery quantity from the

Figure 5-33: Relationship between delivery documents and transfer order

Figure 5-34: Delivery quantity vs. pick quantity

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158 C H A P T E R 5 The Fulfi llment Process

delivery document becomes the pick quantity, which is the quantity needed to be picked from storage. Once the picking is completed, the quantity picked is automatically transferred back into the delivery document.

After picking has been completed, the materials are placed in a staging area where they are packed appropriately. Materials are packed using a vari- ety of shipping units such as cartons, pallets, and containers. Each shipping unit can be packed into another shipping unit to consolidate the shipment. Typically, GBI ships each bike in an individual box and consolidates 20 boxes into one carton. It then packs several cartons into a pallet. Pallets are usually too heavy to lift by hand, so the workers must use a pallet jack or a forklift to load them into a shipping container.

Packing is diagrammed in Figure 5-35, which illustrates a delivery con- sisting of four items or materials. Item 1 is packed into one carton, items 2 and 3 are combined and packed into one carton, and item 4 has to be split and placed into two cartons. Two cartons are subsequently loaded onto one pallet, and the other two cartons onto a second pallet. Finally, both pallets are placed in a single container.

Figure 5-35: Packing options

The fi nal task in shipping is to post goods issue in the ERP system. The goods issue indicates that the shipment has left the facility. It also results in several outcomes, which we discuss in the next section.

Outcomes

The shipping step, which ends with the goods issue, has numerous outcomes (see Figure 5-36). These outcomes fall into three broad categories: (1) account- ing impacts, (2) creation of documents to record transaction data, and (3) updates to master data and previously created documents.

Shipping is the fi rst step in the fulfi llment process that has an impact on fi nancials. Specifi cally, the inventory accounts of the materials shipped are

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Process 159

credited, and the cost of goods sold account is debited. These amounts are based on the cost of making or buying the materials. In the case of trading goods, the amount is based on the moving average price of the material, which we discussed in Chapter 4. In the case of fi nished goods, the amount is based on the standard price which takes into account production costs such as mate- rial, labor, and overhead. An FI document is created to record these data. Figure 5-37 illustrates these outcomes for the GBI example after the goods issue for the fi rst delivery has been posted. As the fi gure indicates, the cost of each bike is $1,400, and the cost of each shirt is $15. Therefore, the inventory accounts for bikes and t-shirts are credited by $42,000 ($1,400 � 30) and $1,500 ($15 � 100), respectively, and the cost of goods sold account is debited by the sum of the two, $43,500. A similar impact will be recorded after the goods issue is posted for the second delivery in June. Note that the other accounts listed Figure 5-37 are relevant in later steps in the process. In addition, a controlling document may be created if a management accounting (controlling) relevant activity, such as profi tability analysis is in use.

Figure 5-36: Outcomes of shipping (goods issue)

Figure 5-37: FI impact of the shipping step

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160 C H A P T E R 5 The Fulfi llment Process

Shipping involves a movement of materials that reduces the quantity of those materials in inventory. Therefore, in addition to the reduction of inven- tory value in the general ledger, the inventory quantity is also reduced in the material master for the delivering plant. A material document is created to record this movement.

Relevant sales documents, such as quotations and sales orders, are updated with the details of the shipment. Finally, the billing due list is updated. The billing due list is a list of deliveries for which the billing step can be exe- cuted. We now turn our attention to billing.

Demo 5.7: Process shipment for a sales order

B I L L I N G

The purpose of the billing step is to create a variety of documents such as invoices for products or services as well as credit and debit memos. The billing step is also used to cancel previously created documents. Billing can be based either on deliveries that have been shipped to customers or on orders that have not yet been delivered. This step utilizes organizational data, master data, and transaction data from previous process steps. Like shipping, billing has several outcomes, some of which impact other processes. Figure 5-38 illustrates the elements of the billing step.

Figure 5-38: Elements of the billing step

Data

Billing, with reference to delivery documents, utilizes data from the delivery document and the sales order, such as material number and quantities (Figure 5-39). Master data, such as customer master and pricing conditions, are the source of pricing data and partner function (bill-to party). In addition, billing utilizes organizational data relevant to the fulfi llment process, client, company code, and sales area.

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Figure 5-39: Data in a billing document

Tasks

The key task in the billing step is to generate a billing document, typically an invoice for materials or services. As previously mentioned, the invoice can be created on the basis of either a delivery or a sales order. Figure 5-19 depicts a scenario in which shipment is sent prior to billing. However, if the company wishes to be paid before it ships the materials—which is frequently the case when the customer is new or has a poor payment history—then the process can be modifi ed so that billing will take place prior to shipment. Our discussion focuses on billing that is based on deliveries.

Other billing documents that are sometimes created are credit and debit memos. A credit memo is a refund the company issues if the customer returns the materials or if the initial invoice overcharged the customer. The company uses a debit memo when the customer was undercharged in the original invoice. A debit memo increases the amount owed by the customer.

As you can see in Figure 5-40, multiple deliveries can be combined to cre- ate one billing document. This process can be employed only when the deliv- eries share the same characteristics with respect to payer (partner function),

Figure 5-40: Relationship between deliveries and billing

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162 C H A P T E R 5 The Fulfi llment Process

billing date, and country of destination. Conversely, one delivery can result in multiple invoices. This is the case when the terms of payment for the items in the delivery are different. In these cases, a different billing document must be created for each term of payment. Note that when deliveries are combined, the partner function payer is relevant, not who placed the order (sold-to party) or who received the shipment (ship-to party).

Referring back to our RMB example, GBI has two options for billing: It can send an invoice after each shipment is sent, or it can wait until both ship- ments are sent and then prepare one cumulative invoice. GBI has elected to send separate invoices for each shipment.

Figure 5-41 illustrates the structure of a billing document (left side). The billing document header consists of the partner identifi cation such as the sold-to party and payer, billing date, document currency, payment terms, and the total. Each billing document item includes data such as material num- ber, quantity, and price. The fi gure also illustrates some of the data that are included in the billing document generated by GBI for the initial shipment (30 bikes and 100 t-shirts). GBI will subsequently generate another billing document for the remaining 10 bikes.

Figure 5-41: Structure of a billing document

Outcomes

Like shipping, billing has several outcomes related to accounting, creating doc- uments, and updating master data and documents. These impacts are presented in Figure 5-42.

Figure 5-42: Outcomes of the billing step

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Process 163

When the billing step is completed, accounts receivable reconciliation and sales revenue accounts in the general ledger are updated. The accounts receivable account is debited by the amount of the invoice, which is the amount the customer owes, and the sales revenue account is credited by the same amount. Recall, however, that because accounts receivable is a rec- onciliation account, the amount of the invoice cannot be posted directly to the accounts receivable account. Instead, the amount is posted through the cor responding subledger account, in this case, the customer account. An open item is created in the customer’s account via a debit entry, which automatically creates an entry in the accounts receivable account. In addition to postings to the general ledger, an FI document is created to record these data. Finally, because the billing step increases the amount receivable from the customer, the available credit decreases by a corresponding amount.

Figure 5-43 illustrates the fi nancial impact of the invoice sent in our exam- ple. The invoice includes 30 bikes and 100 t-shirts. The bikes are billed at $2,800 each and the t-shirts at $27 each ($30 less 10% volume discount), for a total of $86,700 ($84,000 � $2,700). This total is debited to RMB’s account, which results in an automatic posting to the accounts receivable account. Finally, the revenue account is credited in the amount of $86,700. It is worth noting that inventory and cost of goods sold are updated during the shipping step, while revenue and customer/receivables are updated at billing. Further, gross profi t is calculated as revenue minus cost of goods sold. If revenue is less than the cost of goods sold, then the result is a loss rather than a profi t. In our example, GBI has a gross profi t of $43,200 ($86,700 – $43,500).

Figure 5-43: FI impact of the billing step

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164 C H A P T E R 5 The Fulfi llment Process

Billing has potential consequences in management accounting or con- trolling. For example, profi tability analysis uses revenue data from the billing step that are recorded via a controlling document. Finally, billing generates updates to several sales documents, such as sales orders and deliveries, the customer’s credit account, and statistics (information structures) in the sales information system.

Demo 5.8: Process billing for a sales order

PAY M E N T

The fi nal step in the fulfi llment process is the receipt of payment from the customer. The payment is applied to the appropriate open items—that is, items that have not yet been paid—in the customer’s account. The elements of the payment step are diagrammed in Figure 5-44.

Figure 5-44: Elements of the payment step

Data

When a company receives payment from a customer, it retrieves the customer account to identify the open items. It then applies the payment to these items. Therefore, the payment step involves customer master data as well as organi- zational data.

Figure 5-45: Data in a payment document

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Process 165

Tasks

The tasks in the payment step are to identify the open items and to apply the payment to these items. Customers make payment based on terms that were previously agreed upon. Further, customers can pay multiple invoices at once, or, conversely, can divide a single invoice into multiple payments.

Outcomes

When a customer payment is recorded, relevant general ledger accounts are updated, and a corresponding FI document is created. In our example, RMB has sent a payment for the fi rst invoice in the amount of $86,700. Figure 5-46 exhibits the general ledger impact of this payment. The bank account is deb- ited and RMB’s account is credited by the amount of the payment. This trans- action clears the open item in the customer’s account that was created during the billing step. Because the customer account is a subledger account, the cor- responding reconciliation account, accounts receivable, is also automatically credited. Finally, because the payment reduced the amount receivable from the customer, the customer’s credit limit increases by a corresponding amount.

Figure 5-46: FI impact of the payment step

In the above example, the customer pays the full amount owed. Very often, however, the amount paid is not the amount owed. This is the case, for instance, when the customer is entitled to discounts based on the payment terms. Under the terms 1%10/Net 30, for example, payment is due no later than 30 days of receiving the invoice, and the customer is entitled to a 1% discount if it makes payment within 10 days. If the customer meets the terms

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166 C H A P T E R 5 The Fulfi llment Process

for the discount, then the payment received will be less than the invoiced amount. Consequently, additional postings are included to refl ect the discount. Specifi cally, the bank account is debited by the amount of the payment, and the sales discount account1 is debited by the amount of the discount. The cus- tomer account and the accounts receivable reconciliation account are credited by the amount of the invoice, as shown in Figure 5-47. The only differences between Figure 5-47 and Figure 5-46 are that in Figure 5-47 the bank account is debited by a smaller amount (amount owed less discount), and the difference (discount) is debited to the sales discount account. The customer account and the A/R account are credited by the amount owed.

Figure 5-47: Customer payment with discount

In cases where the payment is not equal to the amount of the invoice and no discount is applicable, then two scenarios are possible. In one scenario, the amount of the difference is so small that it is insignifi cant. In such cases, the company either charges off or writes off the difference using an appropriate general ledger account, and the invoice is considered paid. A difference is gen- erally considered small if it falls within the tolerance limits specifi ed in the system. When the difference falls outside tolerance limits and therefore is con- sidered signifi cant, the payment is handled either through the partial payment technique or the residual item technique. Under the partial payment technique, the payment is posted to the customer account, and the original invoice item remains open. Under the residual item technique, the original item is closed, and a new item for the balance is posted to the customer account (and the cor- responding reconciliation account). Figure 5-48 diagrams all of these scenarios.

1 GBI records all discounts related to sales in one account, the sales discount account. This includes discounts offered at the time of receiving the sales order as well as discounts related to payment. It is not uncommon to record these in different accounts, depending on the reporting needs of the company.

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Credit Management Process 167

Figure 5-48: Processing customer payment

Demo 5.9: Process payment for an invoice

C R E D I T M A N A G E M E N T P R O C E S S In our discussion of the fulfi llment process, we assumed that the customer has suffi cient credit. In this section we briefl y discuss the credit management process, which businesses use to assess whether a customer should be granted credit to purchase and receive goods prior to payment. The credit manage- ment process can be confi gured to make this assessment at three points dur- ing the fulfi llment process: (1) when the sales order is created or changed, (2) when the delivery is authorized (delivery document created) or changed, and

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168 C H A P T E R 5 The Fulfi llment Process

(3) when the post goods issue is performed during shipping. The process can further be confi gured to consider a variety of criteria when making this assessment, including the amount of current receivables from the customer and the number and amount of open sales orders, scheduled deliveries, and open invoices. In addition, third-party sources of credit data, such as Dunn & Bradstreet, can also be utilized. The total credit exposure is calculated as the sum of the value of open orders, scheduled deliveries, open invoices, and the value of the current sales order. If the credit exposure exceeds the credit limit, then the company must select one of three possible outcomes: (1) warn the user and allow the process to continue, (2) display an error and do not allow the process to continue, and (3) block delivery of the order. All three outcomes are possible when the sales order or delivery document is being created or changed. During the post goods issue, however, the only option is to block the goods issue from being posted.

Figure 5-49 diagrams the additional credit management steps that are initiated when the sales order is created. First, the company performs a credit check. If the credit exposure falls below the credit limit, then the fulfi llment process continues. If it exceeds the credit limit, the fi gure illustrates the out- come where the delivery of the order is blocked. The order is saved, but it will remain in the delivery blocked status until it is reviewed by a credit manager, who will either approve or reject it. If the manager approves the order, then the delivery block is removed, and the order is released for further processing. Conversely, if the manager refuses to extend credit, then the order is rejected, and the customer is informed of this decision.

Figure 5-49: Credit management process

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Integration With Other Processes 169

I N T E G R AT I O N W I T H O T H E R P R O C E S S E S The fulfi llment process is tightly integrated with many other processes. We identifi ed numerous integration points in the discussion of the process steps and will elaborate on them in other chapters. Below we summarize the key integration points, which are presented in Figure 5-50.

Figure 5-50: Integration with other processes

Because fulfi llment involves both revenues and payments, a clear rela- tionship exists between fulfi llment and fi nancial accounting. For example, some of the master data utilized in fulfi llment, such as customer master and material master, are jointly maintained by sales and accounting. In addition, the shipment, billing, and payment steps have an impact on the general ledger. Fulfi llment can also impact the profi tability analysis process in management accounting, which utilizes sales revenue data.

Going further, during sales order processing, when the company con- ducts availability checks it employs data from inventory management, produc- tion, and purchasing, which are the sources of the materials for shipment. Sales data are also used by materials planning to schedule the procurement and pro- duction of materials. Another fulfi llment step, goods movement, is related to inventory management. In addition, warehouse management processes (such as picking) can be initiated during shipment.

Fulfi llment is also related to project systems. Recall from Chapter 1 that enterprises use projects to create complex products for customers, such as an aircraft. Customer orders for such products are processed using the fulfi llment process. However, instead of preparing and sending shipments, as described in this chapter, the customer requirements are transferred to the project manage- ment process. In turn, project systems infl uence deliveries and billing.

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170 C H A P T E R 5 The Fulfi llment Process

Finally, in the process section we explored the relationship between the fulfi llment process at GBI and the procurement process at RMB. These processes are executed in different companies using different ERP systems. Nevertheless, for both processes to operate effi ciently, the two companies must integrate on a process level and a technical level at multiple stages.

R E P O RT I N G As discussed in previous chapters, SAP ERP provides several reporting options including online lists, work lists, and analytics. An additional reporting option in fulfi llment is the document fl ow, which identifi es all the documents related to a customer order. We examine these options in this section.

D O C U M E N T F L O W

Throughout this chapter we have examined many of the documents associ- ated with the fulfi llment process, including inquiries, sales orders, delivery documents, billing documents, and payment documents. Signifi cantly, all of the documents related to one inquiry or sales order are linked together in a document fl ow. A document flow displays all of the documents associ- ated with the steps that have been completed for a single customer inquiry or order. The document fl ow is updated after each process step is completed. Figure 5-51 illustrates a document fl ow for a completed process that started with a sales order (rather than an inquiry). The document fl ow essentially dis- plays the history and status of the sales order. For example, if a delivery docu- ment is included in the document fl ow but a goods issue is not, then we can conclude that delivery is in progress and the shipment has not yet left the ship- ping point. This conclusion assumes, of course, that the data in the ERP system are up to date and accurately refl ect the activity in the physical system. Any of the underlying documents, such as the sales order or invoice, can be retrieved and displayed from the document fl ow, if more details are necessary.

Figure 5-51: Document fl ow. Copyright SAP AG 2011

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Reporting 171

Demo 5.10: Display document fl ow

W O R K L I S T S

Work lists identify tasks that are ready for completion. These lists can be gen- erated for each task involved in fulfi llment, such as preparing deliveries, pick- ing, post goods issue, and billing. Figure 5-52 displays a series of work lists associated with fulfi llment tasks.

Figure 5-52: Work lists

One example of a fulfi llment work list is a delivery due list or a shipping work list, which is essentially a list of orders that are scheduled to be shipped by a specifi c date. Another example is a list of orders that have been shipped but not billed. Lists can be generated for specifi c dates and for specifi c organiza- tional elements, such as a shipping point. In addition, tasks included in the list can be selected for processing individually or collectively. For example, a delivery due list will display all sales orders that should be shipped for on-time delivery. The user can select a single a sales order for individual processing and create a delivery document for that order. Alternatively, the user can select several sales orders for collective processing and create delivery documents for all of them simultaneously.

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172 C H A P T E R 5 The Fulfi llment Process

Demo 5.11: Display a work list

O N L I N E L I S T S

Online lists are used to generate lists of documents associated with specifi c master data. In the context of fulfi llment, any of the documents discussed ear- lier can be displayed for specifi c customers or materials or a combination of the two. Figure 5-53 is an example of a list of sales orders for a particular sold-to party. The fi gure displays three orders, labeled 1241, 1549, and 1600. Recall that online lists are displayed using a list viewer or an ALV grid. These techniques provide several options for displaying results, such as sorting and summation.

Figure 5-53: List of sales orders

Other examples of online lists are:

• List of delivery documents for a specifi c customer

• List of sales orders for a specifi c combination of customers and materials

• List of delivery documents for a specifi c material or material group

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Reporting 173

Demo 5.12: Display online list

A N A LY T I C S

Figure 5-54 depicts the information structures used in the sales information system. Standard information structures store data based on organizational elements—sales organization and shipping point, for example—as well as mas- ter data such as customer and material.

Figure 5-54: Information structures

Information structures are used to generate both standard and fl ex- ible analyses. Figure 5-55 provides an example of standard analysis, specifi - cally, an analysis of sales that includes sales organizations, order value, and invoiced amount. It further demonstrates a drilldown to display customers (Philly Bikes and Motown Bikes) for a selected sales organization (UE00). Drilling down for one customer (Philly Bikes) reveals data for each time period (month).

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174 C H A P T E R 5 The Fulfi llment Process

C H A P T E R S U M M A R Y

The fulfi llment process involves the activities required to receive and respond to

a customer inquiry, process a sales order, ship goods, and bill and receive pay-

ment from customers. A company’s fulfi llment process is typically optimized

for the type of goods it sells and the sales channels (wholesale or retail) that

it utilizes. The fulfi llment process is the lifeblood of any company due to its

clear focus on generating revenues and driving requirements for many other

processes such as production and purchasing. In addition, the company must

make certain that all revenues resulting from the fulfi llment process are prop-

erly refl ected in the fi nancial statements and that billing and receiving payments

from customers are carried out effi ciently.

The fulfi llment process consists of fi ve key steps: (1) receipt of a cus-

tomer inquiry or RFQ, (2) preparation of a quotation in response to the inquiry,

(3) sales order processing, (4) shipping, and (5) billing and payment processing.

Many types of data are required to execute these steps properly and to account

for the goods and fi nancial impact of the fulfi llment process.

Sales area, shipping point, and credit control area are categories of

organi zational data that are unique to the fulfi llment process. A sales area is a

combination of three additional organizational data: sales organization, distri-

bution channel, and division. The confi guration of these data for each company

is a refl ection of the industry, the product, and any customer requirements that

a company must meet.

Figure 5-55: Example of standard analysis

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Key Terms 175

In contrast, the material master data and customer master data are more

operational in scope. These data are used to execute the various steps of the

fulfi llment process and can vary among customers, plants, and sales organiza-

tions to meet the specifi c requirements of those situations.

Customer master data are critical to ensure that (1) orders are shipped to

the correct location, (2) customers have suffi cient credit to pay for orders, and

(3) invoices are sent to the proper accounts payable group for prompt payment.

In addition, pricing conditions are master data that are maintained for specifi c

materials, quantities, or individual customers, depending on the specifi c con-

tractual and business conditions.

Transaction data are collected at each step of the fulfi llment process to

enable process and instance-level reporting for improved process manage-

ment. Multiple lists and reports are generated to provide management with

operational visibility into every aspect of the fulfi llment process.

K E Y T E R M S

Accounting data

Availability check

Backward scheduling

Bill-to party

Contracts

Credit control area

Credit management master record

Customer master data

Customer-material information record

Delivery document

Distribution chain

Distribution channel

Division

Document fl ow

General data

Inquiry

Item category

Outline agreements

Output conditions

Partner functions

Payer

Post goods issue

Pricing conditions

Quotation

Sales area

Sales area data

Sales order

Sales organization

data

Sales organizations

Sales plant data

Schedule lines

Scheduling agreement

Shipping point

Ship-to party

Sold-to party

Transfer of requirements

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176 C H A P T E R 5 The Fulfi llment Process

R E V I E W Q U E S T I O N S

1. Briefl y discuss the organizational levels relevant to the fulfi llment pro- cess. Be sure to explain the relationships among the various levels.

2. What is a distribution chain? How is it relevant to the fulfi llment process?

3. Explain the relationships among the following organizational levels: sales organization, distribution channel, division, and sales area.

4. What is a credit control area? Explain the difference between a centralized and a decentralized model of credit control areas.

5. Briefl y discuss the master data relevant to the fulfi llment process.

6. Explain the relationship between the master data and organizational data in the fulfi llment process.

7. Describe, with examples, the data in the three segments of a customer master.

8. At what organizational levels are the material master defi ned as it relates to the fulfi llment process? Provide examples of data in the material

master.

9. Explain the role of each partner function in the fulfi llment process.

10. What is the purpose of a customer-material info record? Provide exam- ples of the types of data it contains.

11. How is pricing determined in the fulfi llment process? Provide examples of data relevant to pricing.

12. What is the credit management master record? How is it related to the customer master record?

13. Describe the steps in the fulfi llment process in terms of triggers, data, steps, and outcomes.

14. Describe the structure of the following documents

a. Sales order

b. Delivery document

c. Billing document

15. Explain the relationship between each of the following pairs of key elements of the fulfi llment process:

a. Quotations and sales orders

b. Sales orders and deliveries

c. Deliveries and transfer orders

d. Deliveries and billing documents

16. Explain how the steps in the fulfi llment process impact the general ledger accounts.

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Exercises 177

17. How do companies manage payments that are less than the amount of the invoice?

18. Briefl y describe the credit management process. Which steps of the fulfi ll- ment process are relevant to credit management?

19. Briefl y explain how the fulfi llment process is integrated with other processes.

20. What is a document fl ow?

21. Provide examples of works lists and online lists associated with the fulfi ll- ment process.

22. Provide an example of reporting using standard analysis in fulfi llment. Make certain to include the concept of drill down.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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1 7 8

GBI US Customer List

5AA P P E N D I X

Customer Number

Customer Name and address Sales Organization

Delivering Plant

1000 Rocky Mountain Bikes

6400 Fiddler’s Green Circle, Denver CO 80111 USA

UW00 SD00

2000 Big Apple Bikes

95 Morton St, New York City, NY 10014 USA

UE00 MI00

3000 Philly Bikes

3999 West Chester Pike, Philadelphia, PA 19073 USA

UE00 MI00

4000 Peachtree Bikes

1001 Summit Boulevard, Atlanta, GA 30319 USA

UE00 MI00

5000 Beantown Bikes

3 Van de Graaff Dr, Boston, MA 18033 USA

UE00 MI00

6000 Windy City Bikes

3010 Highland Parkway, Chicago, IL 60515 USA

UE00 MI00

7000 Furniture City Bikes

401 W Fulton, Grand Rapids, MI 49504 USA

UE00 MI00

8000 Motown Bikes

1550 One Towne Square, Detroit, MI 48076 USA

UE00 MI00

9000 SoCal Bikes

18101 Von Karman Ave, Irvine, CA 92612 USA

UW00 SD00

10000 Silicon Valley Bikes

3410 Hillview Ave, Palo Alto, CA 94034 USA

UW00 SD00

11000 DC Bikes

1300 Pennsylvania Ave, Washington, DC 20004 USA

UE00 MI00

12000 Northwest Bikes

601 108th Ave, Seattle, WA 98004 USA

UW00 SD00

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C H A P T E R 4 The Procurement Process 1 7 9

1 7 9

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Describe the master data associated with the production process.

2. Identify the key steps in the production process and the data, documents, and information associated with them.

3. Effectively use SAP® ERP to execute the key steps in the produc- tion process.

4. Effectively use SAP ERP to extract meaningful information about the production process.

T he production process consists of the various steps and activities involved with the manufacture or assembly of fi nished goods and semifi nished goods. Organizations implement a variety of production or manufac-

turing processes, depending on the type of material being produced and the manu facturing strategy used to produce it. Among the most common produc- tion processes are discrete, repetitive, and process manufacturing. Discrete and repetitive manufacturing involve the production of tangible materials such as cars, computers, and bicycles. Each unit produced is a “discrete” unit, meaning it is distinct from other units and it can be counted. Further, the component materials from which the unit is made, such as wheels and bolts in a bike, are identifi able. There is, however, a fundamental distinction between repetitive and discrete manufacturing. In repetitive manufacturing, the same material is produced repeatedly over an extended period of time at a relatively constant rate. In discrete manufacturing, the company produces different materials over time in batches, often alternating between materials on a production line.

In contrast, process manufacturing refers to the production of materials such as paint, chemicals, and beverages that are not manufactured in individual units. Rather, they are produced in bulk, and they are measured in quantities such as gallons and liters. Further, the component materials cannot be identi- fi ed after production because they are mixed together in the fi nal product. Imagine, for example, attempting to identify the raw materials in a gallon of

The Production Process

C H A P T E R 6C H A P T E R

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180 C H A P T E R 6 The Production Process

paint. The real-world example below illustrates discrete, repetitive, and process manufacturing as implemented by Apple, Intel, and Valero, respectively.

A good example of a company that uses the make-to- stock strategy is Apple Inc. Apple uses the make- to-stock process for Macs sold in its Apple stores. The company fi rst estimates the consumer demand for its Mac computers. It then calculates its available manu- facturing capacity and the quantities of raw materials it will need to build enough computers to meet consumer demand. Apple’s strategy is to purchase raw materi- als and reserve manufacturing capacity ahead of time

to maximize the cost effi ciencies of buying materials in bulk quantities and doing large production runs. Apple and its contract manufacturers then produce a specifi c quantity of each Mac model and ship them from the factory to the Apple stores and other retail outlets for sale. When customers come into an Apple store, they expect that the computer they want to buy will be there and that they can take it home immedi- ately after purchasing it.

Business Processes in Practice 6.2: Make-to- Stock vs. Make-to-Order

Apple Inc. produces its Macintosh computers using a discrete production process. Apple1 manufactures sev- eral models of Mac laptop and desktop computers on the same production lines in batches of varying quantities. For example, the Mac desktop production line might produce 10,000 units of the iMac 21.5-inch models and then switch the line to produce 15,000 units of the 27-inch model.

In contrast, Intel produces most of its processors in a repetitive production process. Due to the immense costs and technical complexity associated with semicon- ductor production, Intel must construct dedicated pro- duction lines for each of its microchips. Often, switching a production line from one chip to another can cost tens of millions of dollars. Therefore, to maximize cost effi - ciencies, Intel attempts to run continuous production of a specifi c chip for as long as possible. To successfully implement this strategy, Intel must plan its production very carefully.

Finally, a prominent example of process manufac- turing is Valero Energy Corporation, the largest inde- pendent petroleum-refi ning company in North America. Valero produces fuel, chemicals, and other petroleum products in 15 refi neries across North America. The company’s refi neries operate 24/7 in a continuous pro- duction process, converting a total capacity of nearly 3 million barrels of raw petroleum into multiple prod- ucts. Once a refi nery starts full production, it can be many months or years before Valero shuts it down for maintenance.

Source: Apple, Intel, and Valero company reports.

1 Technically, Apple uses contract manufacturers to execute the physical production, but retains a great deal of visibility and control, effectively using the contract manufacturers as “vir- tual” Apple manufacturing facilities.

Business Processes in Practice 6.1: Types of Production Processes

Regardless of the particular production process used, however, compa- nies typically employ two common production strategies, make-to-stock and make-to-order. In make-to-stock production, the production process is trig- gered by a need to increase inventory. Inventory is typically stored in a ware- house until it is used to fulfi ll customer orders. When inventory falls below certain predefi ned levels, the make-to-stock process is initiated, even if there is no pending customer order. In contrast, under the make-to-order strategy, production is triggered by the need to fi ll a specifi c customer order. In other words, production does not begin until a customer orders a product.

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Because Apple uses a make-to-stock strategy, the company must pay extremely close attention to both its retail sales and the amount of fi nished goods inventory it has in stock in order to estimate its demand as accurately as possible. If Apple overestimates the demand for a par- ticular product, the company will be stuck with a large inventory of very expensive fi nished goods that custom- ers don’t want to buy and that will decrease in value while they sit on the shelf. Conversely, if it underesti- mates the demand for a product, customers who want to purchase the computer will be told it is out of stock. They will then have two options: place a back order and wait until the store gets resupplied with inventory, or shop for the product at a different store. Either outcome will make consumers unhappy and could result in lost sales.

In contrast, one of Apple’s major competitors— Dell—employs a make-to-order production strategy. Dell was the fi rst company in the industry to build computers only after they had received a fi rm order and thus knew exactly what product the customer wanted. Because Dell does not have many retail outlets like Apple (although it has recently tested some retail partnerships), the com- pany relies primarily on telephone and Internet sales channels for the majority of their sales. In contrast to Apple customers, then, when Dell customers place an order, they anticipate that they will have to wait a few days for the computer to be produced and delivered.

After the customer places an order, Dell typi- cally assembles the computer from raw materials it has on hand and then ships it directly to the customer. Unlike Apple, then, Dell does not need to be very con- cerned with estimating demand for its fi nished products because it knows exactly what customers want based on customer orders. However, Dell must be extremely careful in purchasing raw materials and managing its production capacity. Because its production runs are very small—sometimes one computer at a time—it must estimate its raw material needs and production scheduling based on an unknown customer demand. If Dell mismanages its production planning process, it is especially susceptible to an oversupply or undersup- ply of raw materials and shortages or idleness in pro- duction capacity. If Dell does not have suffi cient raw materials or production capacity, customers will have to wait much longer for their computers to be shipped.

Conversely, if the company has excessive raw materials or unused production capacity, it loses money.

Although Dell’s customers are accustomed to waiting a few days for their computers to arrive, they probably will be upset if their deliveries are delayed for several weeks due to a shortage of raw materials or a backlog of production orders. Alternatively, Dell’s prof- itability will suffer if its production lines are idle or its warehouses are fi lled with unused raw materials.

Both Apple and Dell have chosen a produc- tion strategy that maximizes their profi tability. Apple believes that by controlling the entire buying experi- ence through their Internet and physical stores, they can attract more customers. This strategic objective drives Apple to place a much higher emphasis on hav- ing products available in the store when a customer comes there to shop, which increases the likelihood that she or he will make a purchase. In addition, Apple realizes signifi cant cost savings through large, planned production runs and close coordination with retail sales data generated by their online and physical stores. For all these reasons, the make-to-stock production proc- ess is probably the best strategy for both Apple and its customers.

In the case of Dell, the make-to-order production process fi ts well with the company’s rapid assembly and standardized products. Dell’s customers are comfortable ordering a computer that they have never seen because they know that Dell uses high-quality, industry-standard components. They also trust Dell to ship them a fi nished computer in just a few days, and they are willing to wait for it to arrive rather than pick it up in a store.

In essence, the preferences and behaviors of each company’s customers determine, to a great extent, the production process for each company. Apple’s cus- tomers want to touch and experience the product in a retail store, whereas Dell’s customers are content to buy something over the phone or the Internet. Each company has optimized its production process to match both its specifi c set of customer requirements and its internal profi tability goals and cost structure.

Source: Adapted from Magal and Word Essentials of Business

Processes and Information Systems. John Wiley & Sons, Inc.

(2009).

The Production Process 181

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182 C H A P T E R 6 The Production Process

In Chapter 1, we introduced a simplifi ed production process. We repro- duce this process in Figure 6-1. The process is triggered by a request for pro- duction. The request is authorized, which allows the warehouse to issue the raw materials. Production uses these materials to manufacture the requested goods, which are then moved to storage.

Figure 6-1: A basic production process

In this chapter, we discuss the production process in detail. GBI utilizes a make-to-stock production strategy. Further, it employs a discrete production process to make the different types of bicycles in specifi ed quantities or lots.

We begin our discussion by identifying the master data related to the production process. We then examine the specifi c process steps in detail. We conclude by considering reporting as it relates to production. The major orga- nizational data relevant to production are client, company code, plant, and storage location. We already have discussed all of these data in previous chap- ters. Consequently, we will not cover them in this chapter.

M A S T E R D ATA The master data relevant to production are bills of material, work centers, product routings, material master, and production resource tools. Let’s look at each of these more closely.

B I L L O F M AT E R I A L S

A bill of materials (BOM) identifi es the components that are necessary to produce a material. In discreet and repetitive manufacturing, the BOM is a complete list of all the materials, both raw materials and semifi nished goods, that are needed to produce a specifi ed quantity of the material. In process industries, such as chemicals, oil and gas, and beverages, the BOM is often referred to as a formula or recipe, and it includes a list of ingredients needed to create a specifi ed quantity of the product. In this book, we will limit our discus- sion to discrete manufacturing.

A BOM is a hierarchical depiction of the materials needed to produce a fi nished good or semifi nished good (see Figure 6-2). BOMs range from very simple to very complex, depending on the material. For example, a BOM for a ball-point pen consists of only a half dozen or so materials or items.

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In contrast, the BOM for a Boeing 747 aircraft is exceedingly complex, con- taining more than 6 million materials. In addition, BOMs can be either single level or multi-level. A single-level BOM contains only one level in the hierar- chy, whereas a multi-level BOM has more than one. An aircraft, for example, may have more than 50 levels in its BOM.

BOMs in SAP ERP are defi ned as single level. However, SAP ERP can construct multi-level BOMs by nesting several single-level BOMs. Nesting refers to a hierarchy in which a component in a bill of material has its own bill of material. This structure is illustrated in Figure 6-2, where a multi-level BOM is comprised of three single-level BOMs. The BOM for the fi nished good shows three items: two semifi nished goods and one raw material. In turn, each semifi nished good has a BOM consisting of one or more raw materials. (The raw materials have no BOM and are acquired from an external source.)

Signifi cantly, a BOM is defi ned for a material at the plant level. In other words, different plants may use a different BOM to produce the same mate- rial. This is the case when some of the materials used in producing the material are different. For example, one plant may use a slightly different bolt than another plant in making a fi nished good.

Recall from Chapter 1 that GBI makes deluxe and professional tour- ing bikes. The BOM for the touring bikes (Figure 6-3) displays the materi- als required to assemble the bikes. The professional touring bikes include a professional wheel assembly made from aluminum wheels, while the deluxe touring bikes include a deluxe wheel assembly made from carbon composite wheels. The frames for both the professional and deluxe bikes are made of carbon composite material and come in three colors—red, black, and silver.

GBI also manufactures men’s and women’s off-road bikes using alumi- num frames and aluminum wheels. The frame for the men’s bikes is a differ- ent size than the frame for the women’s bikes. The BOM for off-road bikes is shown in Figure 6-4.

Figure 6-3 and Figure 6-4 represent multi-level BOMs. In both fi gures, the wheel assembly is a semifi nished good that is manufactured using three raw materials. The other component materials are all raw materials. Should

Figure 6-2: Single- and multi-level BOMs

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184 C H A P T E R 6 The Production Process

Figure 6-3: Bill of materials for touring bikes

Figure 6-4: Bill of materials for off-road bikes

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Master Data 185

GBI decide to produce the pedal assembly rather than purchase it, then the BOM will be modifi ed to indicate that the pedal assembly is a semifi nished good. In addition, the raw materials needed to make the pedal assembly will be included as a second level in the BOM.

Figure 6-5 identifi es the data contained in a bill of material. The BOM consists of a header section and an items section. The header section includes data that apply to the entire BOM, such as the material number, descrip- tion, plant, usage, validity, status, and base quantity. The material number in the header identifi es the fi nished good or semifi nished good described in the BOM. The BOM is valid from the date specifi ed in the header. A validity date is appropriate when changes are planned for a future date, for example, due to changes in the product design. In such cases the current BOM is valid until the new BOM goes into effect. Because a BOM can be used in several processes, the usage fi eld in the header identifi es the purpose for which the BOM can be used. For example, the BOM in Figure 6-5 displays a usage code of 1, meaning that the BOM is to be used in production. Other purposes for which BOMs are used are engineering, sales and distribution, and plant maintenance.

Going further, regardless of the specifi c usage, a BOM’s status can be active or inactive. An active BOM can be used in the production of a material; an inactive BOM cannot. Finally, the base quantity indicates the quantity of goods that will be produced by the materials specifi ed in the BOM items sec- tion. For instance, the BOM illustrated in Figure 6-5 identifi es the materials needed to make one bike.

The items section of a BOM identifi es all the materials needed to make the fi nished good or semi-fi nished good identifi ed in the header. Figure 6-5 includes some of the items in the BOM for the off-road bike. Examples of data for each item are material number, description, quantity, and item category. Material number and description identify the necessary materials. The quan- tity specifi es how many of these materials are needed. For example, 2 wheel assemblies are needed for each bike. A BOM can contain different types of items, which are distinguished by the item category. The item category iden- tifi es the type of material and infl uences how the material is to be used in the

Figure 6-5: BOM structure

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186 C H A P T E R 6 The Production Process

BOM. Common item categories are stock item, nonstock item, variable-size item, text item, document item, class item, and intra material.

