Magal, Word Integrated Business Processes with ERP Systems Lecture Notes

Word Integrated Business Processes with ERP Systems Lecture Notes By Magal

Email: Richard@qwconsultancy.com

Chapter 1: Introduction to Business Process Learning Objectives After completing this chapter you will be able to: 1. Define 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 GBI’s organizational structure 7. Explain how the SAP system promotes an integrated approach to business processes

Chapter Outline and Teaching Suggestions 1. The Functional Organizational Structure a. The Silo Effect b. Enterprise Systems Discuss how companies are organized, and explain that the functional structure is the most common organizational structure. You can use a university or company or a business school department that you are familiar with as an example. Point out that processes are crossfunctional. Ask the question: Why is the functional structure so common? Figure 1-1 will assist you in explaining the cross-functional nature of business processes.

Explain the silo effect and its negative implications for modern business organizations. You can give an example such as creating a sales order in sales and marketing with no integration or communication with inventory management or production.

Point out that the nature of the functional organizational structure and the cross-functional nature of processes directly conflict with each other.

Explain the benefits of an enterprise system (ES) (i.e., supports end-to-end processes, productivity, competitive edge, monitoring and changing of business processes, etc.).

2. Business Processes

a. b. c. d. e. f. g. h. i. j. k.

Procurement - Buy Production - Make Fulfillment - Sell Material Planning - Plan Inventory and Warehouse Management - Store Lifecycle Data Management - Design Asset Management and Customer Service - Service Human Capital Management - People Project Management - Projects Financial Accounting - Track for Track for External Reporting Management Accounting - Track for Internal Reporting

Define and explain a business process. Point out that organizations use many processes to achieve their objectives and they employ specific terms to identify the processes. Processes can be directly related or closely related to creating and delivering goods and services. Use Figure 1-2 to illustrate a process that is executed in response to a need (trigger). The process is carried out through a sequence of steps and results in an output. You can use an example such as ordering supplies.

Processes can be supported by other processes and can have numerous sub-processes. Point out that communication and coordination of tasks are very important. Figure 1-3 can assist you in explaining this point. Ask students to indentify some other processes that they are familiar with.

Describe and give examples of the business processes (A - K). Figures 1-4 through 1-10 will assist you.

3. Global Bicycle, Incorporated (GBI) Explain that Global Bicycle, Incorporated (GBI) is a fictional company that is used to illustrate the important concepts, processes, and techniques discussed in the textbook. Figure 1-11 will assist you in explaining GBI's organizational structure.

Call up the SAP University Alliance Community (UAC) website http://uac.sap.com, and demonstrate the functionality and services available for students. Also instruct students to read the GBI Backround Document on the UAC to understand GBI’s history, products and operations.

4. How To Use This Book a. Chapter Structure b. SAP Software and Certification c. WileyPLUS

Explain the four key sections in most of the process chapters. Provide a brief background on the origins of SAP and the problems it initially solved.

Explain that most SAP consultants are not programmers and have mastered the material presented in this book.

Explain the three levels of SAP Certification and the value added of becoming a SAP-certified consultant.

Point out that the importance of the WileyPLUS online supplements and the value added to passing the SAP Certification exam. Reinforce the point that using this textbook and the ancillary materials can substitute for taking a formal TERP 10 course.

Review questions 1.

Question: Describe the functional organizational structure. Why do you think this structure is so common? .

Answer: The functional organization structure is divided into functions, or departments, each of which is responsible for a set of closely related activities. This type of organizational structure is widely used because it spreads the responsibility across an organization instead of locating it in one particular person or group. In addition, it enables people to specialize in terms of skills and knowledge.

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

Answer: The silo effect refers to an organizational structure in which workers complete their tasks in their functional “silos” without regard to the consequences for the other functions in the process. This situation exists because each department within a functional organization works independently and focuses on its objectives. This tendency can be reduced by thinking sideways or viewing the business across functional boundaries and focusing on the end-to-end nature of the process and its intended outcomes.

3. Question: What is a business processes? Why is a process view of organizations essential to becoming a successful manager? .

Answer: A business process is a set of tasks or activities that produce desired outcomes. Every process is triggered by some event, such as receiving a customer order or recognizing the need to purchase something. A process view can liberate managers from the silo effect. Managers must

have a solid understanding of the processes that their company uses so that they can meet their company's and customer's satisfaction.

4. Question: Briefly describe the key business processes included in this chapter in terms of their key steps. .

Answer: The key business processes discussed in this chapter are the procurement process (buy), the production process (make), and the fulfillment process (sell). The procurement process refers to all of the activities involved in buying or acquiring the materials used by the organization, such as the raw materials needed to make products. The production process involves the actual creation of the products within the organization. The fulfillment process consists of all the steps involved in selling and delivering the products to the organization’s customers.

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

Answer: This chapter discusses many interrelationships among the various processes found within an organization. These various processes must be coordinated in order to be performed successfully. For example, the asset management and customer service processes are closely integrated with production and sales processes. This interrelationship is important to producing quality products, maintenance of production equipment, repairs of products sold to customers, and providing customer satisfaction.

Exercises Exercises for this chapter are available on the Wiley student companion website at http://www.wiley.com/college/magal/.

Test Questions Three types of test questions are provided – True/False, Multiple-choice (one right answer), and multiple answer (at least two right answers). These are provided in MS word format as well as in a format that can be imported as a test in blackboard.

The files are: Chapter01 Test Questions True False.docx Chapter01 Test Questions Multiple-choice.docx Chapter01 Test Questions Multiple-answer.docx

Blackboard versions of these files are also provided. These versions end with the word Blackboard.

Remember that these are zipped files that should be uploaded to Blackboard as they are, without unzipping. Your Blackboard administrator can help you with any problems you encounter in uploading these files to your course on Blackboard.

If you include all three types of questions, the following grading suggestion is offered.

T/F questions 1 point each Multiple-choice questions 2 points each Multiple-Answer questions 3 (or 4) points each.

All of the correct answers must be chosen in order to receive credit for Multiple-Answer questions. We suggest you do not offer partial credit.

Chapter 2: Introduction to SAP ERP Learning Objectives After completing this chapter you will be able to:: 1.

2.

3.

4.

Understand the evolution and key business benefits of enterprise systems Understand the role of enterprise systems in supporting business processes Understand the different categories of data in SAP ERP Understand options for reporting

Chapter Outline and Teaching Suggestions 1. Enterprise Systems a. Architecture of Enterprise Systems i. Client-Server Architecture ii. Service-Oriented Architecture b. Enterprise Resource Planning (ERP) Systems c. Application Platforms Explain enterprise systems in terms of their architecture, ERP systems, and application platforms. Point out that modern ES have either a three-tier client-server architecture or a service-oriented architecture, both of which have benefits and drawbacks. Students must understand that the client-server architecture has three layers as well as the function of each layer. Consider using a Web browser or SAP GUI as an aid in presenting an example. Figure 2-1 can also assist you.

Explain that service-oriented architecture provides the capability of connecting many different client-server systems together using a Web browser and new technologies (Web services). An example is a company that connects its system with a shipping company’s system so that it can access shipping rates in real time.

Explain that the primary focus of an ERP system is the internal operations of a company; for example, human resources and sales and marketing. Figure 2-2 can be useful in explaining the ERP intra-company processes and the integration of functional and cross-functional business processes.

Figure 2-3 is useful in explaining SAP module names and abbreviations and the capabilities that each one provides.

Briefly explain the enterprise systems application suite, which is based on inter-company processes. The key point is that the data and processes are integrated among the systems in the application suite. Figure 2-4 can aid you.

Point out that the application platform is an enterprise operating system that allows a company to integrate its various systems so that the entire enterprise can function more efficiently. .

SAP’s application platform is NetWeaver. Mention that companies use SOA to integrate SAP systems with non-SAP systems. In addition, SOA enables companies to build new composite applications and to plug in independent software vendor (ISV) applications on top of their ERP and suite applications. An example is a firm whose SAP enterprise system is integrated with an independent vendor’s procurement system. Consider searching the Internet for a vendor to use as an example. Point out that the SAP Business Suite is executed on SAP NetWeaver.

Figure 2-5 will assist you in explaining NetWeaver.

2. Data In An Enterprise System a. Organizational Data i. Client and Company Code ii. Plant b. Master Data i. Material Master ii. Material Types iii. Material Groups iv. Organizational Level c. Transaction Data Emphasize that the central component of the enterprise system is the database. It is important for students to understand how data are organized in SAP. Process steps such as hiring an employee and selling a product to a customer are based on data types such as organizational, master, and transaction.

Explain that organizational data are used to represent the structure of the enterprise, such as a bank or a warehouse. Figure 2-6 will assist you in explaining organizational data.

A key point is that the terms organizational data, organizational levels, and organizational elements are used interchangeably, depending on the context.

The client is the highest organizational level. If the client is headquartered in the United States and has subsidiaries in other countries, then each subsidiary is represented at the company code level and has a separate legal entity and central organizational elements in

financial accounting. Figure 2-7 will assist you in explaining the organizational data for GBI. Explain that a plant is a facility that provides value (multiple functions) such as a hospital, an office, and a university. Make students aware of the rules that govern the relationship between company codes and plants.

Explain that master data represent entities associated with the various processes.

Examples of master data are customers, vendors, materials, and employees.

Explain that master data are shared by various processes such as fulfillment, procurement, and production. Each process requires data about the material that may or may not be needed by other processes. Emphasize that different views of the material master are provided for the different processes. Figure 2-8 will assist you in explaining the material master data views.

Explain material types and how they influence the type of data or view needed for a material. Explain that the material type determines which business processes are permitted to use the material. If possible, demonstrate the screens that appear in the material master record. Point out and describe the material types listed in Chapter 2, and mention that these types are a subset of the total number of material types provided by SAP. Figure 2-9 will assist you in explaining the GBI product structure. Use Demo 4.1: Review material types.

Explain material groups and how they are used.

Explain that materials can be defined differently for different organizational levels. Use Demo 4.2: Review material master data.

Explain transaction data, and provide examples such as payment and prices. Point out that transaction data are recorded in documents, which consist of a header and line items.

Figures 2-10 and 2-11 will assist you in explaining transaction data. Use Demo 4.3: Review a purchase order.

3. Reporting a. Work Lists b. Online Lists c. Information Systems d. Business Intelligence Explain the four types of reporting available with SAP. Point out that transaction and historical data are stored in the SAP main database.

Explain online transaction processing (OLTP), online analytic processing (OLAP), and the differences between them. Figure 2-12 can assist you in explaining both OLTP and OLAP. Point out that the OLAP environment utilizes information structures, which capture and store specified transaction data in an aggregated form. Each information structure is defined in terms of characteristics, key figures, and period definition. Figure 2-13 will aid you in explaining the three components of information structures.

Discuss the three broad categories (LIS, FIS, and HIS) of information systems that SAP provides.

Identify the two types of information structures — standard and user-defined — and assess the value of each one.

Point out that SAP provides business intelligence via a separate SAP system and server. SAP BW systems are designed and optimized to process large quantities of data and to provide powerful analytics. Figure 2-19 will assist in providing an overview of SAP BW. The following are valuable learning tools — Demo 2.4: Review a work list; Demo 2.5: Review an online list; and Demo 2.6: Review ERP reports.

Review questions 1. Question: Describe the client-server and service-oriented architectures. What are their advantages and disadvantages?

Answer: Client-server architecture uses three layers to provide functionality: the presentation layer, application layer, and data layer. It uses a Web browser or a graphical user interface (GUI) to communicate with the application layer. In desktop applications all three layers are contained in one system. The shift to three-tier client-server architecture dramatically reduced the costs of acquiring, implementing, and using an enterprise system while significantly increasing the scalability of these systems. Service-oriented architecture allows multiple client server systems to communicate via new technologies called Web services. SOA also enables companies to create new applications quickly and inexpensively. In addition, it allows them to build composite applications on top of their existing three-tier client-server applications without changing the underlying applications. The disadvantage is that this arrangement exposes business processes and data contained in an enterprise system.

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

Answer: The collection of inter-company systems and an 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. Supply chain management connects a company to other

companies that supply the materials it needs to make its products. Supply relationship management systems typically manage the overall relationships with the suppliers. Customer relationship management systems provide companies with capabilities to manage marketing, sales, and customer service. Product lifecycle management systems help companies administer the processes of research, design, and product management.

3. Question: Briefly explain the three types of data in an enterprise system and how they are related.

Answer: The three types of data in an enterprise system are organizational data, master data, and transaction data. 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. Examples of organizational data are client, company code, and plant.

Master data represent entities associated with various processes such as selling a product to a customer. Examples of master data are customers, vendors, and materials. Transaction data reflect the consequences of executing process steps, or transactions. Examples of transaction data are dates, quantities, prices, and payment and delivery terms. Transaction data are a combination of organizational data, master data, and situational data, that is, data that are specific to the task being executed, such as who, what, when, and where.

4. Question: Explain the relationship between client, company code, and plant in SAP ERP. What are these typically used to represent?

Answer: A client is the highest organizational level in SAP ERP. It represents an enterprise 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 financial accounting. A plant is an organizational element that performs multiple functions and is relevant to multiple processes.

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

Answer: The material master is one of the most complex types of data in an ERP system because it is used by many processes and each process uses the material differently. Each process, therefore, requires data about the material that may or may not be needed by other processes. To manage these data, the material master groups them into different categories or views, each of which is

relevant to one or more processes. Some of the data that are provided in the material master are basic data, sales data, and financial accounting data.

6. Question: What are material types? Explain the four common material types in SAP ERP. Answer: Material types are categories of materials that are based on how the materials are used in the firm’s operations. The four most common material types are raw materials, semi-finished goods, finished goods, and trading goods. Raw materials are purchased from a vendor and used in the production process. Semi-finished goods are typically produced in-house from other materials and are used in the production of a finished good. Finished goods are created by the production process from other materials, such as raw materials and semi-finished goods.

Trading goods are purchased from a vendor and resold to customers. The company does not perform any additional processing of trading goods prior to reselling them.

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

Answer: Material groups consist of materials with similar characteristics. For example, all touring bikes can be included in one material group. In contrast, material types group materials based on how they are used. Examples of material types include raw materials and finished goods.

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

Answer: Transaction data are a combination of organizational data, master data and situational data. A SAP ERP system records transaction data using several different types of documents, such as sales orders and purchase orders.

9. Question: Explain the document concept in SAP ERP. Explain the function of the four types of documents in SAP ERP. Answer: SAP ERP records transaction data using several different types of documents. Some of these documents are created or utilized as the process is being executed, whereas others record data after the process has been completed. The first category is referred as transaction documents.

Documents that store data generated after the business processes have been completed include

financial accounting (FI) documents, management accounting or controlling (CO) documents, and material documents. These three categories are referred to as virtual documents because they reside in the enterprise system and are consulted or printed as needed.

10. Question: Most documents in SAP ERP have a common structure. Explain this common document structure.

Answer: Documents typically consist of two sections, a header section and a detail or line item section.

The header includes data applicable to the entire document, that is, to all line items. Examples of header data are dates and totals. A document can have one or more line items.

11. Question: Explain the three reporting options in SAP ERP. How are these different from each other? How are these different from the reporting options available in SAP BI? Answer: SAP ERP provides simple lists (online and work) of data and document and analytics via information systems using either standard information structures or user-defined information structures. SAP BI provides users with powerful analytic capabilities that are not available in the OLAP environment within SAP ERP.

Exercises Exercises for this chapter are available on the Wiley student companion website at http://www.wiley.com/college/magal/.

Test Questions Three types of test questions are provided – True/False, Multiple Choice (one right answer), and multiple answer (at least two right answers). These are provided in MS word format as well as in a format that can be imported as a test in blackboard.

The files are: Chapter02 Test Questions True False.docx Chapter02 Test Questions Multiple-choice.docx

Chapter02 Test Questions Multiple-answer.docx Blackboard versions of these files are also provided. These versions end with the word Blackboard.

Remember that these are zipped files that should be uploaded to blackboard as they are, without unzipping. Your blackboard administrator can help with any problems you encounter in uploading these files to your course on blackboard.

If you include all three types of questions, the following grading suggestion is offered.

T/F questions 1 point each Multiple -choice questions 2 points each Multiple -answer questions 3 (or 4) points each.

All of the correct answers must be chosen in order to receive credit for Multiple-answer questions. We suggest you do not offer partial credit.

Chapter 3: Financial Accounting Learning Objectives After completing this chapter you will be able to: 1.

2.

3.

4.

5.

6.

7.

Explain the differences between financial accounting and management accounting Describe the organizational data related to financial accounting Discuss and analyze the key types of master data involved with financial accounting Explain and apply basic accounting concepts Execute process in financial accounting Indentify key integration points between financial accounting and other processes Prepare reports in financial accounting Explain the role of the accounting processes, and mention that the accounting processes are broadly divided into two main categories: financial accounting and management accounting.

Figure 3-1 can also assist you.

Identify the key financial accounting processes (general ledger, accounts receivable, accounts payable, asset, and bank ledger). All of these processes are covered later in this chapter except bank ledger accounting.

Emphasize that financial accounting must accurately reflect the financial status of the firm at any given point in time.

Chapter Outline and Teaching Suggestions 1. Organizational Data Explain that the organizational data associated with financial accounting are client, company code, and business area. Point out that even the largest enterprise can have only a single client, which is the highest organizational level.

Explain that business areas are internal divisions of an enterprise that are used to define areas of responsibility or to meet the external reporting requirements of an enterprise segment. An example of a business area for a firm that manufactures computer equipment is networking development. Point out that a segment is a division of an enterprise for which management monitors performance separately from other segments. Figure 3-2 can assist you in explaining business areas.

2. Master Data

a. Chart of Accounts b. General Ledger Accounts c. Subsidiary Ledgers and Reconciliation Accounts Explain that financial data are recorded in the company's general ledger, which includes many accounts to record the different types of financial data.

Explain that a chart of accounts (COA) is an ordered listing of accounts that comprise a company's general ledger. Point out that there are three types of charts of accounts — operative COA, country-specific COA, and group COA — and discuss the functions and use of each type. State that all enterprises must maintain an operative COA in order to record financial data, but that group and country-specific COAs are optional. Figure 3-3 can assist you in explaining chart of accounts.