• A stock item (L) is a material for which stock or inventory is main- tained; therefore, it must have a material master.

• A nonstock item (N) is one for which inventory is not maintained; therefore, it does not need a material master defi ned.

• If a material is available in different sizes, such as sheet metal or fabric, then the different sizes can be represented by the same material number. In these cases the item category used is variable- size item (R), and data concerning the needed size or dimension must be specifi ed in the BOM.

• A text item (T) is used to include notes and comments within the BOM. Notes may explain how to use the material or identify any unusual assembly requirements.

• A document item (D) is used to include documents such as engi- neering drawings, assembly instructions, and photographs.

• Class items (K) are used in variant BOMs to identify a class or group of items. Companies use variant BOMs to create multiple versions or variants of the same material rather than prepare a separate BOM for each version. A class item is a placeholder for an actual item that must be specifi ed when the BOM is used. For example, GBI could use a class item to identify the different colors of frames used in the touring bikes. The specifi c color frame would then be selected either during production for a production BOM or during sales for a sales BOM.

• Intra material (M), or phantom items, are a logically grouped set of materials that could collectively be considered as a single material. The material is created temporarily during production, between two subprocesses, and is immediately consumed as production con- tinues. In the case of GBI, a bicycle always will need two wheels — a front wheel and a rear wheel. The two wheels could be logically considered a set, so GBI could use a phantom item to represent this set.

The bill of materials for the Boeing 747 includes more than 6 million parts, half of which are small fasteners or rivets. A 747-400 contains 171 miles (274 km) of wiring and 5 miles (8 km) of tubing. The body of a 747-400 con- sists of 147,000 pounds (66,150 kg) of high-strength alu- minum. To make things even more complex, all those parts are subject to intensive quality and reliability

checks, and they are inspected multiple times before, during, and after they are installed. In addition, Boeing must stock more than 6.5 million spare parts in eight global distribution centers for airlines that need to make repairs to aircraft that are currently in operation.

Source: Boeing Corp.

Business Processes in Practice 6.3: How Large Can a BOM Be?

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Demo 6.1: Review BOM for bike and wheel assembly

W O R K C E N T E R

A work center is a location where value-added work needed to produce a material is carried out. It is where specifi c operations, such as drilling, assem- bly, and painting, are conducted. A work center can also be a machine or a group of machines; an entire production line; a work area, such as an assembly area; or a person or group of people who are responsible for completing opera- tions in different parts of the plant. Regardless of its composition, however, it is a resource that can be used for a variety of purposes and for multiple pro- cesses. For the purposes of this chapter, we defi ne a work center as a resource used to produce a material.

Figure 6-6 illustrates the data associated with a work center. The basic data section includes the name and description of the work center and the person or people responsible for maintaining the master data for the center. It also identifi es which task lists can use the work center. A task list is simply a list of operations that are required to accomplish a task. Operations are the specifi c tasks that must be completed, such as drilling, cutting, painting, inspecting, and assembling. Different types of task lists are associated with different processes.

In production a task list takes the form of a product routing or a master recipe. We discuss product routings later in this chapter because they are used in discrete and repetitive manufacturing. Master recipes are used in process

Figure 6-6: Work center data

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188 C H A P T E R 6 The Production Process

manufacturing and therefore are not discussed in this chapter. There are many other types of task lists. We will discuss some of them in later chapters in the context of other processes. Others are beyond the scope of this book. Finally, standard value keys are used to assign standard or planned values for the normal time elements—that is, the activities that consume time—associated with the work center. Typical time elements are setup time, processing time (machine and labor), and teardown time. The keys utilize specifi c formulas to calculate how much time must be allotted for each of these elements.

Work center data also include default values for operations performed at the work center. Examples of default values are control keys and wage data. Control keys specify how an operation or a suboperation is scheduled, how costs will be calculated, and how operations will be confi rmed once they are completed in the work center. For example, a control key can indicate that confi rmation of an operation is required and must be printed before the next operation can be performed. Wage data are associated with processes in human capital management, such as payroll.

Available capacity defi nes how much work can be performed at the work center during a specifi ed time. A work center can include more than one resource or capacity, such as labor and machine. In this case, the scheduling basis determines the specifi c capacity to be utilized for production.

A work center is associated with a cost center. Recall from Chapter 3 that a cost center is a container or bucket that accumulates costs that are then allo- cated or further processed by management accounting processes. Costs associ- ated with operations completed in a work center are calculated using formulas that utilize the costs and the standard values associated with each activity type (e.g., setup, labor, and machine).

GBI has three work centers, as illustrated in Figure 6-7 and Figure 6-8. Figure 6-7 shows the layout of the production facility in Dallas. It identifi es the three work centers (ASSY1000, INSP1000, and PACK1000) and the four storage locations (RM00, FG00, SF00, and MI00). All three work centers are associ- ated with one cost center, the production cost center (NAPR1000).

Figure 6-8 provides details of the three work centers. ASSY1000 is the assembly work center. It has 8 hours of labor capacity. Labor is used to complete three operations—stage or prepare materials, construct the wheel assembly, and assemble the fi nished bike. INSP1000 is the inspection work center. Here the bike is placed on a machine that tests its suspension and bal- ance. Meanwhile, the employee visually inspects the entire bike, checking for defects. In contrast to the assembly work center, then, the inspection work center utilizes both labor and machine capacity. Once testing has been com- pleted, the bike is disassembled into the frame assembly and the wheel assem- blies. These components are then packed separately in the fi nal work center (PACK1000), which, like assembly, involves only labor. The fi nal assembly is typically completed at the retailer’s location or by the customer after he or she purchases the bike.

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Master Data 189

Figure 6-7: GBI Dallas production facility

Figure 6-8: GBI work centers

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190 C H A P T E R 6 The Production Process

Although it might not appear to be simple, bicycle assembly is actually quite straightforward compared to other types of manufactured goods. Imagine the com- plexity of the work centers and tasks involved with assembling a Boeing 757 (Figure 6-9). Aircraft assembly

is so complex and the fi nished good is so large that the work centers actually move from one aircraft to another during assembly, in contrast to the stationary work cent- ers used in our GBI example. Notice the mobile work centers (carts and mobile machines) in the fi gure.

Business Processes in Practice 6.4: Aircraft Work Centers

Figure 6-9: Assembling a Boeing 757. ©Kevin Horan/Getty Images, Inc.

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Master Data 191

Demo 6.2: Review GBI work centers

P R O D U C T R O U T I N G S

In our discussion of work centers we defi ned a product routing as a list of operations that a company must perform to produce a material (Figure 6-10). In addition, the product routing specifi es the sequence in which these opera- tions must be carried out, the work center where they are to be performed, and the time needed to complete them. It can also list additional resources, known as production resource tools, which the company needs to complete the operations.

Figure 6-10: Structure of a routing

The left side of Figure 6-10 illustrates the general structure of a routing. Like a BOM, a routing includes a header that contains data applicable to the entire routing, such as status and validity. The routing shows two sequences, each of which identifi es the required operations and the order in which they are performed. All operations in a routing must be performed in some type of

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192 C H A P T E R 6 The Production Process

sequence, and many operations can be completed in a variety of sequences. This routing, for example, displays a standard sequence, in which Operation 1 is performed prior to Operation 2, and an alternate sequence, in which Operation 2 is performed fi rst.

The right side of Figure 6-10 shows the routing for GBI’s deluxe touring bike. The routing indicates that operations needed to produce this bike can be performed in only one possible (standard) sequence. For example, the seat is attached to the frame fi rst, followed by the handle bar.

GBI uses prebuilt components such as the brake kit and pedal assembly that it purchases from vendors. If GBI were to manufacture these two com- ponents in-house, then it would have to assemble them from raw materials before it attached them to the bike frame. Signifi cantly, GBI would not have to build either of these components before the other. Instead, it could build them simultaneously, or in parallel. This process is referred to as parallel sequences. As with alternate sequences, parallel sequences are included in the routing.

Given all these options, when and how does a company decide which approach to utilize? The answer is that it selects the appropriate sequence when it actually carries out the production. It bases this decision on factors such as the desired quantities of the product and the equipment and other resources that are available at the time of production.

As we discussed in the previous section, operations are completed in work centers. Thus, a work center must be assigned to an operation. Recall that work centers have standard values keys and formulas to calculate the time needed to complete the steps in each operation. There are three basic time elements in the production process: setup time, processing time, and tear- down time. Setup time involves confi guring the work center and equipment. Processing time can refer both to machine time, which involves the use of a machine for an operation, and to labor time, which is the human work needed to perform the operation. Finally, during teardown time, workers return the machines to their original state—that is, before setup.

Going further, these time elements can be either fi xed or variable. Fixed time elements are independent of how many units of the material are produced, whereas variable time elements represent the time needed to produce one unit of the material. For example, material staging, the operation whereby the component materials are moved from storage and prepared for use, takes the same amount of time for 10 bikes as for 15 bikes. In contrast, the time needed to build the wheel assembly depends on how many assemblies are being pro- duced. Figure 6-11 illustrates the relationship between Operation 80 (test bike) and INSP1000, the inspection work center. It indicates the setup, machine, and labor times for the operation. Recall that INSP1000 has two capacities—machine and labor (001 and 002 in the fi gure). When more than one capacity is available in a work center, the company uses the scheduling basis to determine which capacity it will utilize to complete the production order.

Figure 6-12 illustrates the routing for GBI’s deluxe wheel assembly. The fi gure identifi es the required operations, the work center where the operation will be completed, the times associated with the operation, and the compo- nents assigned to each operation. The wheel assembly has three operations— stage material, assemble components into wheel assemblies, and move to storage—all of which are completed in work center ASSY1000. Wheels are assembled in batches or lots of 50. It takes 5 minutes to stage the materials for 50 wheels, 3 minutes to assemble each wheel, and another 5 minutes to move

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Master Data 193

Figure 6-11: Routings and work centers

Figure 6-12: Routing for deluxe touring wheel assembly

the 50 wheels assemblies into storage. Because these operations are performed manually, they do not involve any setup time. Consequently, all the time spent on these operations is labor time. Overall, it takes 160 minutes (5 � 50*3 � 5) to assemble 50 wheels, an average of 3.2 minutes per wheel.

Figure 6-13 presents the routing for the deluxe touring bike. In con- trast to the wheel assembly, this routing includes 11 steps. Further, the opera- tions are completed in three different work centers: ASSY1000, INSP1000, and PACK1000. Finally, one operation—#80, Test bike—includes a setup time of 2 minutes. This is the amount of time it takes to place the fully assembled bike

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194 C H A P T E R 6 The Production Process

on the testing machine. Bikes are produced in batches of 10 or 15. For both quantities the material staging operation and move to storage step opera- tion take the same amount of time (10 minutes and 5 minutes, respectively). The other times in the fi gure are per bike. Thus, it takes 305 minutes2 to make 10 bikes—an average of 30.5 minutes per bike—and 450 minutes to make 15 bikes—an average of 30 minutes. For planning purposes, GBI uses the following data:

• Wheel assembly: 3 hours per 50 wheels (3.6 minutes per wheel assembly.

• Bike assembly: 5 hours per 10 bikes (30 minutes per bike)

• On the days wheels assemblies are assembled, only 10 bikes are assembled; on other days, 15 bikes are assembled

The routing indicates how to produce a specifi ed product. The BOM indicates which materials are used to manufacture that product. There is, therefore, an obvious relationship between a BOM and a routing. This relation- ship is defi ned via the component assignment, a technique that assigns compo- nents in a BOM either to a routing or to a specifi c operation within the routing.

Figure 6-13: Routing for deluxe touring bike

2 The total of variable time operations (#s 20-100) for one bike is 29 minutes. For 10 bikes it is 290 minutes and 15 bikes, it is 435 minutes. The fi xed time operations (#10 and #110) take 15 minutes regardless of quantity. Thus total time for 10 bikes � 290 � 15 and for 15 bikes � 435 � 15.

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Master Data 195

Figure 6-14 presents a component assignment that includes three opera- tions in the routing and three materials in the BOM. Material A is assigned to Operation 20, while materials B and C are assigned to Operation 30. The right side of the fi gure indicates that the materials are consumed at the beginning of the operations. Any materials that are not explicitly assigned to an operation are automatically assigned to the fi rst operation and consumed at the beginning of that operation.

Figure 6-14: Component assignment

In addition to indicating how and from which materials fi nished goods or semifi nished goods are produced, the data contained in bills of material, work centers, and routings are used to determine production capacity. Production capacity is a measure of how many units of a material a plant can produce within a given timeframe. For example, GBI’s Dallas plant can produce either 15 bikes or 10 bikes and 50 wheel assemblies per day. Figure 6-15 presents an example of a production plan for the Dallas plant, utilizing its full capacity.

Figure 6-15: Sample GBI production plan

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196 C H A P T E R 6 The Production Process

Demo 6.3: Review routing for a bike and wheel assembly

M AT E R I A L M A S T E R

We introduced the concept of the material master in Chapter 2. Recall that the material master data are grouped into different views or segments based on three factors: (1) the process that uses the materials, (2) the material type (e.g., raw materials, fi nished goods), and (3) the organizational level (e.g., differ- ent plants that use the material differently). In addition, the basic data view contains data that can be applied to all processes, material types, and orga- nizational levels. In this section we introduce two additional views relevant to production; specifi cally, material requirements planning (MRP) and work scheduling. Both MRP and work scheduling data are defi ned at the plant level. That is, they are specifi c to each plant. Although the data in these views must be defi ned in the material master to execute the production process, they are more relevant to the material planning process, which determines which mate- rials must be produced and when they must be produced. Consequently, we do not discuss the details of these data instead, we will discuss these data in the chapter on material planning (Chapter 8).

P R O D U C T I O N R E S O U R C E T O O L S

The fi nal master data relevant to production are production resource tools (PRT). PRTs are movable resources that are shared among different work cen- ters. Examples of PRTs are calibration or measurement instruments, jigs and fi xtures, and documents such as engineering drawings. It is not feasible or eco- nomical to keep these tools in every work center because they are not used very often. Instead, a limited number are available for use in the work centers as they are needed.

P R O C E S S In this section we will discuss the production process in detail (Figure 6-16). The process begins with a request for production that is typically triggered by another process such as fulfi llment, which needs to complete a customer order (make-to-order strategy), or material planning, which has deter- mined that the company needs to increase inventory levels (make-to-stock strategy).

The request is then authorized for production by the production supervi- sor. The next step is to release the order for production so that the materials needed to produce the bikes are issued from storage. Very often, production involves the use of external systems, such as plant data collection (PDC) sys- tems, that utilize data from the ERP system to execute production on the shop fl oor. In such cases, data about the order are transmitted to the external system. After the fi nished goods have been produced, the actual production is confi rmed in the system, signaling that the steps required to manufacture the materials have been completed. The materials are then moved to stor- age, and the system reports that they are now available for consumption by other processes (e.g., fulfi llment). In addition, several activities are performed

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Process 197

Figure 6-16: The production process

periodically during the process, including overhead allocation, work in process determination, and order settlement. Now that we have a general understand- ing of the various process steps involved with production, we examine these steps in terms of triggers, data, tasks, and outcomes.

Our discussion will use the following make-to-stock GBI scenario. The inventory for the men’s off-road bike (ORMN1000) has fallen below its mini- mum level. Consequently, GBI must produce more of this model. Going further, the company has determined that the optimum quantity for a single production run is 25 bikes. We will assume that the raw materials needed to make these bikes and the needed capacity in the various work centers are both available.

R E Q U E S T P R O D U C T I O N

Figure 6-17 illustrates the elements of the request production step. A request for production is triggered by a need to produce materials. Typically, this trigger is a result of activity in another process. Consider the two production strategies

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198 C H A P T E R 6 The Production Process

discussed earlier in this chapter. If the company has adopted a make-to-order strategy, then the receipt of a customer order (fulfi llment process) will trigger the need to produce the materials. If the company has adopted a make-to- stock strategy, then production is triggered by the material planning process, which is concerned with ensuring that suffi cient quantities of materials are always available. Other processes may also trigger production. For example, project management, which involves the building of complex products such as an aircraft, may trigger the production of a component part. Although requests for production are typically triggered from another process, they can also be created manually when there is a need to produce materials independent of other requirements. In our GBI scenario, the request for production is created manually based on a review of inventory levels.

Regardless of the source of the trigger, the outcome of this step is a planned order, which is a formal request for production that indicates what materials are needed, how many units are needed, and when they are needed. It is similar to a purchase requisition (discussed in Chapter 4) in that it does not become a commitment until someone acts on the request.

Data

Various organizational data, master data, and user-specifi ed data are included in a planned order. The key data are listed in Figure 6-18. The individual mak- ing the request specifi es which materials are needed, how many, and when they are needed. At this point the ERP system automatically incorporates both the master data related to the materials and the bill of material in the planned order. The system uses these data, along with confi guration options specifi ed in the system, to calculate additional data, such as order dates and material availability. If the planned order was created by another process, then the user- specifi ed data explained above are provided by the process that created the planned order.

Tasks

The only task in this step is to create the planned order. Planned orders remain in the system until they are acted upon by the authorized person in the com- pany, typically the production manager. The production manager can reject the order, modify it, combine it with other orders, or authorize the production. For our purposes we will assume that he or she authorizes the production. We discuss authorizing production in the next section.

Figure 6-17: Elements of the request production step

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Process 199

Figure 6-18: Data in a planned order

Outcomes

The obvious outcome of the request production step is a planned order, which is a transaction document. Because this step generates no fi nancial impact, no FI or CO documents are created. Likewise, because there is no movement of materials, no material documents are created. In our example, the planned order will indicate a request to produce 25 men’s off-road bikes (ORMN1000) in the Dallas plant (DL00).

Demo 6.4: Create a planned order

A U T H O R I Z E P R O D U C T I O N

Whereas a planned order is simply a request, a production order, which is created in the authorize production step, represents an actual commitment to produce a specifi c quantity of materials by a certain date. Numerous resources, such as materials, work centers, and PRTs, are committed to producing the materials specifi ed in the production order. A production order is typically cre- ated by converting a planned order. However, it can also be generated directly without using a planned order. This process is similar to creating a purchase order without reference to a purchase requisition or creating a sales order without reference to a quotation. Figure 6-19 displays the key elements of the authorize production step.

Data

Figure 6-20 illustrates the key data needed to create a production order. Note that much of this information is also included in the planned order. User input is generally needed only if a planned order is not used as a reference or if the data in the planned order, such as quantity and dates, must be changed.

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200 C H A P T E R 6 The Production Process

Figure 6-19: Elements of the authorize production step

Figure 6-20: Data in a production order

Typically, a production order includes references to a BOM, routing, work centers, and PRTs to be used in production. As explained earlier in this chapter, a BOM identifi es the materials or components to be used in produc- tion, and a routing identifi es the operations needed to produce the material. Work centers are where the operations are to be performed; they defi ne the capacity requirements for the order.

Figure 6-21 illustrates the structure of a production order. The data contained in a production order are quite extensive. Companies use these data to plan, schedule, and execute the production of the specifi ed material. Specifi cally, a production order includes the following data.

• The order header includes basic data such as a unique order num- ber, the plant where the material is to be produced, the person (scheduler) responsible for scheduling production, and the status of the order. The status is signifi cant because it determines which steps in the process can be completed. When the order is initially saved, the status is “created” (CRTD). As the order is executed, the order status is changed to refl ect its current state. Other produc- tion order statuses are partially released (PREL), released (REL),

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Process 201

partially confi rmed (PCNF), confi rmed (CNF), partially delivered (PDLV), and delivered (DLV).

• A production order includes the specifi c operations needed to pro- duce the material, along with data on the designated work centers. It also identifi es the specifi c sequences for the operations. Note that a production order must include at least one operation.

• Capacity splits are used to determine how the work to be per- formed is distributed or “split” among the machines and/or people involved in producing the material.

• The production order identifi es the components needed to produce the specifi ed quantity of the material. Typically, the components are obtained from the BOM. However, they can be added or adjusted manually, as needed.

• The PRTs to complete one or more operations are identifi ed.

• As the name suggests, trigger points initiate or “trigger” some activ- ity or function. An example of a trigger point is the completion of a specifi ed operation. When this occurs, subsequent operations in the routing are released for execution, or some activity in another process is triggered.

• A production order includes preliminary estimates for various cost components, such as material and overhead. These costs are asso- ciated with the appropriate accounts in the general ledger, such as material consumption accounts. As production is executed, the actual costs are also included as data in the production order along with the preliminary cost estimates. These data are used in product costing, which is a process in management accounting.

• After the production order has been completed, the costs accumulated in the production order must be settled. During settlement the actual costs incurred are allocated to cost objects based on specifi ed settle- ment rules. We discuss settlement in more detail later in this chapter.

Figure 6-21: Structure of a production order

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202 C H A P T E R 6 The Production Process

• A production order may contain references to various documents. For example, the BOM may include a document item, or a PRT may refer to a document. In these cases, the production order includes links to the documents in the document management sys- tem (DMS). Using the DMS ensures that the most current versions of the documents are employed during production.

• When the production order has been executed and the materials have been created, the materials actually produced are recorded in the production order via confi rmations. We discuss confi rmations in greater detail later in this chapter.

Tasks

As we discussed earlier, the principal task in the authorize production step is to create a production order. There are several possible scenarios for performing this task. We have already seen that a production order can be created with or without reference to a planned order. Further, planned orders can be converted individually, collectively, or partially. With individual conversion, one planned order is converted to one production order. In collective conversion, multiple planned orders are processed at once, that is, collectively. The outcome can be one or multiple production orders. Finally in partial conversion, only a portion of the quantities listed in the planned order are included in the production order. Partial conversion often generates multiple production orders, each one refl ecting a partial quantity of the material in the planned order.

Another task in creating a production order is to select the appropriate master data, such as BOM, routing, and PRTs. Recall that a routing identi- fi es the operations needed to produce the material. In some cases the ERP system automatically selects an appropriate routing. The system then transfers the operations from the selected routing into the production order. A routing can also be selected manually. In these cases the system displays the available task lists or routings for the material, and the person creating the production order decides which one is most appropriate. Signifi cantly, it is possible to cre- ate a production order without specifying a routing. In this case, the system automatically generates a default operation, which is incorporated into the production order.

Recall that the BOM identifi es the components needed to produce the material. Once again, the system automatically selects a suitable BOM and transfers the components into the production order. If a BOM is not available, then the components must be added to the production order manually.

Now consider a scenario in which (1) the production order is created with reference to a planned order and (2) the planned order includes the BOM and the routing data. In this case the system automatically transfers these data into the production order. Note that the actual BOM and rout- ing data are not retrieved again from the material master. Rather, the data pertaining to the components and operations are copied directly from the planned order into the production order. Further, once these data have been incorporated into the production order, they are not automatically retrieved from the material master again, even when either the BOM or the routing changes. To refl ect changes to the BOM and routing data, the system must be manually instructed to re-read or retrieve these data.

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Process 203

A fi nal task is to assign components and PRTs to specifi c operations. For example, the routing for the deluxe touring bike illustrated earlier in Figure 6-13 indicates that different components are assigned to different operations. Typically, components are automatically assigned by the ERP system, based on the data in the routing. However, they can also be manually assigned or reassigned to specifi c operations as needed. Any component or PRT that is not assigned to a specifi c operation is automatically assigned to the fi rst operation.

Outcomes

The creation of a production order generates several outcomes, including scheduling, availability checks, reservations, preliminary costing, and creating necessary purchase requisitions. The scheduling function calculates the dates when the various operations are to be performed and the capacities that are needed in the work centers. The scheduling function uses data from the pro- duction order (e.g., quantity and dates) and work center parameters previously discussed (e.g., control keys and standard value keys) to complete this task. If the scheduling data in the production order (e.g., dates) are subsequently changed, the system can be confi gured to automatically reschedule the order.

In addition, the system performs an availability check to determine whether the resources (components, PRTs, and capacity) needed to execute the production order are available. If they are, then the system creates mate- rial and machine reservations to set aside the necessary resources so they can- not be used for other purposes. Unlike scheduling, availability checks usually are not repeated automatically if the production order is changed. Rather, the system must be instructed manually to perform this check.

Finally, the preliminary cost estimates for the production order are calcu- lated. Typical costs include direct costs, such as materials and production, and indirect costs in the form of overhead. Material costs are based on the costs of the components assigned to the production order; these costs are maintained in the material master for each material. Production costs are based on data in the work center such as activity types and formulas that identify which activi- ties (e.g., labor and setup) are required and in what quantities.

If the production order requires nonstock items, such as consumable materials, then the system automatically generates purchase requisitions to acquire them. We discussed the purchase of consumable materials in Chapter 3, in the sections on account assignment categories. Recall that to purchase con- sumable materials, an account assignment category is required in the purchase order. In the context of production, the appropriate account assignment cat- egory is production order (F), and the production order number is included in the purchase requisition. The production order acts as a cost object. Recall from Chapter 3 that a cost object is something that absorbs costs or to which costs can be allocated.

In addition, production sometimes involves operations that are per- formed by another company. For example, a component might have to be painted or polished by a business that specializes in these tasks. For these operations the company issues a purchase requisition. The requisition will indicate sub contracting as the item category (see Chapter 4 for a discussion of item categories). Once again, the production order is included in the requisi- tion as the cost object.

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204 C H A P T E R 6 The Production Process

In our example, GBI creates a production order for the requested 25 bikes. When the order is saved, the system reserves the necessary materials as well as capacity in the three work centers in the Dallas plant, based on the BOM and routing for the bikes. The production order also includes an initial cost estimate. Figure 6-22 displays the cost estimates for the materials needed to build one bike. For each bike, raw materials are expected to cost $350, wheel assemblies (semifi nished goods) $230, and labor $25. Thus, the estimated cost for the production order is $15,125. (For the sake of simplicity, we will include only material and labor costs in our example and will not take into account other direct costs [e.g., machine and setup] or indirect overhead costs.) When the production order is created, these estimates are copied to the produc- tion order (Figure 6-23). The other columns in the fi gure—actual, target, and variance—will be discussed in later steps in the production process.

Figure 6-22: Production cost estimates for men’s off-road bike

Figure 6-23: Cost estimates in a production order

Demo 6.5: Create a production order

O R D E R R E L E A S E

An order status of created limits the process steps that can be executed. For example, goods movements and confi rmations cannot be performed. An order must be released for production before subsequent steps can be carried out. The system can be confi gured to release an order automatically as soon as it is created. However, if the company needs time to verify the order or to prepare for production, then the order remains in the created status until it is ready for release. In this case, the order must be released manually. Figure 6-24 diagrams the elements of the order release step.

Data

The data that are required to release an order are the order number(s) and system parameters that determine which steps are performed automatically and which ones require manual interventions.

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Process 205

Tasks

A production order can be released at either the header level or the operations level. This decision is also determined by the system’s confi guration. When the order is released at the header level, all operations are also released. When release occurs at the operations level, however, only certain operations are affected. These operations have the released status, and the order itself has a partially released status. The remaining operations can be released either manually as needed or automatically, based on trigger points. In our GBI example, the order is released at the header level, meaning that all operations can proceed.

Recall that the BOM and routing data are not automatically reentered into the production order if they are changed after the order is created. Instead, the system must be manually instructed to reenter these data. However, if the BOM or routing data are reentered into the production order after the order has been released, then the order status reverts to created, and the order must be re-released.

Production orders can be released individually or collectively. Several orders with similar characteristics, such as material, location (plant), and dates, can be selected and released together.

Outcomes

When a production order is released for production, subsequent steps identi- fi ed in Figure 6-16 can be executed. In addition, shop fl oor papers that are needed to execute the steps in the work center can be printed. Examples of shop fl oor papers are material withdrawal slips, which are used to obtain the materials needed for production; time tickets, used to record the amount of time required to complete various operations; and operations lists, which spec- ify the operations required to produce the material. Printing shop papers is another task that can be automated. In addition, the SAP ERP system can directly communicate with external shop fl oor control systems or PDC systems that automate the exchange of data between the SAP ERP system and other systems that control physical activity on the production fl oor and work centers.

G O O D S I S S U E

The next step in the process is goods issue, in which materials or components are issued to the production order from storage. Figure 6-25 illustrates the ele- ments of the goods issue step. The trigger is the release of the production order. The data, tasks, and outcomes of the goods issue step are the focus of this section.

Figure 6-24: Elements of the order release step

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206 C H A P T E R 6 The Production Process

Data

The data needed to complete the goods issue step (Figure 6-26) are the pro- duction order number, data about the materials to be issued, organizational data regarding the locations involved, and user input.

Figure 6-25: Elements of the goods issue step

Figure 6-26: Data in a goods issue step

Essentially the system must know which materials or components are to be issued, the desired quantities, and the operations to which they are assigned. Recall that when a production order is created, the materials required for production are reserved. At this point the only materials that can be issued are those that have been (1) included in the reservations and (2) assigned to

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Process 207

operations that have been released. The production order includes much of the data related to the goods issue. User input specifi es the actual materials and quantities issued. The materials, quantities, and location (plant, storage loca- tion) can be changed as needed during this step.

Tasks

The principal task in the goods issue step is to issue materials from storage to the production order. An additional step, material staging, is sometimes neces- sary if materials must be prepared for use.

Many companies do not explicitly track the issue of materials to each production order. Instead, they employ backflushing, a technique that auto- matically records the goods issue when the order is confi rmed. Thus, the mate- rials issued are not recorded at the time they are withdrawn from inventory. Consequently, there is a time lag between the actual issue of the materials and the recording of the issue in the ERP system. Nevertheless, many companies prefer this technique because it eliminates a step and can make the production process more effi cient. Backfl ushing can be specifi ed in the material master, routing, or work center data.

Outcomes

There are several signifi cant consequences of a goods issue to a production order.

• The material master is updated to refl ect a reduction in the quan- tity on hand and the inventory value of the material issued.

• General ledger accounts are updated. Specifi cally, the relevant material consumption account(s) and inventory account(s) are updated to refl ect an increase in consumption and a reduction in inventory.

• Material reservations are updated. Specifi cally, reservation quanti- ties are reduced by the quantity of materials issued.

• Because this step involves a goods movement, a material document is created to record the data associated with the movement.

• Because the general ledger accounts are affected, an FI document is created to record fi nancial accounting data.

• Actual costs associated with material consumption are calculated and added to the production order. Recall that the production order is a cost object and serves as a collector of costs incurred during production. During the goods issue step, material costs are debited to the production order. A corresponding management accounting document is created.

• A goods issue document that notes the materials and quantities issued can be created, although it is not required. This document is included with other shop papers that have already been printed, and it serves as a record of which goods were issued. Note that a goods issue document is not the same as a material document. It is used when paper records of the process are maintained.

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208 C H A P T E R 6 The Production Process

In our example, the quantities in the material master for all the com- ponent materials are reduced by the quantity issued. A corresponding reduc- tion in value is also made. The raw material consumption account (720000) is debited by the total value of the raw materials issued, and a correspond- ing credit is posted to the raw material inventory account (200000). Similar postings are made to the semifi nished goods consumption account and the semifi nished goods inventory account for the wheel assemblies issued to the production order. The actual cost of raw materials needed to produce one bike is $369.50, and each wheel assembly costs $115.00. For 25 bikes, raw mate- rials cost $9,237.50, and the wheel assemblies cost $5,750. (Each bike requires 2 wheel assemblies.) Thus, the total material cost for the production order is $14,987.50 (see Figure 6-27). These material costs are also debited to the pro- duction order as actual costs.

Figure 6-27: Financial impact of a goods issue

Demo 6.6: Goods issue to production order

C O N F I R M AT I O N S

Once the materials are issued to the production order, the actual production takes place on the shop fl oor, in the work centers. When the fi nished goods have been produced, the person completing the work records a confirmation

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Process 209

of the work completed in the SAP ERP system. A confi rmation indicates how much work was completed, where it was completed (work center), and who completed it. Figure 6-28 displays the elements of the confi rmation step.

Figure 6-28: Elements of the confi rmation step

Data

The data included in a confi rmation are highlighted in Figure 6-29 and explained below.

Figure 6-29: Data in a confi rmation

• Quantities: How many goods were produced, how many were scrapped, and how many require rework.

• Operations completed: Which operations were completed, such as those involving setup and machines.

• Durations: The dates and times when the operations were started and completed, or the duration of the activities.

• Work center: The physical location in which the operations were carried out.

• Personnel data: Who completed the operations.

• Reason for variance: A reason why the confi rmed quantity is differ- ent from the planned quantity, if this is the case.

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210 C H A P T E R 6 The Production Process

Tasks

Confi rmations can be recorded for the entire order or for specifi c operations or suboperations. When a confi rmation is recorded for the entire order, then all operations in the order are automatically confi rmed. Confi rmations at the operations level can be recorded in several ways, as explained below.

• Time event confi rmations record setup, processing, and teardown times. Confi rmations can be recorded for both machine time and labor time.

• Time ticket confi rmations record confi rmations periodically. An operation can be either partially or fully confi rmed. Partial confi r- mations consist of data accumulated since the previous confi rma- tion. Consider, for example, a production order in which 30 units of a material are to be processed. The work center employee decides to enter two confi rmations. If the fi rst confi rmation is for 20 units, then the second one will refl ect the quantity subsequently pro- duced, that is, 10 units.

• Collective and fast entry confi rmations confi rm multiple operations at the same time.

• In milestone confi rmation, the confi rmation of an operation auto- matically confi rms the preceding operations. Imagine, for example, that one of the operations in a sequence is an inspection operation. Those units that pass inspection are confi rmed, while the remaining units are sent for rework. In this case, the preceding operations are confi rmed for the quantity that passed inspection.

• Progress confi rmation periodically indicates the total progress of an operation at the time of the confi rmation. Revisiting our example of 30 units of a material, when using progress confi rmation, the ini- tial confi rmation will indicate 20 units, and the second will indicate 30 units.

The above discussion assumes that confi rmations are entered into the system manually. As previously stated, the production process may involve the use of external systems such as PDC systems. In such cases, the PDC system auto- matically provides the confi rmation data.

Outcomes

The obvious outcome of the confi rmation step is that the data associated with the work actually completed are recorded. In addition, the production order is updated to refl ect the quantity of materials that were produced, the activities and operations that were completed, and the dates when the work was performed. The order status is set to either completely confi rmed or partially confi rmed, depending on whether the entire order quantity was produced. In cases of partial confi rmation, the work center employees can make additional confi rmations as they produce more of the material. Because confi rmation indicates that production in one or more work centers has been completed, capacity reservations in these centers are reduced. The work centers can then be used for other purposes.

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Process 211

Recall that a work center is associated with a cost center and includes various activities, such as labor and setup. As these activities are consumed dur- ing production and the times are confi rmed in the production order (e.g., labor hours and setup hours), the costs associated with the activities are allocated to the production order, which, as previously explained, serves as an accumula- tor of costs. Note that there is no fi nancial accounting impact at this point. The FI impact occurs when the shop fl oor employees are paid (e.g., weekly). At this time the labor costs are assigned to cost centers associated with the work centers where the employees completed the work. Thus, the cost centers are accumulating labor (and other direct) costs. When a production order is con- fi rmed, the cost centers are credited, and the production order that consumed the labor is debited.

Finally, if the control keys in the last operation permit a goods receipt to be automatically recorded, then this occurs when the last operation is con- fi rmed. We discuss goods receipt in the next section.

In our example, a confi rmation is recorded for the 25 bikes. The labor costs are debited to the production order, and the cost center where the work was completed (work centers) is credited (Figure 6-30). The actual time (labor) required to build the bikes was 775 minutes. Thus, the production order is debited by $645.83, which is the total cost of labor at a previously established hourly rate of $50 (775/60 * 50). Note that the bikes took 31 minutes each to produce and therefore cost more than the planned amount. The production order has accumulated a total of $15,633.33 for material and labor consumed.

Figure 6-30: Financial impact of a confi rmation

Demo 6.7: Confi rm production

G O O D S R E C E I P T

After production has been completed and confi rmed, the materials produced are placed in fi nished goods inventory. This step is accomplished via a goods receipt against the production order. Figure 6-31 highlights the elements of the goods receipt step.

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212 C H A P T E R 6 The Production Process

Figure 6-31: Elements of a goods receipt

Demo 6.8: Goods receipt from production

Data

The data associated with a goods receipt are illustrated in Figure 6-32. The production order number, quantity received, date, and location (plant and storage location) are provided by the user based on the completed work. Organizational data associated with the location and master data associated with the material are obtained automatically by the system. The material mas- ter is used to determine which inventory account needs to be updated and how the material is to be valued (e.g., standard price or moving average price). It also indicates whether the material can be stored in the specifi ed location and whether there are any special storage requirements.

Figure 6-32: Data in a goods receipt

Tasks

The primary task in goods receipt is to physically receive the materials from the shop fl oor and place them in the appropriate storage location. If the

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Process 213

storage location employs a warehouse management (WM) system, then a transfer requirement is created to trigger additional WM steps. We discuss WM processes in Chapter 7.

Outcomes

The goods receipt step generates several signifi cant outcomes. To begin with, the quantity on hand and the value of the inventory are updated in the mate- rial master. The price control fi eld in the material master determines how the material is valued (i.e., standard price or moving average price). Appropriate general ledger accounts are also updated to refl ect the fi nancial consequences of the goods receipt. For example, the inventory account determined by the data in the material master is debited, and the manufacturing output settle- ment account is credited. If the price control in the material master is set to standard price and the actual production costs differ from this price, then this difference or variance is accounted for when the order is settled. (We discuss order settlement in the next section.) A corresponding FI document is cre- ated. The manufacturing output settlement account represents a “cost of goods manufactured” account. Other labels for this account include “plant activity account” and “factory output account.” If the price control is set to moving average price, then the material is valued at a price that is determined by the system based on how the system is confi gured. Details of this technique are beyond the scope of this book.