Explain that the general ledger (GL) records the financial consequences of all transactions within a company. Point out that the general ledger is defined 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. Point out that the general ledger is segmented by organizational level. It includes a client segment and a company code segment. Point out that the account number in the general client segment is assigned a unique value to distinguish it from other accounts in the general ledger. Figure 3-4 can assist you in explaining both general ledger segments and the account data for each segment.

Figure 3-5 can assist in explaining assets, liabilities, and equity and the ways in which the account data for each one are used in the balance sheet.

Figure 3-6 can assist in explaining revenues and expenses and how the account data for each one are used in the profit and loss statement.

Consider discussing the GBI chart of accounts for profit and loss and the balance sheet accounts contained in Appendix 3A. This appendix can help students understand the general ledger and the chart of accounts.

Point out that users of the accounting module need to input data. The field status group is for both the screen display and the document entry rules.

Define the company code segment, and explain how it is used in conjunction with the chart of accounts segment for a general ledger account. Figure 3-7 can assist you.

Explain that companies use open item management to match debits to credits in an account based.

Explain that subsidiary ledgers are used for tracking the transactions of customers, vendors, and assets. These individual accounts are not contained in the general ledger.

Explain that reconciliation accounts are part of the general ledger and are used to consolidate the transactions of the subsidiary ledgers of customers, vendors, and assets.

3. Key Concepts a. Accounting Documents b. Parallel Accounting c. Concepts in Management Accounting Point out that financial transactions are recorded in documents so as to reflect the steps in the financial accounting process. (Recall that Chapter 2 contains a review of the SAP document structure under transaction data.) Identify the various types of financial documents. Discuss the data items of the financial accounting document (FI) in both the header and line items sections. Figure 3-8 will assist you in explaining the structure of a financial accounting document.

Figure 3-9 will assist you in explaining the posting keys related to debit and credit posting to customer, vendor, and general ledger accounting.

Explain parallel accounting, in which enterprises use multiple ledgers in parallel and each ledger is used for different purposes. Specifically, they use a leading ledger for posting all transactions and non-leading ledgers for each company (company code) based on local accounting practices.

Explain management accounting, the process whereby enterprises manage and allocate costs.

A cost center is an organizational element that is associated with a location where costs are incurred. Figure 3-10 will assist you in explaining parallel accounting.

4. Process a. General Ledger Accounting b. Accounts Payable (AP) Accounting c. Accounts Receivable (AR) Accounting d. Asset Accounting • Acquisition • Depreciation • Retirement Explain general ledger accounting, which is concerned with recording the financial impact of all of the process steps performed within the organization. This task is accomplished via a double entry accounting system, where every transaction has both a debit entry and a credit entry. Figure 3-11 can assist you in explaining the double entry accounting system.

Figure 3-12 can assist you in explaining the postings that are recorded when an investment is made in a company.

Explain that when a company purchases office supplies with a check, it treats the supplies as an expense rather as an asset. Figure 3-13 can assist you in explaining the purchase of office supplies.

Then shift your focus to the purchase of office supplies on credit. Emphasize that the company records the purchase and the payment separately. Moreover, if the company purchases supplies from multiple vendors, it records all the payable data in one account, payables miscellaneous. If the company needs to track the money it owes to individual vendors, then it employs a separate process known as accounts payable accounting, which uses sub-ledger accounts. Figure 3-14 can assist you in explaining the process of purchasing supplies on credit.

Note that accounts payable processing tracks money the company owes to individuals or other companies using sub-ledgers accounts, which are not a part of the general ledger. Explain that the vendor master and the corresponding sub-ledger account share the same account number.

Emphasize that a reconciliation account must exist in the general ledger to record the total value of the transactions. Figure 3-15 will assist you in explaining accounts payable processing.

In contrast, accounts receivable processing uses sub-ledger accounts to track the money customers owe to a company. As with accounts payable processing, the customer master and the corresponding sub-ledger account share the same account number, and a reconciliation account must exist in the general ledger to record the total value of the transactions. Figure 316 can assist you in explaining accounts receivable processing.

Explain that asset accounting is used to track the financial consequences associated with the entire lifecycle of an asset, from acquisition to disposal. Data for each asset are master data that are maintained in separate accounts. Point out that assets are assigned to a company code and, by virtue of this assignment, all asset-related transactions are posted to the general ledger assigned to the company code. Assets can also be assigned to business areas, and they are associated with a cost center. Accounting data about each asset are assigned to a subledger; consequently, the asset account number and the sub-ledger are the same. Assets that possess similar characteristics are assigned to an asset class. Each asset class is associated with a specific reconciliation account in the general ledger. Figure 3-17 can assist you in discussing the reconciliation accounts used by GBI. Explain that the reconciliation account for each asset (i.e., the asset sub-ledger account) is determined by its association with an asset class. This association is known as account determination. Figure 3-18 will assist you in explaining asset accounts and account determination.

Explain that companies acquire assets both externally and 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 (material, labor, etc.) are tracked in a corresponding general ledger reconciliation 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.

Point out that for option (1), purchase from an established vendor without using the purchasing process, a purchase order is not created. The financial impact of the acquisition is manually recorded in relevant general ledger and sub-ledgers accounts. The supplies expense is not used.

For option (2), purchase from an established vendor using the purchasing process, the company uses the entire purchasing process, which involves a purchase order, a goods receipt, an invoice receipt, and payment. The financial impacts are automatically recorded by the steps in the purchasing process.

Finally, for option (3), purchase from a one-time vendor, or a vendor for whom master data (and therefore a sub-ledger account) are not maintained, a there is no vendor sub-ledger account. The accounting impact of the acquisition is manually recorded using the asset account (sub-ledger), the corresponding reconciliation account, and a specially designated clearing account.

Figure 3-19 can assist you in explaining an asset acquisition with a clearing account (option 3).

Explain the retirement process, by which an asset is disposed of (retired). Point out that an asset that can generate revenue can be sold to an external entity via the fulfillment process.

Explain that depreciation is used to record the decrease in value of an asset over time due to wear and tear. The value of the asset is equal to its acquisition value less its 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, primarily the type of depreciation method the company employs, the asset’s useful life, and its residual value. The actual amount of asset depreciation depends on several factors, primarily the type of depreciation method the company employs, the asset’s useful life, and its residual value. Point that the differences between straight line depreciation and double declining balances. Explain useful life, residual value, and book value.

Figure 3-20 can assist you in explaining straight line depreciation. Figure 3-21 can assist you in explaining declining balance depreciation. Emphasize, however, that the book value and residual value must be identical in the final year of depreciation.

Explain that an asset can be valued differently to satisfy legal and regulatory requirements or to address management needs. Therefore, an asset can be depreciated using different methods and assumptions simultaneously, a practice called parallel depreciation or parallel valuation of assets. Parallel depreciation is used to support the practice of parallel accounting.

Depreciation areas are used to maintain the different calculations.

5. Integration with Other Processes Briefly explain how the procurement process is integrated with other processes. Use Figure 322 to cover the integration points, and give examples. Emphasize that numerous steps in the different processes have a financial impact on the firm.

6. Reporting a. Account Information b. Asset Explorer c. Financial Statements Explain that account information can be obtained at three levels - balance display, line item list, and original FI document. Figure 3-23 can assist you in explaining account information and the three levels. Consider showing something similar using the SAP R/3 system.

Explain that asset explorer provides an overview of all the activities related to the asset, including acquisition data, planned and posted depreciation 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. Point out that asset explorer distinguishes between planned values —depreciation amounts that have not yet been posted to the general ledger accounts — and posted values, which have been posted. Explain that a depreciation posting run must be executed for the planned values to be posted to the general ledger. Figure 3-24 can assist you in explaining asset explorer.

Explain that a financial statement is a hierarchical grouping of general ledger accounts that must be included in the financial statements. Financial statements are used to report the data needed to meet legal and regulatory statements. The financial statements produced are balance sheet and profit and lost statement. Significantly, they can be generated for different organizational levels, including one or more company codes and business areas. Note that financial statement versions are used to tailor a financial statement to meet different reporting requirements.

Figure 3-25 can assist you in explaining the financial statement version with balance sheet accounts.

Figure 3-26 can assist you in explaining the financial statement version with profit and loss accounts.

Figure 3-27 can assist you in explaining the financial statements based on depreciation areas.

Review questions 1. Explain the difference between financial accounting and management accounting Financial accounting (FI) is concerned with recording the financial impacts of business processes as they are executed. These data are then used to generate financial statements to meet legal or regulatory reporting requirements. These statements are directed toward external audiences such as regulatory bodies; for example, the SEC. Management accounting, or controlling (CO), is internally focused, providing the information needed to effectively manage the company’s various business processes. CO reports focus on the costs and revenues that management uses to achieve the business objectives of increasing revenues, minimizing costs, and achieving profitability.

2. Briefly describe the key processes in financial accounting •

•

•

•

•

General ledger accounting o The general ledger is used to record the financial impacts of business process steps. It contains much of the data needed for financial reporting Accounts receivable accounting o AR accounting is associated with the fulfillment process and is used to manage money owed by customers for goods and services they have purchased.

Accounts payable accounting o AP accounting is associated with the procurement process. Companies use AP accounting to record and manage money owed to vendors for the purchase of materials and services Asset accounting o Asset accounting is used to record data related to the purchase, use, and disposal of assets such as buildings, equipment, machinery, and automobiles.

Bank ledger accounting o Bank ledger accounting is concerned with recording data associated with bank transactions.

3. Explain the key organizational data in financial accounting and the relationships among them.

The key organizational data in financial accounting are client, company code. and business area. The client is the highest organizational level; it represents an enterprise that consists of multiple companies. These companies in turn are represented by company codes. Business areas are internal divisions of an enterprise that are used to define areas of responsibility or to meet the

external reporting requirements of an enterprise segment. Financial statements are generated for each business area within the enterprise.

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

The general ledger is used to record the financial impacts of business process steps. It therefore contains much of the data needed for financial reporting. The chart of accounts is an ordered listing of accounts that comprise a company’s general ledger.

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

Subsidiary ledgers are accounts that are not directly maintained in the general ledger; for example, accounts that track the amounts owed to customers and the payments made for each customer.

Reconciliation accounts are general ledger accounts that consolidate data from a group of related sub-ledger accounts, such as customers (accounts receivable) and vendors (accounts payable). Data cannot be posted directly into a reconciliation account. Rather, they must be posted to sub-ledger accounts, at which point they are automatically posted to the corresponding reconciliation account.

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

An accounting document (FI document) records the impact (financial data) of a transaction step on financial accounting.

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

Parallel accounting is the process whereby enterprises implement multiple ledgers in parallel and use each ledger for different purposes. The enterprise defines ledgers for each company (company code) based on local accounting practices.

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

The transaction step often results in an expense that is incurred by the company. An example of such an expense involves purchasing office supplies. These expenses are typically charged to or assigned to different parts of an organization, such as a department. A cost object is an artifact in the ERP system that can absorb these expenses. An example of a cost object is a cost center that is associated with a department. Other examples are sales orders, production orders, and purchase orders.

9. An organization purchases supplies for $3000 and pays for them via a check. Prepare the taccounts to illustrate the impact of this purchase on the general ledger.

Bank Account 001 3000

Supplies Expense 123 3000

10. An organization purchases the supplies as explained below. The vendor invoices the organization at a later date, and the organization makes payment via a check. Prepare the taccounts to illustrate the impact of these purchases on the general ledger. a. Purchase office supplies for $2,500 from Vender Z b. Purchase office supplies for $1,200 from Vendor Y Accounts Payable Sub-Ledger Accounts Vendor 1 2500

2500

Vendor 2 1200

Accounts Payable Reconciliation 4321

Supplies Expense 123

3700

1200

3700

2500

Bank Account 321

1200

2500 1200

11. An organization sells products to customers as explained below. The customers are sent invoices at a later date, and they make payment for the amount of the invoice. Prepare the taccounts 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 Accounts Receivable Sub-Ledger Accounts Customer A 3500

3500

Accounts Receivable Reconciliation 1234 7000

7000

Sales Revenue 4000 3500 3500

Customer B 3500

3500

Bank Account 321 3500 3500

12. Explain the relationship between asset accounts, asset classes, and general ledger accounts.

Asset accounts are master data about a specific asset. They are used to track the asset’s purchase price as well as increases and decreases in the asset’s value over time. An asset class is a grouping of assets with similar characteristics. The general ledger (GL) records the financial consequences of all transactions within a company. Asset accounts and asset classes are used in the general ledger accounts to report on the assets of a company or organization.

13. Explain the three transaction types in asset accounting.

The first transaction type in asset accounting is acquisition, in which a company obtains assets either internally or externally. Assets acquired internally are produced by the company, whereas those acquired externally can be acquired either with or without a vendor The second transaction type is depreciation. As an asset is used, its value decreases due to normal wear and tear. This decrease in value is recorded as depreciation.

The third transaction type is retirement, where an asset has completed its useful life and is disposed of, or retired. Asset retirement may or may not generate revenue. If it does not, then the asset is scrapped.

14. What are depreciation areas? Why are different depreciation areas necessary?

Depreciation areas refer to the method by which companies depreciate their assets using different methods and assumptions simultaneously. These different calculations are maintained in different depreciation areas. These different methods are used to satisfy different requirements as preparing financial statements for shareholders and filing income tax returns. They are also used to allocate the costs of using the asset to a cost center.

15. Explain the components of the asset explorer.

The asset explorer provides an overview of all the activities related to the asset, including acquisition data, planned and posted depreciation 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. Planned values are depreciation amounts that have not yet been posted to the general ledger accounts. Posted values are values that have been posted to the appropriate general ledger account. Planned data must be periodically posted to the general ledger via a depreciation run.

16. What are financial statement versions? Explain how they are created.

A financial statement version is a hierarchical grouping of general ledger accounts that must be included in the financial statements. Several financial statement versions can be defined, each of which satisfies different reporting requirements. Financial statements can be generated from either the operative chart of accounts or the country-specific chart of accounts.

Exercises Exercises for this chapter are available on the Wiley student companion website at http://www.wiley.com/college/magal/.

Test Questions Three types of test questions are provided – True/False, Multiple Choice (one right answer), and Multiple Answer (at least two right answers). These questions are provided in MS word format as well as in a format that can be imported as a test in Blackboard.

The files are: Chapter03 Test Questions True False.docx Chapter03 Test Questions Multiple-choice.docx Chapter03 Test Questions Multiple-answer.docx

If you include all three types of questions, the following grading suggestion is offered.

T/F questions 1 point each Multiple -choice questions 2 points each Multiple -answer questions 3 (or 4) points each.

All of the correct answers must be chosen in order to receive credit for Multiple-answer questions. We suggest you do not offer partial credit.

Chapter 4: Procurement Process Learning Objectives 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 procurement process.

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

Explain the basic procurement process, but point out that this process now has to be changed to reflect how GBI is currently operating. Explain that companies have to continually review their processes.

Explain that some companies employ a strategy in which they re-order trading goods when inventory falls a predefined level. Within this system the purchasing process can be initiated automatically, and goods can be purchased at specific quantities.

Chapter Outline and Teaching Suggestions 1. Organizational Data a. Storage Location b. Purchasing Organization i. Enterprise- Level Purchasing Organization ii. Company-Level Purchasing Organization iii. Plant-level Purchasing Organization iv. Reference Purchasing Organization c. Purchasing Group Briefly review the relationship of client, company code, and plant, and explain what each level represents.

Explain the data structure and the hierarchy of the purchasing organization. Discuss some of the basic rules governing these relationships (e.g., a combination of a plant and storage location must be unique).

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Identify the three models of purchasing organizations, and explain why each model is unique.

Identify the value added in each one. Discuss why these models vary from highly centralized to highly decentralized. Figures 4-3 through 4-5 will assist you in this task.

Explain the role of a purchasing group and how the groups’ responsibilities may vary.

2. Master Data a. Material Master i. Financial Accounting Data ii. Purchasing Data iii. Plant Data Storage b. Vendor Master c. Purchasing Information Record d. Conditions Identify the four types of master data that are relevant in the procurement process, and discuss how they are integrated in various combinations throughout the process. Specify the view for each type of procurement master data and the corresponding data values and options. Discuss the relationship between master data types and the corresponding organizational data. Explain that these data may vary. Show Demo 4.1: Review material master.

Explain plant data storage, and provide examples.

Explain the three segments of the vendor master. Discuss the data, and mention that for each segment is associated with specific organizational levels. Use Figures 4-6 and 4-7 to explain the three segments and organizational level (client, company code, and purchasing organization). Show Demo 4.2: Review vendor master. Show Demo 4.3: Review purchasing info record and conditions.

3. Key Concepts a. Item Categories b. Account Determination c. Stock Type or Status d. Goods Movement e. Movement Types It is essential to stress to the students that the key concepts (A - E) are very important both within procurement and in the integration of procurement with other departments, functions, and processes such as accounting and production. Give an example of a key concept such as goods receipt or goods issued with a material type such as supplies, parts, or packaging material.

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Explain the five key concepts (A-E), highlighting the data and types for each. Explain the material document data and structure using Figure 4-11. Show Demo 4.4: Review item categories; Demo 4.5: Review a material document; and Demo 4.6: Review goods movements and movement types.

4. Process a. Requirements Determination i. Data ii. Tasks iii. Outcomes b. Source of Supply Determination c. Order Processing i. Data ii. Tasks iii. Outcomes d. Goods Receipt i. Data ii. Tasks iii. Outcomes e. Invoice verification i. Data ii. Tasks iii. Outcomes f. Payment Processing i. Data ii. Tasks iii. Outcomes g. Integration with Other Processes Begin by explaining the detailed procurement process in Figure 4-12. Point out that this is just one possible scenario. Provide a brief overview of the trigger, steps, documents, data, and communication.

Explain each step of the procurement process, and within each step explain the trigger, data types and transaction documents, tasks performed, and outcomes (documents generated, financial impact, and communication). Point out that some data are referenced from other documents whereas other data have to be user-inputted or can be overridden. For example, the purchase requisition can be referenced in a single purchase order or multiple purchase orders.