The postings related to our example are illustrated in Figure 6-33. Postings are based on the target cost of the production order. Recall that planned cost is the cost expected to be incurred when the planned quantity is produced. In contrast, the target cost is the cost expected to be incurred for the actual quantity produced. Note, however, that both planned costs and target costs are based on the standard cost estimates, when the price control in the mate- rial master is standard cost. In our example, the target cost is the same as the planned cost because the actual quantity produced is the same as the planned quantity. However, if the actual quantity produced had been 20 instead of 25, then the target cost would be less than the planned cost. Specifi cally, the target material cost would be $11,600, and the labor cost would be $500 (refer to Figure 6-22, which illustrates cost calculations for 25 bikes).

Figure 6-33: Financial impact of a goods receipt

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214 C H A P T E R 6 The Production Process

In our example, the target cost is the same as the planned cost, and the production order is credited by $15,125. At the same time, the fi nished goods inventory account is debited by this amount, and the manufacturing output settlement account is credited. These steps leave a balance of $508.33 in the production order. This amount, which is the difference between the debits (actual cost) and credits (target cost) in the production order, constitutes a variance. We discuss variances in the next section.

After the goods receipt step has been completed, the status of the pro- duction order is updated to either delivered or partially delivered. Like goods issue, goods receipt can be automated to save time and enhance effi ciency. In such cases the ERP system automatically records a goods receipt at the time of confi rmation.

P E R I O D I C P R O C E S S I N G

Several steps related to production are completed periodically during the process. Periodic processing is also known as period-end closing. Companies defi ne specifi c periods, such as months or quarters, when they complete certain accounting steps to update the data in fi nancial statements. Periodic process- ing includes overhead allocation, work-in-process determination, and order settlement.

The production order accumulates the direct costs associated with pro- duction. Other costs that are not directly associated with production are labeled indirect costs or overhead costs. Examples are the costs associated with the facil- ity such as utilities and maintenance, and the salaries of people, such as supervi- sors and managers, who are not directly involved in the production in the work centers. These costs are accumulated in specifi ed cost centers and are periodi- cally allocated to the production orders based on preestablished rules.

When materials are issued to production, a reduction in the inventory of these materials is recorded. However, the fi nished goods are not completed and placed in inventory until a later point in time (at the time of good receipt). During this interim period, neither the component materials nor the fi nished goods appear as inventory items in the balance sheet. Rather, they are clas- sifi ed as work-in-process (WIP) inventory. WIP is not a signifi cant issue if the production process is relatively short and the value of the materials is not high, as in the case of GBI. However, for products such as aircraft and build- ings, production can take months or even years, and the value of the inventory involved in production is quite substantial. In such cases, the materials used in production are considered WIP inventory and must be properly accounted for in the general ledger. To accomplish this task, a company will periodically calculate the value of WIP and make postings to the general ledger so that the fi nancial statements accurately refl ect the current inventory. A company can use several techniques to determine WIP. However, a discussion of these tech- niques is beyond the scope of this book.

We noted earlier that the difference between total debits and total cred- its in the production order is called a variance. Either periodically or when the production order is completed, these variances must be settled, meaning they must be posted to appropriate general ledger accounts. The manufacturing output settlement account is credited by the variance amount. Recall that this account was credited during the goods receipt step and therefore refl ects the full cost of production. An offsetting entry is made to a variance account, such as a manufacturing output settlement variance account or a price difference

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Reporting 215

account. In our example, the variance of $508.33 was settled using the accounts indicated in Figure 6-34.

C O M P L E T I O N

The fi nal step in the production process, order completion, can be viewed from both a logistics perspective (technically complete) and an accounting perspec- tive (closed). A production order is set to a technically complete (TECO) status when it is no longer necessary or possible to continue with the production. At this point no further execution of the production process steps is possible. All resource reservations that are still open are deleted. Any consequences to other processes, such as purchase requisitions for material needed for production, are also removed. The materials in the order are not expected to be produced and are no longer included in any planning. However, fi nancial postings related to the order, such as those associated with settlement, can still be made.

After a production order has been completed and settled, it is set to a sta- tus of closed (CLSD). Before this step can occur, the order must be in released or technically complete status, and it must be fully settled. After the order is closed, no further processing or fi nancial postings are possible.

Periodically, production orders are archived for record-keeping purposes and deleted from the system. Archived orders can be retrieved as needed.

R E P O RT I N G Reporting options for the production process are similar to those available for the other processes. A variety of lists, reports, and analytics are available via the production information system, which is a component of the logistics information system. Recall that work lists identify tasks to be completed, whereas online lists display documents for specifi c combinations of organizational levels and master data. Production reports can be generated to identify the status of planned orders and production orders, capacity availability and utili- zation, material consumption, and so on. The report illustrated in Figure 6-35 displays the status of component (material) utilization for several orders. Note

Figure 6-34: Financial impact of settlement

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216 C H A P T E R 6 The Production Process

that the materials have been withdrawn for order number 1000002 but not for order number 1000003. Figure 6-36 shows the operations for the same orders. It indicates that all the operations for order number 1000002 have been con- fi rmed and therefore shows start and end dates for the operations in the order. It also shows that order number 1000003 has a status of released, although the work has not yet started.

One of the most important reports in production is the stock /require- ment list (Figure 6-37), which identifi es all of the activities in the system that can potentially impact the quantity of material in inventory. Figure 6-37 shows the stock / requirements list for the deluxe touring bike (DXTR1000) in the Dallas plant (DL00). The list indicates that there are no deluxe touring bikes in inventory. It further shows that there are three independent requirements for the material. These are the rows with the abbreviation “IndReq” in the column labeled “MRP e.” We will discuss independent requirements in the material plan- ning chapter. For the purposes of this discussion, think of independent require- ments as a need to increase inventory, which is one of the triggers for production that we discussed earlier. To address this need, the company has created three planned orders (PldOrd). As these orders are processed, the stock / requirements list will indicate their current status until production has been completed. At that point, the quantity available in inventory will increase. Although not illustrated in the fi gure, a stock / requirements list also includes activities that consume the materials, such as sales orders from the fulfi llment process.

Figure 6-35: Production information system—components. Copyright SAP AG 2011

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Reporting 217

Figure 6-36: Production information systems—operations. Copyright SAP AG 2011

Figure 6-37: Stock/requirements list. Copyright SAP AG 2011

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218 C H A P T E R 6 The Production Process

Demo 6.9: Review a stock / requirements list

C H A P T E R S U M M A R Y

The production process involves the various steps and activities necessary to

manufacture or assemble fi nished goods and semifi nished goods. Organizations

utilize different manufacturing strategies depending on the type of material

being produced and the business model needed to sell those materials profi t-

ably. The two most common production strategies are make-to-stock and make-

to-order. In make-to-stock, the materials are produced and stored in inventory

for sale at a later time. In make-to-order, production occurs only after the com-

pany receives a sales order.

The most common types of production processes are discrete, repetitive,

and process manufacturing. In discrete and repetitive manufacturing, each unit

produced is distinct from other units, and the component materials from which

the unit is made can be identifi ed. In repetitive manufacturing, the same mate-

rial is produced repeatedly over an extended period of time at a relatively con-

stant rate. In discrete manufacturing, the company produces different materials

over time in batches, often alternating between materials on the same produc-

tion line.

Process manufacturing refers to the production of materials in bulk vol-

umes (liters, gallons, barrels, etc) rather than individual units. In process manu-

facturing the component materials cannot be identifi ed because they are mixed

together in the fi nal product.

The production process consists of eight key steps: request production,

authorize production, release production order, raw materials and semifi nished

goods issue, production, production confi rmation, fi nished goods receipt, and

production order completion. Each of these steps is affected by many variables

inside and outside the production process and creates or updates many docu-

ments throughout its execution.

Key master data for the production process are contained in the bill of

materials work centers, and product routings. The BOM identifi es the raw mate-

rials or semifi nished goods needed to produce one or more units of a fi nished

good. A BOM can have one level for simple goods or many levels of nested

hierarchies for more complex goods. BOMs contain detailed information on the

fi nished good as well as each of the component materials needed for production,

warehouse management, and fulfi llment.

The physical operations in the production process are carried out in work

centers. Data regarding the type of work center, the operations performed there,

and the relevant scheduling needs appear in the product routing. A product

routing contains all of the operations or tasks needed to produce a material, as

well as the sequence in which those operations must be completed. Component

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Review Questions 219

assignment ties together the materials listed in the BOM that are needed for

production, the work centers where the fi nal product will be manufactured, and

the operations in the routing that the company will use to manufacture it.

The production information system provides detailed reports to monitor

and manage the production process. Companies utilize a stock / requirements list

to view the different activities that impact the quantity of materials in inventory.

K E Y T E R M S

Backfl ushing

Bill of materials (BOM)

Component assignment

Confi rmation

Goods issue

Goods receipt

Item category

Make-to-order

Make-to-stock

Operations

Order completion

Planned order

Product routing

Production capacity

Production order

Production resource tools

Stock/requirement list

Task list

Work center

Work-in-process (WIP)

R E V I E W Q U E S T I O N S

1. Explain the function of a bill of materials in the production process.

2. What is the signifi cance of item categories in a bill of materials?

3. Explain the structure of a bill of materials.

4. What is the function of a work center in production?

5. Briefl y discuss the key data in a work center master record.

6. What is a product routing? What is it used for?

7. Explain the relationship between operations and sequences.

8. Explain the relationship between bills of materials, work centers, and product routings.

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220 C H A P T E R 6 The Production Process

9. Which material master data are relevant in production?

10. What are production resource tools?

11. Briefl y describe the steps in the production process in terms of triggers, data, tasks, and outcomes.

12. Explain the fi nancial impact of the steps in the production process.

13. What are the different production order statuses? What is the signifi cance of the order status?

14. Briefl y describe the structure of a production order.

15. What are the different options for production order confi rmations?

16. What is a stock / requirements list? What information does it provide?

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 2 2 1

2 2 1

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Discuss the four goods movements associated with inventory management.

2. Describe the organizational levels in warehouse management.

3. Analyze the master data associated with warehouse management.

4. Identify and explain the key steps in the warehouse manage- ment processes.

5. Demonstrate how inventory and warehouse management pro- cesses are integrated with other processes.

6. Effectively use SAP ® ERP to execute the key steps in the ware- house management process.

7. Extract and analyze meaningful information about the ware- house management process utilizing SAP ERP.

I n Chapter 1 we introduced inventory and warehouse management (IWM) processes, which are concerned with the storage and movement of materials within an organization. We indicated that IWM is closely related

to the procurement, fulfi llment, and production processes. Then, in Chapter 4 we introduced the underlying activity in inventory management (IM), namely, goods movement. Specifi cally, we introduced the four goods movements—goods receipt, goods issue, stock transfer, and transfer posting— as well as specifi c movement types. In our discussion of material movement in the preceding chapters, we focused on the simpler processes associated with IM. In addition, we explained that warehouse management (WM) involves processes that enable companies to manage materials more effectively using sophisticated techniques. Business Processes in Practice 7.1 illustrates how a large global enterprise, Steelcase, Inc., uses inventory and warehouse management to effi ciently move materials across various facilities.

Inventory and Warehouse

Management Processes

C H A P T E R 7C H A P T E R

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222 C H A P T E R 7 Inventory and Warehouse Management Processes

Headquartered in Grand Rapids, Michigan, Steelcase is the leading global workplace furniture manufac- turer with approximately 11,000 employees and a total revenue of approximately $2.3 billion in FY 2010. The company relies on a network of more than 650 indepen- dent and company-owned dealers to market, deliver, and install many types of offi ce furniture products (e.g., desks, chairs, and cabinets) for its customers. Steelcase has manufacturing operations dispersed throughout North America, Europe, and Asia. In North America, Steelcase has ten manufacturing plants and six regional distribution centers (RDCs). Each plant has a small warehouse to store raw materials and, temporarily, fi n- ished goods. Steelcase orders raw materials through the procurement process, which are delivered directly to the manufacturing plants. The production process con- sumes the raw materials at the manufacturing plant, after which it ships the fi nished goods to the RDCs. The RDCs manage the logistics activities of the fulfi llment process, including planning shipments, allocating and routing trucks, and consolidating, preparing, and loading shipments. The key goal of inventory and warehouse management at Steelcase is to optimize warehouse space and effi ciently execute the fulfi llment process by balanc- ing the inbound fl ow of goods to its manufacturing plants with the outbound delivery of customer shipments from the RDCs. Steelcase uses the IWM capabilities of SAP ERP extensively to monitor, assess, and manage the effi cient fl ow of goods in and out of their warehouses.

The warehouses at the manufacturing plants and at the RDCs utilize two different IWM processes to address the distinctive storing needs of raw materials

versus fi nished goods. The warehouses at the manufac- turing plants store raw materials from the procurement process until these goods are consumed in the produc- tion process. They also store fi nished goods from the production process until they are consumed by the ful- fi llment process. In the best case scenario, raw materi- als are stored at the manufacturing plant only for a few hours before they are used in production, and fi nished goods are stored only for a few hours before they are shipped to the RDCs. The RDCs receive materials from many manufacturing facilities and store those goods until a customer order has been fi lled. They then pick, pack, and ship the fi nished goods to the customer.

Each Steelcase RDC receives daily shipment fore- cast reports from the manufacturing plants. The RDCs use these reports to plan space for shipments and to manage the logistics activities of the fulfi llment pro- cess. Customer orders are typically fi lled from multiple factories, a process that requires consolidating multiple inbound deliveries into a single outbound delivery. A large RDC can process more than 100 outbound cus- tomer shipments per day, with many more inbound deliveries from the manufacturing plants arriving simultaneously. This constant fl ow of inbound and out- bound deliveries and material movements generates a very complex routing of trucks, pallet loaders, forklifts, and packing materials that are constantly moving in and around the warehouse. Steelcase orchestrates this com- plex ballet with the IWM capabilities of SAP ERP.

Source: Steelcase, Inc. Materials Planning Group

Business Processes in Practice 7.1: Inventory and Warehouse Management at Steelcase, Inc.

In this chapter we will review and elaborate on the IM-related goods movements introduced in previous chapters. We will then discuss the orga- nizational data, master data, and processes associated with WM processes in the context of the procurement, fulfi llment, and production processes. In these discussions we will also highlight the linkages between IM and WM. We will conclude with a discussion of reporting options. Immediately following the end-of-chapter material is Appendix 7A, which discusses procedures for creat- ing storage bins automatically.

I N V E N T O RY M A N A G E M E N T Figure 7-1 illustrates the four goods movements involved in inventory man- agement. We have already discussed goods receipt (indicated with a “1” in the

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Inventory Management 223

fi gure) in the context of the procurement and production processes. Similarly, we discussed goods issue (“2” in the fi gure) in the context of the fulfi llment and production processes. We also addressed stock transfers (“3”) and transfer postings (“4”) in prior chapters. In this section, we will review and extend the discussions of these goods movements. Recall that companies perform goods movements using specifi c movement types that determine what information is needed to execute the movements and which general ledger accounts will be affected by the movements.

Figure 7-1: Goods movements

The key organizational level associated with inventory management is the storage location. We initially discussed storage locations in Chapter 4, in the context of the procurement process. Recall that storage locations are asso- ciated with plants, which in turn are associated with company codes. Further, because inventory management is concerned with material movements, the material master—and, more specifi cally, the plant/data storage view of the material master—is the most relevant master data in IM. We also discussed the plant/data storage view of the material master in Chapter 4.

G O O D S R E C E I P T

A goods receipt is a movement of materials into inventory; it therefore results in an increase in inventory. Recall from Chapter 4 that a goods receipt occurs during the procurement process when a business receives raw materials and trading goods into inventory from a vendor. In addition, as we discussed in Chapter 6, a goods receipt takes place in the production process when a

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224 C H A P T E R 7 Inventory and Warehouse Management Processes

company receives fi nished goods into inventory from the shop fl oor. Both of these movements result in the creation of material and fi nancial accounting documents. Also, in both processes, when materials are received into inventory, they are placed in an appropriate storage location with an appropriate status, such as unrestricted use or in quality inspection.

The procurement and production chapters focused on a goods receipt that is generated against a purchase order and a production order, respectively. It is not uncommon, however, to record a goods receipt without reference to an order. Two scenarios in which this occurs are (1) the initial receipt of inven- tory and (2) an unplanned receipt from vendors or an unplanned return from customers. The initial receipt of inventory involves a movement type that an organization uses when an SAP ERP system is fi rst installed. This movement increases the quantity of materials in inventory and results in appropriate postings to the general ledger accounts. Unplanned receipts occur when a ref- erence document, such as a purchase order or a production order, does not exist. For example, a vendor may deliver materials free of charge (perhaps as samples), or a customer may return materials without prior arrangements. In these cases, the company uses a goods receipt, along with an appropriate movement type, to receive these materials into inventory.

G O O D S I S S U E

In contrast to a goods receipt, a goods issue results in a decrease in inven- tory. In the fulfi llment process, a goods issue indicates a shipment of fi nished goods or trading goods to a customer against a sales order. In the produc- tion process, a goods issue refl ects the issuing of raw materials or semifi nished goods to a production order. These materials are then used in the production process to create fi nished goods. Finally, a goods issue results in the creation of appropriate material, FI, and CO documents.

As in the case of a goods receipt, a goods issue can be unplanned. That is, a goods issue can occur without reference to a sales order or a produc- tion order. Some common cases in which such a goods movement occurs are issuing materials to scrap, sampling, and using the materials for internal con- sumption. When materials are no longer usable due to age or obsolescence, they are discarded or scrapped. Sampling involves testing the quality of the materials. If the testing is destructive—that is, the testing procedure ren- ders the materials unusable—or if the materials are expensive, then, rather than examine all of the materials, the company tests only a small sample. Finally, materials may be withdrawn for internal consumption, for example, for research and development. In all these cases, an appropriate movement type is required.

T R A N S F E R P O S T I N G S

Businesses use transfer postings to change the status or type of materials in stock. Recall from Chapter 4 that there are four common stock statuses that determine the usability of materials—unrestricted use, in quality inspec- tion, blocked, and in transit. Recall further that a transfer posting need not include a physical movement of materials. Figure 7-1 provides three examples of transfer postings, indicated by the number “4.”

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Inventory Management 225

A transfer posting is used in several other situations that do not necessar- ily involve a physical movement of materials. Here we consider two scenarios: material-to-material posting and consignment-to-warehouse stock posting. A material-to-material posting is used to change the material number of a mate- rial. This process is common in industries such as pharmaceuticals and chemi- cals where the characteristics of a material change over time. For example, one of the steps in the process of brewing beer is to boil and cool grains and water. This material, called wort, is combined with yeast and placed into a fermentation vessel. Once the wort is fermented, it becomes beer. Thus one material (wort) changes over time into another (beer). In addition, a company occassionally will change a material number for a material. In both cases, the company uses a transfer posting to change the material number from the old number to a new number, using an appropriate movement type.

The second scenario in which a transfer posting is not accompanied by a physical movement of materials involves vendor-owned inventory—that is, materials that are stored in the customer’s facilities although the vendor retains ownership. This arrangement is common for large companies such as Walmart. Let’s use GBI to illustrate this process. Consider a scenario in which GBI has an agreement with one of its vendors to provide GBI with raw materials on a consignment basis. In this case, when the goods receipt is posted, the quantity of materials in inventory is increased, and the status of the materials is set to consignment stock. However, GBI does not owe any money to the vendor, and the materials are not valued in GBI’s balance sheet. Thus, the goods receipt does not affect GBI’s fi nancial position. There is no impact on the ven- dor’s account, the accounts receivable reconciliation account, or the inventory account. At a later point in time, when GBI uses the raw materials in the pro- duction process, it will change the status of the materials from consignment to warehouse stock (either unrestricted use or in quality inspection). At this point there is a fi nancial impact—GBI now owes the vendor for the quantity of materials used—which is recorded in the general ledger using an appropri- ate movement type. (You might want to review our discussion of the invoice verifi cation step of the procurement process in Chapter 4.)

S T O C K T R A N S F E R S

Whereas a transfer posting need not involve an actual movement of materi- als, a stock transfer is used to physically move materials within the enterprise from one organizational level or location (e.g., a storage location in a plant) to another. A stock transfer can involve movements under three scenarios: (1) between storage locations within one plant, (2) between plants in one company code, and (3) between plants in different company codes. Figure 7-1 provides two examples. The arrow marked “3” in the middle of the fi gure illustrates a stock transfer between two plants (A and B). Although not indicated in the fi gure, the plants may be in the same company code or in different company codes. The arrow marked “3” near the bottom right part of the fi gure illustrates a transfer between two storage locations in the same plant.

Regardless of the organizational levels involved, three options are avail- able for moving materials: using a one-step procedure, a two-step procedure, and a stock transport order. We discuss stock transport orders at the end of this section. The one-step and two-step procedures are illustrated in Figure 7-2.

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226 C H A P T E R 7 Inventory and Warehouse Management Processes

Material movements consist of two tasks: issue and receipt. Issue refers to removing the materials from storage at the supplying or sending location, and receipt involves placing them into storage at the receiving or destination location. In the one-step procedure, as the name implies, both tasks are accom- plished in a single step. Consequently, a decrease in quantity at the supplying location and an increase at the receiving location are recorded simultaneously. This strategy is appropriate when the two locations are physically close to each other and there is no signifi cant time lag between issue and receipt.

By contrast, in a two-step procedure the two tasks are completed in separate steps. The fi rst step (issue) occurs when the materials are removed from storage. At this time the quantity of inventory is reduced at the supply- ing location and simultaneously increased by the same amount at the destina- tion location. However, because the materials do not arrive immediately at the destination location, they are placed in the in-transit stock status at this location. Later, when they are physically received at the destination location, a second step (receipt) changes their status from in transit to unrestricted use (or another sta- tus). Companies utilize the two-step movement when there is a time lag between the two steps, for example, when the locations are geographically separated by distance. The in-transit status alerts the destination location that materials are due to be received. Another situation in which the two-step movement is used is when the same person does not have authorization to make changes at both locations. Signifi cantly, although stock transfers and transfer postings are conceptually different, they are both accomplished via a transfer posting in SAP ERP. The distinction is in the specifi c movement type that is used.

As in any goods movement, a material document is created during both the one-step and two-step procedures. In the one-step procedure, one mate- rial document is created. This document contains two line items for each material moved, one for the issue at the supplying location and one for the receipt at the receiving location. During the two-step procedure, two material

Figure 7-2: One-step and two-step procedures

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Inventory Management 227

documents are created, one at the time of issue and one at the time of receipt. The material document created during the fi rst step includes two line items for each material moved, one for the issue and one for receipt into in-transit status. The material document created at the time of the second step has only one line item for each material moved because the movement (from in transit to unrestricted use) occurs only at the receiving location.

Whether there is a fi nancial accounting impact (and, therefore, FI doc- uments are created) depends on the organizational levels involved in the movement. Three combinations of organization levels are possible: storage location-to-storage location, plant-to-plant, and company code-to-company code. We discuss these next.

Storage Location-to-Storage Location Transfer

A stock transfer between two storage locations within the same plant is referred to as a storage location-to-storage location transfer. There are several reasons for moving materials within the same plant. In some cases, materials received from a vendor or from production are initially stored in a temporary staging area and then moved to a more permanent location at a later date. The staging area is designated as a storage location, so the move- ment from this location to the permanent location is accomplished via a stock transfer. Another possible scenario is when all materials received from a ven- dor must be inspected for quality before being placed in their permanent loca- tions. These materials are initially placed in the location where the inspection is performed. Like the staging area just discussed, this inspection area is des- ignated as a storage location. When the inspection is completed, the company uses a stock transfer to move the materials to the more permanent location.

A transfer within a plant can be accomplished via a one-step or a two- step procedure, as illustrated in Figure 7-3. The numbers on the arrows indicate specifi c movement types. Note that in the one-step procedure, the materials can be in any stock status in the supplying location and can be moved into any stock status in the receiving location. In contrast, a two-step procedure is possible only when the materials are in unrestricted use at the supplying location. Moreover, the materials can be received only into unrestricted use. Finally, as explained earlier, when the fi rst step (issue) is posted, the quantity in unrestricted use in the supplying location is reduced, and a corresponding increase is noted in the receiving location. However, the stock at the receiving location has a status of in transit. When the materials are physically received, their status is changed to unrestricted use.

Because materials are typically valued at the plant level rather than the storage location level, a transfer between storage locations in the same plant does not affect valuation. Therefore, no FI document is created. This observa- tion is true when all quantities of the same materials are valued in the same way. In some cases, however, different quantities of the same material are valued differently. For example, materials purchased from different vendors are val- ued differently, and materials produced in house are valued differently than those purchased externally. When materials are valued differently, through a practice known as split valuation, the company maintains different material accounts for each valuation type. If the material being moved is split-valued and the valuation type changes as a result of the transfer, then the transfer has a fi nancial accounting impact, and an FI document is created.

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228 C H A P T E R 7 Inventory and Warehouse Management Processes

Plant-to-Plant Transfer

A movement of materials between two plants within the same company code is called a plant-to-plant transfer. As diagrammed in Figure 7-4, plant-to-plant transfers can be carried out as either one-step or two-step procedures. Typically, only materials in the unrestricted use status can be moved between plants. In both the one-step and two-step procedures, the quantity of materials in inven- tory is reduced in the issuing plant (Plant A in the fi gure) and increased at the receiving plant (Plant B). The difference is in the stock status at the receiving plant. In the one-step procedure the materials are placed in unrestricted use at the receiving plant. In contrast, in a two-step procedure, the materials are placed in the stock in-transit status at the receiving location after the fi rst step (issue) and then changed into unrestricted use when the materials are actually received.

Plant-to-plant transfers, like storage location-to-storage location trans- fers, result in the creation of material documents. In the one-step procedure, one material document is created with two line items for each material moved. In the two-step procedure, two material documents are created, one at the time of issue and one at the time of receipt. The material document created at the time of receipt has only one line item.

Because materials are valued at the plant level, a plant-to-plant transfer represents a change in the value of the materials. Consequently, there is an FI impact. One FI document is created in both one-step and two-step move- ments. In the two-step method, the FI document is created at the time of issue, when the accounting impact occurs. Therefore, no FI document is created at the time of receipt. Further, the material is valued at the valuation price of the supplying plant.

Figure 7-3: Stock transfer within a plant

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Inventory Management 229

Demo 7.1: Plant-to-plant stock transfer (1 step)

Company-Code-to-Company-Code Transfer

A movement of materials between two plants in different company codes is called a company code-to-company code transfer. This type of transfer can be accomplished via both the one-step and two-step procedures. In both cases the movements are very similar to plant-to-plant transfers. The obvious difference is that, in this scenario, the two plants are located in different com- pany codes. Consequently, two FI documents are created, one for each company code. One line item is for the material account, and the other (offsetting) line item is for a clearing account created to accommodate such a transfer.

S T O C K T R A N S P O RT O R D E R S

The plant-to-plant movements discussed above are simple, straightforward ways of moving materials. However, they have limitations. Among their major limitations are the following:

• They cannot take into account the cost of transporting materials between plants.

• They cannot track the progress of the transfer.

• Valuation can only be based on the book value of the materials at the sending plant and not a negotiated value or price between plants.

Figure 7-4: Plant-to-plant transfer

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230 C H A P T E R 7 Inventory and Warehouse Management Processes

When moving materials from one plant to another requires any of these capabilities, the company utilizes a process in which one plant essentially “pur- chases” the materials and another plant “sells” them. This process involves the use of a stock transport order (STO). An STO is very similar to a pur- chase order in the purchasing process, except that it is used for plant-to-plant movements. An STO can involve steps from three previously discussed processes—procurement, fulfi llment, and inventory management—depending on the specifi c scenario. In this section we discuss the following three scenarios: STO without delivery, STO with delivery, and STO with delivery and billing.

Stock Transport Orders without Delivery

This scenario involves steps from purchasing and inventory management, as illustrated in Figure 7-5. The receiving plant creates a stock transport order, either directly or with reference to other documents such as a purchase requi- sition. At the supplying plant, a goods issue is posted against the STO. At this point the quantity in unrestricted use is reduced at the sending plant, and stock in transit is increased at the receiving plant. A material document with two line items is created to record this movement. When the materials arrive at the receiving plant, a goods receipt is recorded, just as in the procurement process. Recall that in the procurement process the goods receipt was recorded against a purchase order. In this case, the STO is used instead of a purchase order. At this time, the quantity in transit is moved to unrestricted use at the receiving plant, and a corresponding material document with one line item is created. The FI impact (and therefore material valuation) occurs at the time of the goods issue

Figure 7-5: Stock transport order without delivery

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Inventory Management 231

using the valuation price of the supplying plant. As in the case of stock transfers, one FI document is created if the two plants are in the same company code, and two FI documents are created if the plants are in different company codes. The general ledger accounts affected are the material accounts and a clearing account. Note that the procedure described above is a two-step procedure. In fact, only a two-step procedure is possible for STO without delivery.

Demo 7.2: Stock transport order without delivery

Stock Transport Orders with Delivery

In the previous scenario, the only shipping-related task that is included is the goods issue. Recall from Chapter 5 that the shipping step can include addi- tional tasks, such as creating a delivery document, picking, and packing. When a company uses the stock transport with delivery scenario, the sending plant will fi rst create a delivery document prior to goods issue. Recall that in the fulfi llment process, this document is used to pick, pack, and ship the materials to the customer. Thus, when a business uses an STO with delivery, it treats the order like a sales order with the receiving plant taking on the role of a customer, and the sending plant acting as a vendor. After the delivery document is created, the rest of the shipping tasks (pick, pack) are completed, and a goods issue is posted. These steps are illustrated in Figure 7-6. An STO with delivery can uti- lize both the one-step and two-step procedures for the goods movement. When the company uses a two-step movement, the material movement and fi nancial

Figure 7-6: Stock transport order with delivery

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232 C H A P T E R 7 Inventory and Warehouse Management Processes

impact are identical to those associated with an STO without delivery. When it uses a one step movement, only one material document is created, and the materials are placed in unrestricted use at the receiving plant.

Demo 7.3: Stock transport order with delivery

Stock Transport Orders with Delivery and Billing

The third scenario involving STO includes both the delivery document (ship- ping step) and the billing step from the fulfi llment process at the sending plant. In addition, it includes the invoice verifi cation step from the procurement pro- cess (see Chapter 4) at the receiving plant. This scenario is most appropriate for inter-company transfers. Figure 7-7 illustrates this scenario with a two-step procedure, although a one-step procedure could also be used. A stock transport order is created at the receiving plant in response to a need to acquire materi- als. In contrast to the previous two scenarios, a purchase price is included in the STO based on pricing conditions and info records, as we discussed in the Chapter 4. In response, the supplying plant then creates a delivery document authorizing the shipment. As in the fulfi llment process, when the goods issue is posted, the quantity designated as unrestricted use is reduced at the sup- plying plant. In addition, material accounts are credited by the value of the shipment, and the cost of goods sold account is debited. Corresponding material

Figure 7-7: Stock transport order with delivery and billing

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Inventory Management 233

and FI documents are created. However, the materials shipped technically do not belong to the receiving plant in the other company code. Therefore, the value of inventory is unchanged at the receiving plant. The materials are classifi ed as “in-transit CC,” which is different from the “in-transit” category previously discussed. Materials in the in-transit category are included in valu- ation, whereas those in the in-transit CC category are not.

When the company receives the materials at the receiving plant, it records a goods receipt against the STO. As in the procurement process, the quantity held in unrestricted use increases, material accounts are debited by the value of the materials received, and the GR/IR account is credited. Corresponding material and FI documents are created. Note that, in contrast to the other two scenarios involving STOs, the valuation in this scenario is based on the purchase price in the STO. The supplying plant then creates an invoice based on this price, which is the selling price from the perspective of the fulfi llment process. Thus, the valua- tion of materials does not refl ect the valuation price of the delivery plant. Rather, it is based on an agreed-upon transfer price between the companies within an enterprise. When the billing document is created, the system updates the appro- priate revenue and receivables accounts in the sending plant’s general ledger.

The receiving plant then verifi es the invoice, as in the procurement pro- cess. The system updates appropriate accounts payable and GR/IR accounts in the receiving plant’s general ledger. Corresponding FI documents are created as well. In contrast to the purchasing process, the receiving plant does not make any explicit payments to the supplying plant. Rather, when the invoice verifi - cation step is completed, it makes payment via a transfer of funds between appropriate accounts in the two company codes. At this time, the accounts receivable account and accounts payable account are also updated. As usual, corresponding FI documents are created.

Using an STO to move materials between plants, as compared to using stock transfers, has numerous advantages.

• When an STO is created, the company can carry out an availability check to assess material availability in the supplying plant.

• Delivery costs and the selected carrier can be added to the STO.

• Quantities in the STO and planned deliveries and receipts can be included in material planning in both plants.

• Purchase requisitions can be converted to STOs rather than POs.

• The history of the various tasks associated with the STO can be monitored via the purchase order history section of the STO.

• Goods can be received into different stock statuses, such as in qual- ity inspection and blocked stock.

• Goods received can be posted to consumption rather than mate- rial accounts. (Refer to the discussion of stock versus consumable materials in Chapter 4.)

To review, inventory management is concerned with managing and mov- ing materials between storage locations within a plant or between two plants. The plants can belong to the same company code or to different company codes. Several options for moving materials are available depending on the type of movement. However, in all the options we have considered, the movement is at the storage location level. Recall that storage locations are places where

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234 C H A P T E R 7 Inventory and Warehouse Management Processes

materials are kept until they are needed. Storage locations can be very large spaces, such as a room in a plant or even a specifi c area in a large room. It is important to note that although IM keeps track of the quantity of materials in a storage location, it cannot determine their exact location. For example, GBI’s Dallas plant has a storage location for raw materials (RM00), where it stores numerous materials such as tires, tubes, frames, and wheels until it needs them for production. Although IM can track the quantities of these materials in the storage location, it cannot determine exactly where each of these materials is stored. Thus, when production needs the raw materials, the plant employee must manually locate them.

In earlier chapters we alluded to a more granular management of materi- als using warehouse management processes. We also referred to links between previously discussed processes—procurement, fulfi llment, and production—and warehouse management. We now shift our focus to a detailed examination of warehouse management. We begin with organizational data relevant to warehouse management followed by master data and process steps.

O R G A N I Z AT I O N A L D ATA I N WA R E H O U S E M A N A G E M E N T The key organizational data in warehouse management is the warehouse. A warehouse is associated with one or more combinations of plant and stor- age location. For example, in Figure 7-8 the warehouse (100) is associated with three storage locations (FG00, TG00, and MI00) in the San Diego plant (SD00). The association between storage locations and a warehouse provides the linkage between IM processes and WM processes. When linking ware- houses to storage locations, the following rules apply.

• A warehouse must be linked to at least one storage location.

• A warehouse can be linked to storage locations across multiple plants.

• A storage location can be linked to only one warehouse.

• Not all storage locations must be linked to a warehouse.

Figure 7-8: Organizational data in warehouse management

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Organizational Data in Warehouse Management 235

GBI has enabled warehouse management only in the San Diego plant, and all three storage locations in that plant are assigned to warehouse number 100. If GBI wished to enable WM in other plants, then the storage locations in the other plants could also be assigned to the same warehouse number. Alternatively, GBI could create additional warehouses for other storage locations. Although all three storage locations in the San Diego plant are assigned to warehouse num- ber 100, GBI could choose to assign the fi nished goods and trading goods stor- age locations, but not the miscellaneous storage location, to the warehouse. This setup would be appropriate if the miscellaneous storage location were a small area that did not contain many materials.

A warehouse is divided into smaller areas, in a hierarchical manner, as depicted in Figure 7-9. More specifi cally, a warehouse is comprised of storage types, which are further divided into storage sections. In turn, storage sections contain storage bins where the materials are ultimately stored. Note that stor- age bins are actually master data. We introduce them in this section, however, to clarify the relationships among the various elements in a warehouse. Finally, storage types are sometimes divided into picking areas rather than storage sec- tions. We examine all of these concepts in the following sections.

Figure 7-9: Structure of a warehouse

S T O R A G E T Y P E

A warehouse must include at least one storage type. A storage type is a divi- sion of a warehouse based on the characteristics of the space, materials, or activity. For example, the space in the warehouse can be divided into storage types based on how the materials are stored. In such cases the storage types could include shelf storage, pallet storage, and rack storage. Some materials may need to be handled carefully (e.g., hazardous material) or to be kept in environmentally controlled areas (e.g., specifi ed temperature). In these sce- narios the storage types would refl ect these specifi cations. Thus, storage types could be designated as hazardous storage and cold storage. In Figure 7-9 there is one area for shelf storage and one for pallet storage.

Recall that the assignment of storage locations to a warehouse links IM activities to WM activities. To illustrate this point, consider a simple procure- ment scenario in which a company receives a shipment from a vendor. When

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236 C H A P T E R 7 Inventory and Warehouse Management Processes

materials are managed only at the storage location level, the company uses a goods receipt to record the receipt of the materials, which are then placed in the specifi ed storage location. When WM is enabled, however, additional steps must be completed. We will discuss these steps later in the chapter. For now, the key point is that until these WM steps are completed, the materials are placed in specially designated storage types that serve as interim storage areas in the warehouse (e.g., a receiving area). Interim storage areas are also utilized in the fulfi llment process when the materials are to be shipped from a warehouse managed storage location. These areas represent the physical links between IM and WM. Figure 7-9 includes one storage type for shipping and one for receiving.

S T O R A G E S E C T I O N

Storage types can be further divided into storage sections, which group bins with similar characteristics. Examples of storage sections are fast-moving, slow-moving, heavy, light, large, and small. An organization may have some materials that are shipped out very soon after they are received in the ware- house. These materials are designated as fast-moving materials, and, logically, they should be placed close to the receiving and shipping areas. In contrast, slow-moving materials, which remain in the warehouse for long periods before being shipped out, should be stored further away. In Figure 7-9, the pallet area is divided into slow-moving and fast-moving storage sections.