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It is important for the students to understand which data items are included in the header and items (detail) section of each document. Figures 4-11 and 4-18 can be used to cover this point.

The relationship between purchase requisitions and purchase orders can take one of three forms: • • •

one purchase requisition generates one purchase order one purchase requisition generates multiple purchase orders multiple purchase requisitions generate one purchase order

Figure 4-19 can be used to explain this point. This is also a good point at which to show Demo 4.7: Create purchase requisition, and Demo 4.8: Convert purchase requisition to purchase order.

Communication is accomplished using the message capabilities of SAP ERP, as depicted in Figure 4-20. This can be accomplished using printing, e-mail, Web services, and fax. These capabilities are used to send reminders and to request deliveries to be sped up. Vendors use these capabilities to accept or reject orders. Effective communication is very important in customer - supplier relationships.

A major step of the procurement process is the goods receipt. This is the first step in which financial impacts occur. In addition, it is during the goods receipt that documents are updated and tolerance levels are established. We recommend that you cover the outcomes listed in Figure 4-22. You can also reference Figure 4-25, which illustrates the document header and document items for both the material and accounting documents. Show Demo 4.9: Receive goods receipt against a purchase order.

Quality management and warehouse management are optional; the choice to use or not to use them is a management decision. If a company has quality initiatives, then it likely uses quality management. Similarly, if it uses a warehouse to store finished products, then it probably uses warehouse management. Mention that there is a chapter on inventory and warehouse management.

Discuss and give examples of the optional steps that follow the goods receipt, including creations of lots, transfer requirements, notifications, and outputs.

Students must become familiar with the financial impacts of procurement, especially those students who are interested in the TERP10 Certification exam. Consider using a whiteboard or tablet computer to draw the T-accounts shown in Figures 4-24, 4-28, and 4-31. You should also walk the students through the steps of goods receipt, invoice verification, and payments while recording the proper entries as you go through these steps. To illustrate these processes you can use Demo 4.10: Receive and verify an invoice, and Demo 4.11: Make payment to vendor.

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Briefly explain how the procurement process is integrated with other processes. Use Figure 432 to cover the integration points, and give examples. Master data records such as the vendor master are maintained jointly by purchasing and accounting.

5. Reporting a. Online Lists b. Work Lists c. Purchasing Information Systems

Explain that reporting can be accomplished via standard reporting in the transactional processing system or via a purchasing information system.

Explain and give examples of both instance and process reporting.

Standard reporting provides online lists and work lists. Figure 4-33 provides an example of an online list using a list of invoices. Using the SAP R/3 system, you can show other documents as well and use both the list viewer and grid control.

Figure 4-34 provides an example of a work list using open purchase requisitions that has work remaining to be performed on them. Using the SAP R/3 system, you can show the work list of purchase requisitions and other documents as well. This is a good point to use Demo 4.12: Reporting – lists.

The purchasing information system is a component of the logistics information system and provides both standard and flexible analysis capabilities.

Explain standard analysis, and define and give examples of key figures and characteristics.

Inform the students the SAP data warehousing system uses key figures and characteristics in reporting and analysis. Figure 4-35 provides an example of standard analysis. Use the SAP R/3 system to demonstrate standard analysis. Use Demo 4.13: Reporting – standard analysis using the purchasing information system.

Define flexible analysis, and explain how it is used to define both the content and the format of the analysis. Use both Figure 4-36 and the SAP R/3 system for this activity.

Review Questions 1. Question: Explain the key organizational levels relevant to the purchasing process.

Answer: Organizational levels relevant to the procurement process include client, company code, and plant. A client represents an enterprise that is comprised of many companies or subsidiaries, each of which is represented by a company code. A plant is the location where the materials are received.

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2. Question: Explain the differences between the different types of purchasing organizations. Under what conditions is each type appropriate?

Answer: There are typically three types of purchasing organizations: enterprise-level, company-level, and plant-level. The enterprise-level purchasing organization is the most centralized model; there is only one purchasing organization for the entire enterprise and for all plants within the enterprise. The company-level purchasing organization is a single purchasing organization that is responsible for multiple plants within one or more company codes. The plant-level purchasing organization, in which each plant has its own purchasing organization, is the most decentralized model.

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

Answer: The four data types that are relevant to the purchasing process are material master, vendor master, purchasing info records, and conditions. All four types are integrated in various combinations throughout the procurement process.

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

Answer: The data in the vendor master are 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 (defined at the client level), accounting data (defined at the company code level), and purchasing data (defined at the purchasing organization level).

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

Answer: Purchasing info records are an intersection or a combination of material and vendor data. They contain data specific to one vendor and one material or material group. Purchasing info records include some data that are found in the vendor master and the material master, as well as data that are valid for the specific combination of vendor and material. Companies use pricing conditions to determine the cost of purchasing the material from that vendor.

6. Question: What are conditions used for?

Answer:

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Companies use conditions to determine the appropriate prices, discounts, taxes, freight, and so on for materials. Companies use conditions to determine pricing when they create purchase orders.

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

Answer: The various organizational levels use the master data as guidelines while negotiating and purchasing for the company.

8. Question: What are item categories in purchasing? Explain how each of the following item categories impacts the purchasing process: consignment process, third-party item, subcontracting item.

Answer: Item categories determine which process steps and data a company needs when it purchases materials or services. When the company uses the consignment process, it pays the vendor only when it uses or sells the materials. When it employs the third-party item process, the customer receives the goods directly from the vendor. Finally, when it utilizes the subcontracting item process, it sends materials to a vendor who uses them to create finished products.

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

Answer: The role of the account assignment category in purchasing is to determine the specific accounting data necessary to make a purchase; for example, asset, order, cost center, sales order, project.

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

Answer: When companies purchase stock items they use account determination to acquire raw materials for later use in the production process and trading goods for subsequent sales to customers. In contrast, when purchasing consumable items they use account determination to acquire items to be consumed or used within the organization.

11. Question: What are the stock types or statuses based on the usability of materials? What is the significance of these stock statuses?

Answer:

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Goods with the status of unrestricted use can be used in any manner that management feels will benefit the enterprise. Companies use these goods either internally or externally to meet customer demands. Goods with the status of in quality inspection must undergo inspection before being released for consumption. Blocked stock refers to materials that are damaged or unusable. Finally, stock in transit refers to materials that are in the process of being moved from one plant to another.

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

Answer: The four common goods movements are goods receipt, goods issue, stock transfer, and transfer posting. A goods receipt is used to record the receipt of materials into storage, which results in an increase in inventory. A goods issue is used when materials are removed from storage. A stock transfer is used to move goods from one location to another within the organization.

Finally, a transfer posting is used to change a material’s status or type. The first three movement types involve the physical movement of goods. Transfer posting may or may not involve physical movement. Every goods movement requires a movement type, which determines the category of movement being executed.

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

Answer: A material document records data related to a goods movement, such as when goods are received from a vendor. It consists of a header and one or more items. The header includes the material document number, the date, the name of person who created the document, and the source of the document. The items identify the materials involved, quantities, location, and the movement type used.

14. Question: Briefly describe the steps in the procurement process explained in this chapter. What are some possible variations to this process?

Answer: The procurement process is started by a trigger, which is generally a need to acquire materials or services. A purchase requisition is then created. After a vendor is selected, a purchase order is generated, which references the purchase requisition for the items needed. When the items arrive, they are inspected and stored in inventory. A short time later an invoice is received and verified. The accounting department pays the vendor the amount of the invoice, assuming there

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are no discrepancies. Variations to this process may occur if an item needs to be subcontracted or if a company requires a non-stock item.

15. Question: Explain the different steps in the procurement process in terms of their triggers, data needed, task completed, and outcomes Answer: The basic steps in the procurement process are requirements determination, selecting a source of supply, the purchase order, goods receipts, invoice verification, and payment.

For requirements determination, the trigger is a request from other processes or it can be determined manually. The required data are master data and user input. The fundamental task is to create a purchase requisition. This is also the key outcome.

For creating a purchase order, the trigger can be a purchase requisition, an RFQ, or a quotation.

The data needed are master data, transaction documents, and user input. The key tasks are to determine the source of supply and to create a purchase order. The outcomes are creating the purchase order, updating the purchase requisition, and communicating the purchase order to the vendor.

For goods receipt, the trigger is a delivery from a vendor. The necessary data are master data, transactions documents, and user input. The key tasks are to verify receipt of the materials and to create the goods receipt document. The outcomes include creating the material and FI documents and updating the GL accounts, the purchase order, and the material master. In addition, several optional steps can follow the goods receipt step, including the creation of inspection lots, transfer requirements, notifications, and outputs.

For the invoice verification step, the trigger is the receipt of the invoice from the vendor. The data needed are master data, transaction documents, and user input. The key task is to perform the three-way match and to create the invoice document. The outcome is to generate the invoice document and to update the purchase order, FI document, and material master.

The payment processing step is triggered by the receipt and verification of a vendor invoice.

The required data include the date, the vendor number, and the invoice amount from the invoice along with the payment terms, method, and address from the vendor master. The major outcomes are: • • • •

Making a payment to the vendor Updating the GL accounts Creating the FI document Crediting the bank account 9

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Debiting the vendor account and accounts payable

16. Question: Which steps in the procurement process have an impact on financial accounting? Explain these impacts.

Answer: The steps in the procurement process that have impact on financial accounting are goods receipt, invoice verification, and payment processing. Goods receipt affects the inventory and GR/IR accounts. Invoice verification affects the GR/IR, A/P, and vendor accounts. Payment processing affects the bank, vendor, and A/P accounts.

17. Question: During which steps in the procurement process are material documents created. Why? Answer: Material documents are created during the goods movement step. This occurs because transfer posting is used to change the stock type or status of material or to reclassify the material into a different material type.

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

Answer: The source of supply may be external or internal. If the source is external, then the selection process may include additional steps such as requesting and receiving quotations. If the source of supply is internal, then the process is somewhat different. A stock transport order is used instead of a purchase order. If the supplier is known, then the company selects a source from a list of potential suppliers called a source list.

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

Answer: A company may go from a purchase requisition to a purchase order by requesting and receiving quotations. It may also use a stock transport order. The source of supply usually determines the ultimate path.

20. Question: Figure 4-21 illustrates the different purchase order processing options. Explain this figure.

Answer:

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In this example, the purchase requisition previously created is used as the source document to create a purchase order for 500 t-shirts. Spy Gear is automatically selected as the vendor from the source list, and the purchasing info record is used to determine the gross price of $15 per tshirt. Thus, the total for the purchase order is $7,500.

21. Question: A purchase requisition can result in multiple purchase orders, and multiple requisitions can be combined into one purchase order. Explain, with examples, the circumstances when these two scenarios are possible.

Answer: - A purchasing manager receives many requisitions 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. In this scenario multiple requisitions are combined into a single purchase order.

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Alternatively, a single requisition 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.

22. Question: What is a delivery document? What is the significance of a delivery document in purchasing?

Answer: A delivery document identifies the materials included in the delivery and the purchase order.

Shipments include a delivery document that states the contents of the order.

23. Question: Explain the outcomes of a goods receipt step of the procurement process.

Answer: Goods receipt is the first step of the procurement process that has an impact on financials, specifically on the general ledger. The goods inventory account is debited by the value of goods received, and a corresponding credit is posted to the GR/IR account. A material document and an accounting document are also created. Finally, the purchase order history and material master are updated.

24. Question: Explain the outcomes of the invoice verification step of the procurement process.

Answer: Invoice verification has an impact on the general ledger. Specifically, the GR/IR account is debited by the amount of the invoice, and the vendor account is credited by the same amount.

A credit posting is also made to the corresponding reconciliation account in the general ledger, 11

in this case the accounts payable account. In addition, a financial document and an invoice document are created. Going further, the purchase order history and material master are updated. Finally, invoice verification authorizes the payment of the invoice to the vendor.

25. Question: What is a three-way match? What documents are involved in a three-way match? What is the purpose of a three-way match?

Answer: The most common method of invoice verification 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 prices in all three documents are consistent.

26. Question: Explain how the procurement process is integrated with other processes in an organization.

Answer: The vendor master record is jointly maintained by purchasing and accounting. In addition, several steps in the procurement process, such as goods receipt, invoice verification, and payment processing, impact general ledger accounts. Finally, when materials are purchased for consumption, a controlling object such as a cost center, which is related to management accounting, is used to charge groups or departments for the purchase.

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

Answer: Online lists, such as a list displaying a series of invoices for a specified data range, are an example of a list report. Another example of an online list is list of sales orders for a company code. Work lists display work to be completed. Examples of work lists are - a list of purchase requisitions that are open and need to be assigned a source of supply - a list of invoices that are open and need to be paid.

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

Answer: Two examples of standard analysis are as follows: - The average time between sending a purchase order and receiving the materials in the last year, for each vendor.

- The average value of purchase orders sent to a particular vendor in the last quarter - These two reports help a company to determine whether the vendors have achieved their goals and objectives. If they have not, then the company needs to seek new vendors.

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Exercises Exercises for this chapter are available on the Wiley student companion website at http://www.wiley.com/college/magal/.

Test Questions Three types of test questions are provided – True/False, Multiple Choice (one right answer), and multiple answer (at least two right answers). These are provided in MS word format as well as in a format that can be imported as a test in blackboard.

The files are: Chapter04 Test Questions True False.docx Chapter04 Test Questions Multiple Choice.docx Chapter04 Test Questions Multiple Answer.docx Blackboard versions of these files are also provided. These versions end with the word Blackboard.

Remember that these are zipped files that should be uploaded to blackboard as they are, without unzipping. Your blackboard administrator can help with problems uploading these to your course on blackboard.

If you include all three types of questions, the following grading suggestion is offered.

T/F questions 1 point each Multiple Choice questions 2 points each Multiple Answer questions 3 (or 4) points each.

All of the correct answers must be chosen in order to receive credit for Multiple Answer questions. No partial credit is suggested.

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Chapter 5: The Fulfillment Process Learning Objectives After completing this chapter you will be able to: 1. Describe the organizational levels associated with the fulfillment process.

2. List and explain the master data associated with the fulfillment process.

3. Identify the key steps in the fulfillment process and the data, documents, and information associated with each step.

4. Discuss the role of the credit management process in fulfillment.

5. Effectively use SAP ERP to execute the key steps in the fulfillment process.

6. Explain how and why fulfillment is integrated with other processes.

7. Utilize SAP ERP to extract meaningful information about the fulfillment process.

Explain the basic fulfillment process. Point out that GBI has to update its fulfillment process because it has purchased a new ERP system to make the company more effective and efficient.

Figure 5-1 can assist you in explaining the basic fulfillment process.

Chapter Outline and Teaching Suggestions 1. Organizational Data a. Sales Organization b. Distribution Channel c. Division d. Sales Area e. Plant f. Shipping Point g. Credit Control Area Point out the organizational elements that are essential to the fulfillment process. Explain that client, company code, plant, and storage location are relevant to other processes such as procurement. In contrast, sales area, shipping point, and credit control area are unique to fulfillment.

Explain the functions and responsibilities of the sales organization. Emphasize that a company code must have at least one sales organization. Figure 5-2 can assist you in explaining GBI’s sales organizations.

Discuss the functions and responsibilities of the distribution channel. Point out that reporting can be consolidated at the distribution channel level. Emphasize that a sales organization must have at least one distribution channel, but a specific distribution channel can be assigned

to multiple sales organizations. Figure 5-3 can assist you in explaining GBI’s distribution channels.

Review the functions and responsibilities of a division. Emphasize that a product or material can be assigned to only one division. A sales organization must have at least one division, but a specific division can be assigned to multiple sales organizations. Figures 5-4 and 5-5 can assist you in explaining the GBI divisions.

Discuss the functions and responsibilities of a sales area. Point out that a sales area can be assigned to only one company code. Clarify that all documents associated with the fulfillment process, such as quotations and packing list, belong to one sales area. Figure 5-6 can assist you in describing the sales areas for GBI. Explain that in the context of fulfillment the plant is a facility that delivers products or services to its customers. Point out that a plant is a unique combination of sales organization and distribution channel, and it can be assigned to one or more distribution chains. Figure 5-7 can assist you in discussing the plants for GBI. Review the functions and responsibilities of a shipping point. Clarify that (1) a plant must have at least one shipping point and (2) the shipping point does not have to be physically located within the plant. Figures 5-8 through 5-12 will assist you in explaining shipping points.

Identify the functions and responsibilities of a credit control area. Emphasize that a credit control area can be either centralized or decentralized. Figures 5-13 and 5-14 will assist you in differentiating centralized from decentralized credit control areas.

2. Master Data a. Material Master b. Customer Master c. Customer-material Information (Info) Record d. Pricing Conditions e. Output Conditions f. Credit management Master Record Identify the six types of master data that are relevant in the fulfillment process, and explain how they are used in the fulfillment process steps. Specify the view for each type of fulfillment master data, and identify the corresponding data values. Discuss the relationship between the master data and the organizational data. Point out that the customer master, customermaterial info record, and credit management master record are relevant only to fulfillment.

Identify the organizational elements in fulfillment for which the master data are defined: client, sales organization, distribution channel and plant. Point out that these organizational elements vary depending on which master data we are discussing; for example, material

master versus customer master. Provide examples of each element. Show Demo 5.1: Review material master.

Explain the three segments of the customer master data. Mention that each segment is associated with a specific organizational level. Point out that the customer master is a subledger account that is linked to the general ledger via reconciliation accounts. Figures 5-15 and 5-16 can assist you in explaining the three segments and the corresponding organizational levels (client, company code, and sales area).

Identify the four partner functions: sold-to party, ship-to party, bill-to party, and payer.

Explain that each partner can play a different role or one partner can play all four roles, depending on the situation. Figure 5-17 can assist you in explaining the partner functions based on GBI customers. Demo 5.2 — Review customer master — will also help here.

Explain the customer material master and its relationship to the material master. Emphasize that the customer material master exists for each material (product or service) that the company sells to a customer. In particular, the customer material master notes specific requirements for a given material that are unique in the customer supplier relationship; for example, partial deliveries and the cross-referencing of material numbers between the seller and the buyer. Figure 5-18 will assist you in explaining the cross-referencing of material numbers between RMB and GBI. You can also use Demo 5.3: Review customer-material info record.