Storage sections can also be based on the material’s weight or size. For instance, in a shelf area, heavy and bulky materials are placed in lower shelves, and lighter and smaller materials are stored in higher shelves. Thus, a shelf storage area can be divided into heavy and light storage sections, as depicted in Figure 7-9. The receiving and shipping storage areas have one storage sec- tion each, the total section. Each storage type must include at least one storage section.

Finally, Figure 7-9 shows three storage bins within the light storage section. Storage bins are areas in which the materials are actually stored. We discuss storage bins in the section on master data.

P I C K I N G A R E A

Storage areas can be divided into picking areas rather than storage sections. A storage section is a division of a storage area based on storing or putting away materials. In contrast, a picking area is a division of a storage area based on removing or picking materials. A picking area groups storage bins based on similar picking strategies. For example, picking areas can be assigned to spe- cifi c employees who are responsible for picking from the specifi ed bins. As another example, a delivery to a customer can be allocated to multiple picking areas to facilitate parallel picking. This arrangement makes the picking step more effi cient, and it enables the company to deliver the materials to the cus- tomer more quickly.

Figure 7-10 displays the layout of GBI’s San Diego distribution center, and Figure 7-11 displays its structure. GBI has two storage types—shelf storage (001) and pallet storage (002)—and two interim storage types—receiving (003)

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Organizational Data in Warehouse Management 237

Figure 7-10: GBI’s San Diego plant layout

Figure 7-11: Structure of GBI’s warehouse in San Diego

and shipping (004). Note that whereas Figure 7-9 displays multiple storage sections for the shelf and pallet storage areas, GBI has elected to not divide the storage types in the San Diego warehouse into multiple sections. Rather, each storage type has one storage section—the total section, as illustrated in Figure 7-11. Going further, GBI does not have picking areas defi ned in its warehouse. Finally, both the shelf storage and pallet storage have multiple bins. Note that interim storage types do not require bins to be created in advance.

Business Processes in Practice 7.2 describes the structure of a warehouse at Steelcase.

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238 C H A P T E R 7 Inventory and Warehouse Management Processes

In its massive manufacturing plants, Steelcase might have to store and maintain inventory for more than 30,000 unique raw materials for production. These materials are classifi ed into multiple storage types, such as plastic, rolled steel, wood, and fabric. Because each of these materials has unique characteristics, each one requires different types of storage. For example, plastic parts are typically very small and can be stored in large bins in bulk quantity on a rack (Figure 7-12). A single Steelcase warehouse can have up to 15,000 storage bins for small raw materials. Rolls of fabric require a differ- ent type of space for storage (Figure 7-13). However, the rolled steel, which is formed into cubicle walls or fi le cabinets, is delivered in massive rolls that weigh several tons each. These materials are bulky and heavy and require special equipment to store and move around the plant, so they require unique storage and handling space on the warehouse fl oor (Figure 7-14). In addi- tion, raw materials must be stored in two types of stor- age locations—standard storage, which is located in the warehouse, and line storage, which is located directly next to the manufacturing line for easy access. Typically,

Steelcase prefers to have at least a 24-hour supply of raw materials located next to the production line to ensure a constant fl ow of materials and to avoid any disruptions to the manufacturing process.

Source: Steelcase, Inc. Materials Planning Group.

Business Processes in Practice 7.2: Warehouse Organization at Steelcase, Inc.

©Angela D. Gustaf, Steelcase, Inc.

Figure 7-12: Bins in rack storage at the Kentwood

East Manufacturing plant, Steelcase, Inc.

©Angela D. Gustaf, Steelcase, Inc.

Figure 7-13: Fabric storage at the Kentwood East

Manufacturing plant, Steelcase, Inc.

©Angela D. Gustaf, Steelcase, Inc.

Figure 7-14: Rolled steel storage at the Kentwood

East Manufacturing plant, Steelcase, Inc.

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Master Data in Warehouse Management 239

M A S T E R D ATA I N WA R E H O U S E M A N A G E M E N T The key master data in warehouse management are material master and stor- age bins. We examine these data types in this section.

M AT E R I A L M A S T E R

We have previously discussed the material master in the context of several other processes. In these discussions we have explored several views, including basic, purchasing, and sales. If a company stores a material in a storage location that is associated with a warehouse, then it must include additional data in the master record for that material. These data are included in the warehouse management view of the material.

Recall that master data are typically defi ned for specifi c organizational levels. The organizational levels relevant to the warehouse management view of master data are warehouse, plant, and storage type. A warehouse is required; that is, materials must be defi ned for each warehouse. However, plant and stor- age type are optional and are included only when the warehouse data for the material are different in different plants or storage types. Three types of data are relevant to the warehouse management view:

• Basic data

• Data used in defi ning stock placement and removal strategies

• Data regarding the storage bins where the materials will be stored

Basic data are relevant to all processes, as we discussed in Chapter 2. Some of these data, however, are redefi ned for WM. An example is the ware- house management unit of measure, which can be different from the base unit of measure discussed in Chapter 2. For example, a material can have a base unit of measure in single units (e.g., one helmet) but be managed in larger quanti- ties (e.g., box of dozen helmets) in the warehouse. Data related to placement and removal strategies indicate priorities and sequences in which the storage types, storage sections, and picking areas are to be searched. Bin-related data indicate which bins are to be used to store materials as well as the minimum and maximum quantities allowed in the bins.

Demo 7.4: Review WM view of material master

S T O R A G E B I N S

Storage bins are the smallest unit of space in a warehouse. They are the areas where materials are physically stored. Storage bins can vary in size from small containers (for nuts and bolts) to large areas for bulky materials (pallets of soft drink cases). They can be containers on shelves or designated spaces on a warehouse fl oor where pallets of materials are stored. Storage bins have unique addresses that identify their location in a warehouse. These addresses are frequently based on a coordinate system. In a shelf storage environment, for example, a bin address can include a row (or an aisle) number, a stack number, and a shelf number. Consider a library that has rows of shelves that hold books,

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240 C H A P T E R 7 Inventory and Warehouse Management Processes

as illustrated in Figure 7-15. The fi gure displays two rows, each of which has three stacks. In turn, each stack has six shelves. Each unique shelf, such as Row 1, Stack 1, Shelf 3, is a bin. If further granularity is needed, then each shelf can be further divided into smaller areas. Figure 7-16 depicts storage bins at the warehouse at a Steelcase manufacturing plant.

Stacks

Rows (aisles)

Shelves

Figure 7-15: Storage bin addressing

©Angela D. Gustaf, Steelcase, Inc.

Figure 7-16: Storage tubs (bins) at the Kentwood East manufacturing plant,

Steelcase, Inc.

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Master Data in Warehouse Management 241

A bin can be used to store different materials. To distinguish between quantities of different materials, the materials with the same characteristics are grouped into quants. A quant is a specifi c quantity of materials that have simi- lar characteristics and are stored in a single bin. For example, if road helmets and t-shirts are stored in one bin, each material will be identifi ed by a different quant. Figure 7-18 illustrates the use of quants. In the top left quadrant there is one quant of material A. Two materials—A and B—are stored in the bin in the top right quadrant. Each material is identifi ed by a separate quant. Quants are also used when the same material with different characteristics is stored in one bin. In the pharmaceuticals industry, for example, drugs are produced in batches, and each batch has both a specifi c expiration date and a unique batch number. When different batches of the same material are stored in the same bin, each batch is identifi ed by a different quant. This arrangement is illustrated in the bottom left quadrant of the fi gure. Finally, the bottom right displays an example in which some quantities of the material are of the stock type unrestricted use and other quantities are designated as in quality inspection. The quantity of each type of material is associated with a different quant.

Quants are created as needed by the ERP system when materials are moved into bins. After a quant has been created, the quantity of materials can be increased or decreased only by a goods movement. Moreover, when the quantity is reduced to zero, the system automatically deletes the quant. Because quants are generated as needed, they are categorized as transaction data. We discuss them here, however, to emphasize the relationship between quants and storage bins.

Figure 7-17: Quants in a storage bin

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242 C H A P T E R 7 Inventory and Warehouse Management Processes

Demo 7.5: Review storage bins, and display stock in storage bins

P R O C E S S E S I N WA R E H O U S E M A N A G E M E N T Figure 7-18 illustrates steps in the warehouse management process. Typically, the WM process is associated with a goods movement in another process, such as procurement, fulfi llment, production, and inventory management. Recall from our discussion earlier in this chapter that a goods movement is an IM activity. When a goods movement involves a storage location that is warehouse managed, however, additional steps are required to transfer the materials into (putaway) or out of (pick) storage bins in the warehouse. In most cases, an IM goods movement automatically generates a transfer requirement. Transfer requirements are used to plan the movement of mate- rials in and out of a warehouse. The actual execution of the movement is accomplished via a transfer order. After a transfer order is created, the mate- rials are physically moved between interim storage areas and the storage bins, to complete putaway or picking activities. At that point the transfer order is confi rmed.

Figure 7-18: Warehouse management process

In this section we will consider the steps in the WM process. We will fi rst discuss these steps in general terms. We will then delve into the details of these steps as they relate to the procurement, fulfi llment, production, and inventory management processes. We will assume that all the storage locations involved in our discussion are warehouse managed.

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Processes in Warehouse Management 243

P L A N WA R E H O U S E M O V E M E N T

A transfer requirement (TR) is a document that companies use to plan the movement of materials into and out of bins in a warehouse. In most cases the trigger is either an activity in inventory management or a need to transfer materials within a warehouse. The ERP system automatically creates a trans- fer requirement when an IM activity involving a warehouse-managed storage location occurs. The transfer requirement communicates data from the IM processes to the WM processes. Figure 7-19 illustrates the elements of the plan warehouse movement step.

Figure 7-19: Elements of the plan warehouse movement step

Data

Figure 7-20 highlights the data included in a transfer requirement. Master data include data about the materials and bins involved in the movement. Organizational data include the client, company code, plant, storage location, and warehouse number. Transaction data include the materials to be moved, quantity, date, transfer type (putaway, pick, or transfer), and the source of the requirement. The source is included when the requirement was not created manually and is typically a result of specifi c activity in IM such as a goods receipt.

Figure 7-20: Data in a transfer requirement

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244 C H A P T E R 7 Inventory and Warehouse Management Processes

Tasks

The only task involved in this step is to create the transfer requirement. Although the ERP system is generally confi gured to create a transfer require- ment automatically as a result of activity in IM, the requirement can also be manually created. In the case of a transfer posting, a posting change notice (explained below) is created instead of a transfer requirement. Posting change notices can be created either manually or automatically by the ERP system as a result of a transfer posting in IM.

Recall from previous chapters that IM activities occur in procurement, fulfi llment, production, and inventory management processes. In procure- ment, when a goods receipt against a purchase order is created, a transfer requirement is automatically generated as well. Two steps in the production process can potentially generate a transfer requirement. First, when a pro- duction order is released, a transfer requirement for the materials needed for production is created. Then, when the materials have been produced and received into inventory, the receipt of fi nished goods (or semifi nished goods) against the production order triggers a transfer requirement. In inventory management, the stock transfer process uses a transfer requirement. Planning a warehouse movement in fulfi llment is a little different than in other pro- cesses. Recall that a delivery document is created in the shipping step of the fulfi llment process to facilitate picking of materials. The delivery docu- ment serves as a transfer requirement and is used to plan the warehouse movement.

In the case of a transfer posting, however, the system creates a posting change notice rather than a transfer requirement. A posting change notice is a request to change the status of the material, for example, from in quality inspec- tion to unrestricted use. Finally, a transfer requirement can be created manually to facilitate an internal movement of materials from one bin to another within the warehouse. Thus, the source of the requirement for warehouse movement is typi- cally a material document or a production order, as illustrated in Figure 7-21.

Figure 7-21: Reference documents for a transfer requirement

Outcomes

The outcome of this step is either a transfer requirement or a posting change request. Note that there is no fi nancial accounting impact. In IM the FI impact occurs when a goods movement takes place. At that time, IM inventory is

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Processes in Warehouse Management 245

increased or decreased and the FI impact is recorded, as we discussed in the chapters on procurement, fulfi llment, and production.

E X E C U T E WA R E H O U S E M O V E M E N T

Figure 7-22 diagrams the elements of the execute warehouse movement step. Common warehouse movements include picking, putting away, and posting changes. The document that is used to execute these movements is the trans- fer order (TO). The creation of a TO is generally triggered either by a transfer requirement or by a posting change notice. However, TOs can also be created directly from delivery and material documents generated by other processes. Finally, they can be created manually to facilitate internal warehouse transfers.

Figure 7-22: Elements of the execute warehouse movement step

Figure 7-23: Data in a transfer order

Data

Figure 7-23 presents the data involved in a transfer order. The master data and organizational data are the same as those contained in a transfer requirement. If a reference document, such as a transfer requirement, is used, then data from this document are copied into the transfer order. The data in a transfer order include the material number, quantity, data, and transfer type. In addition, identifying the source and destination bins is necessary to execute a WM transfer. The source and

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246 C H A P T E R 7 Inventory and Warehouse Management Processes

distination bins are often proposed automatically by the ERP system. However, they can also be provided by the individual who is executing the transfer.

A transfer order consists of a header and one or more line items, as illus- trated in Figure 7-24. The header includes data that are applicable to all line items. Examples are the transfer order (TO) number, reference document number, dates, and warehouse movement type. Line item data include mate- rial number; source storage type, bin, and quant; destination storage type, bin, and quant; target quantities; and actual quantities moved. Note that a particu- lar material can have more than one line item if the material has to be moved from multiple source bins or to multiple destination bins. This scenario can occur in the case of picking when there is insuffi cient quantity in one source bin and in the case of putaway when the destination bin is not large enough to hold all of the materials moved.

Figure 7-24: Structure of a transfer order

Tasks

The key task in the execute warehouse management step is the creation of a transfer order, with or without a reference document, as illustrated in Figure 7-25. Transfer orders can be created either manually or by the ERP system. When they are created manually, the user selects the appropriate reference document or documents, verifi es the data in these documents, and then creates the orders. When a reference document is not used, the user must provide all of the data that would have been contained in the reference document. The ERP system can create the TOs automatically, but only when a reference document exists. The system also can be confi gured to automatically create transfer orders from reference documents that meet certain criteria (e.g., transfer date). Finally, the system can be programmed to directly create transfer orders as soon as a mate- rial document or an outbound delivery for shipment to a customer is created.

Outcomes

The obvious outcome of this step is a transfer order. When the TO is created, the reference document used to generate it is updated to indicate that this step has been completed. In addition, the storage bin data for the source and des- tination bins are updated to note planned movements (an example of this is provided in the section on reporting later in this chapter). As in the case of a transfer requirement, creating a TO has no FI impact. The transfer order essentially is a transaction document that authorizes warehouse employees to physically move the materials from the source storage bin(s) to the destination storage bin(s) indicated in the document.

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Processes in Warehouse Management 247

C O N F I R M WA R E H O U S E M O V E M E N T

Generating a transfer order allows the warehouse employees to physically move the materials from the source bins to the destination bins. After the employees have completed this movement, they retrieve the transfer order and confi rm the movement. The elements of the confi rm WM movement step are presented in Figure 7-26.

Figure 7-25: Reference documents for a transfer order

Figure 7-26: Elements of the confi rm warehouse movement step

Data

Confi rming the warehouse movement involves the same transfer order created in the previous step. Consequently, this step utilizes the same data concerning the materials being moved and the bins.

Tasks

Confi rming the movement involves updating the transfer order to indicate that the movement was completed. The quantities moved from and to various bins

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248 C H A P T E R 7 Inventory and Warehouse Management Processes

are entered into the transfer order, and the order is saved. If all of the materials have been moved, then the step is complete.

Outcomes

When a confi rmation of warehouse movement is recorded, the ERP system automatically updates the associated reference documents such as the delivery document, transfer requirement, and posting change notice to refl ect the fact that the transfer of materials has been completed.

In this section we explained the warehouse management process in gen- eral terms. In the following sections we examine WM as it relates specifi cally to procurement, fulfi llment, production, and stock transfers. We also review the fi nancial and material impact of the various steps. We begin with procurement.

WA R E H O U S E M A N A G E M E N T I N P R O C U R E M E N T

To illustrate the warehouse management steps as they relate to procurement, we will use the following scenario. GBI wishes to increase the inventory of t-shirts in its San Diego plant. To accomplish this task, it has sent a purchase order for 1,000 t-shirts to its vendor, Spy Gear. Recall that we used a similar scenario in Chapter 4. In this scenario, however, the materials are to be deliv- ered to the San Diego plant, which is warehouse managed, rather than the Miami plant, which is not. We will assume that GBI has 500 t-shirts in stock. Figure 7-27 illustrates the inventory impact of the steps in the procurement process. It indicates that GBI has 500 t-shirts in storage location inventory and in the warehouse prior to the start of the process (column 2).

Figure 7-27: Inventory impact—procurement

Plan Warehouse Movement

Figure 7-28 diagrams the steps in the procurement process. The fi gure includes both IM activities and WM activities. The bottom part of the fi gure illustrates the physical movement. Recall from Chapter 4 that the procurement process involves a goods receipt from a vendor and that the materials are placed into a specifi c storage location. In our example, when GBI receives the 1,000 t-shirts from Spy Gear, the warehouse personnel place them in the interim receiving storage area and record a goods receipt into the trading goods storage location the ERP system. (You might want to refer back to the San Diego plant layout illustrated in Figure 7-10 and the discussion on storage types regarding the use

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Processes in Warehouse Management 249

of storage type 003, receiving, as the interim storage area for goods received.) The interim storage area is the physical link between the procurement and warehouse management processes. When the goods receipt is recorded, fi nan- cial accounting and material documents are created, as explained in Chapter 4. In addition, the system automatically generates a transfer requirement because the trading goods storage location is warehouse managed. The transfer require- ment is created by an IM activity and serves as the information link between the procurement process and the warehouse management process.

A review of inventory at this point in the process (column 3 in Figure 7-27 ) will show that there are 1,500 t-shirts in the trading goods storage location—the initial 500 plus the 1,000 received from Spy Gear. Warehouse (bin) inventory is unchanged because the shirts have not yet been moved into the warehouse. Instead, inventory in the interim (receiving) storage area increases by the 1,000 t-shirts received.

Execute Warehouse Movement

When a warehouse employee is ready to putaway the materials from the interim storage area into warehouse bins, he or she creates a transfer order to facilitate this movement. In our example, the order authorizes the warehouse employees to transfer the 1,000 t-shirts from the interim receiving storage area to specifi c bins in the warehouse. The reference document for this order is the transfer requirement created at the time of goods receipt. When the order is generated, the ERP system proposes destination bin numbers into which the employees can place the t-shirts. Alternatively, the employees can specify the destination bins manually.

Figure 7-28: IM and WM steps in procurement

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250 C H A P T E R 7 Inventory and Warehouse Management Processes

A review of inventory (see Figure 7-27, column 4) will not indicate any change in the number of t-shirts in the storage location, interim storage area, or warehouse bins. This is because the impact on storage location inventory occurs when the goods receipt is recorded in IM. In addition, at this point nothing has actually been moved from the interim bins to the warehouse bins. However, the transfer order will indicate the planned (target) quantities and bins.

Confi rm Warehouse Movement

Creating a transfer order authorizes GBI warehouse employees to physically move the materials from the interim receiving storage area into warehouse bins. After this step has been completed, the TO is updated to confi rm the quantity and locations (bins). In our example, the t-shirts are moved from the interim receiving storage area into the warehouse bins proposed by the ERP system in the TO. The employee then updates the TO to indicate that 1,000 t-shirts were moved.

A review of inventory (see Figure 7-27, column 5) will indicate that stor- age location inventory remains unchanged at 1,500. The quantity in the interim receiving storage area is reduced by the 1,000 t-shirts moved and is now zero. Finally, the warehouse bins now contain 1,500 t-shirts, the original 500 plus the 1,000 that were just moved.

As illustrated in Figure 7-28, the remaining steps in the procurement pro- cess (e.g., invoice receipt and payment) can continue while the WM process steps needed to putaway the materials into bins are completed. These steps can continue because they are based on the material and fi nancial accounting documents that were created at the time of the goods receipt, which is an IM activity and is not dependent on WM activities.

You may have noticed that inventory is tracked at both at the storage location level and the warehouse level. Warehouse inventory is the sum of the inventory in the interim storage areas and the warehouse bins. Note in Figure 7-27 that warehouse inventory is always equal to storage location inventory.

Demo 7.6: Procurement process with warehouse movements

WA R E H O U S E M A N A G E M E N T I N F U L F I L L M E N T

To illustrate warehouse management in fulfi llment we will employ a different GBI scenario. Rocky Mountain Bikes (RMB), a GBI customer, has sent a pur- chase order for 50 bikes, which GBI will ship from the San Diego plant. Recall that we used a similar example in Chapter 5. The signifi cant differences here are (1) GBI will deliver all of the bikes in one shipment and (2) the transaction will include WM steps that were omitted in Chapter 5 to keep the discussion simple. We will assume that GBI has 500 bikes in inventory before the fulfi ll- ment process is executed. We depict this scenario in Figure 7-29. Column 2 in the fi gure indicates the inventory status prior to process execution.

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Processes in Warehouse Management 251

P l a n Wa r e h o u s e M o v e m e n t

Figure 7-30 illustrates the steps in the fulfi llment process, including both IM and WM activities. In this case, the creation of an outbound delivery for a sales order triggers the WM activities. Whereas in the case of procurement the transfer requirement served as the information link between the procure- ment process (IM) and the WM process, in fulfi llment the delivery document serves this role. In our scenario, GBI fi rst generates a sales order in response to RMB’s purchase order. The company then creates an outbound delivery, which triggers the need to move 50 bikes from storage bins to the interim (shipping) storage area, for shipment to RMB. A review of the storage location and the bin inventory will not indicate any change in the quantity of materials because no physical movement has occurred yet (see Figure 7-29, column 3).

Figure 7-29: Inventory impact—fulfi llment

Figure 7-30: IM and WM steps in fulfi llment

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252 C H A P T E R 7 Inventory and Warehouse Management Processes

Execute Warehouse Movement

When a warehouse employee is ready to pick materials from the warehouse, he or she generates a transfer order based on the delivery document. At this time, the ERP system proposes bins from which to move the materials. In our example, the employee creates a TO to pick 50 bikes from the ware- house. Signifi cantly, no physical movement has yet taken place. Consequently, a review of the storage location and warehouse inventory will not show any change in quantities (see Figure 7-29, column 4).

Confi rm Warehouse Movement

After the TO is created, warehouse employees pick the bikes from the pro- posed storage bins and place them in the interim shipping storage area. They then update the TO to indicate the quantity picked and the bins from which they were taken. Again, refer to Figure 7-10 and the discussion of storage types for an explanation of the shipping area. In our example, the 50 bikes are picked from bins in the warehouse and placed in the interim shipping storage area. As in the case of procurement, the interim storage area is the physical link between the fulfi llment and WM processes.

At this point, a physical movement of materials has occurred. Consequently, a review of warehouse inventory will show a reduction of inventory in the warehouse bins and an increase in the bins in the interim storage area. In our example (see Figure 7-29, column 5), 450 bikes remain in the warehouse bins, and 50 bikes are available in the interim shipping storage area. No goods issue has occurred, so the quantity in storage location inventory is unchanged (500).

After the transfer order is updated, it is confi rmed and saved. At this point the reference document that triggered the warehouse movement is updated to indicate the quantity of materials moved. In our example, the delivery docu- ment is updated to indicate that 50 bikes have been picked. (This might be a good time to review Figure 5-34 and the accompanying discussion in Chapter 5 regarding the relationship between a delivery document and a transfer order.) At this point the materials can be shipped and a goods issue can be posted, which generates material, FI, and CO documents, as we discussed in Chapter 5. Note again that the FI impact and the recording of the material movement occur in IM, not WM. The fulfi llment process then continues through the invoice and payment steps.

A review of warehouse inventory after goods issue will show a reduction in the interim storage area of inventory. Further, the storage location inven- tory will now indicate a reduction in inventory, because a goods issue has been posted. In our example (see Figure 7-29, column 6) the storage location inven- tory is reduced by 50 to 450 bikes, and inventory in the interim storage area is reduced to zero. Note that, as explained in the discussion of WM in procure- ment, the total warehouse inventory (bins plus interim storage area) is always equal to the storage location inventory.

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Processes in Warehouse Management 253

Demo 7.7: Fulfi llment process with warehouse movements

WA R E H O U S E M A N A G E M E N T I N P R O D U C T I O N

The production process triggers the warehouse management process in two places, as indicated in Figure 7-31. Recall from Chapter 6 that production involves both a goods issue (when raw materials and semifi nished goods are issued to the production order) and a goods receipt (when fi nished goods are placed into storage). Figure 7-31 assumes that these materials are issued from and received into a warehouse-managed storage location. The production order generates a transfer requirement for the materials that are needed for production. In response, a TO is created, the materials are moved into an interim storage area, and the TO is confi rmed. The accompanying goods issue has all the fi nancial and material outcomes that we discussed in Chapter 6.

Figure 7-31: IM and WM steps in production

After the production process is completed and confi rmed, the fi nished goods are received into storage. At this point the WM process steps are similar to those that occur within the procurement process. A goods receipt is recorded, as explained in Chapter 6. However, the materials are physically placed in an interim storage area, and a transfer requirement is automatically created by the system. A transfer order is then created, the materials are moved from the interim storage area into bins, and the TO is confi rmed. Meanwhile, the

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254 C H A P T E R 7 Inventory and Warehouse Management Processes

remaining steps in the production process, such as completion and variance calculation, can be executed.

WA R E H O U S E M A N A G E M E N T I N S T O C K T R A N S F E R S

In addition to the scenarios we have already discussed, WM activities are also ini- tiated by stock transfers and transfer postings. We addressed these topics earlier in this chapter in the context of inventory management. Figure 7-32 illustrates fi ve scenarios under which stock transfers involving warehouse movements can occur. The fi rst four scenarios involve movement between two storage loca- tions. Recall that IM processes are responsible for managing inventory at the storage location level. Consequently, these four scenarios will require a stock transfer that is initiated in IM. When these goods movements involve warehouse- managed storage locations, the transfer requirements are automatically gener- ated by the ERP system. The fi fth scenario involves movement between two bins in the same warehouse and thus does not involve any IM activity. In the following section we consider each of these scenarios in greater detail.

Figure 7-32: WM scenarios for stock transfers

The fi rst scenario involves a stock transfer from a plant where the storage location is warehouse managed (storage location B associated with warehouse 1) to a plant where it is not (storage location A). In this case, a goods issue at the sending plant triggers WM process steps, as explained earlier in the chapter. At the receiving plant, a simple goods receipt is recorded in IM.

The second scenario depicts the opposite movement; namely, a stock trans- fer from a plant where the storage location is not warehouse managed (storage location A) to a plant where it is (storage location B associated with warehouse 1). In this case, a goods issue (IM) records the shipment of materials at the sending location. At the receiving location, a goods receipt triggers WM process steps.

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Processes in Warehouse Management 255

The third and fourth scenarios involve a stock transfer between two warehouse-managed storage locations. Specifi cally, they involve a goods issue from and a goods receipt to warehouse-managed storage locations. Therefore, WM processes are triggered at both the goods issue (sending location) and the goods receipt (receiving location).

Finally, in the fi fth scenario materials are moved from one bin to another within the same warehouse. This is an internal transfer and thus does not involve IM. Consequently, a transfer requirement is not automatically gener- ated and therefore must be created manually. After it is created, the rest of the WM process steps are completed as in the other scenarios.

Note that in the fi rst four scenarios, material documents are created when IM activities (goods issue and goods receipt) are involved. In contrast, the last scenario does not involve any IM activities, so no material document is created. Also, the fi rst four scenarios may result in a fi nancial impact. If so, appropriate FI documents are created. In the last scenario, there is typically no fi nancial impact, so no FI documents are created.

Demo 7.8: Internal warehouse transfer

O R D E R O F P O S T I N G S I N W M A N D I M

The scenarios considered in the preceding section are summarized in the fi rst two rows of Figure 7-33. Goods receipt postings for purchase or production orders trigger putaway activity in WM. Delivery documents (for sales orders) and production orders trigger picking activity in WM, which are followed by goods issue postings.

Figure 7-33: Scenarios for WM and IM activities

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256 C H A P T E R 7 Inventory and Warehouse Management Processes

As the fi gure indicates, the order in which IM and WM activities are com- pleted can vary from one scenario to another. Consider, for example, the sce- narios diagrammed in the bottom two rows of Figure 7-33. The third row is a case in which the goods issue (for a sales order or production order) is posted before WM activities are recorded in the ERP system. This scenario can occur when either a customer or the production process needs materials urgently and the materials are removed from storage and shipped out to the customer or the production fl oor. In such cases, the materials are withdrawn from the warehouse and a goods issue is posted, but the WM activities of picking the materials and placing them in the interim storage area have not been recorded. Rather, they are recorded later as time permits.

Let’s consider the impact of this type of movement on storage location and warehouse inventory. Figure 7-34 illustrates a scenario in which a company has 100 units in inventory prior to the process execution. It then ships 25 units to a customer. At the time of shipment, a goods issue is posted, and storage location inventory decreases by 25 units to 75. To keep storage location and warehouse inventory equal, the ERP system will post a negative quantity to the interim storage area (–25). As a result, warehouse inventory now becomes 75 (100 – 25). To reduce the warehouse bin inventory, a transfer order must be confi rmed. When this occurs, a decrease of 25 units is recorded for warehouse bins, and an increase of 25 units is recorded for the interim storage area. As a result, the interim storage area shows a quantity of zero and warehouse bins indicate a quantity of 75, which matches the storage location inventory.

Figure 7-34: Inventory impact when IM precedes WM

The last row in Figure 7-33 represents a case in which putaway in WM is completed before a goods receipt is recorded in IM. This situation can occur when fi nished goods from the production process are moved directly to bins in a warehouse. It is common in the case of repetitive manufacturing, where fi nished goods are continuously being produced (see Chapter 6 for an explanation). When the materials are brought to the warehouse for putaway, a transfer requirement or transfer order is created and confi rmed. Goods issues are then periodically posted in IM to refl ect the increase in inventory in the storage location.

Figure 7-35 illustrates the inventory impact of this scenario. It assumes that 100 bikes are in inventory initially and that 25 bikes are received into the warehouse. When the transfer order is confi rmed, there will be 125 bikes in the warehouse bins, but only 100 in storage location inventory, because the goods receipt has not been recorded. To ensure that storage location inventory and ware- house inventory are equal, a negative quantity is recorded in the interim storage area. When the goods issue is posted, 25 bikes are added to both the storage loca- tion and interim storage areas, leaving a total of zero in the interim storage area.

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Reporting 257

Figure 7-35: Inventory impact when WM precedes IM

Some of the offi ce furniture products that Steelcase produces are too large to fi t on racks or shelves and aren’t appropriate for pallet storage. To accom- modate these products, the warehouse operates on a “virtual truck” bin concept. Floor space in the warehouse is marked off into bins that represent the length and width of delivery trucks. As inbound goods are received, they are scanned with a bar code scanner that is connected to SAP ERP. In turn, the system confi rms goods receipt automatically and then informs the workers which bin to store the goods in. When the bin (virtual truck) is fi lled and all of the

goods for the outbound customer shipment are in place, the materials in the bin are “picked” and moved to a staging area near the truck dock. They are then “packed” for shipment and loaded onto the delivery truck. When a shipment is placed on the truck, a post goods issue is completed, which creates all of the paper shipping documents for the truck driver and triggers the printing of an invoice for the customer. Steelcase processes more than 1,000 outbound customer ship- ments per week in North America in this manner.

Source: Steelcase, Inc. Materials Planning Group

Business Processes in Practice 7.3: The Virtual Truck Concept

R E P O RT I N G In this section we consider several examples of reports that contain informa- tion relevant to inventory and warehouse management. As in the case of other processes, a variety of reporting options are available in warehouse management, including status reports, work lists, online lists, and reports using the information system. A list of documents, such as transfer requirements and transfer orders, can be generated in a manner similar to the lists explained in previous chapters. Figure 7-36 illustrates a list of transfer orders.

Figure 7-36: List of transfer orders. Copyright SAP AG 2011

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258 C H A P T E R 7 Inventory and Warehouse Management Processes

Demo 7.9: List Report—list & transfer orders

Figure 7-37 is an example of an inventory status report. It displays inventory at the storage location level. Specifi cally, it indicates that there are 50 road helmets (RHMT1000) in the trading goods storage location (TG00) in the San Diego plant (SD00), in GBI’s U.S. company (US00). It does not show inventory at the bin level.

Figure 7-37: Storage location inventory report. Copyright SAP AG 2011

Figure 7-38 displays inventory at the San Diego warehouse. It indicates that there are 50 road helmets in the interim receiving storage area (GR Area External Receipts). This report was generated after a goods receipt against a purchase order was recorded, a process step that automatically generates a transfer requirement. Figure 7-39 is the same report after a transfer order has been created. Note that the 50 helmets in the interim receiving area now appear under the “Pick quantity” column, indicating that they need to be picked from the interim area. The 50 helmets also appear in the “Stock for put- away” column in the shelf storage area, where they are to be putaway. Finally, Figure 7-40 displays the same report after the transfer order has been con- fi rmed. The status of the helmets in the shelf storage area has been changed from “Stock for putaway” to “Available stock.”

Another useful report is the bin status report, an example of which is pre- sented in Figure 7-41. The report displays a list of bins that contain materials. It indicates that bin number STBN-1-000 contains road helmets and t-shirts. The system can generate similar reports to display all bins or bins that are empty. Double-clicking on a bin that contains materials produces a drilldown report that conveys details of the materials. Figure 7-42 represents a drilldown report for bin number STBN-1-000. It indicates that the bin contains two materials (road helmets and t-shirts) and two quants. Recall that a quant is a quantity of mate- rials with similar characteristics. In this example, there is one quant for each material. If necessary, the system can drill down further to display the details of each quant. An example of such a report is provided in Figure 7-43, which shows the quant for the road helmets in storage bin STBN-1-000.

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Reporting 259

Figure 7-38: Warehouse inventory report—after goods receipt and TR

are created. Copyright SAP AG 2011

Figure 7-39: Warehouse stock—after TO is created. Copyright SAP AG 2011

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260 C H A P T E R 7 Inventory and Warehouse Management Processes

Figure 7-40: Warehouse stock—after TO is confi rmed. Copyright SAP AG 2011

Figure 7-41: Bin status report. Copyright SAP AG 2011

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Reporting 261

Figure 7-42: Storage bin details. Copyright SAP AG 2011

Figure 7-43: Quants in a bin. Copyright SAP AG 2011

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262 C H A P T E R 7 Inventory and Warehouse Management Processes

C H A P T E R S U M M A R Y

Inventory and warehouse management (IWM) processes are concerned with the

storage and movement of materials in an organization. IWM is closely related to

the procurement, fulfi llment, and production processes. Inventory management

(IM) involves the movement of goods in and out of plants, and warehouse man-

agement (WM) involves processes that permit sophisticated management of

materials within and in-between plants. WM is typically used by organizations that

have large quantities of expensive inventory that must be managed very closely.

The WM process is typically initiated by a transfer requirement, which is

triggered by an activity in IM that creates a need to transfer goods. A transfer

requirement is used to plan the movement, which is then executed by a transfer

order. Once the transfer order is created, the materials are physically moved

to and from the storage bins and then the transfer order is confi rmed. Transfer

requirements and interim storage areas are the key links between IM and WM.

IM consists of four goods movements: goods receipt, goods issue, stock

transfer, and transfer posting. Goods movements are accomplished using spe-

cifi c movement types that determine the information needed to execute the

movement and the general ledger accounts that are affected.

Goods receipt is a movement of materials into inventory; it therefore results

in an increase in inventory. Typically raw materials and trading goods are received

inventory from a vendor as part of the procurement process, and fi nished goods are

received from the shop fl oor once the production process completes making them.

Goods issue is a movement of materials out of inventory; it therefore

results in a decrease in inventory. Typically a goods issue is associated with a

shipment of fi nished goods or trading goods to a customer against a sales order

or an issue of raw materials or semifi nished goods against a production order.

Stock transfers are used to move materials within the enterprise from one

organization level or location to another in a simple way. Materials can be moved

between storage locations within one plant, between plants in one company

code, or between plants in different company codes.

Transfer postings are a straightforward way to change the status or type

of stock, such as unrestricted use, in quality inspection, blocked, or in transit.

Transfer postings do not necessarily involve the physical movement of goods,

but they result in a change to the status or type of goods.

In more complex situations, transfers are accomplished with stock trans-

port orders (STOs), which simulate one plant “purchasing” materials from

another plant that “sells” the materials. STOs can be done without delivery,

with delivery and with delivery and billing, depending on the level of complexity

needed and organization’s accounting policies. STOs offer many advantages

over simple stock transfers or transfer postings, but also require more complex

activities to complete.

Warehouse management (WM) operates on the concept of warehouses as

logical units that manage and track the movement of goods in and out of storage

locations. A warehouse must be associated with at least one storage location.

Demo 7.10: Bin status report

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Review Questions 263

It is divided into one or more storage types. A storage type is a division of

a warehouse based on the characteristics of the space, materials, or activity

needed, such as shelf storage, pallet storage, or hazardous storage. Storage

types can be further divided into storage sections, which are logical groupings

of materials based on similar characteristics, such as weight, size, or activity.

Within each storage section, materials are grouped into storage bins, which is

where the actual materials are stored and are the smallest logical unit of stor-

age that can be managed in WM. Each storage bin has a unique address which

identifi es it, typically based on a coordinate system.

Warehouse management is tightly integrated with the procurement, ful-

fi llment, and production processes and can provide companies with a great

deal of accuracy when managing large inventories of materials. There are multi-

ple reporting options to view inventory status and activities across warehouses

and plants from high-level activities to bin-level quantities.

K E Y T E R M S

Company code-to-company code

transfer

End value

Inventory and warehouse

management (IWM)

Inventory management (IM)

Increment

Interim storage areas

Picking area

Plant-to-plant transfer

Posting change notice

Quant

Stock transport order (STO)

Storage bins

Storage location-to-storage

location transfer

Storage type

Transfer order (TO)

Transfer requirement (TR)

Warehouse

Warehouse management

view

Warehouse management (WM)

R E V I E W Q U E S T I O N S

1. Identify and discuss the key organizational levels relevant to inventory management and warehouse management.

2. Discuss the key master data relevant to warehouse management.

3. Defi ne the four types of goods movements in IM, and provide an example of each type.

4. Explain the material and fi nancial accounting impacts of goods movements in IM.

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264 C H A P T E R 7 Inventory and Warehouse Management Processes

5. Analyze the differences between one-step and two-step stock transfers.

6. Identify several possible scenarios for stock transfers, and explain the key differences between these scenarios.

7. What is a stock transport order used for? What are the advantages of using a stock transport order?

8. Explain the differences between using stock transport orders without delivery, with delivery, and with delivery and billing.

9. Describe the steps in the warehouse management process in terms of triggers, tasks, data, and outcomes.

10. Explain the role of the warehouse management process as it relates to (1) the procurement process, (2) the fulfi llment process, and (3) the

production process.

11. Explain the relationship between storage location inventory and bin inventory.

12. Describe the different options for the order of postings in WM and IM and the consequences of each option on IM and WM inventory status.

13. Identify the key reports available in warehouse management and the signifi cant information found in these reports.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 2 6 5

2 6 5

Creating Storage

Bins Automatically

A P P E N D I X 7A

S torage bins can be created individually. However, a large warehouse will have a huge number of bins, often in the tens of thousands. In this case, creating each bin individually is extremely ineffi cient. Therefore, storage

bins are generally created automatically by defi ning templates, structures, start- ing values, ending values, and an increment. Figure 7-44 illustrates three exam- ples of how these elements are used in defi ning bins. The template defi nes the format to be used when creating bins automatically. It is 10 digits long and can include one alphabetic character (A), several numeric characters 0 through 9 (N), and several common characters (C), which can be either letters or numbers. In the fi rst example, the template (fi rst row) indicates that the bins

Figure 7-44: Automatic storage bin creation examples

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266 C H A P T E R 7 Inventory and Warehouse Management Processes

will begin with an alphabetic character (A) followed by two numbers (NN). The seven remaining characters are common to all bins (C). Thus, a possible bin number is A12XXXXXXX, where “X” represents the common character.

The structure indicates how the noncommon digits will increase or increment. Essentially, digits with the same letter in the structure are incre- mented together, and digits represented by different numbers are incremented independently of one another. Thus, in the fi rst example in Figure 7-44, each of the fi rst three digits is incremented individually because each digit (column) has a different letter in the structure row (A, B, and C). Therefore, an incre- ment in B will not automatically result in an increment in C. In contrast, in the second example the second and third digits are incremented together because they have the same character (B) in the structure row. Thus, if the second digit is incremented by 1, then the third digit also is incremented by 1.

The start value and end value indicate the starting and ending val- ues of the noncommon digits in the bin numbers. In all three examples in Figure 7-44 the start values are A11 and the end values are B22.

Finally, the increment indicates how much each noncommon digit is to be increased by. In the fi rst and second examples each digit is incremented by 1 unit (1 letter or 1 number). Thus, A is incremented to B, 1 is incremented to 2, and so on. In contrast, in the third example the second digit does not increase because the increment for that digit (column) is set to zero.

Let’s turn to the fi rst example. Bin numbers are determined from right to left. The fi rst bin is A11, and each of the three noncommon digits (columns) is incremented separately. The rightmost digit will increment by 1—the incre- ment identifi ed in row 5—so the next bin will be A12. At this point, the rightmost digit has reached its ending value (row 4), so the digit immediately to the left will begin incrementing. Following the same rules, the next bins are A21 and A22. Finally, the fi rst digit increments to “B,” thus creating bins B11, B12, B21, and B22, for a total of 8 bins.

In the second example, the second and third digits are incremented together because they have the same value (B) in the structure. Consequently, bin values for these two digits will be 11 and 22. Combining these values with the value of fi rst digit (A and B) will result in bins A11, A22, B11, and B22.

In the third example, the second and third digits increment together, but the increment value for the second digit is 0. Therefore the second digit will never increment. As a result, these two digits (second and third) will have 12 values ranging from 11 through 22. When these values are combined with the two values for the fi rst digit (A and B), a total of 24 bins are created.

Figure 7-45 illustrates the bin creation data for GBI. GBI uses these two models to create bins in the shelf storage area and the pallet storage area, respectively. All bins begin with the common characters STBN- and end with the common characters 000. Thus, the sixth digit (column) is the only one that increments. For the shelf storage area the starting value is 1, the ending value is 3, and the increment value is 1. Similarly, for the pallet storage area, the start value is 7, the end value is 9, and the increment is 1. Consequently, three bins are created in each area.

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Appendix 7A: Creating Storage Bins Automatically 267

Figure 7-45: Automatic bin creation—GBI

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C H A P T E R 4 The Procurement Process 2 6 9

2 6 9

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Explain the master data associated with the material planning process.

2. Analyze the key concepts associated with material planning.

3. Identify the basic steps in the material planning process and the data, documents, and information associated with them.

4. Effectively use SAP® ERP to execute the basic steps in the mate- rial planning process.

5. Extract and evaluate meaningful information about the material planning process using the SAP ERP system.

M aterial planning at GBI historically has been very informal. Planning for various types of materials has not been integrated with other pro- cesses. Instead, the company acquires or produces materials when it

needs them. As GBI has expanded to include more facilities, materials, and cus- tomers, however, this informal planning has created myriad problems for the company. Inventory levels are rarely what they should be—too much in some cases, not enough in others. On several occasions, customers have expected products to be available sooner than GBI could provide them. The results of this lack of overall planning and coordination have been increased costs due to expedited procurement or production, unplanned expenses resulting from storing excess inventory, and lost sales. GBI’s management fully understands that failing to plan adequately is equivalent to planning for failure. Their strat- egy for alleviating these problems is to implement an effective material plan- ning process at GBI.

C H A P T E R 8C H A P T E R

1The contents of this chapter were prepared with the expert assistance of Dr. Ross Hightower of the Mays Business School at Texas A&M University.

The Material Planning Process1

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270 C H A P T E R 8 The Material Planning Process

Material planning is concerned with answering three basic questions: (1) What materials are required, (2) how many are required, and (3) when are they required? The inability to answer any of these three questions accurately will result in ineffi ciencies, lost revenues, and customer dissatisfaction. The main objective of material planning is to balance the demand for materials with the supply of materials so that an appropriate quantity of materials is available when they are needed.

The fi rst part of this equation—the demand for materials—is driven largely by other processes. For example, the fulfi llment process uses trad- ing goods and fi nished goods, and the production process uses raw materials and semifi nished goods. If the materials are not available when they are needed, these processes will not function effectively. If raw materials are not available, for example, then the company cannot produce fi nished goods in a timely manner. Consequently, it will be unable to fulfi ll customer orders because it does not have the necessary materials in stock. This situation is known as a stock-out. A stock-out can result in lost sales if customers are not willing to accept late deliveries.

The supply side of the demand-supply equation is usually the domain of the procurement and production processes. That is, materials usually are either purchased or produced. Buying or producing more materials than what are needed will result in excess inventory, which ties up cash until the materials are eventually used. The money tied up in inventory represents an opportunity cost to the company. Additional costs are related to the cost of storage, insur- ance, and the risk of obsolescence. In addition, the value of some materials, such as computer components like memory and hard drives, can decrease rapidly. Thus, the longer the materials remain in storage, the more money the company loses. In some cases, materials may never be used at all and must be discarded, as illustrated in the example of Cisco Systems in Business Processes in Practice 8-1.

In 2001, Cisco Systems was selling huge amounts of their key networking products, driven largely by the dot-com boom. Cisco was having a diffi cult time keep- ing up with the demand for their products due to severe shortages of raw materials, so they had placed double and triple orders for some parts with their suppliers to ‘‘lock up’’ the parts. In addition, they had accumulated a ‘‘safety stock’’ of fi nished goods based on optimis- tic sales forecasts. When the Internet boom started to crash, however, orders began to taper off quickly. Even more damaging for Cisco, the company was unable to communicate the drop in demand through their

organization so that they could reduce their production capacity to sell off their ‘‘safety stock’’ of fi nished goods and also reduce the amount of raw materials they were purchasing to reduce their supply buffer.

This mismatch between lower demand, substan- tial inventories of raw materials, and excessive produc- tion capacity ultimately forced Cisco to write off more than $2.5 billion of excess inventory from their books in 2001—the largest inventory write-off in history.

Source: Compiled from Cisco company reports; and ‘‘Cisco

’Fesses Up to Bad News,’’ Infoworld, April 16, 2001.

Business Processes in Practice 8.1: Cisco Systems

The above discussion focused on fulfi llment and production. Almost all processes, however, either use materials (e.g., plant maintenance, project system, warehouse management) or make them available when they are needed (e.g., project systems, inventory, and warehouse management). Therefore,

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Master Data 271

material planning is one of the most complex processes within an organiza- tion. It uses data from many other processes, and it generates procurement proposals, that is, proposed methods of acquiring materials. These proposals are typically in the form of purchase requisitions or planned orders. Purchase requisitions, which we discussed in Chapter 4 (procurement), are requests to purchase materials. Planned orders, discussed in Chapter 6 (production), are requests to produce materials.

A simplifi ed material planning process is depicted in Figure 8-1. The process begins with sales and operations planning (SOP), which uses strategic revenue and sales objectives established by senior management to create spe- cifi c operations plans. The demand management step translates these plans into requirements for individual materials. Requirements specify how many of the materials are needed and when they are needed. These requirements are then used by the materials requirements planning (MRP) step to generate the fi nal procurement proposals for all materials. These proposals trigger the production or procurement processes that make or buy the needed materials. Ultimately the company uses these materials to execute the fulfi llment process.

Figure 8-1: A basic material planning process

The organizational data relevant to the material planning process are cli- ent, company code, plant, and storage locations. Because we have considered all of these concepts in previous chapters, we will not discuss them in this chapter. The next section describes the master data related to the material planning pro- cess. This section is followed by a detailed discussion of process steps. We con- clude the chapter with a discussion of reporting as it relates to material planning.

M A S T E R D ATA The master data relevant to material planning are bill of material, product routing, material master, and product group. We discussed bills of material and product routings in detail in Chapter 6. Recall that materials are used in nearly all processes and that material master data are grouped by process,

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272 C H A P T E R 8 The Material Planning Process

material type, and organizational level. We have also discussed various data (views) of the material master in previous chapters. In Chapter 5, we intro- duced MRP and work scheduling views, but we did not examine them in depth. In this section we will discuss these views at length because they are more directly relevant in material planning. In addition, we will discuss product groups as they relate to material planning.

M AT E R I A L M A S T E R

Data related to MRP and work scheduling are illustrated in Figure 8-2. MRP data can be quite extensive. Consequently, they are divided into four views or tabs—MRP 1, MRP 2, MRP 3, and MRP 4—to make the data more read- able. These data are relevant to both discrete and repetitive manufacturing (explained in Chapter 6). Our discussion is limited to data relevant to dis- crete manufacturing. Both MRP and work scheduling data are defi ned at the plant level. That is, they are specifi c to each plant. These data determine which strategies and techniques the company will use when planning for the material. Each MRP view provides a specifi c set of data, as indicated in the following list.

Figure 8-2: Material master data for material planning

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• The MRP 1 view defi nes the overall planning strategy used for the material and determines how much material the company should procure.

• The MRP 2 view identifi es the times the system can use for sched- uling and conveys data that the system uses to determine how to procure materials (make vs. buy).

• The MRP 3 view identifi es the strategy the system will use to cal- culate how much material is available, and it determines how the material will be produced.

• The MRP 4 view contains data that the system uses to select the correct BOM.

The work scheduling view contains data that determine production time such as setup, teardown, and processing time. We discussed these times in Chapter 6 in the context of work centers.

The next section provides a detailed discussion of the key data included in the MRP and work scheduling views of the material master.

Procurement Type

The outcome of the material planning process is one or more procurement proposals, which can trigger either the production or the procurement process. The procurement type indicates whether a material is produced in-house or internally (via the production process), obtained externally (via the procure- ment process), both, or none. Trading goods and raw materials are typically pur- chased from vendors. Consequently, the procurement type for such materials is specifi ed as external. In contrast, fi nished goods and semifi nished goods are typically produced in house. As a result, the procurement type for these types of materials is typically in-house production. Occasionally, however, when a company does not have the material or other resources to produce materials in house, it purchases them externally. In such cases, the procurement type is set to both. Procurement type none is appropriate for discontinued materials.

At GBI, the procurement type is defi ned as both for fi nished goods, as external for trading goods and raw materials, and as in-house for semi- fi nished goods.

MRP Type

MRP type specifi es the production control technique used in planning. Common production control techniques are consumption-based planning, materials requirement planning2 (MRP), and master production scheduling (MPS). MRP type can also be set to “no planning,” in which case the material is not included in the planning process.

Consumption-based planning calculates the requirements for a mate- rial based on historical consumption data. It manipulates these data to project

2The term materials requirement planning refers to both a planning technique and a step in the material planning process.

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274 C H A P T E R 8 The Material Planning Process

or forecast future consumption. The company then procures materials based on this projection. Figure 8-3 illustrates one type of consumption-based plan- ning called reorder point planning. The vertical axis represents the stock or inventory level, and the horizontal axis indicates the relevant time period. Note that the stock level steadily decreases over time. The diagonal line that repre- sents the changes in the stock level is the consumption line.

Figure 8-3: Consumption-based planning

Figure 8-3 also indicates a desired safety stock, which is the mini- mum desired level of inventory. The term stock is often used as a synonym for inventory. A stock-out will occur if a company has insuffi cient inven- tory to fi ll a customer order or to produce a fi nished good. As we discussed earlier in this chapter, a stock-out can lead to insuffi cient production and lost sales. Consequently, a company typically maintains a safety stock to avoid this situation. The material planning process monitors stock levels to prevent them from falling below the safety stock. The safety stock is specifi ed in the material master.

To prevent stock levels from going below the safety stock level, the com- pany must receive a supply of materials by the time the stock level reaches the safety stock level (point A in the fi gure). It takes some time for an order to be processed and for the shipment to be received. The time gap between placing an order—the reorder date in the fi gure—and receiving the materials—the deliv- ery date in the fi gure—is called the replenishment lead time. To ensure that the company receives the materials by the desired delivery date, it must place an order early enough to give the supplier suffi cient time to deliver the materials.

Most companies fi nd it more valuable to determine when to place an order in terms of stock level than in terms of a point in time. Specifi cally, they order materials when the stock level reaches a predetermined level, known as the reorder point. The reorder point is calculated by drawing a verti- cal line from the order date to the consumption line (to point B) and then a horizontal line to the vertical axis (to point C).

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The two other broad categories of consumption-based planning are forecast-based planning and time-phased planning. Forecast-based planning uses historical data to estimate or forecast future consumption. Organizations use the forecast to determine when to order materials. The advantage of this technique over reorder point planning is that it can consider consumption patterns that are more complex than a trend line. Time-phased planning is similar to forecast- based planning. It is used in cases where vendors deliver only on specifi c days of the week.

Regardless of the specifi c technique, consumption-based planning is relatively uncomplicated compared with materials requirements planning. It assumes that future consumption will follow the same patterns as past con- sumption. In addition, it does not take into account dependencies between different materials. For example, the need for wheels depends on the need to produce bicycles. In this case, consumption-based planning is not appropri- ate. This is because the need for wheels is not based on its past consumption; rather, it is based on the need to make bicycles. Companies generally reserve consumption-based planning for materials of low value or signifi cance, such as nuts and bolts.

GBI uses consumption-based planning for materials classifi ed as acces- sories, such as bike helmets (OHMT1000). Figure 8-4 illustrates the plan- ning scenario for procuring helmets. In this example the replenishment lead time is 3 days, and the safety stock is 50 units. The consumption line, calculated from historical sales data, projects that inventory will fall to the safety stock level on day 7 (point A). To ensure that the helmets will arrive by that date, GBI must initiate the purchasing process on day 4 (7 minus the replenishment lead time), the reorder date. The reorder point is calcu- lated by drawing a line from the reorder date to the consumption line (to point B) and then a horizontal line to the vertical axis (to point C). Thus, GBI must place an order for helmets when 125 or fewer helmets are left in stock.

Figure 8-4: Reorder point planning example

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276 C H A P T E R 8 The Material Planning Process

In contrast to consumption-based planning, the MRP technique calcu- lates requirements for a material based on its dependence on other materials. To understand the specifi cs of the MRP technique, we must fi rst consider two related concepts—dependent and independent requirements. The terms dependent and independent refer to the source of the requirements. A material has a dependent requirement if its requirement is dependent on the requirements for another material. For example, a bicycle is made of several components such as wheel assemblies and a seat. The requirement for wheel assemblies and seats is depen- dent on the requirement for bicycles. Therefore, wheel assemblies and seats have a dependent requirement. Typically, semifi nished goods (e.g., wheel assemblies) and raw materials (e.g., seats) have dependent requirements because they are used to make other materials (fi nished goods or other semifi nished goods). In contrast, the requirement for bicycles, a fi nished good, is not dependent on any other material. Instead, it is based on customer demand. Thus, bicycles, and fi n- ished goods in general, have independent requirements.

The MRP technique is used to calculate and plan requirements for mate- rials at all levels of the BOM. This procedure, known as exploding the BOM, is illustrated in Figure 8-5. The input to MRP is the independent requirement for the fi nished goods, which is calculated by the sales and operations planning step of the material planning process. We will examine this technique in greater detail in the process section of this chapter. For now, it is suffi cient to under- stand that the independent requirements are determined based on actual and forecasted sales. These calculated requirements are called planned indepen- dent requirements (PIRs). In contrast, actual sales orders are also known as customer independent requirements (CIRs), or simply customer require- ments. PIRs drive the requirements calculations for each successive level in the BOM. Going further, the requirements for each level are dependent on the requirement for higher-level materials. For example, if the PIR for bicycles is 100 and each bicycle uses 2 wheel assemblies and 1 seat, then the MRP calcula- tion will create dependent requirements of 200 wheel assemblies and 100 seats.

A variation to MRP is master production scheduling (MPS), which utilizes a process similar to MRP but focuses exclusively on the requirements

Figure 8-5: MRP vs. MPS

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for the top-level items in the BOM. Companies use MPS for the most critical fi nished goods to ensure that resources and capacity are available for these materials before they plan for other materials. MPS is an optional step in the planning process and is usually followed by MRP, which completes the plan- ning process for the remaining materials.

Lot Size Key

A lot size is the quantity of material that is specifi ed in the procurement pro- posals generated by the material planning process. The lot size key specifi es the procedure that is used to determine the lot size. A variety of procedures for determining lot size are available. The most basic procedures are static lot-siz- ing procedures, which specify a fi xed quantity based on either a predetermined value (fi xed lot size) or the exact quantity required (lot-for-lot). For example, when using the lot-for-lot procedure, if the calculated requirement for seats is 100, then the proposed order quantity is also 100. Period lot-sizing procedures combine the requirements from multiple time periods, such as days or weeks, into one lot. Optimum lot-sizing procedures take into account the costs of order- ing and storing materials using techniques such as the economic order quantity and economic production quantity calculations. For example, if the calculated requirement for seats is 100, the proposed order quantity may be 500 if it is more economical to purchase the seats in larger quantities. GBI uses the lot-for-lot procedure to determine the lot size for all of its materials.

Scheduling Times

One task that must be performed by the planning process is to estimate the time needed to procure the necessary materials. This calculation is based on estimates of the time required to complete the various tasks that are included in the material master and the product routing. Common time estimates include:

• In-house production time, which is the time needed to produce the material in house.

• Planned delivery time, which is the time needed to obtain the mate- rial if it is externally procured.

• GR (goods receipt) processing time, which is the amount of time required to place the received materials in storage so that they are ready for use.

In-house production time and the GR processing time are used to deter- mine procurement time for internally procured materials. For externally pro- cured materials, the planned delivery time and the GR processing time are used.

In-house production time is further divided into three time elements: setup, processing, and interoperation. Recall the discussion of some of these elements from Chapter 6.

• Setup time is the time required to set up the work centers used in production.

• Processing time is the time required to complete operations in the work centers.

• Interoperation time is the time required to move materials from one work center to another.

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278 C H A P T E R 8 The Material Planning Process

Times can be lot size independent or lot size dependent. Lot size inde- pendent times remain the same regardless of the amount of material being procured. In contrast, lot size dependent times vary according to the lot size or quantity. Examples of lot size independent times are setup time, in-house production time, and the GR processing time. In contrast, processing time is typically lot size dependent.

The lot size independent in-house production time is an estimate of the total time required for production including the setup, processing, and interop- eration times. Although the processing time normally depends on the number of units being produced, the lot size independent in-house production time is used when (1) the lot size is fi xed, so that processing time is constant, or (2) the processing time is very short compared to the setup and interoperation times. When the processing time is large in comparison to the setup and interopera- tion times or when the quantity of material to be produced varies, a lot size dependent in-house production time is calculated using the three time ele- ments (setup, processing, and interoperation).

Because companies utilize these various time estimates in the planning process to schedule procurement and production, inaccurate values will cause signifi cant problems. Inaccurate schedules require manual intervention, and, if users fi nd they can’t trust the data in the system, they will learn to ignore them and create their own workarounds. Thus, it is imperative that an organization carefully analyze and monitor its processes for determining scheduling times.

Planning Time Fence

The material planning process often has to adjust the quantities and sched- ules it creates for procurement proposals. For example, the consumption of a raw material may be unexpectedly high because of higher-than-expected demand. In such cases the planning process may increase the quantities of existing planned procurements, or it may schedule them so the materials arrive earlier. Changes in procurement proposals far into the future normally are not a major concern, but changes to proposals in the near future can cause prob- lems because other departments or processes in the organization may have incorporated the original proposals into their planning. For this reason, com- panies establish a period of time in which the ERP system is not allowed to automatically change procurement proposals. This time period is known as the planning time fence. If the planning time fence is 30 days, for example, then no purchase requisition that is dated 30 days or less from the current date can be changed automatically by the system. If changes are necessary, they must be made manually.

BOM Selection Method

Recall from Chapter 6 that a bill of materials (BOM) identifi es the materials needed to produce a fi nished good. In some cases a single material can have multiple BOMs. For example, a company might use different BOMs for differ- ent plants or different lot sizes. Companies also generate multiple BOMs when they update their products. For example, if GBI plans to upgrade the touring bike model with a new tire beginning January 1, then it must create a new BOM for the bike in advance with a beginning validity date of January 1. At the same time, it must set the ending validity date of the current BOM to December 31.

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Because several BOMs can exist for the same material, the ERP system must have a method to determine which BOM to use. The BOM selection method in the material master identifi es the criteria the system should use to select the BOM. Examples of criteria are lot size and validity date.

Availability Check Group

The availability check group defi nes the strategy the system uses to deter- mine whether a quantity of material will be available on a specifi c date. The most common method, called available-to-promise (ATP), considers a broad range of elements representing both the supply of and demands for the material. Supply elements include existing inventory, purchase requisitions, purchase orders, and production orders. Demand elements include mate- rial reservations, safety stock, and sales orders. The availability check group informs the system which supply and demand elements to take into account when determining availability. Because material availability is a concern in many parts of an organization, the availability check group is used by multiple processes. For example, the fulfi llment process uses it to ensure that materials can be delivered to a customer on the requested delivery date, and the produc- tion process uses it to ensure that materials are available before production orders are released.

Strategy Group

Strategy group specifi es the high-level planning strategy used in production. Production planning strategies fall into three broad categories: make-to-stock, make-to-order, and assemble-to-order. We introduced the fi rst two strategies in Chapter 6, in the context of the production process. Business Processes in Practice 6-2 in that chapter presents examples of how Dell and Apple use make-to-order and make-to-stock strategies, respectively. In this section, we will extend the discussion of these planning strategies.

In the make-to-stock (MTS) strategy customer orders are fulfi lled from an existing inventory of fi nished goods. The MTS strategy is usually employed by fi rms that produce a high volume of identical products. This strategy reduces the time required to fi ll customer orders because there is no need to wait until the materials are produced. In addition, it enables the company to produce goods at a constant rate and in optimum lot sizes, regardless of customer demand. In SAP ERP the simplest make-to-stock strategy is net requirements planning (strategy 10), in which the system generates procurement proposals based on calculated PIRs without regard to CIRs.

A common variation to the make-to-stock strategy is planning with fi nal assembly (strategy 40). This strategy is also based on PIRs. Unlike the pure MTS strategy, however, this approach takes into account actual sales orders through a procedure called consumption. We discuss consumption modes in the next section.

In contrast to MTS, in a make-to-order (MTO) strategy the produc- tion of the fi nished goods and any needed semi-fi nished goods is triggered by a sales order. The company does not maintain an inventory of these mate- rials. MTO is also referred to as sales-order-based production. In contrast to MTS, MTO is used when each product is unique. For example, if GBI intro- duced a line of high-end racing bikes designed specifi cally for individual riders,

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280 C H A P T E R 8 The Material Planning Process

it would use MTO for these products. The bikes would not be produced until the order was received.

A variation of the MTO strategy is assemble-to-order (ATO), in which an inventory of components (semifi nished goods) needed to make the fi n- ished good is procured or produced to stock. The production of the fi nished goods is triggered by a sales order and therefore uses an MTO strategy. ATO is commonly employed in an environment in which there are a large number of possible confi gurations of end items. For example, different computer confi gu- rations are possible using a number of different options for monitors, storage devices, and memory. A sales order for the fi nished product can usually be fi lled quickly because only the fi nal assembly has to be executed. (The compo- nents are already in stock.) In SAP ERP, the ATO strategy is also referred to as planning without fi nal assembly (strategy 50) or subassembly planning. Variations of both the pure MTO and MTS strategies offer more fl exibility in meeting customer requirements.

Consumption Mode

A key point that emerges from the discussion of strategy groups is that the manner in which PIRs (planned independent requirements) and CIRs (actual customer orders) interact is determined by the planning strategy. On the one hand, in a MTS strategy such as net requirements planning, CIRs and PIRs are independent of each other, and procurement proposals generated by the material planning process are based only on PIRs. CIRs are fulfi lled entirely from existing stock. On the other hand, under the planning with fi nal assem- bly approach, procurement proposals take into account both PIRs and CIRs. However, procurement proposals are not created by simply adding the PIR and CIR quantities. This is because the PIRs are created in anticipation of customer orders, and CIRs are expected to consume the PIRs. In other words, sales orders are expected to be fi lled from the planned requirements. When a CIR consumes PIRs, it reduces the quantity of PIRs by the quantity of the CIR. This process is called consumption.

Table 8-1 illustrates consumption under the planning with fi nal assembly strategy. In Example 1 a PIR of 50 exists when a CIR of 60 is created. Because the CIR is greater than the PIR, the entire PIR is consumed. Therefore, after consumption the PIR quantity is zero. The planning process will create a pro- curement proposal for the CIR quantity of 60 units. In Example 2 a PIR of 50 exists when a CIR of 40 is created. After consumption, 10 of the original 50 in the PIR remain. The planning process will create two procurement proposals: one for the PIR quantity of 10 units and one for the CIR quantity of 40 units.

Before Consumption After Consumption

PIR CIR PIR CIR

Example 1 50 60 0 60

Example 2 50 40 10 40

Table 8-1: Consumption example

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Thus, when PIRs are not consumed by CIRs (because there are not enough customer orders), the procurement proposals will result in an increase in the inventory of the material. In the opposite situation, when CIRs exceed available PIRs within the consumption period—that is, customer orders exceed the planned requirements—then the planning process generates additional procurement proposals to cover the difference.

The manner in which CIRs consume PIRs is determined by the consump- tion mode. Two commonly used consumption modes are forward consumption and backward consumption. A combination of forward and backward con- sumption is also possible. These alternatives are diagrammed in Figure 8-6. The top part of the fi gure illustrates backward consumption (mode 1); the mid- dle part, forward consumption (mode 3); and the bottom part, backward and forward consumption (modes 2 and 4). In these illustrations the horizontal axis is the time line, the area above the time line represents the planned inde- pendent requirements, and the area below the time line indicates the customer requirements. The plan (PIR) is to produce or procure 40 bikes in each time period. In each case the company must fi ll a customer requirement of 60 bikes.

Figure 8-6: Consumption modes

In backward consumption, customer requirements consume PIRs that are dated prior to the time of the customer requirements. Thus, to meet the CIR of 60 bikes, the immediately preceding PIR is consumed. Because this quantity (40) is not suffi cient to satisfy the CIR (60), 20 bikes from the next preceding PIR are consumed. In forward consumption, customer requirements consume PIRs that occur after the date of the CIR. Thus, to meet the require- ment of 60 bikes, the PIRs immediately following the CIR are consumed as

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282 C H A P T E R 8 The Material Planning Process

needed—40 bikes from the fi rst PIR and 20 from the next. Modes 2 and 4 use both forward and backward consumption. Mode 2 uses backward consump- tion fi rst followed by forward consumption; mode 4 uses the reverse.

The consumption period indicates the number of days, before or after, from the CIR that PIRs can be consumed. PIRs outside the consumption period cannot be consumed by the CIR. The assumption is that, because of scheduling and capacity considerations, only PIRs in the same general time- frame as the sales order should be consumed by the CIR.

Demo 8.1: Review MRP and scheduling views for a material

P R O D U C T G R O U P S

When a company manufactures or sells many similar products, such as a fur- niture company with tens of thousands of different types of chairs and desks, planning separately for each material is neither necessary nor effi cient. For this reason, companies generally place products with similar planning characteris- tics, such as similar types or similar manufacturing processes, into a product group or a product family. The grouping of products, from the lowest mate- rial (fi nished good or trading good) level to the highest product group level, is called aggregation. That is, products are aggregated into groups. Moreover, a higher-level product group can be nested, meaning that it is comprised of lower-level product groups. The lowest product group in any hierarchy con- sists of materials, either fi nished goods or trading goods.

Figure 8-7 illustrates the product groups for GBI bikes. The bicycle prod- uct group (PG-BIKE000) consists of a number of nested product groups. Each one of these groups represents a different product line such as the touring bikes (PG-TOUR000) and off-road bikes (PG-ORBK0000). The eight boxes at the bottom level of the hierarchy are all materials that represent the differ- ent bicycle models.

Materials and product groups can be members of more than one group for different planning scenarios. For example, a company might plan sepa- rately for domestic and export markets because they involve different sales patterns. Further, each member of a product group is assigned a proportion factor. A proportion factor is a measure of how much the item infl uences the product group. For example, in Figure 8-7, the product group for off-road bikes includes the Men’s bikes and Women’s bikes, with proportion factors of 65% and 35%, respectively. Thus, Men’s bikes are more infl uential than Women’s bikes in planning for the off-road bike group. Proportion factors are used in the material planning process to derive detailed plans from high-level fore- casts. Forecasts and plans for the higher level product groups are disaggregated into plans for lower levels using the proportion factors. For example, if the plan calls for 1,000 off-road bikes, then the system automatically translates this information into a plan for 650 Men’s and 350 Women’s bikes. We address aggregation and disaggregation in greater detail in the process section of this chapter. Business Processes in Practice 8-2 describes product groups at Apple Inc.

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Figure 8-7: GBI product groups

Apple provides an excellent example of how compa- nies use product groups for material planning purposes. (Figure 8–8). Apple’s product portfolio consists of sev- eral hardware, software, and service products, such as Macs, iPods, iPhones, iPads, and peripherals. If we look only at Apple’s standard make-to-stock hardware prod- ucts, we can begin to appreciate the complexity of the company’s material planning process. Apple assigns each product to a product group, for example, Macs, iPads, and Peripherals and Accessories. Nested within the Macs product group are several product subgroups, for exam- ple, Desktops, Portables, and Servers. In turn, the product subgroups are subdivided into individual fi nished goods. Thus, for example, the product subgroup Portables is comprised of the MacBook, MacBook Pro, and MacBook

Air. Signifi cantly, many products within the same prod- uct group are manufactured from similar raw materials. For example, most of the products in the product groups for iPad, iPhone, and iPod contain the same processors and fl ash memory chips. However, only the iPod Touch and the iPhone share the same size touch screens. Thus, aggregation and disaggregation across product groups become increasingly complex when companies need to plan for shared raw material dependencies. For this rea- son, companies must employ accurate demand forecast- ing to ensure that material planning is executed properly.

Note: Apple changes its product offerings with great frequency.

Figure 8-8 depicts the Apple mid-2010 product offering.

Source: Apple company reports.

Business Processes in Practice 8.2: Product Groups at Apple, Inc.

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Figure 8-8: Product groups at Apple Inc

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Demo 8.2: Review GBI product groups

P R O C E S S In this section we will discuss the material planning process, which is presented in Figure 8-9. The fi rst step in the process is often sales and operations planning (SOP). SOP is a forecasting and planning tool that businesses use to enter or generate a sales forecast, specify inventory requirements, and then generate an operations plan. SOP typically involves fi nished goods. Therefore, the operations plan is, in effect, a production plan for these materials. The plan generated by SOP is called a rough-cut plan because the planning is usually at a highly aggregated level and is not very precise.

Figure 8-9: The material planning process

Whether SOP is required depends on the production planning strategy used for the material. MTO production does not require a production plan because production is triggered by sales orders. Therefore, SOP is not nec- essary. In contrast, MTS production requires a production plan based on a sales forecast because sales orders are fi lled from materials already in inven- tory. Consequently SOP is relevant for materials with the MTS strategy. For variations of MTO such as ATO, in which semifi nished materials are produced ahead of time and placed in inventory, production plans must be created for the semifi nished materials.

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286 C H A P T E R 8 The Material Planning Process

SOP creates a production plan at the product group level. In turn, these requirements must be translated into PIRs for the individual mate- rials in the product group. This task is accomplished in the disaggregation step. The PIRs for the individual materials are then transferred to demand management, where they are revised and refi ned based on the specifi c plan- ning strategies we discussed earlier. The fi nal step, MRP, creates specifi c procurement proposals to ensure that suffi cient materials will be available to cover each requirement.

The sales and operation step requires input from many parts of an orga- nization and is often performed by the planning or forecasting group. After the production plan is transferred to demand management, it becomes the respon- sibility of the MRP controller. The MRP controller is the person or persons in an organization responsible for creating procurement proposals and monitor- ing material availability. All materials that are used in the planning process must be assigned to an MRP controller in the material master.

Our discussion of the material planning process will use GBI’s bicycles product group (Figure 8-7) as an ongoing example. GBI initiates its material planning process when it develops its overall strategic plan. This plan includes expected sales for the bicycles product group (PG-BIKE000).

S A L E S A N D O P E R AT I O N S P L A N N I N G

Figure 8-10 diagrams the elements of the sales and operations planning step. SOP is triggered when the organization wishes to revise its production plan. Most organizations perform this task at scheduled intervals depending on their planning process. For example, an organization may require quarterly reviews of sales forecasts and production plans. SOP may also be triggered by unex- pected events such as changes in the overall economic outlook. For example, the fi nancial crisis of 2008 caused many companies to revise their sales fore- casts downward and reduce their production levels accordingly. SOP uses data from a variety of sources to produce a production plan.

Figure 8-10: Elements of the SOP step

SOP can generate several versions of a production plan based on dif- ferent assumptions concerning the growth of the overall economy. Each plan incorporates different sales forecasts and desired inventory levels. The company then evaluates these plans to determine their feasibility in terms of production capacity. Generating multiple versions allows the organization to consider different planning scenarios. After evaluating the various plans, the company selects one scenario as the basis for further planning.

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SOP can be either standard or fl exible. With standard planning a company uses predefi ned planning models. These models are relatively simple, and they take into account total values for sales, production, and inventory levels for the entire organization. Therefore, standard planning can be employed only for highly aggregated planning. It is easy to use, however, and requires no preparation.

In contrast, with fl exible planning a company uses tools to develop more complex planning models that contain far greater levels of detail. For example, an organization can create a model that breaks down sales to the distribu- tion channel level and calculates production quantities for individual plants. However, fl exible planning requires more-detailed data than does standard planning, and the desired planning models must fi rst be created. Our discus- sion is limited to standard planning.

Data

Figure 8-11 illustrates the data utilized in the sales and operations step. The most critical data are a sales plan, existing inventory levels, and inventory requirements. Existing inventory levels can be transferred from inventory and warehouse management. Inventory requirements most frequently are deter- mined based on economic and fi nancial criteria such as storage costs, varia- tions in expected customer demand, and production capacities. They can be calculated as a part of the overall strategic planning process.

Figure 8-11: Data in the SOP step

Organizations execute planning for specifi c organizational levels and master data—for example, for specifi c product groups and specifi c plants.

Tasks

The tasks in the sales and operations planning step include creating the sales plan, specifying inventory requirements, and creating a production plan. The interface to complete the tasks in SOP is a simple-to-use spreadsheet-like tool

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288 C H A P T E R 8 The Material Planning Process

called the planning table. Figure 8-12 illustrates a standard SOP planning table. The header area of the table indicates the product group and plant for which the plan is generated as well as the version number of the plan. (Recall that multiple versions of the same plan can be created for different planning scenarios.) The columns represent months by default, but users can specify other time periods. The table includes the following rows:

Figure 8-12: Standard SOP planning table

• Sales: This row contains the sales plan.