Explain pricing conditions, and point out that the final selling price contains various components such as gross price, discounts, freight, surcharges, and taxes. Emphasize that numerous conditions are defined for a product; therefore, a company must have a procedure to determine which conditions apply to a particular customer. This procedure is called the condition technique. Show Demo 5.4: Review pricing conditions.

Explain output conditions, and point out that a variety of outputs are generated during the fulfillment process — such as quotations, confirmations, and invoices — that must be communicated to the customer. Point out that output conditions are defined separately for the different output types (quotations, invoices, etc.). 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) are defined as well.

Define the credit management master record, and emphasize that it includes data relevant to managing credit for a customer. Point out that the data are grouped into three segments — general data, credit control area data, and overview. Provide an example of each segment.

3. Process a. Pre-sales Activity

b.

c.

d.

e.

I. Data II. Tasks III. Outcomes Sales Order processing I. Data II. Tasks III. Outcomes Shipping I. Data II. Tasks III. Outcomes Billing I. Data II. Tasks III. Outcomes Payment I. Data II. Tasks III. Outcomes

Highlight the steps in the fulfillment process using Figure 5-19. Explain that the purposes of the fulfillment process are to complete a sales order and to receive payment from a customer.

Point out that the pre-sales activity step can be triggered either by a customer action or salesperson action. Point out that additional steps can be necessary, including activities to be completed by other processes. (To keep the discussion simple, we don’t include credit management in this example.) Identify the steps of the fulfillment process, the data types, and the document types.

4. Explain pre-sales activity, focusing on the triggers, data, tasks, and outcomes. An effective example is a restaurant. The restaurant needs products (raw materials) that must be purchased and shipped (fulfillment). It then cooks and serves the food as a finished product.

Point out that agreements are binding contracts to purchase specific quantities or values of materials. Further, these agreements can be either outline agreements or scheduling agreements. Identify the types of organizational and master data associated with an inquiry and a quotation. Figure 5-21 can assist you. Point out that when documents are referenced, such as the quotation, then information from the reference document is automatically copied into the sales order. Figure 5-22 can assist you in explaining reference documents for a quotation. You can also utilize Demo 5.5: Create a quotation.

Explain sales order processing. Highlight and explain the triggers, data, tasks, and outcomes, and provide examples based on your experiences with ordering goods or services (e.g., your university). Point out that a sales order is an internal document. Explain that the data included in the sales order can be either user inputted or referenced from other sources such as the

customer master, contracts, and customer-material info records.. Figure 5-24 can assist you in explaining the types and the sources of the data that are contained in a sales order. Figure 525 can assist you in identifying the sources of the data that are included in a quotation to the sales order.

Figure 5-26 can assist you in explaining the structure of a sales order. Clarify which data are contained in the header, document items, and schedule lines. Point out that for multiple deliveries of a specific item (partial deliveries), more than one schedule line will appear for the specific line item. You can use Demo 5.6: Create a sales order.

Emphasize that the only transaction document generated by the sales ordering processing step is the sales order document. Explain availability check, delivery scheduling, and transfer of requirements. Point out that backward scheduling is used to calculate the time needed to carry out the steps within the availability check. Figure 5-27 will assist you in explaining backward scheduling.

Emphasize that creating a sales order can generate a transfer of requirements to the material planning process to plan for the procurement and production of the needed materials.

Discuss shipping. Highlight and explain the triggers, data, tasks, and outcomes. You can continue your example from the sales order process for a purchased good or finished good that now has to be shipped. Figure 5-28 will assist you in explaining the shipping steps.

Point out that the delivery document is the central document in shipping. It identifies which materials are to be shipped to which business partner and from which plant and storage location. Emphasize that the data in the delivery document are compiled from multiple sauces such as the sales order, material master, and customer master.. Figures 5-29 through 5-32 will assist you in explaining the delivery document.

Point out that the picking step is part of the warehouse management process and is triggered during the shipping step when the delivery document is created. The delivery document is used to create a transfer order in warehouse management to complete the physical movement of the materials needed for the shipment. Figure 5-33 will assist you in explaining the relationship between delivery documents and transfer requirements. Point out that multiple delivery documents can be combined into a single transfer requirement and, alternatively, a delivery document can generate multiple transfer requirements.

Explain that the delivery document contains the quantity of the material to be picked. After the material is picked, the delivery document is updated with the picked quantity. Figure 5-34 will assist you in explaining delivery quantity versus picked quantity.

Point out that materials are packed using a variety of shipping units such as cartons, pallets, and containers. Emphasize that shipping units can be packed into larger units for shipment consolidation. Figure 5-35 will assist you in explaining packing options.

Explain that the shipping step is concluded with a goods issue posting. Figure 5-36 will assist you in discussing the outcomes of shipping (goods issue).

Emphasize the fact that shipping is the first step in the fulfillment process that has an impact on financials. Inventory account(s) of the materials shipped are credited, and the cost of goods sold accounts are debited. Point out that the FI document is created to record these data. In addition, documents that are relevant to the sales process, such as quotations and sales orders, are updated, as is the billing due list. Figure 5-37 will assist you in explaining the financial impact of the shipping step. Show Demo 5.7: Process shipment for a sales order.

Discuss billing. Highlight and explain the triggers, data, tasks, and outcomes. Emphasize that billing is also used to cancel previously created documents. Figure 5-38 will assist you in explaining the billing step.

Identify the data contained in the billing document and the sources for those data. Figure 5-39 will assist you.

Point out that that a billing document can be created as either debit or credit memos.

Emphasize that multiple deliveries can be combined to create one billing document. Figure 540 will assist you in explaining the relationship between deliveries and billing.

Explain the structure of the billing document using Figure 4-41.

Discuss the outcomes of the billing step. Figures 5-42 and 5-43 will assist you in explaining the outcomes and the financial impact of the billing step, respectively. Point out that the billing step can also have a financial impact in management accounting (controlling). To help students grasp these concepts, use Demo 5.8: Process billing for a sales order.

Explain payment. Discuss the triggers, data, tasks, and outcomes. Emphasize that payment is intended for items that have not been paid (open items). Figure 5-44 will assist you in explaining the billing step.

Identify the data contained in the payment document as well as the sources of those data.

Figure 5-45 will assist you.

Point out that customers can pay multiple invoices at once, or, conversely, can divide a single invoice into multiple payments. Figure 5-46 will assist you in explaining the financial impacts of the payment step. Figure 5-47 focuses more specifically on the payment step when the customer is allowed a discount.

Discuss partial payment and residual technique. Emphasize that partial payment and residual technique are used when the payment received does not equal the invoice amount and there is no agreed-upon discount. Figure 5-48 will assist you in explaining the various scenarios of customer payment. You can also use Demo 5.9: Process payment for an invoice.

5. Credit Management Process Explain the credit management process. Point out that this process can be configured to make a credit assessment at three points during the fulfillment process. Mention that a variety of criteria can configured when making the credit assessment, such as the amount of the customer's current account receivables, the number of and amount of open sales orders, and third-party sources of credit data. Figure 5-49 will assist you in explaining the credit management process.

6. Integration with Other Processes Briefly explain how the procurement process is integrated with other processes. Use Figure 550 to cover the integration points, and give examples. Point out that fulfillment involves both revenues and payments, which are directly related to financial accounting. Mention that fulfillment also impacts management accounting (profitability analysis process), which utilizes revenue data.

7. Reporting a. Document Flow b. Work Lists c. Online Lists d. Analytics Explain that reporting can be accomplished via standard reporting in the transactional system or via the sales information system.

Explain that document flow displays all of the documents associated with the steps that have been completed with a sales order, inquiry, or quotation. Figure 5-51 will assist you in explaining document flow. Show Demo 5.10: Display document flow.

Point out that work lists identify tasks that are ready for completion, such as preparing deliveries, picking, posting a goods issue, and billing. Figure 5-52 will assist you in explaining work lists. You can also use Demo 5.11: Display a work list.

Point out that online lists in the fulfillment process are used to generate a list of documents associated with specific master data. The documents can be displayed for specific customers and materials, or for a combination of the two. Figure 5-53 can assist you in explaining online lists. Show Demo 5.12: Display an online list.

Explain that information structures in the sales information system store data based on key figures, characteristics, and time elements, as explained in Chapter 2. Examples of key figures in fulfillment are the number of quotations and the net quotation value. An example of characteristic is sales organization, and the time period specifies a date range. Figure 5-54 can assist you in explaining the information structures that are used in the sales information system. Explain that information structures are used to generate both standard and flexible analyses. They also offer drill down capability. Figure 5-55 will assist you in explaining standard analysis.

Review questions 1. Briefly discuss the organizational levels relevant to the fulfillment process. Be sure to explain the relationships among the various levels.

The organizational levels relevant to the fulfillment process are client, company code, sales area, plant, storage location, shipping point, and credit control area. Sales area, shipping point, and credit control area are unique to fulfillment, whereas the other levels are relevant to other processes as well. The client level is the highest level in the organizational hierarchy; it usually includes the corporate headquarters. The company code is the second level. In most cases company codes represent legally independent entities. A sales area is a combination of three other organizational elements — sales organization, distribution channel, and division.

2. What is a distribution chain? How is it relevant to the fulfillment process?

A distribution chain is a unique combination of a sales organization and division. Some master data, such as material master and pricing conditions, are maintained at the distribution chain level.

3. Explain the relationships among the following organizational levels: sales organization, distribution channel, division, and sales area.

A sales area is a combination of sales organization, distribution channel, and division. A sales organization is responsible for the sale and distribution of goods and services for a particular geographical area. A distribution channel is the means by which a company delivers its goods and services to its customers; for example, wholesale or retail. A division is typically used by companies to consolidate materials with similar characteristics within a unit. These materials are usually associated with a product line.

4. What is a credit control area? Explain the difference between a centralized and a decentralized model of credit control areas.

A credit control area is an organizational level that is responsible for customer credit. It determines customers’ creditworthiness, establishes credit limits, and monitors and manages the actual

extension of credit to customers. A centralized system manages credit for customers across all company codes in the enterprise. In contrast, a decentralized system maintains multiple credit control areas, each of which manages credit for one or more companies within the enterprise.

5. Briefly discuss the master data relevant to the fulfillment process.

Master data in the fulfillment process include material master, customer master, customer-material info record, pricing conditions, output conditions, and credit management master record. Material master includes data that are relevant to the material being sold to the customer, including sales organization data and sales plant data. Customer master data include data the company needs to conduct business with customers and to execute transactions that are specifically related to the fulfillment process. These data include general data, accounting data, and sales area data. Data in a customer-material info record relate to purchases of a specific product by a specific customer; for example, a customer's material number cross-referenced with company's material number. Pricing conditions are master data that companies utilize to determine the prices of their products. Output conditions are the methods companies use to generate the various outputs of the fulfillment process, like quotations and invoices. The credit management master record includes data relevant to managing credit for that customer.

6. Explain the relationship between the master data and organizational data in the fulfillment process.

Master data in the fulfillment process are defined for specific organizational levels. One example, customer master data, are defined for specific company codes (financial data) and sales organizations (sales data). Another example is the material master, which is defined for a client (basic data), sales organization (sales strategies) , and sales plant data (how the material will be shipped). .

7. Describe, with examples, the data in the three segments of a customer master.

The three segments of a customer master are general data, accounting data, and sales area data.

The general data include general information about the customer including name, address, and account number. Accounting data include payment terms and reconciliation accounts in the general ledger. Sales area data relate to sales, shipping, billing, and partner functions. An example is the currency in which the transaction is conducted.

8. At what organizational levels are the material master defined as it relates to the fulfillment process? Provide examples of data in the material master.

The three views relevant to fulfillment are basic data, sales organization data, and sales plant data.

Basic data are defined at the client level. An example is the name of the material. Sales organization data are defined for combinations of sales organizations and distribution channels. Examples are the delivering plant and the sales units. Sales plant data are defined at the plant level. Examples are transportation requirements and methods of loading.

9. Explain the role of each partner function in the fulfillment process.

The four required partner functions are sold-to party, ship-to party, bill-to party, and payer. All four functions can be filled by one customer or by multiple customers The customer who submits the order is the sold-to party. If the order specified that the materials should be shipped to a different location or that the invoice should be sent to a party other than the sold-to party, then the ship-to party and bill-to party functions, respectively, are filled by different customers. Finally, another customer may be authorized to make payment on an order. This would be the payer function.

10. What is the purpose of a customer-material info record? Provide examples of the types of data it contains.

A customer-material information record is comprised of master data specific to one customer and one material. Data in a customer-material info record relate to purchases of a specific product by a specific customer. One example is the customer material number, which cross-references the company’s material number with the seller’s material numbers. Thus, the customer material number is the link between the seller’s master data and the buyer’s master data.

11. How is pricing determined in the fulfillment process? Provide examples of data relevant to pricing.

Companies create conditions for various components of the final selling price, including gross prices, discounts, freight, surcharges, and taxes. Conditions can be fixed amounts, percentages, or calculated based on a sliding scale.

12. What is the credit management master record? How is it related to the customer master record?

The credit management master record is an extension of the customer master record, and it includes data relevant to managing credit for that customer.

13. Describe the steps in the fulfillment process in terms of triggers, data, steps, and outcomes.

The fulfillment process begins with pre-sales activities; proceeds to sales order processing, shipping, and billing; and concludes with the receipt of payment from the customer. Pre-sales activity is usually optional. The trigger is a customer action (inquiry or request for quotation) or salesperson action (proposal, contracts, and campaigns). Otherwise, the fulfillment process begins with sales order processing, which is triggered by the receipt of a customer’s purchase order. It involves creating a sales order, which is used to manage and track the order as it flows through the process.

After the sales order is created, the order itself is picked and packed. All of these activities are components of the sales order processing step. The order is then shipped to the customer, when the sales order becomes due for delivery. The next step is billing the customer for the materials shipped.

Finally, the company receives a payment from the customer. Data is user input or obtained from referenced documents. Examples of data are material number, customer number, conditions, quantities, dates, etc. The final outcome is that the customer has received the their order, customer is billed, and customer payment is received.

14. Describe the structure of the following documents a. Sales order

The header in a sales order includes data that are valid for the entire sales order, such as partner functions, dates, and order total. Each sales document can include one or more line items, which contain data about each item included in the sales order. A third level is the schedule lines which specify the delivery quantities and dates for each line item in the sales order. A line item includes at least one schedule line, but can include more than one. b. Delivery document The header in the delivery document includes data applicable to the entire document, such as the ship-to party, shipping address, dates, and totals (weight, number of items). Data about each item in the shipment, such as material number, delivery quantity, and weight, appear as separate line items. Each schedule line in a sales order is a line item in the delivery document. c. Billing document The billing document header consists of the partner identification such as the sold-to party and payer, in addition to the billing date, document currency, payment terms, and the total.

Each billing document item includes data such as material number, quantity, and price.

15. Explain the relationship between each of the following pairs of key elements of the fulfillment process: a. Quotations and sales orders A quotation is a binding agreement to sell specific products to the customer under clearly defined delivery and pricing terms. A sales order is an internal document that contains information necessary to fill the customer order in a standardized form. Much of the data contained in the sales order is also found in the quotation. A sales order can be created with reference to one or more quotations. A single quotation can generate either one or multiple sales orders.

Sales orders and deliveries Creating a delivery document serves as an authorization for delivery. Schedule lines from multiple sales orders with similar characteristics can be combined into one shipment or delivery. This arrangement is possible only when the sales orders have the same ship-to address, shipping point, and due date. Conversely, items in one order can be split into multiple deliveries. b. Deliveries and transfer requirements Items from multiple delivery documents can be included in a single transfer requirement.

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 delivery document can generate multiple transfer requirements. Data from the delivery documents are copied to the transfer requirement. c. Deliveries and billing documents

Multiple deliveries can be combined to create one billing document. This process can be employed only when the deliveries share the same characteristics with respect to payer, billing date, and country of destination. Conversely, one delivery can generate multiple invoices. This is the case when the terms of payment for the items in the delivery are different.

16. Explain how the steps in the fulfillment process impact the general ledger accounts.

The shipment, billing, and payment steps have an impact on the general ledger. When the order is shipped, the inventory value in the general ledger is reduced. When the billing step is completed, accounts receivable reconciliation and sales revenue accounts in the general ledger are updated.

When a customer payment is also recorded, the relevant general ledger accounts are updated, and a corresponding FI document is created.

17. How do companies manage payments that are less than the amount of the invoice?

In a case where the payment is not equal to the amount of the invoice, two scenarios are possible.

In one scenario, the amount of the difference is so small that it is insignificant. 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. This is usually done if the difference is within the tolerance limits specified in the system. When the difference falls outside the tolerance limits and therefore is considered significant, the payment is handled either through partial payment or residual item.

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.

18. Briefly describe the credit management process. Which steps of the fulfillment process are relevant to credit management?

Companies use the credit management process to determine whether a customer should be granted credit to purchase and receive goods prior to payment. Three steps in the fulfillment process are relevant to credit management: a. When the sales order is created or changed b. When the delivery is authorized (created) or changed c. When the post goods issue is performed during shipping.

The company performs a credit check to determine whether the customer has exceeded its credit limit. The three possible outcomes are (1) warn the user and allow the process to continue, (2) display an error message 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 is being created or changed.

During the post goods issue, the only option available is to block the goods issue from being posted.

19. Briefly explain how the fulfillment process is integrated with other processes.

The fulfillment process and financial accounting are integrated because fulfillment involves both revenues and customer payments. Some of the master data utilized in fulfillment, such as customer

master and material master, are jointly maintained by sales and accounting. The shipment, billing, and payment steps have an impact on the general ledger.

When a company conducts availability checks during sales order processing, it uses data from inventory management, production, and purchasing, which are the sources of the materials for shipment. Sales data are also used by materials planning to schedule the procurement and production of materials. Another fulfillment step, goods movement, is related to inventory management. Finally, warehouse management processes can be initiated during shipment.

Fulfillment is also related to project systems. Project systems influence deliveries and billing.