• Production: This row contains the production plan, which is usually calculated by the system.

• Stock level: This row contains inventory levels, which are generated by the system when the production plan is calculated.

• Target stock: Desired stock (inventory) levels are entered in this row.

• Day’s supply: Day’s supply is the number of days the organization can expect to cover sales using only existing inventory. This num- ber is calculated by dividing inventory by sales per workday in the period. The number of workdays is specifi ed when the system is initially confi gured. This row is calculated by the system.

• Target day’s supply: The desired day’s supply is entered in this row.

The sales plan is entered fi rst. Data for the sales plan can be obtained from a variety of sources:

• A sales plan based on desired levels of profi tability can be imported from profi tability analysis, which is one of the processes in manage- ment accounting.

• If the company anticipates that future sales will be the same as past sales, then it can transfer historical sales data from the sales infor- mation system (SIS), which we discussed in Chapter 5.

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Process 289

• Conversely, if the company expects future sales to differ from past sales but it believes it can predict them based on past sales, then it can create a forecast by inputting historical data from SIS into one of several forecasting models available in SOP.

• Employees can enter a sales plan manually based on either experience or a forecast from another program.

• A sales plan can be copied from the plan generated for another product group.

Regardless of which procedure the company uses, after it enters the sales plan the system generates a production plan based on one of the following options:

• Synchronous to sales: In this scenario, the system simply copies quantities from the sales plan row to the production plan row. Thus, the quantities in both rows are identical.

• Target stock level: In this scenario, the company specifi es a desired stock level, and the system calculates the production quantities needed to meet the sales plan and achieve the target stock level.

• Target day’s supply: This scenario is similar to the target stock level scenario. The difference is that the desired inventory levels are expressed in terms of day’s supply instead of specifi c quantities. The target day’s supply is specifi ed by the user, and the system calculates the quantities in the production row required to achieve that target.

• Stock level � 0: In this scenario the desired stock level at the end of each period is zero. The system uses existing stock to cover sales until the stock level falls to zero. As long as there is any exist- ing inventory, the company will not produce new material. When inventory reaches zero, the system calculates production quantities that will just cover sales quantities with no excess for inventory. Thus, the stock level row will be zero for every period.

Figure 8-13 illustrates a planning table for the bicycles product group for GBI’s Dallas plant. The planning timeframe is 4 months. The planning scenario is one in which the system will calculate the needed production plan to meet the specifi ed sales plan and the desired target stock levels. The top fi gure illus- trates the planning table after the sales plan and target stock levels have been entered. The bottom table displays the results after the system has calculated the needed production plan. The production data are calculated by computing the total requirements (sales � target stock) and subtracting available stock (stock level from the previous month).

Figure 8-13 shows that the production plan for the bicycles product group for the 4 months is 1,100, 1,300, 900, and 850, respectively. Table 8-2 shows the calculation for the third month.

To calculate the day’s supply, the system fi rst determines the daily require- ments by dividing the sales by the number of working days in the month. It then divides the target stock level by the daily requirements. The calculation for month 2 is shown in Table 8-3 (assuming 30 working days in month 2).

The target day’s supply row in Figure 8-13 is empty because the values in this row would be entered by the user only if the method for calculating the production plan was based on the target day’s supply.

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290 C H A P T E R 8 The Material Planning Process

Figure 8-13: GBI SOP example

Sales 1,000 units

Target stock � 100 units

Previous inventory � 200 units

Production 900 units

Table 8-2: Production plan calculation example

Target stock �

200 units � 5 Day’s supply

Daily requirements (1,200 units / 30 working days)

Table 8-3: Day’s supply calculation example

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Process 291

Outcomes

The outcome of SOP is one or more versions of the production plan. There are no fi nancial implications and no material movements. Consequently, no FI, CO, or material documents are created.

Demo 8.3: Create an SOP for the bicycles product group

D I S A G G R E G AT I O N

The SOP step creates sales and production plans at the product group level. After this step has been completed, the plans must be translated into plans for the fi nished goods in the product group hierarchy. This process step is called disaggregation. (We introduced disaggregation in our discussion of product groups.) The elements of the disaggregation step are diagrammed in Figure 8-14. Disaggregation is triggered when a new production plan is cre- ated. Organizational data (e.g., plant) and master data (e.g., product groups) from the production plan are used to calculate requirements for the materials in the product group. These requirements are then transferred to the demand management step for further planning.

Figure 8-14: Elements of the disaggregation step

Data

The data used in the disaggregation step include product group data, the pro- duction plan from SOP, and user input (Figure 8-15). The system uses the pro- portion factors from the product group to compute the disaggregated values for each member of the product group. Recall that product group members are other product groups or, at the lowest level, materials. The user provides parameters that determine how the plan is disaggregated.

Tasks

The essential task in this step is to translate the plans generated in the SOP step for product groups into plans for the materials contained in those groups. Disaggregation can be completed for the entire product group hierarchy or for one or more levels of the hierarchy. Further, either the production plan or the sales plan can be disaggregated. Thus, a variety of options are available at this step.

• Disaggregate the production plan to one or more levels or down to the material level.

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292 C H A P T E R 8 The Material Planning Process

• Disaggregate the sales plan down to the next level in the product group. The disaggregated plan is the sales plan for the next level and is used to calculate a production plan, as explained in the SOP step. Then, continue to the material level.

• Disaggregate the sales plan down to the material level, and calcu- late the production plan for each material.

One option for GBI is to disaggregate the sales plan for the bicycles prod- uct group to the touring bike and off-road bike product groups and then use SOP to create production plans for these product groups. Alternatively, GBI can choose to disaggregate the production plan for the bicycles product group all the way to the fi nished goods at the bottom of the product group hierarchy.

In our example GBI selects the second option. Recall from the exam- ple in the SOP step that the production plan for the fi rst month is 1,100 units for the bicycles product group. The disaggregation step translates this value throughout the product group hierarchy, as illustrated in Figure 8-16.

The 1,100 bicycles are translated into 660 touring bikes and 440 off-road bikes using the proportion factors of 60% and 40%, respectively. The 660 tour- ing bikes are further translated into 462 deluxe touring bikes and 198 pro- fessional touring bikes (70% and 30%). Finally, the deluxe touring bikes are translated into 184 black deluxe touring bikes and 139 each of the silver and red deluxe touring bikes. These production plan values are the PIRs for the three deluxe touring bikes for the fi rst month. GBI completes a similar disag- gregation for all members of the product group hierarchy and for all months.

Outcomes

The outcome of the disaggregation step is to calculate the PIRs for each plan- ning period (e.g., week or month). These requirements are then transferred to demand management, as illustrated in Figure 8-17. The fi gure indicates that the plan for the product group deluxe touring bikes is disaggregated to the three materials in the group as material-plant specifi c PIRs. These data are then transferred to demand management.

Figure 8-15: Data in the disaggregation step

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Process 293

Figure 8-16: GBI disaggregation example

Figure 8-17: Transfer PIRs to demand management

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294 C H A P T E R 8 The Material Planning Process

As in the SOP step, no FI, CO, or material documents are created because disaggregation has no fi nancial consequences and does not involve any mate- rial movements.

Demo 8.4: Disaggregate production plan and transfer to demand management

D E M A N D M A N A G E M E N T

Demand management calculates revised PIRs for the materials using the PIRs from SOP (after disaggregation), actual customer orders (CIRs) from the fulfi llment process, and data from the material master regarding planning strategies. Figure 8-18 illustrates the specifi c elements of the demand manage- ment step.

Figure 8-18: Elements of the demand management step

Data

Demand management (Figure 8-19) uses requirements data from SOP (PIRs) and the fulfi llment process (CIRs). It also uses the planning strategy defi ned by the strategy group in the material master.

Figure 8-19: Data in the demand management step

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Process 295

Tasks

The primary task in demand management is to create revised PIRs for materi- als. Which procedure a company uses to calculate these requirements depends on the production planning strategy defi ned by the strategy group in the mate- rial master. As previously discussed, the production planning strategy deter- mines whether production is triggered by planned independent requirements (MTS) or customer requirements (MTO), or if the interaction of these two types of requirements affects the planning process through consumption.

The demand management step is carried out automatically by the ERP system. However, the MRP controller monitors the results using a variety of reports and makes adjustments as needed. For example, if the process uses a planning strategy with consumption, then scheduling changes may be required when new customer requirements are created. With an MTO planning strategy, the MRP controller must monitor the inventories of subassemblies carefully because customer orders appear at unpredictable intervals.

Outcomes

The outcomes from demand management are PIRs for each material included in planning. These PIRs represent requirements for the materials for specifi c quantities and specifi c dates. They are then used by the MRP step. There are no fi nancial implications and no material movements associated with demand management, so no FI, CO, or material documents are created.

M AT E R I A L S R E Q U I R E M E N T S P L A N N I N G

The fi nal step in the material planning process is MRP, which calculates the net requirements for materials and creates procurement proposals—to make or buy the necessary materials—that ensure that the organization will have suf- fi cient material available to cover its requirements. Figure 8-20 illustrates the elements of the MRP step.

Figure 8-20: Elements of the MRP step

Recall that SOP generates plans at the product group level, and demand management generates plans at the material level. In contrast, MRP generates plans for materials as well as for the components and raw materials that are used to produce a material. That is, it plans for all levels of the BOM.

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296 C H A P T E R 8 The Material Planning Process

A variety of activities can affect material availability in the different pro- cesses as illustrated in the following list:

• Procurement: purchase requisitions, purchase orders, and goods receipts

• Fulfi llment: sales orders, deliveries, and goods issues

• Production: planned orders, production orders, material reserva- tions, and goods receipts and issues

These activities are called MRP elements, and they are used in the MRP step to calculate net requirements and to generate procurement propos- als. Net requirements utilize all of the relevant MRP elements to calculate the quantities in the procurement proposals. We explain the net requirement calculation later in this section.

The MRP step can be executed manually. However, because numerous activities in other processes affect MRP, the planning situation is constantly changing. Therefore, companies frequently confi gure their ERP system to peri- odically execute the MRP step automatically. The MRP controller is typically responsible for monitoring the results of the planning process via a variety of reports that we discuss later in this chapter. He or she must then take appropri- ate actions to trigger necessary procedures. For example, planned orders must be converted to production orders or purchase requisitions. Production orders must be released so that production can begin. Planned orders might have to be rescheduled to resolve problems relating to scheduling or capacity. As you can imagine, in plants that use hundreds or even thousands of materials, the MRP controller can be very busy.

MRP can be executed for one plant, for multiple plants, or within MRP areas. An MRP area can include an entire plant or specifi c storage locations within a plant. Executing MRP for individual MRP areas enables a company to plan for one group of materials within a plant independent of other groups. For example, the company can plan for low-value materials separately from high-value ones.

Master production scheduling (MPS) is a specialized form of MRP that organizations use to plan for highly profi table materials or for materials that use critical resources. Materials planned by MPS are typically the fi nished goods at the top level of the BOM hierarchy. They are fl agged as master schedule items, and they have priority for resources such as capacity and transportation. After planning the master schedule items, MPS creates dependent requirements for the components of those items. However, it does not plan them or any mate- rials below them. After MPS is fi nished, MRP is used to plan the remaining materials. In many cases, only MRP is used.

Data

The data in the MRP step are illustrated in Figure 8-21. Master data used in the MRP step include material master, material BOM and—optionally—the rout- ing. Material BOMs are used to determine dependent requirements. Recall that when multiple BOMs exist for a material, the method for determining which BOM will be used is defi ned in the material master. Normally, MRP uses the scheduling times in the material master to perform scheduling and to determine the order start date and the order fi nish date. These dates indicate

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Process 297

when production must begin and when it will end. However, MRP cannot determine the details for individual production operations using times in the material master. If more detailed scheduling that includes operations-level data is required, MRP uses scheduling data in the product routing. The rout- ing contains the operations and times required for production, so MRP can schedule each individual operation in detail. This type of scheduling, called lead time scheduling, is not normally performed until the planned order is con- verted into a production order.

Tasks

Figure 8-22 illustrates the tasks in the MRP step. These steps are performed automatically by MRP.

Figure 8-21: Data in the MRP step

Figure 8-22: MRP procedure

Check Planning File

The fi rst task in MRP is to determine which materials must be planned. Any change to an MRP-relevant material generates an entry in the planning fi le. Examples of relevant changes are changes to the scheduling times in the mate- rial master and changes to MRP elements such as inventory levels, purchase requisitions, and purchase orders. The materials in the planning fi le are coded so that fi nished goods are planned fi rst, followed by components in the BOM for the fi nished goods, and so forth. Individual raw materials at the bottom of a BOM hierarchy are planned last.

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298 C H A P T E R 8 The Material Planning Process

Calculate Net Requirements

The next step is to determine whether there is a need to procure the material. This step is accomplished by performing a net requirements calculation, which takes into account all of the relevant MRP elements to determine whether a shortage of materials exists. If more materials are needed, then procurement proposals are generated to meet the shortfall.

The trigger for this calculation and the choice of the calculation method depends on the MRP type specifi ed in the material master. If the MRP type is consumption-based planning, then the net requirements calculation deter- mines the available stock according to the following formula:

Available stock � Plant stock � Receipts

Receipts result from purchase orders, fi rmed purchase requisitions, fi rmed planned orders, and production orders. A purchase requisition or planned order is fi rmed if it is within the planning time fence. If available stock falls below the reorder point, then the material must be procured. Other consumption- based planning methods use similar calculations. Notice that neither indepen- dent nor dependent requirements are relevant for these materials.

If the MRP type is MRP or MPS, the net requirements calculation is triggered when an independent or dependent requirement exists. For each requirement, MRP performs the net requirements calculation to determine whether suffi cient material exists to meet the requirement. The calculation is as follows:

Available stock � Plant stock � Safety stock � Receipts � Issues

The calculation takes into account inventory by summing current plant stock and subtracting the safety stock. The system also takes into account all goods receipts and issues. Goods receipts result from purchase orders, fi rmed pur- chase requisitions, fi rmed planned orders, and production orders. Goods issues are the result of customer requirements, PIRs, and material reserva- tions. If the available stock in this calculation is negative, then a procurement proposal is generated.

Determine Lot Size

If a procurement proposal is required, the system uses the lot size procedure to determine how much material to procure. The lot size procedure is defi ned by the lot size key in the material master.

Perform Scheduling

After MRP determines the lot size, it performs scheduling to determine whether the material can be acquired by the required date. MRP can utilize two types of scheduling: backward scheduling and forward scheduling. The sys- tem initially uses backward scheduling and employs forward scheduling only if backward scheduling is unsuccessful. Backward scheduling is illustrated in Figure 8-23.

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Process 299

In backward scheduling, the system starts at the requirement date and subtracts the procurement time to determine the date when the procurement process must begin. The times used are the scheduling times defi ned in the material master, depending on the procurement type. If the procurement type in the material is in house, then the in-house production time and goods receipt times are used. In contrast, if the procurement type is external, then the pur- chasing department processing time, planned delivery time, and goods receipt times are used. Unlike the other times, the purchasing department processing time is not included in the material master because it is not normally material dependent. These data are defi ned elsewhere in the system.

Ultimately, MRP will schedule all procurement proposals until it has scheduled the raw materials at the lowest level of the BOM. If the earliest start date falls prior to the current date, then the system will perform forward sched- uling. Essentially, it shifts the material with the earliest start date to the fi rst available future date and then schedules all of the other materials from that date working forward and using the same scheduling times. If the resulting schedule in not acceptable, then the MRP controller can manually adjust the schedule.

Determine Procurement Proposals

After the system has completed scheduling, the next step is to determine the type of procurement proposal to generate. Figure 8-24 illustrates the possibili- ties. For materials with the procurement type of in-house, MRP always gener- ates planned orders. Planned orders must be converted to production orders by the MRP controller. This action triggers the production process described in Chapter 6.

For procuring materials externally there are three options. Which option is selected depends on the parameters defi ned in the MRP step. The fi rst option is for the system to create purchase requisitions. The second is for the system to create planned orders, which are then converted manually to purchase requisitions. The advantage of creating planned orders is that it affords the MRP controller greater control over the planning process. When

Figure 8-23: Backward scheduling

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300 C H A P T E R 8 The Material Planning Process

Figure 8-24: Procurement proposals

the system produces a purchase requisition, the purchasing department is responsible for acting on it to create a purchase order, and the MRP control- ler cannot modify the requisition. In contrast, when the system generates a planned order, then the MRP controller must make certain that it is converted into a purchase requisition in time for the purchasing department to process it and for the supplier to provide the materials by the scheduled date. A varia- tion of this option is to create purchase requisitions in the opening period and then planned orders beyond the opening period. The opening period is the time during which the MRP controller can convert planned orders into production orders or requisitions. It is added in the scheduling process to give the MRP controller some fl exibility on the exact date that planned orders are converted. The length of time of the opening period is defi ned in the system. This strategy expedites the procurement process in the near term while pro- viding scheduling fl exibility in the long term.

The last option is to create schedule lines. This option is relevant if the organization uses scheduling agreements. Recall from Chapter 5 that schedul- ing agreements are a type of contract in which the vendor agrees to deliver materials according to a specifi c schedule. The schedule line created by MRP is similar to the schedule lines in a sales order in that they both specify that a cer- tain quantity of material will be delivered on a certain date. One major differ- ence, however, is that the schedule lines generated during fulfi llment indicate the customer’s delivery requirements. In contrast, the schedule lines created by MRP identify the company’s requirements to its vendor. Because deliveries follow predetermined schedules, the MRP controller cannot reschedule them.

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Process 301

Determine Dependent Requirements

For materials produced in-house, MRP generates dependent requirements for the components that are included in the material’s BOM by exploding the BOM or calculating requirements for successive levels of the BOM. (Recall that we discussed BOM explosion earlier in this chapter.) Figure 8-25 illus- trates options for the BOM explosion.

Figure 8-25: BOM explosion

If the company elects to use single-level MRP, then the process terminates after this initial step. If it selects the multilevel approach, then MRP performs the calculations for all levels. If any of the components that have dependent requirements are assemblies—that is, if they have their own BOMs—then MRP creates dependent requirements for the components in their BOMs. The process continues until the system has exploded all BOMs down to the level of individual raw materials.

After the planning is completed for all selected levels of the BOM for a material, MRP returns to the planning fi le and repeats the process for the next material that requires planning. Note that the actions MRP takes, such as creating dependent requirements, can also make entries in the planning fi le, which will cause further processing. The process continues until there are no more materials left to plan.

In our GBI example, the system created PIRs for eight materials when the production plan for the bicycles product group was disaggregated and transferred to demand management. The materials, represented by the boxes at the bottom of the hierarchy in Figure 8-16, include six types of touring bikes and two types of off-road bikes. Because these materials are fi nished goods, the system will fi rst execute the MRP steps for each of these materials and cre- ate dependent requirements for the components in their BOMs. Figure 8-26 displays the BOM for the off-road bike. When the system has completed the

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302 C H A P T E R 8 The Material Planning Process

MRP steps for this bike, it creates dependent requirements for each of the materials in the fi rst row of its BOM. After the system has completed the MRP steps for all eight fi nished goods, it executes the MRP steps for materials with dependent requirements—that is, the fi rst-level components of the fi nished goods such as the off-road aluminum wheel assembly (ORWA1000) in Figure 8-26. When the ERP system has completed the MRP steps, for the fi rst-level components, it creates additional dependent requirements for their compo- nents. Thus, in our example, when the system completes the MRP steps for ORWA1000, it creates dependent requirements for ORTR1000, ORTB1000, and ORWH1000.

Figure 8-26: BOM for off-road bikes

A number of control parameters determine how the steps in the MRP procedure are completed. One of these control parameters, the processing key, determines how the materials in the planning fi le are processed. Three processing keys are available:

• Regenerative planning (NEUPL): Regenerative planning plans all MRP-relevant materials. All data from previous planning runs are discarded, and new data are generated. In this scenario every material is processed, not just the materials in the planning fi le. Therefore, when there are a large number of materials, this process can be very time consuming. For this reason it is rarely used.

• Net change planning (NETCH): In net change planning only the materials for which there has been an MRP-relevant change are planned. Recall from our discussion earlier in this chapter that an MRP-relevant change is any activity in the system that affects mate- rial availability, such as changes in the MRP elements for the material; and that these changes are identifi ed by an entry in the planning fi le.

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Process 303

• Net change planning in the planning horizon (NETPL). Net change planning in the planning horizon plans only those mate- rials for which there has been an MRP-relevant change within a specifi ed period of time called the planning horizon. The plan- ning horizon is defi ned during the confi guration of the ERP sys- tem as a number of workdays. The planning horizon is usually specifi ed to extend beyond the replenishment lead time for most materials.

The following additional control parameters determine the output of the MRP procedure:

• Create purchase requisitions. This parameter determines whether MRP (1) always creates purchase requisitions for externally pro- cured materials, (2) creates planned orders, or (3) creates purchase requisitions only in the opening period and creates planned orders after the opening period.

• Delivery Schedules. Similar to the previous item, this parameter applies to scheduling agreements. The options are (1) not to create schedule lines, (2) to create them only during the opening period, or (3) to create them only within the planning horizon.

• Create MRP list. This parameter determines whether the system will create the MRP list, which we explain later in this chapter. Another option is to create the MRP list only for materials for which exception messages are generated. The ERP system gen- erates an exception message when it encounters problems with scheduling. For example, if the system determines a start date that is in the past and can fi nd no alternative, an exception message will be created.

• Planning mode. The planning mode parameter determines how previously created procurement proposals will be handled. The choices are to adjust the quantities and dates of existing proposals or to discard the proposals and create new ones.

• Scheduling. This parameter determines whether the system should calculate only basic dates using the scheduling times in the material master or whether it should perform lead time scheduling using the more detailed times in the routing.

Outcomes

The outcome of the MRP step is procurement proposals, usually in the form of purchase requisitions and planned orders, which trigger the procurement and production processes, respectively. This step has no fi nancial implications, so no FI or CO documents are created. In addition, because no movement of materials has occurred, no material documents are created. Business Processes in Practice 8-3 describes planning at Steelcase, Inc.

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304 C H A P T E R 8 The Material Planning Process

To ensure that the right materials are delivered to the manufacturing facilities at the right time in the right quantities, Steelcase must constantly monitor and man- age the stock levels in the production warehouse and line storage while planning for constantly changing consumption levels from the manufacturing lines. Most Steelcase products are manufactured for a specifi c cus- tomer order (make-to-order), so there is a great deal of variability in what a plant must produce from one day to the next. Steelcase has also optimized each plant for the production of a specifi c type or set of products. For example, one plant might specialize in the production of offi ce chairs while another focuses on manufactur- ing cubicles and fi ling cabinets. Although this strategy enables Steelcase to maximize its capital resources, it also introduces a great deal of complexity into the man- ufacturing planning process because customer orders must be split among multiple plants and then consoli- dated at a regional distribution center (RDC) for fi nal customer delivery.

The standard lead time (from order placement until delivery) for a customer order is usually between 2 and 3 weeks. This schedule generates roughly 14 days

of general visibility into manufacturing requirements from which raw material planning can be derived. However, each plant typically has visibility into what will be produced only 6 days before it needs to be shipped to the RDC. Thus, each manufacturing plant must usually procure, receive, and stage suffi cient materials to complete the production of a customer order in less than a week. In addition, manufacturing plants can receive multiple deliveries of raw materials daily from suppliers. This arrangement reduces inven- tory carrying costs and optimizes the use of limited warehouse space. To manage this dynamic planning environment, Steelcase uses very advanced planning capabilities in its SAP system to constantly assess and plan material requirements. Every Steelcase manufac- turing facility has around seven planning employees who constantly manage this process. Each manufac- turing plant runs both MPS and MRP at least three times daily to assess the status and needs for all sales orders, materials, bills of materials, and inven- tory changes.

Source: Steelcase, Inc. Materials Planning Group.

Business Processes in Practice 8.3: Planning at Steelcase, Inc.

Demo 8.5: Run MRP

R E P O RT I N G The reporting options in material planning are not as extensive as those in other functions. For example, there are no work lists that pertain to material plan- ning. However, there are three very important tools that convey information about the planning situation: the stock/requirements list, the MRP list, and the planning result report.

S T O C K / R E Q U I R E M E N T S L I S T

The most important reporting tool in material planning is the stock/require- ments list. We introduced this report in Chapter 6, where we explained that it displays all of the activities that could potentially impact material inven- tory. Earlier in this chapter we defi ned such activities as MRP elements. Thus,

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Reporting 305

the stock/requirements list displays all MRP elements for a material. The MRP controller can use this report to determine whether any actions need to be taken. The data might indicate, for example, that planned orders should be converted to production orders. Figure 8-27 illustrates a stock require- ments list for the black deluxe touring bike. The MRP elements visible in the Figure include planned independent requirements (IndReq), planned orders (PldOrd), and customer requirements (CusOrd).

Figure 8-27: Stock/requirements list. Copyright SAP AG 2011

In addition to MRP elements, the stock/requirements list includes infor- mation such as existing stock level, safety stock, planning time fence, and excep- tion messages. MRP generates exception messages when it encounters an issue such as a scheduling problem that it cannot resolve. The MRP control- ler is responsible for managing exception messages. Exception messages are indicated by a number in the column headed by the letter E (Exception). For example, in Figure 8-27 the 07 in the exception column indicates that planned orders 4 and 5 have at least one exception message. Figure 8-28, which displays the details of planned order number 4, shows that the order has two exception

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306 C H A P T E R 8 The Material Planning Process

Figure 8-28: Exception message. Copyright SAP AG 2011

messages—number 06 and number 07. Different message numbers indicate different types of problems encountered by MRP. For example, message num- bers 06 and 07 in Figure 8-28 indicate that the basic start and fi nish dates fall prior to the current date. In this case the MRP controller has to reschedule or cancel the planned order.

A report that can be obtained from the stock/requirements list is the order report (Figure 8-29), which shows the components required for sales orders, planned orders, and production orders. The report indicates the date when the materials are required, the quantity required, and whether suffi cient materials are available to fi ll the order. The lightning bolt symbols to the left of the material numbers in the fi gure indicate that there is a problem with avail- ability, and the exception messages on the right side describe the problems that the system has been unable to resolve automatically. Double-clicking on a material line in the order report retrieves the stock/requirements list for the material. The MRP controller can use this list to investigate and resolve the availability problem.

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Reporting 307

Figure 8-29: Material availability in the stock/requirements list. Copyright SAP AG 2011

Figure 8-30 displays the stock statistics report, which can also be accessed from the stock/requirements list. This report presents details of the inven- tory of the material as well as planned issues and receipts. The top of the fi gure lists warehouse stock, which is divided into stock that is available for planning (including unrestricted use stock, stock in quality inspection, stock in transfer, and consignment stock), and stock that is not available for planning (including blocked stock, restricted use stock, and stock returned to vendors). MRP will not

Figure 8-30: Stock statistics. Copyright SAP AG 2011

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308 C H A P T E R 8 The Material Planning Process

consider the latter types of stock when it performs the net requirements calculation. The bottom of the fi gure shows issues and receipts. Fixed issues and receipts are those within the planning time fence, meaning they cannot be rescheduled or canceled automatically by the ERP system. The planned receipts and issues are outside the planning time fence, so they can be rescheduled or canceled.

The stock/requirements list is dynamic, and it displays the data for the material at the time the report was generated. For example, note the time stamp on the report title in Figure 8-27 (23:54 hours). This report should be refreshed periodically to retrieve the most current data.

Demo 8.6: Review stock/requirements list and related reports

M R P L I S T

Another useful report is the MRP list. The MRP list is similar to the stock/ requirements list, but it displays static data as of the time the MRP step was executed. A comparison of the MRP list and stock/requirements list high- lights changes to MRP elements that have occurred since MRP was executed. Figure 8-31 displays the stock/requirements list—MRP list comparison screen. The PIRs List 1 column is from the stock/requirements list, and the PIRs

Figure 8-31: Stock/requirements list/MRP list comparison. Copyright SAP AG 2011

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Reporting 309

List 2 is from the MRP list. The two columns are identical, indicating that there have been no changes in the planning situation since MRP procedure was completed.

Demo 8.7: Review MRP list

P L A N N I N G R E S U LT R E P O RT

Another report that shows the result of MRP is the planning result report, illustrated in Figure 8-32. Unlike the stock/requirements list, this report aggregates quantities for MRP elements to make it easier to view the overall picture. As with the stock/requirements list, individual MRP elements can be accessed and managed from this report. The report can be generated for both individual materials and product groups. Figure 8-32 illustrates the planning result report for the GBI bicycles product group. The report is divided into Receipts and Issues on the left of the screen. You can see from this report that planned receipts exist for three planned orders (for DXTR1000, DXTR2000, and DXTR3000) and one production order (DXTR3000). Going further, in the fi rst month, planned receipts exist for 270 DXTR2000 and DXTR3000 (planned orders) and 113 DXTR3000 (production order). Thus, the total planned receipts for the fi rst month equal 653 ([270 � 2] � 113).

The planned issues presented in the report include both PIRs and cus- tomer orders. A total receipt of 900 units is planned for the fi rst month, all as a result of independent requirements for DXTR1000 (360), DXTR2000 (270), and DXTR3000 (270). Customer requirements are identifi ed as orders under “Fixed external.” The term fi xed indicates that this order cannot be resched- uled because the customer is expecting it on a specifi c date. Although there are no customer requirements for the fi rst month, there is a requirement of 100 DXTR1000 for the second month.

Figure 8-32: Planning result report. Copyright SAP AG 2011

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310 C H A P T E R 8 The Material Planning Process

Demo 8.8: Review planning result report

C H A P T E R S U M M A R Y

Material planning is one of the most complex processes in an organization. The

main objective of material planning is to balance the supply of materials with

the demand so that a suffi cient supply of materials are available when they are

needed. Material planning is concerned with answering three basic questions:

(1) What materials are required; (2) how many are required; and (3) when are

they required? It uses data from several other processes, and generates procure-

ment proposals in the form of purchase requisitions or planned orders.

The fi rst step in the material planning process is sales and operations plan-

ning. SOP is a forecasting and planning tool that is used to enter or generate a

sales forecast, specify inventory targets, and then generate a production plan at

the product group level that satisfi es the sales plan and inventory requirements.

The production plan is disaggregated to the individual materials in the product

group hierarchy and then transferred to demand management in the form of

PIRs for materials.

The next step is demand management, which calculates revised PIRs for

the materials using the disaggregated production plan from SOP, actual cus-

tomer orders from the fulfi llment process, and data from the material master

regarding planning strategies.

The fi nal step in the material planning process is materials requirement

planning (MRP), which calculates the net requirements for materials and cre-

ates procurement proposals, usually in the form of purchase requisitions and

planned orders. In turn, purchase requisitions and planned orders trigger the

procurement and production processes to make or buy the necessary materials.

The master data that are critical to the material planning process are

bills of material, product routings, material masters, and product groups. The

material master includes several key data relevant to the material planning

process. Procurement type indicates whether a material is produced in-house

(via the production process), obtained externally (via the procurement pro-

cess), either, or neither. MRP type specifi es the production control technique

used in planning. Common production control techniques are consumption-

based planning, materials requirement planning (MRP), and master production

scheduling (MPS).

Consumption-based planning calculates the requirements for a material

based on historical data and a forecast that assumes that future consumption

will follow the same patterns as indicated by the historical data. However, it

does not take into account dependencies between different materials. Materials

requirement planning (MRP) calculates requirements for a material based on

its dependence on other materials. Independent requirements are determined

using actual and forecasted sales. Dependent requirements are based on the

requirements for another material. Master production scheduling (MPS) uses

a process similar to MRP. However, it is employed only for the most critical fi n-

ished goods, thus ensuring that resources and capacity are available for these

materials before planning for other materials.

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Key Terms 311

Assemble-to-order (ATO)

Availability check group

BOM selection method

Consumption-based planning

Customer independent

requirements (CIR)

Demand management

Dependent requirement

Disaggregation

Exception messages

Independent requirements

Lot size

Lot size key

Make-to-order (MTO)

Make-to-stock (MTS)

Master production scheduling (MPS)

MRP elements

MRP list

MRP type

Net change planning (NETCH)

Net change planning in the planning

horizon (NETPL)

Planned independent

requirements (PIR)

Planning result report

Planning time fence

Production planning strategies are broadly categorized as make-to-stock,

make-to-order, and assemble-to-order. They are specifi ed in the strategy group

category. Make-to-stock (MTS) is a planning strategy that fulfi lls customer orders

from fi nished goods inventory. In contrast, in make-to-order (MTO), the produc-

tion of the fi nished goods and any needed semifi nished goods is triggered by

a sales order, and no inventory of these materials is maintained. Assemble-to-

order (ATO) is a planning strategy in which an inventory of components (semi-

fi nished goods) needed to make the fi nished good is maintained in stock, and

the fi nal assembly of the fi nished goods is triggered by a sales order.

Products with similar planning characteristics, such as similar types, plan-

ning strategies, and manufacturing processes, are grouped into a product group

or a product family. Product groups are used to disaggregate the demand for

the higher-level groups to the materials in the lowest levels.

Reporting in material planning is limited to relatively few reports but

includes three important tools to obtain information about the planning situ-

ation: the stock/requirements list, the MRP list, and the planning result report.

The most important reporting tool in material planning is the stock/require-

ments list, which displays all MRP elements for a material and includes other

information such as existing stock level, safety stock, and exception messages.

The MRP list is similar to the stock/requirements list, but it displays static data

as of the time MRP step was executed. A comparison of the MRP list and stock/

requirements list highlights changes to MRP elements that have occurred since

MRP was executed. Finally, the planning result report aggregates quantities for

MRP elements to present an overall picture of receipts and issues. This report

can be generated for individual materials or for product groups.

K E Y T E R M S

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312 C H A P T E R 8 The Material Planning Process

R E V I E W Q U E S T I O N S

1. What is the main objective of material planning? What are the basic ques- tions addressed by material planning?

2. List and describe the steps in the material planning process.

3. Which master data are relevant for material planning?

4. Defi ne and explain the relevance to material planning of the following data in the material master:

a. Procurement type

b. MRP type

c. Lot size key

d. Scheduling times

e. Planning time fence

f. BOM selection method

g. Availability check group

h. Strategy group

i. Consumption mode

5. Defi ne and distinguish between consumption-based planning and materi- als requirements planning.

6. Explain how reorder point planning works.

7. Explain the differences between

a. Dependent requirements and independent requirements

b. Planned independent requirements (PIRs) and customer requirements (CIRs).

8. Explain the common time estimates included in the material master.

9. Identify and discuss the different types of in-house production times defi ned in the material master.

10. Compare and contrast the three production planning strategies discussed in this chapter.

11. Explain the process by which CIRs consume PIRs, and provide an example.

Processing key

Procurement type

Product group

Regenerative planning

(NEUPL)

Safety stock

Sales and operations

planning (SOP)

Stock/requirements list

Strategy group

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Exercises 313

12. What are product groups? What is the role of product groups in material planning?

13. Compare and contrast aggregation and disaggregation.

14. What is the role of the MRP controller in material planning?

15. Briefl y describe the steps in the material planning process in terms of the triggers, data, tasks, and outcomes.

16. Explain the functions and components of a planning table. Discuss the different methods of generating a production plan with a planning table.

17. What are the different options for disaggregating a sales plan or a produc- tion plan?

18. Explain the differences between MRP and MPS.

19. Describe the tasks completed in the MRP step of the material planning process.

20. Explain the different control parameters that determine the way the tasks in the MRP step are executed.

21. Discuss the different MRP processing keys.

22. Describe the net requirements calculation.

23. Explain the scheduling process in MRP.

24. Defi ne and discuss the types of procurement proposals that can be cre- ated in MRP.

25. Assess the advantages and disadvantages of creating planned orders and purchase requisitions for externally procured materials.

26. Defi ne MRP element.

27. Discuss the different reporting tools that are useful in material planning.

28. Distinguish between the stock/requirements list and the MRP list.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

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C H A P T E R 4 The Procurement Process 3 1 5

3 1 5

L E A R N I N G O B J E C T I V E S

After completing this chapter you will be able to:

1. Define process integration, and explain why this concept is fundamental to modern business operations.

2. Explain how the procurement, fulfi llment, and IWM processes interact when a company fi lls a customer order for trading goods.

3. Identify and discuss the various integration points among the procurement, fulfi llment, production, and warehouse manage-

ment processes.

4. Analyze the fi nancial and material impacts of the various steps in the integrated processes.

I n Chapter 1 we introduced the key processes in organizations in simple terms. In Chapters 3–8 we examined six processes in detail:

• Financial accounting

• Procurement

• Fulfi llment

• Production

• Inventory and warehouse management

• Material planning.

In addition, we briefl y discussed management accounting concepts in several chapters. At this point, then, you should have a clear understanding of the triggers, data, tasks, and outcomes of these processes.

In Chapter 1 we also introduced the concept of process integration, which posits that the various processes are interdependent, so that steps in one process almost inevitably impact steps in other processes. For example, the material planning process generates planned orders and purchase requisitions, which in turn trigger the production and procurement processes, respectively. We illustrated process integration in Figure 1-3, which is reproduced in Figure 9-1.

C H A P T E R 9C H A P T E R Process Integration

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316 C H A P T E R 9 Process Integration

In Chapters 3–8 we also examined the numerous relationships between and among the various processes. For example, we explained that the pro- curement process can be triggered by a material need arising from production, fulfi llment, or material planning. In turn, the procurement process frequently triggers warehouse management processes. In most cases, however, we did not elaborate on these integration points. Instead, we discussed each process independently of the other processes. We adopted this approach to keep the discussions of the processes relatively simple. To truly appreciate the complex operations of modern business organizations, however, it is essential to understand how the different processes interact.

In this chapter, we will approach the same processes that we covered in earlier chapters, but from a holistic, integrative perspective in order to highlight the deeper connections and key operational dependencies among them. To help you visualize these interdependencies, we will include two scenarios in which GBI needs to fulfi ll a customer order. In the fi rst scenario, the order is for trad- ing goods (t-shirts). This scenario will involve the procurement, fulfi llment, and inventory and warehouse management (IWM) processes. Because it focuses on trading goods, however, it will not involve the production process. In contrast, the second scenario involves a customer order for a fi nished good (a bike) and thus will include the production process. Both scenarios will explore the fl ow of steps, documents, and data and will examine the outcomes across the mul- tiple processes involved in fulfi lling a customer order. In contrast to the earlier chapters, where we made many assumptions to simplify the explanation of the individual processes, these scenarios will introduce more complex and realistic decisions that the company must make as the steps cross process boundaries.

Because of the tightly integrated nature of business processes, enabling holistic process execution is one of the primary goals of an ERP system. By using a single, integrated ERP system, companies can provide “one version of

Figure 9-1: Integrated business processes

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Process Integration 317

the truth” to everyone involved in executing the various processes. An ERP system helps employees to understand how the different processes are inter- dependent while providing them with instant access to the data they need to make intelligent decisions.

We will begin by reviewing a few concepts from the different processes that are critical to understanding how these processes are integrated.

• In the material planning chapter we considered two fundamental production planning strategies: make-to-stock and make-to-order. Similar strategies are available for materials that are procured (purchased) from a vendor—procure-to-stock and procure-to-order. In the make-to-stock and procure-to-stock strategies, the inventory of materials serves as the buffer between the production and procure- ment processes on the one hand and the fulfi llment process on the other. That is, the company executes the production and procurement processes to maintain a stock or an inventory of materials, from which it fi lls customer orders. In contrast, in the make-to-order and procure- to-order strategies, the company does not maintain an inventory of materials. Rather, customer orders received in the fulfi llment process trigger the production and procurement processes as needed.

• In Chapter 4 we explained that the procurement process is triggered by a requirement that is generated by the fulfi llment, production, or material planning process. Procurement is triggered by fulfi llment when the company employs a procure-to-order strategy for trading goods. It is triggered by production when the company employs a procure-to-order strategy for raw materials. Finally, it is triggered by material planning when a company employs a procure-to-stock strategy for either raw materials or trading goods. We also included a scenario in which GBI purchased 500 t-shirts from Spy Gear because its inventory was low. This scenario presents a case in which the procurement process is triggered by a requirement from material planning. It also illustrates the strategy of procure-to-stock.

• In the chapter on fulfi llment (Chapter 5), we described a process that employed a sell-from-stock strategy. For example, in the discus- sion of the availability check procedure we explained that the ERP system determines availability based on both current inventory and planned receipts from either procurement or production. Also, in the example in which GBI delivered deluxe touring bikes and t-shirts to Rocky Mountain Bikes, we assumed that the materials needed to fi ll the order were available in inventory. Consequently, GBI utilized the sell-from-stock strategy.

• Finally, the discussion of the production process in Chapter 6 focused on a make-to-stock scenario that assumed that the materials needed to make the fi nished goods were readily available. Thus, the scenario in which GBI manufactured men’s off-road bikes was triggered by a need to increase inventory rather than by a customer order.

We can see, then, that the make-to-stock, procure-to-stock, and sell-from stock strategies use inventory as a buffer between processes, to de-couple them or make them less dependent on each other.

In this chapter, to illustrate the integration among processes, we will no longer assume that a suffi cient inventory of raw materials (for production) and fi nished goods or trading goods (for fulfi llment) exists. We will also examine

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318 C H A P T E R 9 Process Integration

the make-to-order and procure-to-order strategies. We will begin by considering the fi rst scenario described above—fi lling a customer order for trading goods. This scenario will illustrate the integration among the procurement, fulfi llment, and IWM processes.

P R O C U R E M E N T, F U L F I L L M E N T, A N D I W M P R O C E S S E S

We will use the following scenario in our discussion of integrated processes. Rocky Mountain Bikes (RMB), a GBI customer, has ordered 800 t-shirts (SHRT1000) from GBI. Because RMB is located in the Western U.S. sales organization, GBI will ship the t-shirts from its San Diego plant, which is warehouse management enabled. We will make the following assumptions:

1. The San Diego plant has 200 t-shirts in stock valued at a moving average price of $15.43 each.

2. The Miami plant has 1,500 t-shirts in stock valued at a moving aver- age price of $15.25 each.

3. GBI can purchase t-shirts from Spy Gear at $14.95 each.

4. RMB has sent GBI a purchase order (PO) for 800 t-shirts.

5. GBI sells t-shirts for $30 each.

In this scenario the San Diego plant does not have a suffi cient quantity of t-shirts in stock. Therefore, the customer order will trigger the procurement process. Recall that companies can procure materials from either an external source (a vendor) or an internal source (another plant). If the plant that is sending or receiving the materials is warehouse managed, then WM processes are triggered to pick or put away the materials. When the materials become available, then the fulfi llment process can proceed to the shipping step.

Before we discuss this process in detail, let’s review the fi nancial account- ing and material valuation data that exist at the start of the process. The balances in the relevant accounts are illustrated in Figure 9-2. Recall from the discussion of valuation class in the material master that the value of materials with similar characteristics is maintained in one general ledger account. In the case of GBI, the value of t-shirts (and all other trading goods) is maintained in one inven- tory account. As illustrated in Figure 9-2, this account has a balance of $25,961. (Table 9-1 provides an explanation of how this value is calculated.) To keep the discussion simple, we will not include the starting balances in any other accounts (e.g., bank, vendor, and customer accounts) or for other materials.

Although the total value of all trading goods is maintained in one general ledger account at the company code level, the valuation of the materials occurs at the plant level. That is, the materials can be valued differently in each plant. Further, the quantity and value of the materials are maintained in the mate- rial master for each material. Table 9-1 displays this arrangement for t-shirts in GBI’s Miami and San Diego plants. The table shows the stock (status and quantity), the moving average price (MAP), and the value of the stock in each plant and for GBI as a whole. Note that the sum of the values at the plant level ($25,961) is the total value indicated in the inventory account in Figure 9-2.

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Procurement, Fulfi llment, and IWM Processes 319

Figure 9-2: Account balances at the start of the process

Demo 9.1: Review fi nancials and inventory (plant, storage location, and bin stock and value)

Figure 9-3 illustrates the integration among the fulfi llment, procurement, and IWM processes. The integrated process is triggered by the receipt of a customer PO (indicated by “start” in the fi gure). Note that both the San Diego and Miami plants are included in this illustration. The steps that have a fi nancial accounting impact are identifi ed with an “FI” symbol, the steps with a controlling impact are identifi ed with a “CO” symbol, and the steps with a material impact (i.e., goods movement) are identifi ed with an “M” symbol. Recall that an FI document is created when a process step impacts the general ledger, and a material document is created when a process step involves a goods move- ment. When we discussed each process separately, all of the process steps were

Table 9-1: Plant stock valuation at the start of the process

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320 C H A P T E R 9 Process Integration

completed without any interruptions. Again, we adopted this approach because we assumed that the needed materials were available in inventory. In contrast, in this scenario the process steps presented in Figure 9-3 are interrupted while steps in other processes are being completed. We have identifi ed the following six logical groupings of process steps in the fi gure. The next section examines each grouping in detail.

1. Fulfi llment process—initial steps

2. Procurement process—initial steps

a. Procurement process—internal procurement

b. Procurement process—external procurement

3. Warehouse management steps related to procurement

4. Fulfi llment process—shipping

5. Warehouse management steps related to fulfi llment

6. Fulfi llment process—concluding steps

1 : F U L F I L L M E N T P R O C E S S — I N I T I A L S T E P S

The fulfi llment process is triggered when GBI receives a purchase order from RMB for 800 t-shirts. The resulting steps are labeled “1” in Figure 9-3 and are reproduced in Figure 9-4.

To avoid making this discussion too complex, we did not include the pre- sales steps (inquiry and quotation) discussed in the fulfi llment chapter. After GBI receives the customer PO, the next step in the fulfi llment process is sales order processing, in which GBI creates a sales order and executes an availabil- ity check for materials ordered. If GBI has suffi cient materials in inventory to fi ll the order, then the fulfi llment process proceeds directly to the shipping step. In Chapter 5 we assumed that the materials were available. In this scenario, as you can see from the previous discussion and Table 9-1, the San Diego plant does not have enough t-shirts in stock. Consequently, the fulfi llment process is interrupted while San Diego procures the needed materials.

Demo 9.2: Create two customer orders

2 : P R O C U R E M E N T P R O C E S S — I N I T I A L S T E P S

This shortage of materials creates a requirement for t-shirts in the San Diego plant. Consequently, it triggers the procurement process, labeled “2” in Figure 9-3 and reproduced in Figure 9-5. Specifi cally, the plant creates a purchase req- uisition in the requirements determination step of the procurement process. In our example, a requisition for 1,000 t-shirts is created. The requisition is then converted to a PO in the purchase order processing step. At this point, GBI has two options for acquiring the materials: internally from another plant and externally from a vendor (areas labeled 2A and 2B in Figure 9-3, respectively). If the Miami plant is able to supply the necessary quantity of t-shirts, then GBI

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Procurement, Fulfi llment, and IWM Processes 321

Figure 9-3: Procurement, fulfi llment and warehouse management processes

Figure 9-4: Fulfi llment process—initial steps

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322 C H A P T E R 9 Process Integration

can use a stock transport order (STO) to transfer the t-shirts from Miami to San Diego. Conversely, if the Miami plant cannot supply the t-shirts—perhaps it needs the inventory to fi ll its own customer orders—then GBI has to create a purchase order and send it to Spy Gear. We explore each of these scenarios next.

Demo 9.3: Create two requisitions and POs

2 A : P R O C U R E M E N T P R O C E S S — I N T E R N A L P R O C U R E M E N T

We will fi rst consider the option in which the San Diego plant can procure the t-shirts internally from the Miami plant. The steps in this process included are labeled “2A” in Figure 9-3 and are reproduced in Figure 9-6. Recall from Chapter 7 that there are several options for processing an STO. We will consider the simplest case—STO without a delivery document. In this case, the Miami plant will simply issue the goods (t-shirts) against the STO.

Figure 9-5: Procurement process—initial steps

Figure 9-6: Procurement process—internal procurement

The Miami plant executes a goods issue (GI) for 1,000 t-shirts against the STO using movement type 351. This step has both a material impact and an FI impact, and it generates a material document and an accounting (FI) document, as illustrated in Figure 9-7. The material document includes two line items, one for each location. The document in Figure 9-7 indicates a decrease (negative sign next to the movement type) in the Miami plant and a corre- sponding increase in the San Diego plant. However, the status of the material being shipped is “stock in transit” in the San Diego plant, and a storage location is not included in the material document. The FI impact of this movement is captured in the accounting document in Figure 9-7. We explained in Chapter 7 that in a plant-to-plant movement, valuation occurs (1) at the time of the goods issue and (2) at the valuation price of the issuing plant. Thus, the FI document indicates a debit and a credit to the inventory account for trading goods. The

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Procurement, Fulfi llment, and IWM Processes 323

Figure 9-7: Material and FI documents at goods issue for STO

Figure 9-8: Account balances at GI for STO

reason for this is that GBI maintains the t-shirt inventory in one general ledger account for all plants. The amount of the debit and the credit is based on the valuation price at the Miami plant (1,000 * $15.25). The entries in the general ledger accounts are illustrated in Figure 9-8.

Although there is no change in the value of the t-shirts in the general ledger, there is a change in value in the material master. This change is illustrated in Table 9-2. The quantity of materials in the unrestricted use status in Miami has decreased from 1,500 to 500, and there is no change in the moving average price. In contrast, the quantity of stock in transit in San Diego has increased

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324 C H A P T E R 9 Process Integration

by 1,000. In addition, a new moving average price has been calculated to take into account the difference between the old moving average price ($15.43) and the price at which the new materials are valued ($15.25). The new moving average price in San Diego is $15.28. (The calculation is included in Table 9-2.) It is important to note that although the valuation of materials has changed between the two plants, the total value of materials at GBI (Miami � San Diego) remains unchanged at $25,961.

Table 9-2: Plant stock valuation at GI for STO

Figure 9-9: Material and FI documents at GR for STO

When San Diego receives the shipment of t-shirts from Miami, it records a goods receipt using movement type 101. The ERP system creates one material document with a single line item to indicate the receipt of 1,000 t-shirts into storage location TG00 (Figure 9-9). This movement changes the status of the materials from in transit to unrestricted use. There is no FI impact at this point. Instead, the impact occurred at the time of the goods issue in Miami. The master data (Table 9-3) will now indicate that there are 1,200 t-shirts in unrestricted use (200 � 1,000 received) in San Diego. There is no change in value, however.

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Demo 9.4: Internal procurement for fi rst PO

2 B : P R O C U R E M E N T P R O C E S S — E X T E R N A L P R O C U R E M E N T

In the event the Miami plant is unable to fi ll San Diego’s requirement for t-shirts, then the San Diego plant dispatches a purchase order for 1,000 t-shirts to Spy Gear. The steps associated with this option are identifi ed by the label “2B” in Figure 9-3 and are illustrated in Figure 9-10.

Table 9-3: Plant stock valuation at GR for STO

Figure 9-10: Procurement process—external procurement

When the San Diego plant receives the shipment from Spy Gear, it com- pletes a goods receipt against the PO. Figure 9-11 illustrates the material impact and the FI impact of a goods receipt against a PO. In this scenario, one material document is created, with a single line item showing the receipt of 1,000 t-shirts in the San Diego plant via movement type 101. At the same time, an FI docu- ment is created to record the debit of $14,950 (1,000 t-shirts @ $14.95 each) to the trading goods inventory account and a credit for the same amount to the goods receipt/invoice receipt (GR/IR) account. The FI document refl ects the entries in the general ledger illustrated in Figure 9-12—a debit to the inven- tory account with a corresponding credit to the GR/IR account. Thus, the value of inventory (trading goods) has increased to $40,911 ($25,961 � $14,950).

Finally, Table 9-4 displays the valuation of the materials at the plant level. The quantity, value, and moving average price for the t-shirts in the Miami plant are unchanged. The quantity of t-shirts in unrestricted use in San Diego has increased by the 1,000 received from Spy Gear. Because the price per unit for the t-shirts ($14.95) is different from the moving average price prior to the receipt ($15.43; see Table 9-1), the moving average price is recalculated to $15.03, as illustrated at the bottom of Table 9-4. Note again that the sum of the inventory in Miami ($22,875) and San Diego ($18,036) is equal to the value of inventory in the inventory account in the general ledger ($40,911).

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326 C H A P T E R 9 Process Integration

Figure 9-11: Material and FI documents at GR for PO

Figure 9-12: Account balances at GR for PO

Now that we have examined both the internal and the external procure- ment options, for the rest of the discussion we will assume that GBI has selected the external option. Under this scenario, the procurement process continues with the receipt of the vendor invoice followed by payment to the vendor. Figure 9-13 illustrates the general ledger impact of these two steps. When a vendor invoice is received and verifi ed, the GR/IR account is cleared (debit posting), and the vendor subledger account is credited by the amount of the

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Procurement, Fulfi llment, and IWM Processes 327

Table 9-4: Plant stock valuation at GR for PO

Figure 9-13: Account balances after procurement

invoice. In our example, the amount is $14,950 (1,000 t-shirts @ $14.95 each). When GBI makes a payment to the vendor, the bank account is credited by the payment amount, and the vendor subledger account and the accounts receivable reconciliation account are debited by the same amount. For both steps an FI document is created. Refer to Chapter 4 for an explanation of these steps.

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328 C H A P T E R 9 Process Integration

Demo 9.5: External procurement for second PO

3 : WA R E H O U S E M A N A G E M E N T S T E P S R E L AT E D T O P R O C U R E M E N T

Regardless of whether GBI procured the materials from internal or external sources, the goods receipt in the San Diego plant into storage location TG00 will trigger steps related to the warehouse management process (labeled “3” in Figure 9-3) because storage location TG00 is warehouse managed. These steps are illustrated in Figure 9-14. In this situation the goods received are placed in an interim storage area, and a transfer requirement (TR) is automatically created by the ERP system. The TR serves as a request to move them to an appropriate storage bin.

Figure 9-14: WM steps related to procurement

In response to the transfer requirement, the warehouse creates a trans- fer order (TO). This order authorizes the warehouse personnel to move the materials from the interim storage area into storage bins. When this step is completed, the TO is confi rmed, and the warehouse management process is complete with regard to putting away the materials received from the ven- dor. Recall that no FI or material documents are created in the WM process.

Demo 9.6: WM steps for goods receipt for PO

4 : F U L F I L L M E N T P R O C E S S — S H I P P I N G

Once the t-shirts have been moved into the storage bins, there is now a suffi cient quantity of materials for the fulfi llment process to proceed to the shipping step (labeled “4” in Figure 9-3). Shipping is diagrammed in Figure 9-15. This step involves creating a delivery document that authorizes picking, packing, and goods issue. Because the materials are located in a warehouse-managed storage location (TG00 in San Diego), the WM process is triggered by the creation of the delivery document.

Figure 9-15: Fulfi llment process—shipping

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Procurement, Fulfi llment, and IWM Processes 329

Demo 9.7: Create delivery for PO

5 : WA R E H O U S E M A N A G E M E N T S T E P S R E L AT E D T O F U L F I L L M E N T

The trigger that initiates the WM steps is the delivery document. The delivery document serves as a request to move the needed materials (800 t-shirts) from the bins to the interim shipping storage area. The steps associated with this pro- cess are labeled “5” in Figure 9-3 and are reproduced in Figure 9-16. A trans- fer order is created based on the delivery document, the materials are moved from storage bins to the interim shipping storage area, and the transfer order is confi rmed. This concludes the warehouse management steps associated with picking materials for shipment. No material or FI documents are generated.

Figure 9-16: WM steps related to fulfi llment

Demo 9.8: WM steps for delivery

6 : F U L F I L L M E N T P R O C E S S — C O N C L U D I N G S T E P S

After the materials have been placed in the interim shipping storage area, the fulfi llment process can be concluded. These steps (labeled “6” in Figure 9-3) are diagrammed in Figure 9-17.

Figure 9-17: Fulfi llment process—concluding steps

The shipping step was partially completed when the delivery document was created. Now that the materials have been picked in the warehouse and moved into the shipping area, a goods issue is completed using movement type 601. This step generates a material document and an FI document, as illustrated in Figure 9-18, as well as postings to the general ledger accounts, illustrated in Figure 9-19. The material document records the removal of 800 t-shirts from inventory. The FI document indicates a credit of $12,024 to the inventory account and a corresponding debit to the cost of goods sold (COGS)

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330 C H A P T E R 9 Process Integration

account. The amount of the debit and credit is the value of the 800 t-shirts at the current moving average price of $15.03. Finally, Table 9-5 illustrates the plant valuation of the materials after the goods issue is completed. Note again that the total valuation in the plants ($28,887) is equal to the value in the inventory account in the general ledger (the sum of the debits and credits). A controlling impact occurs if the profi tability analysis process in management accounting is in use. The goods issue step provides the cost of goods sold data in determining profi tability.

Figure 9-18: Material and FI documents at GI for delivery

Figure 9-19: Account balances after goods issue for delivery

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Procurement, Fulfi llment, and IWM Processes 331

The fi nal steps in the fulfi llment process are billing and receiving pay- ment from the customer. In Chapter 5 we saw that when a customer invoice is generated, a credit is posted to the revenue account, and a debit is posted to the customer subledger account with an automatic posting to the accounts receivable reconciliation account. In Figure 9-20, the posting is for $24,000 (800 t-shirts @ $30.00 each). The entries for the payment step include a debit post- ing to the bank account and a credit posting to the customer account, with an accompanying automatic posting to the accounts receivable reconciliation account. Both steps result in FI documents. In addition, the billing step pro- vides revenue data to the profi tability analysis process in controlling. Please refer to Chapter 5 for an explanation of these steps.

Table 9-5: Plant stock valuation at GI for SO

Figure 9-20: GL account balances after customer billing and payment

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332 C H A P T E R 9 Process Integration

Demo 9.9: Complete fulfi llment

PROCUREMENT, FULFILLMENT, P R O D U C T I O N , A N D I W M P R O C E S S E S

We now consider the scenario that includes production. In this scenario, Rocky Mountain Bikes (RMB) has ordered 40 Red Deluxe Touring Bikes (DXTR3000) from GBI. We will make the following assumptions:

1. The San Diego plant has 10 Red Deluxe Touring Bikes valued at a standard price of $1,400 each.

2. The Dallas plant currently does not have any touring bikes in inventory. When it does have these bikes, the standard price is also $1,400.

3. The Dallas plant has 200 aluminum wheel assemblies that are needed to produce touring bikes. The standard price for these wheel assemblies is $110.

4. GBI’s vendor, Space Bike Composites, is able to supply all of the raw materials needed to make touring bikes.

5. GBI purchases raw materials in lot sizes of 200. It produces bikes in lot sizes of 50.

6. RMB has sent GBI a purchase order for 40 Red Deluxe Touring Bikes.

7. GBI sells these bikes for $2,800 each.

The bill of materials (BOM) for touring bikes was discussed in Chapter 6 and is reproduced in Figure 9-21. The material in our scenario—the Red Deluxe Touring Bike (DXTR3000)—includes the red frame (TRFR3000) and the aluminum wheel assembly (TRWA1000), which, in turn, includes the aluminum wheels (TRWH1000). The other materials indicated in the BOM are common to all touring bikes.

Figure 9-22 displays the initial balances in the relevant GL accounts. The fi nished goods inventory account has a balance of $14,000, which represents the 10 bikes in Dallas valued at $1,400 each. The semifi nished goods (SFG) inventory account has a balance of $22,000, which represents the 200 wheel assemblies currently in stock in Dallas valued at $110 each. In our discussion, we will not enumerate the quantity and value of each raw material needed for the production of the bike. Rather, to keep the discussion relatively simple, we will include all the raw materials in one bundle in our calculations. Thus, collectively, the raw materials are valued at $480 per bike (see Table 9-6). At the beginning of the process, there is no inventory of raw materials. Also in the interest of keeping the discussion simple, we do not include starting balances in the other accounts in Figure 9-22.

Table 9-7 illustrates material valuation. The standard price for bikes in all plants is $1,400, and the only current inventory consists of the 10 bikes in San Diego. Inventories of wheel assemblies (TRWA1000) and the raw materials (shown as a bundle in the fi gure) are maintained only in Dallas. There are currently 200 wheel assemblies and no raw materials in stock.

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Procurement, Fulfi llment, Production, and IWM Processes 333

Figure 9-21: BOM for Touring Bikes

Table 9-6: Raw material cost per bike

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334 C H A P T E R 9 Process Integration

Figure 9-23 illustrates the integration among the procurement, ful- fi llment, production, and IWM processes. When GBI receives RMB’s pur- chase order for 40 Red Deluxe Touring Bikes, the fulfi llment process is triggered. Because RMB is situated in the Western U.S. sales organiza- tion, the bikes will be shipped from the San Diego plant, which is ware- house management enabled. During the sales order processing step, the ERP system performs an availability check that indicates that only 10 bikes are available in inventory in San Diego. Consequently, the plant requests a stock transfer from Dallas via an STO. Because Dallas has no inven- tory of bikes, the STO is a requirement that will trigger the production process. Once production is completed in Dallas, the plant will complete a goods issue against the STO. This step reduces the inventory of bikes in Dallas and increases the inventory in San Diego, in the in-transit status. When the materials reach San Diego, the plant completes a goods receipt against the STO, which moves the bikes from in-transit to unrestricted use status. Because the storage locations in San Diego are warehouse managed, the goods receipt triggers the WM process to put away the bikes received from Dallas into storage bins. After this step has been completed, the fulfi llment process can proceed to shipping. This step will again trigger the WM process, this time to pick the bikes needed to fi ll the order. After the bikes have been picked, the remaining task in the shipping step, goods issue, can be completed. Goods issue is followed by the last two steps in the fulfi llment process—billing and payment.

Figure 9-22: Account balances—start of process

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Procurement, Fulfi llment, Production, and IWM Processes 335

Table 9-7: Material valuation at the start of process

The scenario described above represents the normal process established by GBI. However, let’s consider two variations. In the fi rst variation, if either the Miami plant or the Dallas plant has the needed quantity of bikes in its inventory, then GBI can make an exception to its normal process and authorize an alternate plant to ship the bikes directly to RMB. GBI will choose this option if it is necessary to ensure timely delivery to the customer. In another variation, RMB’s order can trigger the Dallas plant to manufacture the bikes, as described above. Instead of sending the bikes to San Diego after production, however, Dallas can ship them directly to RMB.

As in our earlier discussion, steps with material and fi nancial accounting impacts are indicated with “M” and “FI” symbols, respectively, in Figure 9-23. In addition, steps with a management accounting or controlling impact are identifi ed with the “CO” symbol. Also as in the previous discussion, the pro- cess steps are interrupted while steps in other processes are being completed. We have identifi ed the following 10 logical groupings of process steps in the fi gure.

1. Fulfi llment process—initial steps

2. Inventory management (STO)—initial steps

3. Production process—initial steps

4. Procurement process (external)

5. Production process—continued

6. Inventory management (STO)—continued

7. Warehouse management process related to STO

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336 C H A P T E R 9 Process Integration

8. Fulfi llment process—continued

9. Warehouse management process related to fulfi llment

10. Fulfi llment process—concluding steps

Figure 9-23: Procurement, fulfi llment, production, and warehouse management processes

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Procurement, Fulfi llment, Production, and IWM Processes 337

Demo 9.10: Review fi nancials and inventory (plant, storage location, and bin stock and value)

1 : F U L F I L L M E N T P R O C E S S — I N I T I A L S T E P S

RMB’s purchase order triggers the integrated process and prompts GBI to create a sales order (Figure 9-24). The ERP system then executes an avail- ability check, which concludes that the warehouse does not have the necessary number of bikes in stock.

Figure 9-24: Fulfi llment process—initial steps

Demo 9.11: Create sales order

2 : I N V E N T O RY M A N A G E M E N T ( S T O ) — I N I T I A L S T E P S

Because the warehouse does not have a suffi cient inventory to fulfi ll the cus- tomer PO, GBI follows its normal procedure and creates an STO requesting that the bikes be transferred from Dallas to San Diego (Figure 9-25).

Figure 9-25: Inventory management—initial step

Demo 9.12: Create STO

3 : P R O D U C T I O N P R O C E S S — I N I T I A L S T E P S

When the Dallas plant reviews the STO, it checks its inventory and discovers that it does not have the number of bikes needed to meet the requirement in the STO. This calculation triggers the production process (Figure 9-26). The Dallas plant requests production by creating a planned order. Production is authorized, and the planned order is converted to a production order. Although GBI needs to produce only 30 bikes to meet RMB’s order, it has

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338 C H A P T E R 9 Process Integration

decided to authorize a production lot size of 50 bikes. Recall that when the production order is created and released, the planned costs are included in the production order. Chapter 6 contained an extensive discussion of how the cost- ing of materials produced is determined, including how variances are handled. In this section we will assume that the actual costs are the same as the planned costs and that there is no variance.

Figure 9-26: Production process—initial steps

The next step in the production process is to issue materials to the pro- duction order. A check of inventory (see Table 9-7) indicates that although the needed wheel assemblies (100; 2 per bike) are in stock, the needed raw materials are not.

Demo 9.13: Create planned order and production order

4 : P R O C U R E M E N T P R O C E S S ( E X T E R N A L )

The requirement for raw materials triggers the procurement process to acquire these materials (Figure 9-27). GBI issues a PO to Space Bike Composites for the quantity of raw materials it needs to produce 200 bikes because it is more economical to purchase these materials in larger quantities.

Figure 9-27: Procurement process (external)

Figure 9-28 illustrates the balances in the accounts payable (vendor) sub- ledger account and the general ledger account at the conclusion of the procure- ment process. The FI impacts occur in the last three steps of the process—receive shipment (goods receipt), receive invoice from vendor, and make payment to ven- dor. The 200 units of raw materials are valued at $480 each for a total of $96,000.

Finally, Table 9-8 illustrates the material valuation after the procurement process is completed. The quantity and value of raw materials in Dallas have increased.

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Procurement, Fulfi llment, Production, and IWM Processes 339

Figure 9-28: Account balances after external procurement

Table 9-8: Material valuation after procurement

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340 C H A P T E R 9 Process Integration

Demo 9.14: Execute procurement process

5 : P R O D U C T I O N P R O C E S S — C O N T I N U E D

Once GBI has received the raw materials from Space Bike Composites, the production process can continue (Figure 9-29).

Figure 9-29: Production process—continued

The account balances and material valuation after production has been completed are illustrated in Figure 9-30 and Table 9-9, respectively. The steps that have an FI impact are the goods issue and goods receipt. All three steps have a CO impact. During goods issue, the raw materials and semifi nished goods needed to produce the 50 bikes are issued to the production order. This action results in a decrease in the quantity and value of the inventory of raw materials and semifi nished goods.

The material accounts are credited, and the consumption accounts are debited. At this time, material and FI documents are created. These material costs are debited to the production order as actual costs (CO impact). After the bikes are produced and confi rmed, they are received into fi nished goods inventory. Recall that the confi rmation step has a CO impact in the form of a transfer of labor costs from the work centers to the production order. The goods receipt step increases the quantity and value of fi nished goods. At this point, the fi nished goods inventory account is debited, and the manufacturing output settlement account is credited (FI impact). In addition, the production order is credited by the value of the fi nished goods (CO impact). Since there is no variance between the planned and actual costs in our scenario, additional settlement steps discussed in Chapter 6 are not necessary.

Demo 9.15: Complete production

6 : I N V E N T O RY M A N A G E M E N T ( S T O ) — C O N T I N U E D

When the bikes have been received into inventory, the requirement in the STO can be addressed (Figure 9-31). A goods issue against the STO is executed in Dallas. This action results in a decrease in the inventory in Dallas and an increase

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Procurement, Fulfi llment, Production, and IWM Processes 341

GR- production order

Figure 9-30: Account balances after production

Table 9-9: Material valuation after production

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342 C H A P T E R 9 Process Integration

in the inventory in San Diego. In addition, a debit and a credit are posted to the fi nished goods inventory account (Figure 9-32). Recall, however, that the quantity in San Diego has the status in transit (Table 9-10). When the bikes reach San Diego, the plant completes a goods receipt to change the status from in transit to unrestricted use (Table 9-11). There is no FI impact at the time of the goods receipt.

Figure 9-31: Inventory management—continued

Figure 9-32: Account balances after goods issue against an STO

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Procurement, Fulfi llment, Production, and IWM Processes 343

Table 9-10: Material valuation after goods issue against

STO

Table 9-11: Material valuation after goods receipt against

STO

Figure 9-33: Warehouse management steps

Demo 9.16: Complete GI and GR for STO

7 : WA R E H O U S E M A N A G E M E N T P R O C E S S R E L AT E D T O S T O

When the bikes are received in San Diego, warehouse employees place them in the interim storage area and complete a goods receipt. The ERP system will automatically create a transfer requirement that triggers the WM process (Figure 9-33). In response, a transfer order is created that authorizes the ware- house employees to place the materials in bins. The bikes are moved into spe- cifi c storage bins, and the transfer order is confi rmed.

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344 C H A P T E R 9 Process Integration

Demo 9.19: Complete WM steps related to sales order

1 0 : F U L F I L L M E N T P R O C E S S — C O N C L U D I N G S T E P S

Finally, when the bikes have been moved into the interim shipping area, the goods issue task in the shipping step can be completed (Figure 9-36). When GBI has completed the shipping steps, it then focuses on customer billing and payment.

Figure 9-34: Fulfi llment process—continued

Demo 9.17: Complete WM steps related to STO

8 : F U L F I L L M E N T P R O C E S S — C O N T I N U E D

Once the bikes are in stock in San Diego, the fulfi llment process, which was interrupted due to a shortage of inventory, can proceed to the shipping step (Figure 9-34). The fi rst task in the shipping step is to create a delivery document, which authorizes warehouse personnel to pick, pack, and ship the order. There is no material or FI impact at this time. Recall that in the fulfi llment process these impacts occur at the time of the goods issue.

Figure 9-35: Warehouse management process

Demo 9.18: Create delivery for sales order

9 : WA R E H O U S E M A N A G E M E N T P R O C E S S R E L AT E D T O F U L F I L L M E N T

The storage locations in San Diego are warehouse managed. Therefore, a transfer order is created for the delivery document (Figure 9-35). The transfer order is used to move the bikes from the storage bins to the interim shipping storage area. Once this movement is completed, the transfer order is confi rmed. Warehouse management steps do not have a material impact or an FI impact.

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Procurement, Fulfi llment, Production, and IWM Processes 345

Figure 9-36: Fulfi llment process—concluding steps

Figure 9-37: Account balances after fulfi llment

The goods issue task has a material impact and an FI impact. It results in updates to the GL accounts and the creation of material and FI documents. Both billing and payment processing have an impact on the GL. In addition, the goods issue and billing steps provide data for profi tability analysis in controlling. The FI and material consequences are illustrated in Figure 9-37 and Table 9-12, respectively.

The goods issue reduces the quantity and value of the fi nished goods. The fi nished goods inventory account is credited by the value of the shipment, and the cost of goods sold account is debited. Valuation occurs at the standard price of the material. At the time of billing, the customer account in the accounts receivable subledger is debited, and the revenue account is credited. The debit

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346 C H A P T E R 9 Process Integration

Table 9-12: Material valuation after fulfi llment

to the customer account automatically results in a debit to the corresponding reconciliation account in the GL. These entries are based on the selling price of the bikes. Finally, when GBI receives RMB’s payment, it credits RMB’s customer account (and the reconciliation account), and it debits the bank account by the amount of the payment.

Demo 9.20: Complete fulfi llment steps

C H A P T E R S U M M A R Y

In the real world of business operations, processes are never as clean or as sim-

ple as they have been depicted in this book. In this chapter, we have attempted

to illustrate both the complex interdependencies among processes across the

organization and the impact that individual decisions can have for subsequent

steps in the process or for related processes. Business must make their decisions,

both large and small, with an acute awareness of these interdependencies and

of the potential impact each decision can have across the organization.

In the fi rst scenario GBI took a customer order for trading goods, deter-

mined whether to purchase those goods from an external vendor or transfer

them from another warehouse, completed the purchase or transfer, managed

the inventory of those received goods, and then completed the picking, packing,

shipping, and invoicing for those goods to the customer.

The second scenario added the production process to address the need to

fulfi ll a customer order for manufactured goods. In order to meet the needs of the

production process, many additional steps were added that involved the sourc-

ing and transfer of the raw materials needed to produce the fi nished goods.

Throughout both processes, we kept track of the fi nancial and material impacts

of processes steps, and we illustrated the key role of data, decision making,

and collaboration between and among functional departments in executing the

processes effi ciently. For example, some of these steps involved collaboration

between GBI’s Miami and Dallas warehouses. In addition, many decisions made

throughout the process required real-time data from the ERP system.

CH009.indd 346CH009.indd 346 31/01/11 6:43 AM31/01/11 6:43 AM

Review Questions 347

This chapter also highlighted the central role of fi nancial accounting in

the execution of business processes by identifying the fi nancial impact at each

step of the process. Nearly every action that a company takes, from the smallest

decisions on the shop fl oor to the most sweeping strategic decisions in the

boardroom, has an impact on the company’s fi nancial status. Monitoring and

managing the fi nancial impact of process execution is fundamental to ensuring

that a company is operating effi ciently and that management always has a clear

picture of the fi nancial status of the enterprise.

By this point you should have a keen appreciation of the role of an integrated

ERP system in the holistic execution of processes within an enterprise. Imagine

if all of the steps in this chapter had to be executed in various disconnected

departmental applications and employees in each group had no visibility into

the activities of other groups. Going further, imagine the fi nancial and managerial

accounting nightmare involved in trying to track the impact of each activity

simultaneously in each disparate system.

This textbook is the foundation for process awareness and knowledge. As

you acquire more experience in the workplace, you will undoubtedly refer back

to the concepts you have just learned. The information covered in this textbook

represents the fundamental concepts that govern the operations of every large

and medium-sized (and, increasingly, small) company on the planet. The knowl-

edge you have gained from this textbook will provide you with a distinct advan-

tage in the workplace. Appreciation for the role of business processes in the

operations of companies coupled with hands-on exposure to the capabilities of

the world’s leading ERP system for executing and managing business processes

will serve you well for the rest of your career.

R E V I E W Q U E S T I O N S

1. Explain the various strategies for the procurement, fulfillment, and production processes.

2. Explain the role of inventory in reducing the interdependence among processes.

3. Identify and discuss the steps in the integrated process that include the procurement, fulfi llment, and IWM processes. Analyze the fi nancial and

material impacts of the various process steps.

4. Identify and discuss the steps in the integrated process that include the procurement, fulfi llment, production, and IWM processes. Analyze the

fi nancial and material impacts of the various process steps.

5. Prepare a process diagram that displays the steps that GBI must execute in order to fi ll a customer order, based on the fi ve assumptions listed

below. Make certain to include the fi nancial and material impacts of each

step as illustrated in the chapter.

a. Rocky Mountain Bikes has ordered 250 road helmets (RHMT 1000) from GBI.

b. The San Diego plant has 50 road helmets valued at a moving average price of $25.13 each

CH009.indd 347CH009.indd 347 31/01/11 6:43 AM31/01/11 6:43 AM

348 C H A P T E R 9 Process Integration

c. The Miami plant has 400 road helmets valued at a moving average price of $25.25.

d. GBI has decided to move 100 road helmets from Miami to San Diego and purchase 300 helmets from Spy Gear at $25.54 each.

e. GBI sells road helmets for $50 each.