20. What is a document flow?

A document flow displays all of the documents associated with the steps that have been completed for a single customer inquiry or order. The document flow is updated after each process step is completed. The document flow essentially displays the history and status of the sales order.

21. Provide examples of works lists and online lists associated with the fulfillment process.

Work lists identify tasks that are ready for completion. These lists can be generated for each task involved in fulfillment, such as preparing deliveries, picking, post goods issue, and billing. An example of work list is delivery due (shipping work) list, which is essentially a list of orders that are scheduled to be shipped by a specific date. Another example is a list of orders that have been shipped but not billed.

Companies use online lists to generate lists of documents associated with specific master data.

Examples are a list of delivery documents for a specific customer and a list of sales orders for a specific combination of customers and materials.

22. Provide an example of reporting using standard analysis in fulfillment. Make certain to include the concept of drill down.

An example of standard analysis is sales reporting, which includes sales organizations, order value, and invoiced amount. In addition, sales reporting provides a drill down to display customers for a selected sales organization. Drilling down for one customer reveals data for each time period.

Exercises Exercises for this chapter are available on the Wiley student companion website at http://www.wiley.com/college/magal/.

Test Questions Three types of test questions are provided – True/False, Multiple Choice (one right answer), and multiple answer (at least two right answers). These are provided in MS word format as well as in a format that can be imported as a test in Blackboard.

The files are:

Chapter03 Test Questions True False.docx Chapter03 Test Questions Multiple-choice.docx Chapter03 Test Questions Multiple-answer.docx

If you include all three types of questions, the following grading suggestion is offered.

T/F questions 1 point each Multiple -choice questions 2 points each Multiple -answer questions 3 (or 4) points each.

All of the correct answers must be chosen in order to receive credit for Multiple-answer questions. We suggest you do not offer partial credit.

Chapter 6: The Production Process Learning Objectives 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 production process.

4. Effectively use SAP ERP to extract meaningful information about the production process.

Explain that organizations implement a variety of production or manufacturing processes.

Point out that the most common production processes are discrete, repetitive, and process manufacturing. Emphasize that discrete and repetitive manufacturing involve the production of tangible materials such as cars, computers, and bicycles. In repetitive manufacturing, however, the same material is produced repeatedly over an extended period, whereas in discrete manufacturing, the company produces different materials over time in batches. Explain that 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.

Briefly describe the steps in the production process. Point out that the production process is triggered by a request for production. Emphasize that in order to produce the desired quantity of finished goods, the company might have to procure raw materials if the current inventory is not adequate. The raw materials are issued from the warehouse to the production floor.

Emphasize that regardless of the particular production process used, companies typically employ two common production strategies — make-to-stock and make-to-order. Explain both strategies, and provide examples you are familiar with. You can use the Internet to locate examples.

Figure 6-1 can help you to explain the basic production process for GBI, which uses the maketo-stock strategy.

Chapter Outline and Teaching Suggestions 1. Organizational data a. Note the organizational data relevant to production and that these have been discussed in previous chapters. Provide a quick review if deemed necessary.

2. Master Data a. Bill of Materials

b. c. d. e.

Work Center Product Routing Material Master Production Resource Tools

Discuss the master data that are relevant to production: materials, work centers, product routings, material master, and production resource tools.

Explain that the bill of materials (BOM) identifies the raw materials or semifinished goods that are necessary to produce the finished goods. Point out that for discrete and repetitive manufacturing, the BOM is a hierarchical list of all of the materials required for the finished goods. For process industries such as oil and gas, however, the BOM is a formula or receipt.

BOMS in SAP ERP are defined as single-level but can be constructed into multi-level BOMS by nesting several single-level BOMS. Point out that a BOM is defined for a material at the plant level and can differ for each plant that makes the same finished good. Figure 6-2 will assist you in explaining both single-level and multi-level BOMS. Figures 6-3 and 6-4 will assist you in explaining multi-level BOMS. Identify the data that are contained in a bill of materials, which consists of a header section and items sections. Explain each field in the bill of material for both the header and items sections. The header section is applicable to the entire BOM. A bill of material can be used in several processes. Figure 6-5 will assist you in explaining the bill of material structure. Show Demo 6.1: Review BOM for bike and wheel assembly.

Define a work center as a location where value-added work needed to produce a material is carried out. Provide examples. Point out that a work center is a resource that can be used for variety of purposes and for multiple processes. Data related to a work center are divided into the categories of basic data, default values, cost center, HR assignment, scheduling, and capacities. Explain that a task list is a list of operations that that are necessary to produce a product. Operations are the specific tasks that must be completed, such as drilling, cutting, painting, inspecting, and assembling. Point out that in the production process, a task list takes the form of a product routing or a master recipe. Explain and give examples for each data item that makes up the categories of a work center. Figure 6-6 will assist you in explaining work center data. Figure 6-7 will assist you in explaining the layout of a work center. Figure 6-8 will assist you in explaining the details of the GBI work centers. Show Demo 6.2: Review GBI work centers.

Explain that the product routing specifies the sequence in which operations must be carried out, the work center where the operations are to be performed, and the time needed to complete the operations. It can also include production resource tools that the company needs to complete the operations. Explain the structure of a routing, which includes a header that contains data that are applicable to the entire routing. Point out that a routing can be a

standard sequence (operation 1 is performed before operation 2) or an alternate sequence (operation 2 is performed before operation 1). Figure 6-10 will assist you in explaining the structure of a routing.

Explain parallel sequences in product routing, where operations are executed simultaneously rather than sequentially. Identify the three basic time elements in the production process: setup time, processing time, and teardown time. These elements can be either fixed or variable. Figure 6-11 will assist you in explaining these elements.

Figure 6-12 will assist you in explaining the routing for the GBI deluxe touring wheel assembly, which includes operations, work center, setup time, processing time, and materials allocated.

Figure 6-13 — routing for the GBI deluxe touring bike — is similar to Figure 6-12. However, this routing also includes multiple work centers, more steps in the routing, and setup time for the operation test bike.

Explain component assignment, which is a technique that assigns components in a BOM either to a routing or to a specific operation within the routing. Figure 6-14 will assist you in explaining component assignment.

Point out that data contained in the bills of materials, work centers, and routings are used to determine production capability. Production capability is a measure of how many units of a material a plant can produce within a given timeframe. Figure 6-15 will assist you in explaining production plan and production capability. Show Demo 6.3: Review routing for a bike and wheel assembly.

Explain that the material master is grouped into different views or segments based on process, material type, and organizational level. In the production process the material master views are material requirement planning and work scheduling, which are defined at the plant level.

Material requirement planning and work scheduling are more directly relevant in material planning and will be discussed in Chapter 8.

Explain that production resource tools (PRTs) are movable resources that are shared among different work centers. Examples are calibration instruments, fixtures, and documents.

3. Process a. Request Production i. Data ii. Tasks

b.

c.

d.

e.

f.

g. h.

iii. Outcomes Authorize Production i. Data ii. Tasks iii. Outcomes Order Release i. Data ii. Tasks iii. Outcomes Goods Issue i. Data ii. Tasks iii. Outcomes Confirmations i. Data ii. Tasks iii. Outcomes Goods Receipt i. Data ii. Tasks iii. Outcomes Periodic Processing Completion

Highlight the steps of the production process using Figure 6-16. Explain that the production process begins with a request for production that is typically triggered by the fulfillment process to fill a customer order (make-to-order) or by the material planning process to increase inventory (make-to-stock). Point out that the request for production has to be authorized by the production supervisor. Explain that external systems such as plant data collection (PDC) systems can use data from the ERP system to trigger production. Emphasize that when the finished goods are completed, the actual production is confirmed in the system, and the finished goods are then moved to storage for consumption by other processes such as fulfillment. The fulfillment process is responsible for selling finished goods, which are picked, packed, and shipped to the customer (buyer). Identify the steps of the production process, data types, and document types. Figure 6-16 will assist you in explaining the production process.

Explain request production, focusing on the triggers, data, tasks, and outcomes. A suggestion is to give examples of make-to-order strategy, make-to-stock strategy, and some other process outside fulfillment such as project management. Point out that production can be triggered manually by creating a planned order when there is a need to produce materials.

Regardless of the trigger, the outcome is a planned order that indicates what materials are

needed, how many units are needed, and when they are needed. Figure 6-17 will assist you in explaining request production.

Explain that various organizational data, master data, and user-specified data are included in a planned order. The ERP system automatically incorporates both the master data related to the materials and the bill of materials in the planned order. Figure 6-18 will assist you in explaining the data in a planned order. Point out that a planned order remains in the ERP system until it is acted upon by an authorized person. This person can reject the order, modify it, combine it with other planned orders, or authorize production. Point out that a planned order is a transaction document. The request production step does not generate any financial impacts. In addition, it does not involve a goods movement, so no material documents are created. Show Demo 6.4: Create a planned order.

Discuss the authorize production step, focusing on the triggers, data, tasks, and outcomes.

Emphasize that the document created in the authorize production step is the production order.

Unlike the planned order, the production order represents a commitment to produce a specific quantity of materials by a specific date. Consequently it commits resources to producing the materials such as work centers, materials, and PRTs. A production order usually is created by converting a planned order. In some cases, however, it can be generated directly without using a planned order. Figure 6-19 will assist you in explaining the authorize production step.

Define the data contained in a production order. Explain that most of these data are also included in the planned order. In addition, user input is generally needed only if the planned order is not used as a data source or if some of the data must be changed. Figure 6-21 will assist you in explaining the structure of the production order and the data items it contains.

You can also use Demo 6.5 "Create a production order" to aid you in explaining the production order.

Explain that the tasks for the authorize production step have several scenarios. Point out that planned orders can be converted individually, collectively, or partially. The routing can be selected either manually or by the ERP system. It is also possible to create a production order without specifying routing. In this scenario the ERP system automatically generates a default operation, which is incorporated into the production order. Point out that the ERP 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. Emphasize that components and PRTs are assigned to specific operations automatically by the ERP system based on data in the routing. However, they can also be assigned manually or reassigned to specific operations as needed. You can refer back to Figure 6-13, which shows that different components are assigned to different operations.

Explain that the creation of a production order generates several outcomes, including scheduling, availability checks, and reservations. Discuss each type of outcome, and provide examples. Figures 6-22 and 6-23 will assist you in explaining preliminary costing.

Explain order release. Highlight and discuss the triggers, data, tasks, and outcomes.

Emphasize that an order release can be performed either automatically by the ERP system or manually. Point out that production orders can be released at either the header level or the operations level. In addition, they can be released individually or collectively. Point out that the SAP ERP can directly communicate with external shop floor control systems or PDC systems that control physical activity on the production floor and work centers. Figure 6-24 will assist you in explaining order release.

Explain the goods issue step. Highlight and explain the triggers, data, tasks, and outcomes.

Figure 6-25 will assist you in explaining goods issue. Emphasize that the production order includes much of the data related to the goods issue. User input specifies the actual materials and quantities issued. The materials, quantities, and location (plant, storage location) can be changed as needed during this step. Figure 6-26 will assist you in explaining the data in the goods issue. Point out that an additional step — material staging — is sometimes necessary if materials must be prepared for use. Explain that backflushing is an optional technique that automatically records the goods issue after the production order is confirmed if a company chooses to post the goods issue after production rather than before. Emphasize that the outcomes of the goods issue include updating the material master and creating a material document, an FI document, and a management accounting (CO) document. An optional goods issue document can also be created. Figure 6-27 will assist you in explaining the financial impact of a goods issue. You can also utilize Demo 6.6: Goods issue to production order.

Explain confirmations. Highlight and explain the triggers, data, tasks, and outcomes. Figure 628 will assist you in explaining confirmations. Figure 6-29 will assist you in explaining the data included in the confirmation step. Emphasize that confirmations can be recorded for the entire order or for specific operations or sub-operations. Explain that the outcome for confirmation is that the data associated with the work for the production order are completed and recorded.

These data consist of the quantity of the materials that were produced, the activities and operations that were completed, and the dates when the work was performed. Point that that the order status for completed work is set to either confirmed or partially confirmed, depending on whether the entire order quantity was produced. When the production order is confirmed, the cost centers are credited, and the production order that consumed the labor is debited with the labor cost. If the control keys allow a goods receipt posting, then the posting is executed automatically upon confirmation. Figure 6-30 will assist you in explaining the financial impact of a confirmation. Also valuable here is Demo 6.7: Confirm production.

Explain goods receipt, highlighting the triggers, data, tasks, and outcomes. Figure 6-31 will assist you. Figure 6-32 will assist you in identifying the data that are included in the goods receipt. Point out that when the finished goods are physically moved into inventory, if the storage location employs a warehouse management (WM) system, then a transfer requirement is created to trigger additional WM steps.

Explain that the outcomes for the goods receipts are the updating of the material master and general ledger accounts. A financial accounting document is created, and the cost of goods manufactured and the target cost are posted. Figure 6-33 will assist you in explaining the financial impact of the goods receipt. The SAP ERP system can be configured to automatically record a goods receipt at the time of completion. This is a good place to introduce Demo 6.8: Goods receipt from production.

Define periodic processing: a system in which companies define specific periods, such as months or quarters, when they complete certain accounting steps to update the data in their financial statements. Periodic processing includes overhead allocation, work-in-process determination, and order settlement. Point out that indirect or overhead costs are accumulated in specified cost centers and are periodically allocated to the production orders based on pre-established rules. Emphasize that materials classified as work-in-process that are out of inventory for long periods of time value are posted to the general ledger so that financial statements can accurately reflect the current inventory value. Figure 6-34 will assist you in the explaining financial impact of settlement.

Explain completion, and point out that it can be viewed from both a logistics (technically complete (TECO) order status) and an accounting (closed order status) perspective. Emphasize that although the production order is in the technically complete status, financial postings related to the order can still take place until the production order is placed in the closed status, after which no further processing or financial postings are possible.

4. Reporting Define reporting, and explain that the options are similar to those available for the other processes such as fulfillment and procurement. A variety of lists, reports, and analytics are available via the production information system, which is a component of the logistics information system. Work lists identify tasks to be completed, whereas online lists display documents for specific 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 utilization, material consumption, and so on. Figures 6-35 and 6-36 will assist you in explaining a report from the production information system. Point out that one of the most important reports in production is the stock/requirement list, which identifies all of the activities in the system that can potentially impact the quantity of material in inventory. The stock/requirement list can display planned orders and production orders. Figure 6-36 represents a stock/requirement list that displays three planned orders. Demo 6.9 — Review a stock/requirement list — would also be helpful here.

Review questions

1. Explain the function of a bill of material in the production process A bill of materials (BOM) identifies the raw materials and/or semifinished goods that are necessary to produce a finished good. In discreet and repetitive manufacturing, the BOM is a complete list of all of the raw materials and semifinished goods that are needed to produce a specified quantity of the finished goods. 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 specified quantity of the product. A BOM is a hierarchical depiction of the materials needed to produce a finished or semifinished good. BOMs vary from very simple to very complex, depending on the final product.

2. What is the significance of item categories in a bill of materials?

The item sections of a BOM identify all the materials needed to make the finished good or semifinished good identified in the header. Examples of data for each item are material number, description, quantity, and item category. A BOM can contain different types of items, which are distinguished by the item category. The item category identifies the type of material and influences how the material is to be used in the BOM. Common item categories are stock item, non-stock item, variable-size item, text item, document item, class items, and intra material. A stock item is a material for which stock or inventory is maintained; it must have a material master defined. A nonstock item is one for which inventory is not maintained; it does not need a material master defined.

The variable-size category is used for a material that is available in different sizes. A text item is used to include notes and comments within the BOM. A document item is used to include documents such as engineering drawings, assembly instructions, and photographs. Class items are used in variant BOMS to identify a class or group of items. Intra material, or phantom items, are a logically grouped set of materials that could collectively be considered as a single material.

3. Explain the structure of a bill of materials?

The BOM consists of a header section and an item section. The header section includes data that apply to the entire BOM such as the material number, description, usage, validity, status, and base quantity. The material number in the header identifies the finished good or semifinished good described in the BOM. The BOM is valid from the date specified in the header. A validity date is appropriate when changes are planned for a future date. A BOM 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 specified in the BOM. The items section of a BOM identifies all the materials needed to make the finished good or semifinished good identified in the header.

4. What is the function of a work center in production?

A work center is a location where value-added work needed to produce material is carried out. It is where specific operations, such as drilling, assembly, 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 operations 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 in multiple processes.

5. Briefly discuss the key data in a work center master record.

The basic data section in a work center 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 specifies which task lists can use the work center. In production a task list takes the form of a product routing.

Standard key values are used to assign standard or planned values for normal time elements — i.e., 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 specific 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 wage data and control keys. Control keys specify how an operation or a sub-operation is scheduled, how costs will be calculated, and how operations will be confirmed once they are completed.

6. What is a product routing? What is it used for?

Product routing is defined as a list of operations that a company must perform to produce a material. In addition, the product routing specifies the sequence in which these operations 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, that the company needs to complete the operations. All operations in a routing must be performed in some type of sequence, and many operations can be completed in a variety of sequences.

7. Explain the relationship between operations and sequences.

Operations are the specific tasks that must be completed, such as drilling, cutting, painting, inspecting, and assembling. Different types of tasks lists are associated with different processes. In addition, the product routing specifies the sequence in which these operations must be carried out, the work center where they are to be performed, and the time needed to complete them.

Sequences are the order in which the operations are performed. They can be standard (operation 1 before operation 2), alternate (operation 2 before operation 1), or parallel (operations performed at the same time).

8. Explain the relationship between bill of materials, work centers, and product routings.

The routing indicates how to produce a specified product, and the BOM indicates which materials are needed to manufacture that product. There is, therefore, an obvious relationship between a BOM and a routing. This relationship is defined via the component assignment, a technique that assigns components in a BOM either to a routing or to a specific operation within the routing.

Further, a work center is a location where value-added work needed to produce material is carried out. The routing identifies the work centers where the operations are to be completed.

9. Which material master data are relevant in production?

The master data relevant to production are bill of materials, work centers, product routings, material master, and production resource tools.

10. What are production resource tools?

Production resource tools (PRTs) are the final master data relevant to production. PRTS are movable resources that are shared among different work centers. Examples of PRTs are calibration or measurement instruments, jigs, and fixtures and documents such as engineering drawings.

11. Briefly describe the steps in the production process in terms of triggers, data, tasks, and outcomes.

The production process begins with a request for production that is typically triggered by another process such as fulfillment, which needs to complete a customer order, or material planning, which has determined that the company needs to increase its inventory levels. The various process steps involved within production are examined in terms of triggers, data, tasks, and outcomes.

A request for production is triggered by a need to produce materials. Typically, this trigger is a result of activity in another process. If the company has adopted a make-to-order strategy, then the receipt of a customer order will trigger the need to produce the materials. Regardless of the trigger, the outcome of this step is a planned order.

Various organizational data, master data, and user-specified data are included in a planned order.

The individual making the request specifies which materials are needed, how many are needed, and when they are needed. The ERP system automatically incorporates both master data related to the materials and the bill of materials in the planned order.

The next step in the production process is authorize production. The trigger to authorize production is a planned order or a need for material. A production order is created, which represents an actual commitment to produce a specific quantity of materials by a certain date. Much of the key data needed to create a production order are 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. The creation of a production order generates several outcomes, including scheduling, availability checks, reservations, preliminary costing, and creating necessary purchase requisitions.

The next step in the production process is order release. An order must be released (REL) for production before subsequent steps can be carried out. 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. When a production order is released for production, subsequence steps such as plant data collection (PDC) systems and goods issue to production order can be executed. Shop floor papers that are needed to execute the steps in the work center can be executed.

The next step in the production process is goods issue. The data needed to complete the goods issue step are user input (production order number, quantities, dates and storage locations), production order (components, quantities, reservations, status), master data (material master), and organizational data (client, company code, plant storage location). There are several significant consequences of a goods issue to a production order. Specifically, general ledger accounts, material master, material reservations are updated. Costs associated with material consumption are calculated and added to the production order. In addition, FI, CO, and material are created to record the consequences of this steps.

The next step in the production process is confirmations where the data associated with completing one or more operations are recorded. Specifically data regarding quantities, tasks, and duration are recorded. Confirmations result in an update to the production order to reflect 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 confirmed or partially confirmed, depending on whether the entire order quantity was produced. Labor costs are assigned to cost centers associated with the work centers where the employees completed the work.

The next step in the production process is the goods receipt where the materials produced are physically moved from the shop floor into the appropriate storage location. A goods receipt generates several significant outcomes. Inventory quantity and value is updated, appropriate general ledger accounts are updated, and the status of the production order is updated to either delivered or partially delivered.

Several steps related to production are completed periodically during the process. Periodic processing is also known as period-end closing. Companies define specific periods, such as months or quarters, when they complete certain accounting steps to update the data in financial statements. Periodic processing includes overhead allocation, work-in-process determination, and order settlement.

The final step in the production process, order completion, can be viewed from both a logistics perspective (technically complete) and an accounting perspective (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 steps is possible. After a production order has been completed and settled, it is set to a status of closed (CLSD).

12. Explain the financial impact of the steps in the production process.

Financial impacts of the steps in the production process occur in goods issue, goods receipt, and periodic processing steps. During the goods issue step, the general ledger is affected, and a FI document is created to record financial accounting data. The actual costs associated with the material consumption are accumulated and debited to the production order. There is also a corresponding debit to a specific material consumption account and a credit to a specific material inventory account. During the goods receipt step, the quantity of the material on hand and the value of the inventory are updated in the material master. The inventory account determined by the material master is debited, and the manufacturing output 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. The manufacturing output settlement account represents a cost of goods manufactured 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 configured. Target cost is the cost expected to be incurred for the actual quantity produced. If the target cost is different than the planned cost then a variance has occurred.

During the periodic processing (period-end closing), the variance is settled. Specifically, the variance in the production order is debited to the manufacturing output settlement variance account and credited to the manufacturing settlement credit account.

13. What are the different production order statuses? What is the significance of the order status?

When the order is initially saved, the status is created (CRTD). As the order is executed, the order is changed to reflect its current state. Partially released (PREL) means that the production order was released at the operations level and some operations have not been released.. Released (REL)

means that the production order has been released for all of its operations. Partially confirmed (PCNF) means that the entire order quantity was not produced for the production order. Work center employees can make additional confirmations as they produce more of the material.

Confirmed (CNF) means that the entire quantity of the production order has been produced. The final step in the production process — order completion — can be viewed from a logistics perspective (technically complete) and an accounting perspective (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. After the production order has been completed and settled, it is set to a status of closed (CLSD). Before this step can occur, the order must be in either released or technically complete status, and it must be fully settled.. After the order is closed, no further processing or financial postings are possible.

14. Briefly describe the structure of a production order

The data in a production order are used to plan, schedule, and execute the production of the specific material. The order header includes basic data such as a unique order number, the plant where the material is to be produced, the person (scheduler) responsible for scheduling production, and the status of the order. The status determines which steps in the process can be completed. A production order includes the specific operations needed to produce the material, along with data on the designated work centers. A production order also identifies the specific sequences for the operations. Capacity splits are used to determine how the work to be performed is distributed or “split” among the machines and/or people involved in producing the material. The production order identifies the components needed to produce the specified quantity of the material. The PRTs to complete one or more operations are identified. Trigger points initiate or “trigger” some activity or function. A production order includes preliminary estimates for various cost components, such as material and overhead. These costs are associated with the appropriate accounts in the general ledger, such as material consumption accounts. 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 specified settlement rules. A production order may contain references to various documents. When the production order has been executed and the materials have been created, the materials actually produced are recorded in the production order via confirmations.

15. What are different options for production order confirmations?

Confirmations at the operations level can be recorded in several ways. Time event confirmations record setup, processing, and teardown times, which can be recorded for both machine time and labor time. Time ticket confirmations record confirmations periodically. An operation can be either partially or fully confirmed. Partial confirmations consist of data accumulated since the previous confirmation. Collective and fast entry confirmations confirm multiple operations at the same time.

In milestone confirmation the confirmation of an operation automatically confirms the preceding

operation. Finally, progress confirmation periodically indicates the total progress of an operation at the time of the confirmation.

16. What is a stock requirement list? What information does it provide?

The stock requirement list identifies all of the activities in the system that can potentially impact the quantity of material in inventory. As the planned orders are processed, the stock requirement list will indicate their current status until production has been completed. At that point the quantity available in inventory will increase. The stock requirement list also includes activities that consume the materials, such as sales orders from the fulfillment process.

Chapter 7: Inventory and Warehouse Management Process Learning Objectives After completing this chapter you will be able to: 1.

2.

3.

4.

5.

Discuss the four goods movements associated with inventory management.

Describe the organizational levels in warehouse management.

Analyze the master data associated with warehouse management.

Identify and explain the key steps in the warehouse management processes.

Demonstrate how inventory and warehouse management processes are integrated with other processes.

6. Effectively use SAP ERP to execute the key steps in the warehouse management process.

7. Extract and analyze meaningful information about the warehouse management process utilizing SAP ERP.

Inventory and warehouse management processes are concerned with the storage and movement of materials within an organization. They are closely related to the procurement, fulfillment, and production processes. Refer students to Chapter 4, which introduced the underlying activity in inventory management, namely, goods movement (goods receipt, goods issue, stock transfer, and transfer posting) and the specific movement types. Point out that warehouse management, which involves processes that enable companies to manage materials more effectively using sophisticated techniques, was briefly discussed in Chapters 4– 6.

This chapter will review and elaborate on the four goods movements covered in previous chapters and will then discuss the organizational data, master data, and processes associated with IM and WM processes in the context of the procurement, fulfillment, and production processes. The chapter will also focus on the linkages between IM and WM as well as the reporting options.

Chapter Outline and Teaching Suggestions 1. Inventory Management a. Goods Receipt b. Goods Issue c. Transfer Postings d. Stock Transfers i. Storage Location-to-Storage Location Transfer

ii. Plant-to-Plant Transfer iii. Company Code-to-Company Code Transfer e. Stock Transport Orders i. Stock Transport Orders without Delivery ii. Stock Transport Orders with Delivery iii. Stock Transport Orders with Delivery and Billing Explain that four goods movements are involved in inventory management: goods receipt, goods issue, transfer postings, and stock transfers. Companies execute goods movements using specific movements types that determine what information is needed to execute the movements and which general ledger accounts will be affected by the movements. Point out that the key organizational level associated with inventory management is the storage location. Emphasize that because inventory management is concerned with materials movement, the plant/data storage view of the material master is the most relevant master data in inventory management. Figure 7-1 will assist you in explaining goods movements.

Define goods receipt: a movement of materials into inventory, which results in an increase in inventory. Point out that a goods receipt occurs in both the procurement and production processes, and provide an example for each process. Emphasize that the goods receipts for both the procurement and production processes result in the creation of a material document and a financial document. In addition, the material received for both processes is stored in the appropriate storage location with the appropriate status such as unrestricted use or in quality inspection. Point out that it is not uncommon to post a goods receipt without reference to an order in scenarios such as unplanned receipt from vendors or unplanned returns from customers.

In contrast to a goods receipt, a goods issue results in a decrease in inventory. Emphasize that a goods issue occurs in both fulfillment and production, and provide an example for each process. Point out that a goods issue can be unplanned; for example, issuing materials to scrap, sampling, or using the material for internal consumption.

Explain that transfer posting is used to change the status or type of materials in stock. The four common stock statuses are unrestricted use, in quality inspection, blocked, and in transit.

Point out that a transfer posting need not include a physical movement of materials.

Emphasize that a transfer posting could take place as a result of changing the material number of a material, which is a material-to-material posting, or consignment, an arrangement in which materials are stored at a customer's facilities although the vendor retains ownership. Provide examples of both material-material posting and vendor-owned inventory (consignment). Point out that in the case of consignment, when the ownership changes from vendor to customer, there is a financial impact.

Explain that stock transfers are used to physically move materials within the enterprise from one organizational level or location to another. A stock transfer can take place between storage locations within one plant, between plants in one company code, and between plants in different company codes. Regardless of the organizational levels involved, however, three options are available for moving materials: one-step procedure, two-step procedure, and using a stock transport order. Point out that material movements consist of two tasks: issue (removing materials from storage at the supplying location) and receipt (placing the materials into storage at the receiving location). Point out that in the one-step procedure both tasks — removing and placing the materials —as well as the recording are executed simultaneously.

Emphasize that the one-step procedure is typically used when two locations are physically close to each other and there is no significant time gap between issue and receipt.

In contrast, in the two-step procedure, issue and receipt are preformed in two separate steps.

During the first step (removal from storage), the quantity of inventory is reduced at the supplying location and is simultaneously increased by the same amount at the destination location. The materials are placed in the in transit stock status at the receiving location until they arrive. Once the materials arrive, the second step is used to change the status from in transit to unrestricted use (or another status). Emphasize that 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. Point out that a material document is created during both the one-step and two-step procedures. In the one-step procedure, one material document is created. During the two-step procedure, two material documents are created, one at the time of issue and one at the time of receipt. Figure 7-2 will assist you in explaining both the one-step and two-step procedures.

Explain that a storage location-to-storage location transfer is used when moving materials within the same plant. Point out that companies use this option when materials are placed in a temporary location before being moved to a permanent location within the same plant.

Emphasize that the transfer within the plant can be accomplished via the one-step or two-step procedure. Point out 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, the two-step procedure can be executed only when the materials are in unrestricted use at the supplying location. When the first step (removal) 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 has a status of in transit. When the materials are physically received, their status is changed to unrestricted use (or another status). Point out that 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 observation is true when all quantities of the same materials are valued in the same way. When materials are valued differently — a practice known as split valuation — then 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 financial accounting impact, and an FI document is created. Figure 7-3 will assist you in explaining a stock transfer within a plant.

Explain that plant-to-plant transfer is a movement of materials between two plants within the same company code. Again, both the one-step and two-step procedures can be used. Typically, only materials in the unrestricted use status can be moved between plants. Emphasize that the difference between the one-step and two-step procedure is 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 first step (issue) and then changed into unrestricted use when the materials are actually received.

Material documents are created in storage location-to-storage transfers. A plant-to-plant transfer represents a change in the value of the materials. Consequently, there is a FI impact, and an FI document is created. Figure 7-4 will assist you in explaining plant-to-plant transfer.

Explain that a company code-to-company code transfer involves the movement of materials between two plants that have different company codes. Once again, this type of transfer can be accomplished via the one-step or two-step procedure. Because each plant has a different company code, two FI documents are created, one for each company code. The FI document contains one line item for the material account and another (offsetting) line item for a clearing account created to accommodate such a transfer. Direct students to Demo 7.1, plant-to-plant stock transfers.

Explain that plant-to-plant movements that have been discussed have the following limitations.

• They cannot take into account the cost of transporting materials between plants, • They cannot track the progress of the transfer, and • Valuation can be based only on the book value of the materials at the sending plant and not a negotiated value or price between plants.

Companies overcome the limitations inherent in plant-to-plant transfers by utilizing stock transport orders (STOs). In this process, one plant essentially “purchases” the materials and another plant “sells” them. An STO is very similar to a purchase order in the purchasing process, except that it is used for plant-to-plant movements.

Explain that a stock transport order without delivery involves steps from purchasing and inventory management. The receiving plant creates a stock transport order either directly or with reference to other documents such as a purchase requisition. The supplying plant executes a goods issue that is posted against the STO. Point out that the quantity in unrestricted use is reduced at the sending plant, and stock in transit is increased at the receiving plant. Emphasize that 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 occurs at the time of the goods issue using the valuation price of the supplying plant.

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. Point out that only the two-step procedure is possible for STO with delivery. Figure 7-5 and Demo 7.2 will assist you in explaining the stock transport order without delivery.

Explain that stock transport orders with delivery involve the creation of a delivery document.

The sending plant will create the document prior to goods issue. Emphasize that an STO with delivery can utilize both the one-step and two-step procedures for the goods movement.

When the company uses a two-step movement, the material movement and the financial impact are identical to those associated with an STO without delivery. When it uses a onestep movement, only one material document is created, and the materials are placed in unrestricted use at the receiving plant. Figure 7-6 and Demo 7.3 will assist you in explaining stock transport order with delivery.

Stock transport orders with delivery and billing include both the delivery document (shipping step) and the billing step from the fulfillment process at the sending plant. The invoice verification step from the procurement process at the receiving plant is also included. Point out that this option is most appropriate for inter-company transfers. Both the one-step and two-step procedures can be used. A stock transport order is created at the receiving plant in response to a need to acquire materials. A purchase price is included in the STO based on pricing conditions and info records. The supplying plant then creates a delivery document authorizing the shipment. When the goods issue is posted, the quantity designated as unrestricted use is reduced at the supplying plant. In addition, material accounts are credited by the value of the shipment, and the cost of goods sold account is debited. The corresponding material and FI documents are created. The materials shipped technically do not belong to the receiving plant in the other company code. The materials are classified as “in-transit CC,” which is different from the “in-transit” category previously discussed.

Materials in the in-transit category are included in valuation, 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. 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. The valuation is based on the purchase price in the STO. The supplying plant creates an invoice based on this price, which is the selling price from the perspective of the fulfillment process. The valuation of materials does not reflect the valuation price of the delivery plant. Rather, it is based on an agreedupon transfer price between the companies within an enterprise. When the billing document is created, the system updates the appropriate revenue and receivables accounts in the sending plant’s general ledger. The receiving plant verifies the invoice, as in the procurement process. The system updates the appropriate accounts payable and GR/IR accounts in the

receiving plant’s general ledger. Corresponding FI documents are created. Payment is made 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.

Corresponding FI documents are created. Figure 7-7 will assist you in explaining the stock transport order with delivery and billing.

2. Organizational Data In Warehouse Management a. Storage Type b. Storage Section c. Picking Area Explain that the key organizational data in warehouse management is the warehouse. A warehouse is associated with one or more combinations of plant and storage location.

Emphasize that the association between storage locations and a warehouse provides the linkage between IM processes and WM processes. Explain the rules that apply when linking warehouses to storage locations. Point out that a warehouse is divided into a hierarchy comprised of storage areas, storage sections, and storage bins. Figure 7-8 will assist you in explaining organizational data in warehouse management.

Explain that a storage type is a division of a warehouse based on the characteristics of the space, materials, or activity. Point out that space in the warehouse can be divided into storage types based on how the materials are stored, such as hazardous material or material requiring a specified temperature. Emphasize that the assignment of storage locations to a warehouse links IM activities to WM activities. Explain that interim storage areas represent the physical links between IM and WM. Figure 7-9 will assist you in explaining storage type.

Explain that a storage section groups bins with similar characteristics such as fast-moving, slow-moving, heavy, light, large, and small. Fast-moving items are usually located close to the receiving and shipping areas. Heavy and bulky materials are placed in lower shelves, and lighter and smaller materials are stored in higher shelves. Emphasize that each storage type must have at least one storage section. Figure 7-9 will assist you in explaining storage section.

Explain that 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 specific employees who are responsible for picking from specified bins.

Figure 7-10 displays the layout of GBI's San Diego distribution center, and Figure 7-11 illustrates the structure of GBI's warehouse in San Diego Figures 7-12 - 7-14 can be used to discuss the storage of different material types.

3. Master Data in Warehouse Management

a. Material Master b. Storage Bins Explain that the key master data in warehouse management are material master and storage bins. Remind the students that the material master has been previously discussed in the context of several other processes. These discussions examined several basic views such as basic, purchasing, and sales. Point out that 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. Point out that the organizational levels relevant to the warehouse management view of master data are warehouse, plant, and storage type. When a warehouse is used, materials must be defined for each warehouse. Point out that plant and storage type are optional and are included only when the warehouse data for the material are different in different plants or storage types.

The three types of data that are relevant to warehouse management are basic data, data used in defining stock placement and removal strategies, and data regarding the storage bins where the materials will be stored. Point out that basic data are relevant to all processes, as was discussed in Chapter 2. However, for warehouse management, some of these data must be redefined. An example is the warehouse management unit of measure, which can be different from the base unit of measure discussed in Chapter 2. A material can have a base unit of measure in single units (e.g., one helmet) but be managed in larger quantities (e.g., box of 24 helmets) in the warehouse. Point out that data related to placement and removal strategies indicate priorities and the sequences in which the storage areas, 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 will help students understand this material.