E X E R C I S E S

Exercises for this chapter are available on WileyPLUS.

CH009.indd 348CH009.indd 348 31/01/11 6:43 AM31/01/11 6:43 AM

3 4 9

A ABAP list viewer (ALV) grid

control, 41, 43 Accounts, 52 Account assignment category, 97–99 Account assignment object, 96–97 Account currency, 55–56 Account determination, 67, 96–99 Account group, 55 Account information levels, 72–73 Accounting, 49–77

fi nancial, see Financial accounting (FI) management, see Management

accounting (controlling, CO) parallel, 59–60

Accounting data: customer master, 140–141 vendor master, 92–93

Accounting documents, 58–59 Account numbers, 4, 53 Accounts payable, 14, 57 Accounts payable (AP) accounting,

14, 50–51, 63 Accounts receivable, 14, 57 Accounts receivable (AR)

accounting, 50, 63–65 Account types, 58 Acquisition of assets, 68–69 Aggregation, 40, 282 Alternate sequence (production), 192 Alternative accounts, 53 ALV (ABAP list viewer) grid

control, 41, 43 Analytics:

fl exible analysis, 44, 123, 173 fulfi llment, 173–174 online analytic processing, 39–40,

44–45 in SAP ERP, 39 standard analysis, 44, 122–123,

173–174

Analytical environment, 39 AP accounting, see Accounts payable

(AP) accounting Apple Inc.:

business areas and segments, 52 distribution channels, 131 product groups, 283–284 production process, 180–181 sales structure, 133

Application layer, 24, 25 Application platforms, 28–29 Application suite, 27 AR (accounts receivable) accounting,

50, 63–65 Architecture of enterprise systems,

24–25 Archived production orders, 215 Assemble-to-order (ATO)

production, 279, 285 Assets, 55. See also Asset accounting

fi nancial, 65 fi xed, 66 intangible, 65 leased, 66 liquid, 55 tangible, 65, 66

Asset accounts, 57 Asset accounting, 14, 51, 65–71

acquisition, 68–69 depreciation, 69–71 retirement, 71

Asset category (account assignment), 97

Asset class, 66 Asset explorer, 73–74 Asset management, 6, 11–12, 316 Assets under construction, 66, 68 ATO (assemble-to-order)

production, 279, 285 ATP (available-to-promise), 279 Authorize production step, 199–204

Availability check: fulfi llment, 152–153 production, 203

Availability check group (material planning), 279

Available-to-promise (ATP), 279

B Backfl ushing, 207 Backward consumption, 281–282 Backward scheduling:

fulfi llment, 153 materials requirements planning,

298–299 Balance sheet, 14, 51, 74, 75 Balance sheet accounts, 54, 61–62 Bank ledger accounting, 51 Basic data:

fulfi llment, 140 for work centers, 187

Billing: fulfi llment, 145, 146, 160–164 stock transport orders with,

232–234 Billing due list, 160 Bill of materials (BOM), 182–187

BOM selection method, 278–279 component assignment, 194–195 exploding, 276, 301–302 header section, 185 items section, 185–186 multilevel, 183–185

Bill-to party (partner function), 142 Bin-related data, 239 Bin status report, 258, 260–262 Blocked stock, 99 Boeing Corp.:

747 bill of materials, 186 757 assembly, 190

BOM, see Bill of materials BOM selection method, 278–279

Index

BINDEX.indd 349BINDEX.indd 349 01/02/11 3:34 PM01/02/11 3:34 PM

350 I n d e x

Book value (assets), 69, 70 Brief text (brief description), 54 Budgeting phase (project

management), 13 Business areas, 51, 52 Business intelligence, 45–46 Business processes, 4–15. See also

specifi c processes and topics asset management, 11–12 customer service, 12 defi ned, 4 fi nancial accounting, 14 fulfi llment, 9 human capital management,

12–13 inventory and warehouse

management, 10–11 lifecycle data management, 11 management accounting, 14–15 material planning, 9–10 procurement, 7–8 production, 8–9 project management, 13–14

Buying, see Procurement

C Call-off orders, 106 Capacity, production, 188, 195 Capacity splits (production

orders), 201 Centralized credit control area,

138–139 Certifi cations, SAP, 18 Characteristics, 39, 40 Chart of accounts (COA), 52–55 CIRs, see Customer independent

requirements Cisco Systems, 270 Class items (BOM), 186 Clearing account, 68, 69 Client, 30, 51 Client segment (COA), 53–54 Client-server architecture, 24–25 Closed production orders, 215 CO (controlling), see Management

accounting COA (chart of accounts), 52–55 Coca-Cola® Enterprises, 31 CO (controlling) documents, 37, 145 Collective confi rmations, 210 Collective conversion

(production), 202 Company code, 30, 51

sales areas assigned to, 133 sales organizations in, 129

Company code data, in general ledger accounts, 55–57

Company code segment (COA), 53, 54

Company-code-to-company-code transfer, 229

Company-level purchasing organization, 87

Compensation and benefi ts management, 12

Completion (production), 215 Components, on production

orders, 201 Component assignment (production),

194–195 Composite applications, 25 Conditions:

output, 144 pricing, 144 procurement, 94–95

Condition technique, 144 Condition types:

fulfi llment, 144 purchasing info record, 94

Confi rmations: production, 202, 208–211 transfer orders, 242

Confi rm warehouse movement (IWM), 247–248

for fulfi llment, 252 for procurement, 250

Consignment, materials purchased on, 95

Consignment-to-warehouse stock posting, 225

Consumable materials, 96, 98 Consumption, 279–282 Consumption-based planning,

273–275 Consumption mode (material

planning), 280–282 Consumption period, 282 Contracts:

fulfi llment, 147 procurement, 106 subcontracting, 96

Contract release orders, 106 Control keys, 188 Controlling (CO), see Management

accounting Controlling (CO) documents,

37, 145 Corrective maintenance, 12 Costs, production, 201, 203,

213–214 Cost allocation and management, 60

Cost centers: in management accounting, 60 work centers associated with, 188

Cost center category (account assignment), 97

Cost objects, 60 Cost of goods sold, 159 Create subtotals (list viewer), 44 Credit control area:

credit management master record, 145

fulfi llment, 138–139 Credit control area data, 145 Credit exposure, 168 Credit management master

record, 145 Credit management process, 167–168 Credit memo, 161 CRM (customer relationship

management), 27, 146 Cross-company code purchasing

organization, 86 Cross-functional processes, 2 Cross-plant purchasing

organization, 87 Currency:

account, 55–56 valuation, 90

Customer accounts, 57, 63–65 Customer independent

requirements (CIRs): demand management, 294 material planning, 276, 280–282

Customer master (fulfi llment), 140–143

Customer master data, 140–141 Customer-material information

(info) record, 143–144 Customer material number, 143 Customer relationship management

(CRM), 27, 146 Customer service, 6, 12, 316

D Data (in ESs), 29–37. See also specifi c

types of data master data, 31–36 organizational data, 29–31 transaction data, 36–37

Data layer, 24, 25 Data warehouses, 38 DC (distribution channel), 130–131 Debit memo, 161 Decentralized credit control area,

138, 139

BINDEX.indd 350BINDEX.indd 350 01/02/11 3:34 PM01/02/11 3:34 PM

Index 351

Default values (production), 188 Delivering plant, 134 Delivery document:

fulfi llment, 154–158 inventory and warehouse

management, 244, 251–252 procurement, 111 for stock transport, 231–232

Delivery scheduling: fulfi llment, 153 and materials requirements

planning, 303 Delivery tolerances, 91 Dell Computers:

procurement strategies, 89 production strategy, 181

Demand management, 271, 286, 294–295

Dependent requirements (MRP), 276, 301–303

Depreciation, 69–71 Depreciation areas, 71, 76 Depreciation methods, 69–71 Depreciation posting run, 74 Description data, 32 Design, see Lifecycle data

management Details (documents), 37, 38 Direct costs (production), 214 Disaggregation (material planning),

282, 286, 291–294 Discounts, sales-related, 166n.1 Discrepancies:

invoice verifi cation, 116 payment, 166

Discrete manufacturing, 179 Distribution chains, 131, 134–135 Distribution channel (DC), 130–131 Divisions, 132–133 DMS (document management

system), 202 Document fl ow (fulfi llment), 170–171 Document items (BOM), 186 Document management system

(DMS), 202 Document type, 58 Double-declining balance

depreciation, 70

E Economic order quantity, 277 Economic production quantity, 277 Effi ciency, 3–4 Enterprise-level purchasing

organization, 86 Enterprise resource planning (ERP)

systems, 25–28, 316–317. See also SAP ERP system

Enterprise systems (ES), 3–4, 23–46 application platforms, 28–29 architecture of, 24–25 data in, 29–37 ERP systems, 25–28 master data in, 31–36 organizational data in, 29–31 reporting in, 37–46 transaction data in, 36–37

Equity, 55 ERP (enterprise resource planning)

systems, 25–28, 316–317. See also SAP ERP system

ES, see Enterprise systems Estimates:

production, 201, 203 scheduling, in material planning,

277–278 Exception messages (MRP), 303,

305–306 Execute warehouse movement

(IWM), 245–247 for fulfi llment, 252 for procurement, 249–250

Execution phase (project management), 14

Expenses, 55 Exploding the BOM, 276, 301–302 Export (list viewer), 44 External procurement, 5, 325–327,

338–339 External reporting, fi nancial

accounting for, 14

F Fast entry confi rmations, 210 FERT, see Finished goods FI, see Financial accounting FICP expert, 27 FI (fi nancial accounting) documents,

36, 58–59 Field status group, 56 Financial accounting (FI), 7, 14, 49–60

account information, 72–73 accounting documents, 58–59 accounts payable accounting, 63 accounts receivable accounting,

63–65 asset accounting, 65–71 asset explorer, 73–74 and billing, 162–163 chart of accounts, 52–55 fi nancial statements, 74–76 general ledger accounting, 61–63

general ledger accounts, 53–58 integration of other processes and,

71–72, 316 key processes in, 50–51 management accounting vs., 50 master data for, 52–58 organizational data for, 51–52 parallel accounting, 59–60 for payments, 165–167 processes used in, 61–72 reconciliation accounts, 57 reporting, 72–76 subsidiary ledgers, 57

Financial accounting data (procurement), 90–91

Financial accounting (FI) documents, 36, 58–59

Financial assets, 65 Financial information systems

(FIS), 44 Financial reporting standards, 59n.3 Financial statements, 74–76

balance sheet, 14, 51, 74, 75 income statement, 14, 51 profi t and loss statement, 51, 74, 75 statement of cash fl ow, 51

Financial statement version, 74 Finished goods (FERT), 9, 33, 35 Firmed orders/requisitions, 298 FIS (fi nancial information

systems), 44 Fixed assets, 66 Fixed lot size, 277 Flexible analysis, 44

fulfi llment, 173 with purchasing information

system, 123 Flexible planning (SOP), 287 Forecast-based planning, 275 Formula, BOM as, 182 Forward consumption, 281–282 Forward scheduling (MRP), 298 Fulfi llment, 9, 127–175

analytics, 173–174 billing, 160–164 credit control area, 138–139 credit management master record,

145 credit management process,

167–168 customer master, 140–143 customer-material information

record, 143–144 distribution channel, 130–131 division, 132–133 document fl ow, 170–171

BINDEX.indd 351BINDEX.indd 351 01/02/11 3:34 PM01/02/11 3:34 PM

352 I n d e x

Fulfi llment (Continued ) integration of other processes and,

169–170, 316–346 master data for, 139–145 material master, 139–140 online lists, 172–173 organizational data for, 129–139 output conditions, 144 payment, 164–167 plant, 134–135 presales activity, 146–149 pricing conditions, 144 reporting for, 170–174 sales area, 133–134 sales order processing, 149–154 sales organization, 129–130, 132 shipping, 154–160 shipping point, 135–138 steps in process of, 145–167 and warehouse management,

250–253, 329, 344 work lists, 171–172

Functional structure, 2–4

G GAAP (generally accepted

accounting principles), 14, 59n.3

GBI (fi ctional case study), 15–16. See also specifi c topics

General data: credit management master

record, 145 customer master, 140 vendor master, 92, 94

General ledger (GL), 14, 50 accounts in, 53–58 chart of accounts, 52–55

General ledger accounting, 61–63 Generally accepted accounting

principles (GAAP), 14, 59n.3 GL, see General ledger Global Bike Incorporated (GBI)

(fi ctional case study), 15–16. See also specifi c topics

Goods issue, 101 fulfi llment, 153, 154, 158, 159 inventory management, 224 procurement, 100 production, 205–208

Goods movement, 222–223. See also Inventory management (IM); Warehouse management (WM)

goods issue, 224 goods receipt, 223–224 procurement, 99–102

shipping, 154–160, 328 stock transfers, 225–229 transfer postings, 224–225 types of, 101

Goods receipt, 101 inventory management, 223–224 procurement, 99, 111–114 production, 211–214

Goods receipt document, 111 Goods receipt (GR) processing time,

91, 277, 299 Goods receipt slip, 114 Group accounts, 53 Group chart of accounts, 53 GR (goods receipt) processing time,

91, 277, 299

H HALB (semifi nished goods), 9, 33–35 Handelsgesetzbuch (HGB), 14, 59n.3 HAWA (trading goods), 33, 35 HCM, see Human capital

management Headers, document, 37, 38. See also

specifi c document types HGB (Handelsgesetzbuch), 14, 59n.3 Hightower, Ross, 269n.1 Hiring, 12 Human capital management (HCM),

6, 12–13, 316 Human resources information

systems (HIS), 44

I IFRS (International Financial

Reporting Standards), 51n.1, 59n.3

IM, see Inventory management Income statement, 14, 51 Independent requirements

(MRP), 276 Indirect costs (production), 214 Individual conversion (production

orders), 202 Information structures, 39, 44 Information systems (IS), 44–45

components of, 39, 40 purchasing, 121–123

Information technology (IT): investments in, 3 SAP consultants in, 18

In-house production time, 277, 278, 299

Initial receipt of inventory, 224 In quality inspection (materials), 99

Inquiries (fulfi llment), 146, 147, 149 Inspection lot, 114 Intangible assets, 65 Integration of processes, see Process

integration Intel Corporation:

organizational structure, 130 procurement strategy, 89 production process, 180

Inter-company processes, 27 Interdependence of processes,

316–317. See also Process integration

Interim storage areas, 236 Internal consumption, materials

withdrawn for, 224 Internal procurement, 5, 322–325. See

also Production Internal reporting, management

accounting for, 14–15 International Commercial Terms,

107n.2 International Financial Reporting

Standards (IFRS), 51n.1, 59n.3 Interoperation time, 277 Intra-company processes, 25 Intra material items (BOM), 186 Inventory, as buffer between

processes, 317 Inventory accounts (fulfi llment),

158–160 Inventory and warehouse

management (IWM), 6, 7, 10–11, 221–263

integration of other processes and, 316, 318–346

inventory management, see Inventory management (IM)

order of postings in, 255–257 reporting in, 257–262 warehouse management, see

Warehouse management (WM)

Inventory control information systems, 44

Inventory management (IM), 221–234 in fulfi llment, 251–252 goods issue, 224 goods receipt, 223–224 order of postings in, 255–257 and process integration, 337, 340,

342–343 in procurement, 248–250 stock transfers, 225–229 stock transport orders, 229–234 transfer postings, 224–225

BINDEX.indd 352BINDEX.indd 352 01/02/11 3:34 PM01/02/11 3:34 PM

Index 353

Inventory status report, 258–260 Invoice verifi cation, 114–117 IS, see Information systems IT (information technology):

investments in, 3 SAP consultants in, 18

Item categories: bill of materials, 185, 186 procurement, 95–96 sales orders, 152

IWM, see Inventory and warehouse management

J John Wiley & Sons, 132

K Key fi gures, 40

L Layers, 24 Layout (list viewer), 44 Leading ledger, 59 Lead time, 10 Lead time scheduling, 297 Leased assets, 66 Liabilities, 55 Lifecycle data management, 6, 11, 316 Line items (documents), 37, 38 Line item display (accounts),

56–57, 72 Liquid assets, 55 LIS (logistics information systems), 44 Lists:

billing due, 160 MRP, 303, 308–309 online, 41–44, 120, 172–173 operations, 205 packing, 111 in SAP ERP, 39 source, 106 stock/requirements, 216–218,

304–308 task, 187 of transfer orders, 257 work, 40–41, 121, 171–172

List viewer, 41–44 Loading (fulfi llment), 153 Logistics information systems

(LIS), 44 Long text (description), 54 Lot-for-lot, 277 Lot size, 277, 298 Lot size dependent times, 278 Lot size independent times, 278 Lot size key, 277

M MA documents, see Management

accounting documents Maintenance:

corrective, 12 preventive, 11

Make-to-order (MTO) production, 180, 181, 279–280, 285, 317

Make-to-stock (MTS) production, 180–181, 279, 280, 285, 317

Making, see Production Management accounting (controlling,

CO), 7, 14–15, 50 and billing, 164 fi nancial accounting vs., 50 integration of other processes

and, 316 key concepts in, 60

Management accounting (MA) documents, 36–37, 145

Manufacturing, 179. See also Production

Mash-ups, 25 Master data, 31–36. See also specifi c

types of data bill of materials, 182–187 chart of accounts, 52–55 conditions, 94–95 credit management master

record, 145 customer master, 140–143 customer-material information

record, 143–144 for fi nancial accounting, 52–58 for fulfi llment, 139–145 general ledger accounts, 53–58 material groups, 35–36 material master, 32, 90–92,

139–140, 196, 239 material types, 32–35 for organizational level, 36 output conditions, 144 pricing conditions, 144 for procurement, 89–95 product groups, 282–285 for production, 182–196 production resource tools, 196 product routings, 191–196 purchasing info records, 93–94 reconciliation accounts, 57 storage bins, 239–242 subsidiary ledgers, 57 vendor master, 92–93 in warehouse management,

239–241 work center, 187–191

Master production scheduling (MPS), 273, 276–277, 296

Master recipes, 187, 188 Master schedule items (MPS), 296 Materials. See also Goods... entries

change in ownership of, 107n.2 consumable, 96, 98 customer-material information

(info) record, 143–144 ownership of, 107n.2 purchased on consignment, 95 raw, 10, 33–35 sampling, 224 scrapped, 224 stock, 96, 99 and supply and demand, 10 withdrawn for internal

consumption, 224 Material documents, 37

inventory management, 226–227 procurement, 100–101

Material groups, 35–36 Material master, 32

for fulfi llment, 139–140 for material planning, 272–282 for procurement, 90–92 for production, 196 for warehouse management, 239

Material number, 32 Material planning, 6, 9–10, 269–311

availability check group, 279 basic questions in, 270 BOM selection method, 278–279 consumption-based, 273–275 consumption mode, 280–282 demand management, 271,

294–295 disaggregation, 291–294 integration of other processes and,

315–317 lot size key, 277 master data, 271–284 master production scheduling, 273,

276–277 material master, 272–282 materials requirements planning,

271–282, 295–304 MRP list, 308–309 MRP type, 273–277 planning result report, 309–310 planning time fence, 278 process for, 285–304 procurement proposals, 271 procurement type, 273 product groups, 282–285 reorder point planning, 274

BINDEX.indd 353BINDEX.indd 353 01/02/11 3:34 PM01/02/11 3:34 PM

354 I n d e x

Material planning (Continued ) reporting, 304–309 requirements determination, 271 sales and operations planning, 271,

285–291 scheduling times, 277–278 stock/requirements list, 304–308 strategy group, 279–280 time elements, 273 work scheduling, 272, 273

Materials requirements planning (MRP), 196, 271–273, 276, 286, 295–304

check planning fi le, 297 data for, 273–282 dependent requirements, 301–303 lot size, 298 MRP controller, 286, 296, 300 MRP elements, 296, 305, 309 net requirements, 298 procurement proposals, 299–300 scheduling, 298–299 use of term, 273n.2

Material reservation, 153 Material staging, 153, 207 Material-to-material posting, 225 Material types, 32–35 Material withdrawal slips, 205 Microsoft Windows, 28–29 Milestone confi rmations, 210 Movable resources, see Production

resource tools (PRT) Movement types, 101–102. See also

Goods movement Moving average price, 90 MPS, see Master production

scheduling MRP, see Materials requirements

planning MRP area, 296 MRP controller, 286, 296, 300 MRP elements, 296, 305, 309 MRP list, 303, 308–309 MRP-relevant changes, 302 MRP type, 273–277 MTO production, see Make-to-order

production MTS production, see Make-to-stock

production Multi-level BOMs, 183

N Nesting, 183, 282 Net change planning (MRP), 302 Net change planning in the planning

horizon (MRP), 303

Net requirements calculation, 298 Net requirements planning, 279 Nonleading ledgers, 59 Nonstock items (BOM), 186 Notifi cation, 114

O OLAP, see Online analytic processing OLTP, see Online transaction

processing One-step stock transfers, 225–229 Online analytic processing (OLAP),

39–40, 44–45 Online distribution, 131 Online lists, 41–44

fulfi llment, 172–173 for procurement, 120

Online transaction processing (OLTP), 39, 40, 44

Opening period (MRP), 300 Open item management, 56 Operational accounts, 53 Operational effi ciency, 3 Operations (production), 187, 201 Operations lists, 205 Operative/operational chart of

accounts, 53 Optimum lot-sizing, 277 Oracle, 27 Order category (account

assignment), 97 Order completion (production), 215 Order processing, 107–111. See also

Fulfi llment Order release (production orders),

204–205 Order report (MRP), 306 Organizational data, 29–31

client, 30 company code, 30 credit control area, 138–139 distribution channel, 130–131 division, 132–133 for fi nancial accounting, 51–52 for fulfi llment, 129–139 picking area, 236–238 plant, 30–31, 134–135 for procurement, 84–89 purchasing organization, 86–88 sales area, 133–134 sales organization, 129–130 shipping point, 135–138 storage locations, 84–86 storage section, 236 storage type, 235–236 in warehouse management, 234–239

Organizational elements, 30. See also Organizational data

Organizational levels, 29, 30, 36. See also Organizational data

Organizational structures: functional, 2–4 of GBI, 15–16

Outline (purchase) agreements: fulfi llment, 147 procurement, 106

Output conditions (fulfi llment), 144 Overhead allocation, 214 Overhead costs, 214 Overview segment (credit

management master record), 145 Owner’s equity, 55 Ownership of materials, 107n.2

P Packing (fulfi llment), 154, 158 Packing list, 111 Parallel accounting, 59–60 Parallel depreciation, 71 Parallel sequences (production), 192 Parallel valuation of assets, 71 Partial conversion (production

orders), 202 Partial payment, 166 Partner functions (fulfi llment), 142 Payer (partner function),

142, 161, 162 Payment (fulfi llment), 145, 146,

164–167 Payment processing (procurement),

117–119 Payment program, 117, 118 Payroll administration, 13 Period defi nition, 40 Period-end closing, 214. See also

Periodic processing Periodic processing, 214–215 Period lot-sizing, 277 Phantom items (BOM), 186 Picking, 40, 154, 157 Picking area:

“virtual truck” bin concept, 247 warehouse management, 236–238

Picking due list, 40–41 Pick quantity, 158 PIRs, see Planned independent

requirements Placement and removal strategies

(WM), 239 Planned costs (production), 213–214 Planned delivery time (material

planning), 277, 299

BINDEX.indd 354BINDEX.indd 354 01/02/11 3:34 PM01/02/11 3:34 PM

Index 355

Planned independent requirements (PIRs):

demand management, 294, 295 material planning, 276, 280–282

Planned orders: fi rmed, 298 materials requirements planning,

299, 300 production, 198–199

Planned values, 73, 74 Planning fi le, 297 Planning horizon, 303 Planning mode (MRP), 303 Planning phase (project

management), 13 Planning result report, 309–310 Planning table (SOP), 288 Planning time fence, 278 Planning with fi nal assembly, 279 Planning without fi nal

assembly, 280 Plants, 30

delivering, 134–135 functions of, 30–31 receiving, 84 sales plant data, 140

Plant data/storage view (procurement), 91

Plant-level (plant-specifi c) purchasing organization, 87–88

Plant maintenance information systems, 44

Plant-to-plant transfer, 228–230 Plan warehouse movement (IWM),

243–245, 251 for fulfi llment, 251 for procurement, 248–249

PLM (product lifecycle management), 27

PO (purchase order), 89, 107–111 Posted values, 74 Post goods issue (fulfi llment), 158 Posting(s):

depreciation posting run, 74 of goods receipts, 213–214 in inventory and warehouse

management, 255–257 to ledgers, 57 transfer, 100, 101, 224–225, 244

Posting change notice, 244 Posting key, 58 Preliminary cost estimates

(production), 203 Presales activity (fulfi llment),

145–149 Presentation layer, 24, 25

Preventive maintenance, 11 Price control, 90 Price per unit, 90–91 Pricing conditions (fulfi llment), 144 Processing time:

material planning, 277 production, 192

Process integration, 315–347 among procurement, fulfi llment,

and IWM, 318–331 among procurement, fulfi llment,

production, and IWM, 332–346 with fi nancial accounting, 71–72 with fulfi llment, 169–170, 317 with material planning, 317 with procurement, 119, 120, 317 with production, 317

Process manufacturing, 179–180 Procurement, 7–8, 83–124

account determination, 96–99 goods movement, 99–102 goods receipt, 99, 111–114 integration of other processes and,

119, 120, 316–346 internal and external, 5 invoice verifi cation, 114–117 item categories, 95–96 master data for, 89–95 movement types, 101–102 order processing, 107–111 organizational data for, 84–89 payment processing, 117–119 process of, 102–119 purchasing group, 89 purchasing organization, 86–88 reporting, 119–123 requirements determination,

103–105 source of supply determination,

105–107 stock type or status, 99 storage locations, 84–86 and warehouse management,

248–250, 328 Procurement proposals, 271, 278

determining, 299–300 from MRP process, 303 MRP scheduling of, 299

Procurement type (material planning), 273

Procure-to-order, 317 Procure-to-stock, 317 Product design and improvement, see

Lifecycle data management Product groups (product families),

282–285

Production, 8–9, 179–219 authorize production step,

199–204 bill of materials, 182–187 completion, 215 confi rmations, 208–211 goods issue, 205–208 goods receipt, 211–214 integration of other processes and,

316, 317, 332–346 master data for, 182–196 material master, 196 order completion, 215 order release, 204–205 periodic processing, 214–215 process of, 196–214 production resource tools, 196 product routings, 191–196 reporting, 215–218 request production step, 197–199 warehouse management in,

253–254 work center, 187–191

Production capacity, 188, 195 Production order, 199–204

completion of, 215 release of, 204–205 structure of, 200–202

Production plan (SOP), 286, 289–291 Production resource tools (PRT),

191, 196 Productivity, 3–4 Product lifecycle management

(PLM), 27 Product routings, 187, 191–196 Profi tability, 3 Profi t and loss accounts, 54 Profi t and loss statement, 51, 74, 75.

See also Income statement Program management, 316 Progress confi rmations, 210 Project category (account

assignment), 97 Project management, 7, 13–14, 316 Proportion factor (material

planning), 282 Proposals, procurement, see

Procurement proposals PRT (production resource tools),

191, 196 Purchase agreements, outline, 106, 147 Purchase order (PO), 89, 107–111 Purchase requisitions, 102–107

converting to purchase orders, 109–111

creating, in MRP, 303

BINDEX.indd 355BINDEX.indd 355 01/02/11 3:34 PM01/02/11 3:34 PM

356 I n d e x

Purchase requisitions (Continued ) fi rmed, 298 from production orders, 203 requirements determination,

103–105 source of supply determination,

105–106 Purchasing data (vendor master),

91, 93, 94 Purchasing department processing

time, 299 Purchasing group, 89, 91 Purchasing info records, 93–94 Purchasing information systems, 44,

121–123 Purchasing organization, 86–88 Purchasing process, see Procurement Purchasing view, 91

Q Qualitative aggregation of data, 40 Quality management, 114 Quality management information

systems, 44 Quants, 241 Quantitative aggregation of data, 40 Quotations (fulfi llment), 146–148, 151

R Raw materials (ROH), 10, 33–35 Receiving plant, 84 Recipe(s):

BOM as, 182 master, 187, 188

Reconciliation accounts, 57, 63 accounts payable, 63 accounts receivable, 63–65 for assets, 66–68

Recruitment, 12 Reference purchasing

organization, 88 Regenerative planning (MRP), 302 Release (production orders), 204–205 Release orders (procurement), 106 Reorder point (material planning), 274 Reorder point planning, 274 Repair, product, 12 Repetitive manufacturing, 179 Replenishment lead time, 274 Reporting, 39

account information, 72–73 analytics, 173–174 asset explorer, 73–74 business intelligence, 45–46 document fl ow, 170–171 in enterprise systems, 37–46

external, 14 in fi nancial accounting, 72–76 fi nancial accounting for, 14 fi nancial statements, 74–76 for fulfi llment, 130, 170–174 information systems, 44–45 internal, 14–15 in inventory and warehouse

management, 257–262 management accounting for,

14–15 for material planning, 304–309 MRP list, 308–309 online lists, 41–44, 120, 172–173 planning result report, 309–310 for procurement, 119–123 for production, 215–218 purchasing information systems,

121–123 stock/requirements list, 304–308 work lists, 40–41, 121, 171–172

Request for quotations (RFQ), 106, 146

Request production step, 197–199 Requirements determination:

material planning, 271, 301–303 procurement, 103–105

Requisitions, see Purchase requisitions

Requisition-to-pay process, see Procurement

Reservations, machine (production), 203

Residual item technique, 166 Residual value (assets), 69 Retirement of assets, 71 Revenues, 55 RFQ (request for quotations),

106, 146 Risk category, 145 ROH (raw materials), 10, 33–35 Rough-cut plan (SOP), 285

S Safety stock, 274 Sales and operations planning (SOP),

271, 285–291 planning table, 288 production plan, 286, 289–291 sales plan, 288–289 standard vs. fl exible, 287

Sales area (fulfi llment), 128, 133–134

Sales area data, 141 Sales information systems, 44 Sales order, 145, 146, 149–152

Sales-order-based production, 279. See also Make-to-order (MTO) production

Sales order category (account assignment), 97

Sales order processing, 145, 146, 149–154

Sales organizations, 129–130, 132 Sales organization data, 140 Sales plan (SOP), 288–289, 292 Sales plant data, 140 Sampling (of materials), 224 SAP AG, 17–19, 25, 28 SAP Associate Application

Consultant, 19 SAP Business Suite, 28, 29 SAP® Business Warehouse (SAP

BW), 45–46 SAP certifi cations, 18 SAP consultants, 18 SAP® CRM, 28 SAP ERP system, 15, 23, 25–28.

See also specifi c topics SAP list viewer, 41–44 SAP NetWeaver, 28, 29 SAP® PLM, 28 SAP® R/3, 17–18, 23, 25 SAP® SCM, 28 SAP software, 17–18 SAP® SRM, 28 SAP University Alliances Program

(SAP UAC), 15, 18–19 Scalability, 25 Schedule lines:

materials requirements planning, 300 sales orders, 152, 156

Scheduling: backward, 153, 298–299 delivery, 153, 303 forward, 298 inaccurate, 278 lead time, 297 master production scheduling, 273,

276–277, 296 materials requirements planning,

272, 273, 296–299, 303 production, 196, 203 work, 196, 272, 273

Scheduling agreements: fulfi llment, 147 materials requirements

planning, 303 procurement, 106

Scheduling basis (work centers), 188 Scheduling times (material planning),

277–278

BINDEX.indd 356BINDEX.indd 356 01/02/11 3:34 PM01/02/11 3:34 PM

Index 357

SCM (supply chain management), 27 Scope-of-list parameters, 41 Scrapping materials, 224 Scrap value (assets), 69 Segments, 51, 52 Select detail (list viewer), 41 Selection parameters (online lists), 41 Sell-from-stock, 317 Selling, see Fulfi llment Semifi nished goods (HALB),

9, 33–35 Services:

asset management, 6, 11–12, 316 customer service, 6, 12, 316 procurement, 96

Service-oriented architecture (SOA), 25

Service sheet, 96 Set fi lter (list viewer), 41 Settlement:

production orders, 201 production variances, 214–215

Settlement phase (project management), 14

Setup time: material planning, 277 production, 192

Shipment (fulfi llment), 145, 146 Shipping:

fulfi llment, 154–160 and process integration, 328

Shipping point, 135–138 Shipping units, 158 Ship-to party (partner function), 142 Shop fl oor information systems, 44 Shop fl oor papers, 205 Short text, 54 Silo effect, 2–3 Single-level BOMs, 183 SOA (service-oriented architecture), 25 Sold-to party (partner function), 142 SOP, see Sales and operations

planning Sort (list viewer), 41 Source list, 106 Source of supply determination

(procurement), 105–107 Split valuation, 227 SRM (supplier relationship

management), 27 Standard analysis, 44

fulfi llment, 173–174 with purchasing information

system, 122–123 Standard information structures, 44 Standard items, 95

Standard planning (SOP), 287–291 Standard price, 90–91 Standard sequence (production), 192 Standard value keys, 188 Statement of cash fl ow, 51 Static lot-sizing, 277 Steelcase, Inc.:

inventory and warehouse management, 222

material planning, 304 “virtual truck” bin concept, 247 warehouse organization, 238, 240

STOs, see Stock transport orders Stock:

blocked, 99 safety, 274 use of term, 274

Stock in transit, 99 Stock items (BOM), 186 Stock level = 0 (production plan), 289 Stock materials (procurement), 96 Stock-out, 10, 270, 274 Stock/requirements list:

material planning, 304–308 production, 216–218

Stock statistics report, 307 Stock statuses (procurement), 99 Stock transfers, 96, 101

company-code-to- company-code, 229

inventory management, 225–229, 254–255

plant-to-plant, 228–230 procurement, 100 stock transport orders vs., 233 storage location-to-storage

location, 227–228 warehouse management, 254–255

Stock transport orders (STOs): with delivery, 231–232 with delivery and billing, 232–234 inventory management, 229–234 procurement, 103 stock transfers vs., 233 and warehouse management, 343 without delivery, 230–231

Stock type (procurement), 99 Storage bins, 234–235, 239–242

addressing, 240 bin-related data, 239 bin status report, 258, 260–262 quants, 241 “virtual truck” concept, 247

Storage locations, 84–86, 233–236 Storage location-to-storage location

transfer, 227–228

Storage of materials, see Inventory and warehouse management (IWM)

Storage sections, 234–236 Storage types (warehouse

management), 235–236 Strategy group (material planning),

279–280 Subassembly planning, 280 Subcontracting, 96 Subsidiary ledgers (subledgers),

57, 63 Supplier relationship management

(SRM), 27 Supply and demand (materials), 10 Supply chain management (SCM), 27 Synchronous to sales (production

plan), 289

T “T” accounts, 61–62 Tangible assets, 65, 66 Target costs (production), 213–214 Target day’s supply (production

plan), 289, 290 Target stock level (production

plan), 289 Task list (work centers), 187 Tax-related data, 56 Teardown time, 192 Technically complete production

orders, 215 Text items (BOM), 186 Third-party order, 95–96 Three-tier client-server architecture,

24–25 Three-way match (invoice

verifi cation), 115 Time elements:

material planning, 273, 274, 277–278

production, 188, 192–194 Time event confi rmations, 210 Time-phased planning, 275 Time tickets, 205 Time ticket confi rmations, 210 TO, see Transfer order Total values (list viewer), 44 TR, see Transfer requirement Trading goods (HAWA), 33, 35 Training, 12 Transactions, 36 Transactional environment, 39 Transaction data, 36–37 Transaction documents, 36

BINDEX.indd 357BINDEX.indd 357 01/02/11 3:34 PM01/02/11 3:34 PM

358 I n d e x

Transactions types (assets), 67 Transfer of requirements

(fulfi llment), 153, 154 Transfer order (TO):

fulfi llment, 157 warehouse management, 242,

245–248, 257 Transfer postings, 101

inventory management, 224–225 procurement, 100 warehouse management, 244

Transfer requirement (TR), 114 as information link, 249 warehouse management, 242–244

Transportation planning (fulfi llment), 153

Triggers, 103 Trigger points, 201 2%/10Net30, 118n.3 Two-step stock transfers, 225–229

U Unplanned goods issues, 224 Unplanned goods receipts, 224 Unrestricted use (materials), 99 Useful life (assets), 69 User-defi ned information

structures, 44

V Valero Energy Corporation, 180 Valuation, split, 227 Valuation class, 90 Valuation currency, 90 Variable-size items (BOM), 186 Variances (production), 214–215 Variant BOMs, 186 Vendor accounts, 57 Vendor master data, 32, 92–93 Vendor-owned inventory, 225 “Virtual truck” bin concept, 247

W Wage data, 188 Warehouse, 234–235 Warehouse management (WM), 221,

234–257 confi rm warehouse movement,

247–248, 250, 252 execute warehouse movement,

245–247, 249–250, 252 and fulfi llment, 250–253, 329, 344 master data, 239–241 material master, 239 order of postings, 255–257 organizational data, 234–239 picking area, 236–238

plan warehouse movement, 243–245, 248–249, 251

processes in, 242–257 and procurement, 328 in procurement, 248–250 in production, 253–254 in stock transfers, 254–255 and stock transport orders, 343 storage bins, 239–242 storage section, 236 storage type, 235–236 transfer requirements, 114

Warehouse management unit of measure, 239

Warehouse management view, 239 Web services, 25 Weight data, 32 WileyPLUS, 19 WIP (work-in-process), 214 WM, see Warehouse management Work centers, 187–191 Work-in-process (WIP), 214 Work lists, 40–41

fulfi llment, 171–172 procurement, 121

Work scheduling: material planning, 272, 273 production, 196

BINDEX.indd 358BINDEX.indd 358 01/02/11 3:34 PM01/02/11 3:34 PM