Explain that storage bins are the smallest unit of space in a warehouse; they are the containers in which materials are physically stored. Point out that storage areas can vary in size depending on the size of the materials. Storage bins have unique addresses that identify their location in a warehouse. These addresses are frequently based on a coordinate system.

Figures 7-15 and 7-16 will assist you in explaining storage bin addressing. Explain that a storage 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 specific quantity of materials that have similar characteristics and are stored in a single bin. Point out that 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. When the quantity is reduced to zero, the system automatically deletes the quant. Figure 7-17 will assist you in explaining quants. In addition, Demo 7.5 focuses on storage bins and the materials stored within them.

4. Processes In Warehouse Management

a. Plan Warehouse Movement I. Data II. Tasks III. Outcomes b. Execute Warehouse Movement i.

Data ii.

Tasks iii.

Outcomes c. Confirm Warehouse Movement i.

Data ii.

Tasks iii.

Outcomes d. Warehouse Management in Procurement i.

Plan Warehouse Movement ii.

Execute Warehouse Movement iii.

Confirm Warehouse Movement e. Warehouse Management in Fulfillment i.

Plan Warehouse Movement ii.

Execute Warehouse Movement iii.

Confirm Warehouse Movement f. Warehouse Management in Production g. Warehouse Management in Stock Transfers h. Order of Postings in WM and IM Explain that warehouse management is triggered by a goods movement in another process, such as procurement, fulfillment, production, and inventory management. Point out that a goods movement is an inventory management activity. Emphasize that in most cases, a goods movement in inventory management automatically generates a transfer requirement.

Transfer requirements are used to plan the movement of materials 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 materials are physically moved between interim storage areas and the storage bins, to complete put-away or picking activities. When the activities are completed, then the transfer order is confirmed.

Explain the plan warehouse movement step. Highlight and discuss the triggers, data, tasks, and outcomes. Point out that the ERP system automatically creates a transfer requirement for a goods movement that involves a warehouse-managed storage location. Figure 7-19 will assist you in explaining the elements of the plan warehouse movement step.

Point out that the source of the transfer requirement is included when the requirement is not created manually, which is usually the result of a specific activity in inventory management such as a goods receipt or goods issue. Figure 7-20 will assist you in explaining the data in a

transfer requirement. Point out that the only task in the plan warehouse movement step is to create the transfer requirement. Explain that a posting change notice is a request to change the status of the material, for example, from in quality inspection to unrestricted use. Posting change notices can be created either manually or automatically by the ERP system as a result of a transfer posting in inventory management.

Point out that a transfer requirement can be created manually to facilitate an internal movement of materials from one bin to another within the warehouse. The source of the requirement for warehouse movement is typically a material document, a delivery document, or a production order. Figure 7-21 will assist you in explaining the reference documents for a transfer requirement. The outcome of the of the plan warehouse movement step is either a transfer requirement or a posting change request. There is no financial impact.

Explain the execute warehouse movement step. Highlight and discuss the triggers, data, tasks, and outcomes. Common warehouse movements include picking, putting away, and posting changes. The document that is used to execute these movements is the transfer order, which is generally created by a trigger from a transfer requirement or a posting change notice.

Emphasize that a transfer order can be created directly from delivery and material documents from other processes. A transfer order can be created manually to facilitate internal warehouse transfers. Figure 7-22 will assist you in explaining the elements of the execute warehouse movement step.

Point out that identifying the source and destination bins is necessary to execute a WM transfer. The destination bin is often determined automatically by the ERP system. It can also be provided by the individual who is executing the transfer. Point out that a transfer order consists of a header and one or more line items. The header includes data that are applicable to all line items. Line item data include material number; source storage type, bin, and quant; destination storage type, bin, and quant; target quantities; and actual quantities moved. Point out that a particular material can have more than one line item if the material has to be moved from multiple source bins or to multiple destination bins. Figure 7-23 will assist you in explaining the data in a transfer order. Figure 7-24 will assist you in explaining the structure of a transfer order.

Explain that the key task in the execute warehouse management step is the creation of a transfer order, with or without a reference document. Point out that transfer orders can be created either manually or by the ERP system. When a reference document is not used, the user must provide all of the data that would have been contained in the document. The ERP system can create the TOs automatically, but only when a reference document exists. The ERP system also can be configured to automatically create transfer orders from reference documents that meet certain criteria (e.g., transfer date). The system can be programmed to directly create transfer orders as soon as a material document or an outbound delivery for shipment to a customer is created. Figure 7-25 will assist you in explaining the reference

documents for a transfer order. The outcome of the execute warehouse movement is the creation of the transfer order. When the transfer order is created, the reference document used to generate it is updated to indicate that this step has been completed. The storage bin data for the source and destination bins are updated to note planned movements. There is no financial impact.

Explain the confirm warehouse movement step. Highlight and discuss the triggers, data, tasks, and outcomes. Point out that after the materials have been moved from source bins to destination bins, the confirm warehouse movement step is executed. This step uses the same data concerning the materials from the transfer order in the execute warehouse movement step. Emphasize that confirming the movement involves updating the transfer order to indicate that the movement was completed. The outcome of the confirm warehouse movement step is to record the confirmation of a warehouse movement. The ERP system automatically updates the associated reference documents such as the delivery document, transfer requirement, and posting change notice to reflect the fact that the transfer of materials has been completed. Figure 7-26 will assist you in explaining the confirm warehouse movement step.

Emphasize that warehouse management has a relationship with procurement. This is the case when materials received against a purchase order will be stored in a storage location that uses warehouse management. Figure 7-27 will assist you in explaining the inventory impact with warehouse management in procurement.

Use Figures 7-27 and 7-28 to illustrate the plan warehouse movement step. Point out that the example used in this chapter involves the procurement process and both inventory management and warehouse management processes. You might want to refer back to the San Diego plant layout illustrated in Figure 7-10 and the discussion of storage types regarding the use of storage type 003, receiving, as the interim storage area for goods received. Point out that the interim storage area is the physical link between the procurement and warehouse management processes. When the goods receipt is recorded, financial accounting and material documents are created.

Explain that execute warehouse movement is used when it is time to store materials from the interim storage area into warehouse bins. A transfer order is created to facilitate this movement. The reference document for this order is the transfer requirement created at the time of goods receipt. Point out that no materials have been moved from the interim bins to the warehouse bins. The transfer order indicates the planned (target) quantities and bins.

Explain that the confirm warehouse movement step is executed after the materials have been physically moved from the interim receiving storage area into warehouse bins. Point out that the remaining steps in the procurement process (e.g., invoice receipt and payment) can continue while the WM process steps needed to put away the materials into bins are completed. Emphasize that these steps can continue because they are based on the material

and financial accounting documents that were created at the time of the goods receipt, which is an inventory management activity and is not dependent on warehouse management activities. Figures 7-27 and 7-28 will assist you in explaining the confirm warehouse movement step. Also, refer students to Demo 7.6, procurement process with warehouse movements.

Explain that warehouse management is used in fulfillment when a company fulfills a customer request using materials that are currently stored in a storage location that is warehouse management enabled. Figure 7-29 will assist you in explaining the inventory impact for warehouse management in fulfillment.

Explain the plan warehouse movement step using Figure 7-30. Point out that the example used in this chapter involves the fulfillment process and both inventory management and warehouse management processes. The creation of an outbound delivery for a sales order generates a transfer requirement, which serves as the link between the fulfillment process and the IM and WM processes. A sales order is generated in response to a purchase order. A company then creates an outbound delivery, which triggers the ERP system to automatically generate a transfer requirement to move products from storage bins to the interim (shipping) storage area, for shipment to the customer. Figure 7-29 will assist you in explaining plan warehouse movement in relationship to fulfillment.

Explain that execute warehouse movement is used when it is time to pick materials from the warehouse. At this point a transfer order is generated based on the transfer requirement. The ERP system proposes bins from which to move the materials. Figure 7-29 will assist you in explaining execute warehouse movement.

Explain that confirm warehouse movement is performed after the transfer order is created. At this point the materials are picked from the proposed storage bins and placed in the interim shipping storage area. The transfer order is then updated to indicate the quantity picked and the bins from which they were taken. Refer to Error! Reference source not found.Figure 7-10 and the discussion of storage types for an explanation of the shipping area. Point out that after the transfer order is updated, it is confirmed and saved. The delivery document is updated to reflect the picked quantity of materials. After the materials have been shipped, a goods issue is posted, which generates financial and controlling documents .Emphasize that the financial impact and the recording of the material movement occur in inventory management, not warehouse management. The fulfillment process then continues through the invoice and payment steps. Figure 7-29 will assist you in explaining the confirm warehouse movement step. Direct students to Demo 7.7, the fulfillment process with warehouse movements.

Explain warehouse management in production. Point that production involves both a goods issue (when raw materials and semifinished goods are issued to the production order) and a goods receipt (when finished goods are placed into storage). At the point of goods issue, the warehouse management process steps are similar to those that occur during the fulfillment process. The production order generates a transfer requirement for the materials that are needed for production. A transfer order is created, the materials are moved into an interim storage area, and the TO is confirmed. The accompanying goods issue has all of the financial and material outcomes that were discussed in Chapter 6. Point out that after the production process is completed and confirmed, the finished goods are received into storage. At this point the warehouse management 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. A transfer order is then created, the materials are moved from the interim storage area into bins, and the TO is confirmed.

Meanwhile, the remaining steps in the production process, such as completion and variance calculation, can be executed. Figure 7-31 will assist you in explaining warehouse management in production.

Explain that warehouse management in stock transfers initiate warehouse management activities by stock transfers and transfer postings. Point out that when goods movements involve warehouse-managed locations, transfer requirements are automatically generated by the ERP system. Use Figure 7-32 to explain the five warehouse management scenarios for stock transfers. Also, have students access Demo 7.8 to review internal warehouse transfers.

Explain the order of postings in warehouse management and inventory management.

Emphasize that the order in which inventory management and warehouse management activities are completed can vary from one scenario to another. Point out that goods receipt postings for purchase orders or production orders trigger put-away activity in warehouse management. Delivery documents (for sales orders) and production orders trigger picking activities in warehouse management, which are followed by goods issue postings. Figure 7-34 will assist you in explaining the inventory impact when inventory management activities precedes warehouse management activities (goods issue for a sales order or production order is posted before WM activities are recorded in the ERP system). Point out that warehouse management activities can precede inventory management activities. (Put away in WM occurs before a goods receipt is recorded in IM.) Figure 7-35 will assist you in explaining inventory impact when warehouse management precedes inventory management.

5. Reporting Explain that reporting for warehouse management is similar to the reporting processes that have been discussed in the previous chapters. Emphasize that for warehouse management, reporting options that are available are 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 and Demo 7.9 will assist you in explaining transfer orders. Figure 7-37 will assist you in explaining an inventory status report, which displays inventory at the storage location level. Figure 7-38 displays a warehouse inventory report after a goods receipt against a purchase order was recorded, a process step that automatically generates a transfer requirement. Point out that there are 50 road helmets in the interim receiving storage area (GR Area External Receipts).

Figure 7-39 is the same report as illustrated in Figure 7-38 after a transfer order has been created. Point out 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 putaway” column in the shelf storage area, where they are to be put away.

Figure 7-40 represents the same report as Figure 7-39 after the transfer order has been confirmed. Point out that the status of the helmets in the shelf storage area has been changed from “Stock for putaway” to “Available stock.”

Review questions 1. Identify and discuss the key organizational levels relevant to inventory management and warehouse management. a. Storage location. The key organizational level associated with inventory management.

Storage locations are associated with plants, which in turn are associated with company codes. b. Warehouse. The key organizational level in warehouse management. A warehouse is associated with one or more combinations of plant and storage location.

The association between storage locations and a warehouse provides the linkage between IM processes and WM processes. When linking warehouses 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.

2. Discuss the key master data relevant to warehouse management.

The key master data in warehouse management are material master and storage bins. a. Material master. 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. Master data are typically defined for specific organizational levels. The organizational levels relevant to the warehouse management view of master data are warehouse, plant, and storage type. Three types of data are relevant to the warehouse management view: basic data, data used in defining stock placement and removal strategies, and data regarding the storage bins where the materials will be stored. b. 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 floor 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.

3. Define the four types of goods movements in IM, and provide an example of each type.

a. Goods receipt. Goods receipt is a movement of materials into inventory; it results in an increase in inventory. Typically raw materials and trading goods are received from a vendor as part of the procurement process, and finished goods are received from the shop floor after the production process has manufactured them.

b. Goods issue. Goods issue is a movement of materials out of inventory; it therefore results in a decrease in inventory. In the fulfillment process, a goods issue indicates a shipment of finished goods or trading goods to a customer against a sales order. In the production process, a goods issue reflects the issuing of raw materials or semifinished goods to a production order.

c. Stock transfer. Stock transfers are used to move materials from one organization level or location to another within the same enterprise in a simple way. Material can be moved between storage locations within one plant, between plants in one company code, or between plants in different company codes.

d. Transfer posting. 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 (e.g., changing the material number of a material), but they always result in a change to the status or type of goods.

4. Explain the material and financial accounting impacts of goods movements in IM. a.

Goods receipt. Both material and financial accounting documents might have to be created.

b.

Goods issue. Appropriate material, FI, and CO documents are created.

c. Stock transfer. Both material and financial accounting documents might need to be created.

d. Transfer posting. Material document is created. However, whether there is a financial accounting impact depends on the organizational levels involved in the goods movement.

▪

Storage location-to-storage location transfer. 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 observation applies only if all quantities of the same materials are valued in the same way. When materials are valued differently, the transfer has a financial accounting impact, and an FI document is created.

▪

Plant-to-plant transfer. Because materials are valued at the plant level, a plantto-plant transfer represents a change in the value of the materials.

Consequently, there is an FI impact, and an FI document is created.

▪

Company code-to-company code transfer. In this scenario, two FI documents are created – one for each company code.

5. Analyze the differences between one-step and two-step stock transfers.

a. Number of steps.

The one-step procedure executes both tasks — issue and receipt — as a single step. In the two-step procedure they are completed in separate steps. b. Number of material documents created.

In a one-step stock transfer only one material document is created. In a two-step stock transfer two material documents are created. c. Value of the material.

The value of the material at the receiving plant is the same as that of the supplying plant in the case of one-step stock transfer, but it might not be the same in a two-step transfer. d. Stock status.

In a one-step transfer, the stock of the issuing plant is reduced, and the stock of receiving plant increases. In the two-step transfer, the materials are placed in the “intransit” stock status at the receiving location because they do not arrive immediately at the destination 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 status). e. Usage.

When the two locations are physically close to each other and there is no significant time lag between issue and receipt, the one-step procedure is more appropriate to use.

In contrast, if locations are not physically close to each other and the time lag between issue and receipt is significant, the two-step procedure is more appropriate. The twostep movement also might be required if the same individual does not have authorization to make changes at both locations.

6. Identify several possible scenarios for stock transfers, and explain the key differences between these scenarios.

a. 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.

Examples: 1. Materials received from a vendor or from production are initially stored in a temporary staging area and are subsequently moved to a more permanent location at a later date.

2. All materials received from a vendor must be inspected for quality before being placed

in their permanent locations.

b. Plant-to-plant transfer. A movement of materials between two plants within the same company code is called a plant-to-plant transfer.

c. 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.

7. What is a stock transport order used for? What are the advantages of using an STO? A STO is a transaction document that is used to acquire materials internally, from another plant within the enterprise. It is similar to a purchase order, which is used to acquire materials externally from a vendor.

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 quality inspection and blocked stock.

- Goods received can be posted to consumption accounts rather than material accounts.

8. Explain the differences between using stock transport orders without delivery, with delivery, and with delivery and billing. a. One-step and two-step procedures.

Only the two-step procedure is possible for STOs without delivery. However, both one-step and two-step procedures can be utilized for STOs with delivery and with delivery and billing. b. Price.

In contrast to the other two scenarios, in STOs with delivery and billing a purchase price is included in the STO based on pricing conditions and info records. c. Stock mode.

For STOs with delivery and billing, the materials are classified as in-transit CC at the receiving plant until they are actually received. At that time the status is changed to unrestricted. For the other two scenarios the materials are classified as in transit and then subsequently changed to unrestricted.

d. Valuation.

For STO with delivery and billing, valuation is based on the purchase price in the STO. For STO with and without delivery, valuation is based on the valuation price of the sending plant. e. Billing step at the sending plant and invoice verification step at the receiving plant are involved in STOs with delivery and billing.. They do not exist for the other two scenarios.

f.

Delivery step is included for both STO with delivery and STO with delivery and billing.

There is obviously no delivery step for STO without delivery.

9. Describe the steps in the warehouse management process in terms of triggers, tasks, data, and outcomes.

There are three steps in the warehouse management process: plan, execute, and confirm warehouse movement. The data are the same for all three steps. However, the triggers, tasks, and outcomes vary, as described below. a. Plan warehouse movement Triggers – either an activity in inventory management or a need to transfer materials within a warehouse.

Tasks – create a transfer requirement, create a posting change notice Data – organizational data, master data, user input Outcomes – transfer requirement, posting change notice b. Execute warehouse movement

Triggers – transfer requirement, delivery document, or an internal (within the warehouse) need Tasks – create transfer order Data - organizational data, master data, user input Outcomes – transfer order, update transfer requirements

c. Confirm warehouse movement

Triggers – completed transfer of materials Tasks – update transfer order Data – organizational data, master data, user input Outcomes – updated transfer order, updated source documents

10. Explain the role of the warehouse management process as it relates to (1) the procurement process, (2) the fulfillment process, and (3) the production process.

a. The procurement process. When the goods received from a vendor in the procurement process are received into a storage location that is warehouse managed, then WM steps must be completed to put away the materials into storage bins. The materials received are placed in the interim receiving storage area, which is a physical link between the procurement and the warehouse management processes. The ERP system automatically generates a transfer requirement. The transfer requirement is triggered by IM activity involving a WM-enabled storage location. It serves as the information link between the procurement process and the warehouse management process. When materials need to be moved from the interim storage area into warehouse bins, a transfer order is created to facilitate this movement. When the order is generated, the ERP system proposes destination bin numbers into which the employees can place the materials. The transfer order will indicate the planned (target) quantities and bins. 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. Warehouse inventory is always equal to storage location inventory. b. The fulfillment process. The creation of an outbound delivery for a sales order triggers the WM activities. When a sales order is generated, an outbound delivery is created. To pick materials from the warehouse, a transfer order needs to be created. No physical movement has yet taken place. After the TO is created, the materials are picked from the proposed storage bins and placed in the interim (shipping) storage area. The TO is then updated to indicate the quantity picked and the bins from which they were taken. As in the case of procurement, the interim storage area is the physical link between the fulfillment and WM processes. At this point, a physical movement of materials has occurred. After the transfer order is updated, it is confirmed and saved. At this point the reference document that triggered the warehouse movement is updated to indicate the quantity of materials moved. c. The production process. 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 confirmed. After the production process is completed and confirmed, the finished goods are received into storage. The materials are physically placed in an interim storage area. A transfer order is then created, the materials are moved from the interim storage area into bins, and the TO is confirmed.

11. Explain the relationship between storage location inventory and bin inventory.

Warehouse inventory is the sum of the inventory in the interim storage areas and the warehouse bins. Warehouse inventory is always equal to storage location 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.

The typical order of postings in procurement and in the goods receipt part of production is goods receipt followed by WM steps. In fulfillment and the goods issue part of production, the typical order is WM steps followed by the goods issue.

In the case of a goods receipt, the quantity of materials in both the storage location and the interim bins is increased. When the WM steps are completed and the materials are put away, the quantity of inventory in the interim bins is reduced, and the quantity in the permanent bins is increased. In the case of a goods issue, the WM steps completed first cause the quantity in permanent bins to be decreased and the quantity in the interim bins to be increased. Then, when the goods issue is posted, the quantity in both the interim bins and storage location is reduced. At all times, the total quantity in storage location is equal to the total quantity in warehouse bins (interim plus permanent).

Occasionally, the order of postings is reversed. For example, materials from the production floor are placed directly into permanent bins, and the goods receipt is posted later. Or, when a shipment must be sent to a customer urgently, the materials are removed from the permanent bins and shipped (goods issue), and the WM steps are recorded later. In both cases, negative quantities in the interim bins are posted to ensure that the total quantity in the storage location and warehouse are equal.

13. Identify the key reports available in warehouse management and the significant information found in these reports.

The storage location inventory report displays inventory at the storage location level.

The bin status report displays a list of bins that contain materials. Double-clicking on a bin produces a drilldown report that conveys details of the materials.

Another key report in warehouse management is a report indicating a list of transfer orders.

Finally, the stock overview indicates the current warehouse stock inventory level. The quantities displayed in the report will change to reflect any goods movements, such as goods issue, goods receipt, and transfer orders.

Chapter 8: Material Planning Process Learning Objectives 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 material planning process.

5. Extract and evaluate meaningful information about the material planning process using the SAP ERP system.

Explain that material planning at GBI has been very informal. Planning for various types of materials has not been integrated with other processes. Instead, materials are acquired as needed. Consequently, GBI often has either insufficient or excess materials in stock. In order to become more cost effective and to improve customer satisfaction, the company is planning to implement an effective 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. Point out that the main objective of material planning is to balance the demand for materials with the supply so that an appropriate quantity of materials is available when they are needed.

Explain that all most all processes either use materials or make them available when they are needed. Provide examples that you are familiar with. Point out that material planning uses data from many other processes and generates procurement proposals for acquiring materials (purchase requisitions) and producing materials (planned orders). Refer the students back to Chapters 4 (Procurement) and 6 (Production). This chapter discusses the material planning process from both a strategic and operational component. Figure 8-1 will assist you in explaining the basic material planning process.

Chapter Outline and Teaching Suggestions 1. Master Data a. Material Master i. Procurement Type ii. MRP Type iii. Lot Size Key iv. Scheduling Times v. Planning Time Fence

vi. BOM Selection Method vii. Availability Check Group viii. Strategy Group ix. Consumption Mode b. Product Groups Explain that the master data that are relevant to material planning are bill of materials, product routing, and product group. Refer students back to Chapter 6 for a refresher on bill of materials and product routing. Point out that materials are used in nearly all processes and that the material master data are grouped by process, material type, and organizational level.

This chapter will focus in depth on the material master MRP views, work scheduling view, and product groups as they are relevant to material planning.

Emphasize that MRP data can be quite extensive. MRP data are divided into four views or tabs: MRP 1, MRP 2, MRP 3, and MRP 4. MRP and work scheduling data are defined at the plant level and are specific to each plant. Emphasize that these data determine which strategies and techniques a company will use when planning for a material. Explain that each MRP view provides a specific set of data, as outlined below.

• The MRP 1 view defines the overall planning strategy used for the material, and it determines how much material the company should procure.

• The MRP 2 view determines how the material is to be procured, identifies the times the system can use for scheduling, and conveys data that the system uses to determine how to procure the materials (make vs. buy).

• The MRP 3 view identifies the strategy the system will use to calculate 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. Explain that the work scheduling view contains data about various times that determine production time such as setup, teardown, and processing time.

Explain that procurement type indicates whether a material is produced in house (via the production process), obtained externally (via the procurement process), both, or none. Trading goods and raw materials are typically obtained externally. In contrast, finished goods and semifinished goods are typically produced in house. Point out that the procurement type can be set to none for discontinued materials and set to both for materials that a company normally produces in house but does not have the resources to produce at the current time.

Explain that MRP type specifies the production control technique used in planning. Point out that common control techniques are consumption-based planning, material requirement planning (MRP), and master production schedule (MPS). Explain that consumption-based planning calculates the requirements for a material based on historical consumption data and manipulates these data to project or forecast future consumption. Point out that safety stock

is the minimum desired level of inventory and is specified in the material master. Emphasize that one type of consumption-based planning is reorder point planning, in which a company plans to receive a supply of materials by the time the inventory reaches the safety stock level.

Point out that the time gap between placing an order — the reorder date — and receiving the materials is called the replenishment lead time. Point out that the reorder point is the stock level at which materials need to be ordered.

Explain that 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. Explain that time-phased planning is similar to forecast-based planning and is used in cases where vendors deliver only on specific days of the week. Figures 8-3 and 8-4 will assist you in explaining consumption-based planning and reorder point planning, respectively.

Explain that the terms dependent and independent refer to the source of the requirements.

Independent requirement are based on customer demand for finished goods and are not dependent on any other materials. In contrast, dependent requirements are associated with semifinished goods and raw materials because they have a dependency on other materials.

Point out that the MRP technique is used to calculate and plan requirements for materials at all levels of the BOM. This procedure is known as exploding the BOM. Figure 8-5 will assist you in explaining this procedure. Point out that the input to MRP is the independent requirement for the finished goods, which is calculated by the sales and operations planning step of the material planning process. Independent requirements are based on both actual and forecasted sales. These calculated requirements are called planned independent requirements (PIRs). Actual sales orders are also know as customer independent requirements (CIRs), or simply customer requirements. Explain that master production scheduling (MPS) utilizes a process similar to MRP but focuses exclusively on the requirements for the top-level items in the BOM. Companies use MPS for the most critical finished goods to ensure that resources and capacity are available for these materials before they plan for other materials.

Explain that a lot size is the quantity of material that is specified in the procurement proposals generated by the material planning process. Static lot-sizing procedures specify a fixed quantity based on either a predetermined value (fixed lot size) or the exact quantity required (lot-for-lot). 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 ordering and storing materials using techniques such as the economic order quantity and economic production quantity calculations.

Explain that scheduling times are utilized by the material planning process to estimate the time needed to procure required materials. Point out that 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 are in-house production time,

planned delivery time, and goods receipt processing time. In-house production time is further divided into setup time, processing time, and interoperation time. Times can also be lot size independent or 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 interoperation times.

Define the planning time fence as a period of time in which the planning process is not allowed to change procurement proposals. Any necessary changes must be implemented manually.

When a material has more than one BOM, then the BOM selection method in the material master identifies the criteria the system should use to select the BOM. Examples of these criteria are lot size and validity date.

Explain that the availability check group is used by processes such as fulfillment and production to ensure that materials are available on a specific date. The most common method, available-to-promise (ATP), considers a broad range of elements representing both the supply and demands for the material. Supply elements include existing inventory, purchase requisitions, purchase orders, and production orders. Demand elements include material reservations, safety stock, and sales orders.

Explain that strategy group specifies the high-level planning strategy that is to be used in production. Three basic production planning strategies are make-to-stock, make-to-order, and assemble-to-order. Remind the students that make-to-stock and make-to-order were discussed in Chapter 6. In the make-to-stock strategy, customer orders are fulfilled from an existing inventory of finished goods. This strategy reduces the time required to fill customer orders because there is no need to wait until the materials are produced. It also enables the company to produce goods at a constant rate and in optimum lot sizes, regardless of customer demand. In a make-to-order strategy, the production of the finished goods and any needed semifinished goods is triggered by a sales order. The company does not maintain an inventory of these materials. MTO is also referred to as sales-order-based production. In the assembleto-order strategy, by contrast, the inventory of components (semifinished goods) needed to make the finished goods is procured or produced to stock. The production of the finished 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 configurations of end items.

Explain that consumption mode is the manner in which CIRs consume PIRs. Two commonly used consumption modes are forward consumption and backward consumption. A combination of forward and backward consumption is also possible. Point out that PIRs are created in anticipation of customer orders, and CIRs are expected to consume the PIRs. When a CIR consumes PIRs, it reduces the quantity of PIRs by the quantity of the CIR. This process is called consumption. Point out that 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. Figure 8-6 will assist you in explaining consumption modes.

Also, you can assign Demo 8.1, which deals with the MRP and scheduling views for a material.

Explain that product groups consist of products with similar planning characteristics, such as similar types or manufacturing processes. A product group is often referred to as a product family. Point out that the grouping of products, from the lowest material (finished good or trading good) level to the highest product group level, is called aggregation. Emphasize that products are aggregated into groups. 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 consists of materials, either finished goods or trading goods. Figures 8-7 and 8-8 and Demo 8.2 will assist you in explaining product groups.

2. Process a. Sales and Operations Planning i. Data ii. Tasks iii. Outcomes b. Disaggregation i. Data ii. Tasks iii. Outcomes c. Demand Management i. Data ii. Tasks iii. Outcomes iv. d. Materials Requirements Planning i. Data ii. Tasks i. Outcomes

Explain that the first step in the material planning process is often called sales and operations planning (SOP). Point out that 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 finished goods. In essence, the operation plan is the production plan for materials. Point out that the plan generated is a rough-cut plan because the planning is usually at a highly aggregated level and is not very precise. Emphasize that the SOP creates a production plan at the product group level and that these requirements must be transferred or translated into PIRs for the individual materials in the product group. This task is accomplished in the disaggregation step. Point out that the PIRs for the individual materials

are then transferred to demand management, where they are revised and refined based on the specific planning strategies that were previously discussed. Emphasize that in the final step, MRP creates specific procurement proposals to ensure that sufficient materials will be available to cover each requirement. Explain that the sales and operation step requires input from many parts of an organization and is often performed by the planning or forecasting group.

After the production plan is transferred to demand management, it becomes the responsibility of the MRP controller. The MRP controller is the person or persons in an organization responsible for creating procurement proposals and monitoring material availability. All materials that are used in the planning process must be assigned to an MRP controller in the material master. Figure 8-9 will assist you in explaining the material planning process.

Identify the elements of the sales and operations planning step. Highlight and discuss the triggers, data, tasks, and outcomes. Explain that the SOP step is triggered when the organization wishes to revise its production plan. It can also be catalyzed by unexpected events such as changes in the overall economic outlook. Emphasize that SOP uses data from a variety of sources to produce a production plan that identifies the PIR quantities and specifies the dates when they are needed. Sales and operations planning can generate several versions of the a production plan based on different assumptions concerning the growth of the overall economy. Each plan incorporates different sales forecasts and desired inventory levels. Point out that SOP can be either standard or flexible. With standard planning a company uses predefined planning models. In contrast, with flexible planning a company uses tools to develop more complex planning models that contain far greater levels of detail. Highlight and discuss the triggers, data, tasks, and outcomes. Figure 8-10 will assist you in explaining the elements of the sales operations planning steps.

Explain that the most critical data utilized in the sales and operation step are a sales plan, existing inventory levels, and inventory requirements. Point out that existing inventory levels can be transferred from inventory and warehouse management. Emphasize that organizations execute planning for specific organizational levels and master data, such as specific product groups and specific plants. Figure 8-11 will assist you in explaining data in the sales and operations step.

Explain that the tasks in the sales and operations planning step include generating the sales plan, specifying inventory requirements, and creating a production plan. A planning table is the interface that is used to complete the tasks. It contains a header area that indicates the product group, the plant for which the plan is generated, and the version number of the plan.

It also contains columns that represent months by default, although users can specify other time periods. Figure 8-12 will assist you in explaining the standard sales and operations planning table. Be sure to cover both the header area and each item contained in the columns and rows. Emphasize that the data for sales and operations plan can come from a variety of sources such as profitability analysis, sales information system, historical data, forecast data,

and a sales plan copied from another product group. Point out that after the sales and operations plan is created, a production plan is generated based on options such synchronous to sales, target stock level, target day's supply, and stock level = 0. Figure 8-13 will assist you in explaining GBI sales and operations plans. Also, Demo 8.3 will walk students through the process of creating an SOP for the bicycles product group.

Explain that in the disaggregation step the production plan is translated into plans for the finished goods in the product hierarchy. Organizational data and master data from the production plan are used to calculate requirements for the materials in the product group.

Point out that these requirements are then transferred to the demand management step for further planning. Highlight and discuss the triggers, data, tasks, and outcomes. Figure 8-14 will assist you in explaining the elements of the disaggregation step. Explain that the data used in the disaggregation step include product group data, the production plan from SOP, and user input. The system uses the proportion factors from the product group to compute the disaggregated values for each member of the product group. Figure 8-15 will assist you in explaining the data required in the disaggregation step. Explain that the essential task in the disaggregation step is to translate the plans generated in the sales and operations for product groups into plans for material contained in those groups. Point out that disaggregation can be completed for the entire product group hierarchy or for one or more levels of the hierarchy.

The production plan or the sales plan can be disaggregated. Identify the options available to companies at the disaggregation step. Figure 8-16 will assist you in explaining disaggregation at GBI. Explain that the outcome for the disaggregation step is to calculate the PIRs for each planning period (e.g., week or month). These requirements are then transferred to demand management. Emphasize that no FI, CO, or material documents are created because disaggregation has no financial consequences and does not involve any material movements.

Figure 8-17 will assist you in explaining the transfer of PIRs to demand management. Demo 8.4 provides a review of the entire disaggregation step.

Explain that the demand management step is used to calculate revised PIRs for the materials using the PIRs for the sales and operations plan (after disaggregation), actual customer orders (CIRs) from the fulfillment process, and data from the material master regarding planning strategies. Highlight and discuss the triggers, data, tasks, and outcomes. Figure 8-18 will assist you in explaining the elements of the demand management step. Explain that the data used in the demand management step are taken from the sales and operations plan (PIRs) and the fulfillment process (CIRs). The planning strategy defined by the strategy group in the material master is also used. Figure 8-19 will assist you in explaining data in the demand management step. Explain that the primary task in demand management is to create revised PIRS for materials. Point out that the particular procedure a company uses to calculate these requirements depends on the production planning strategy defined by the strategy group in the material master. Remind the students that the production planning strategy determines 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. Point out that 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. Explain that the outcomes of the demand management step are PIRs for each material included in planning, which represent requirements for the materials for specific quantities and specific dates. There are no financial implications and no material movements associated with demand management; consequently, no FI, CO, or material documents are created.

Explain that the final step in the materials requirements planning process is the MRP step, 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 sufficient material available to cover its requirements. Point out that MRP generates plans for materials as well as for the components and raw materials that are used to produce a material. MRP plans for all levels of the BOM. Emphasize that a variety of activities can affect material availability in different processes such as: • Procurement: purchase requisitions, purchase orders, and goods receipts • Fulfillment: sales orders, deliveries, and goods issues • Production: planned orders, production orders, material reservations, and goods receipts and issues.

Point out that the above activities are called MRP elements and are used in the MRP steps to calculate net requirements and to generate procurement proposals. Emphasize that net requirements utilize all of the relevant MRP elements to calculate the quantities in the procurement proposals. Point out that MRP steps can be executed manually; however, most companies configure their ERP systems to periodically execute the MRP step automatically due to constant changes to ERP by other processes. Point out that the MRP controller is typically responsible for monitoring the results of the planning process via a variety of reports, which are discussed in the reporting section. Emphasize that MRP can be executed for one plant, for multiple plants, or within MRP areas. An MRP area can include an entire plant or specific storage locations within a plant. Figure 8-20 will assist you in explaining the elements of the MRP step. Explain that the data used in the MRP step include material master, material BOM and – optionally—the routing. Material BOMs are used to determine dependent requirements. Point out that MRP uses the scheduling times in the material master to perform scheduling and to determine the order start date and the order finish date. If more detailed scheduling that includes operations-level data is required, then MRP uses scheduling data in the product routing. Figure 8-21 will assist you in explaining the data in the MRP step.

Explain that the tasks in material requirements planning that are performed automatically by MRP are check planning file, calculate net requirements, calculate lot size, scheduling, determine procurement proposal, and determine dependent requirements. Explain that in the check planning file task, any change to an MRP- relevant material generates an entry in the planning file. Point out that the materials in the planning file are coded so that finished goods are planned first, followed by components in the BOM for the finished goods, and so forth.

Individual raw materials at the bottom of a BOM hierarchy are planned last. Explain that the purpose of the calculate net requirements task is to determine whether a shortage of materials exists. If more materials are needed, then the system generates procurement proposals to meet the shortfall. If the MRP type is consumption-based planning, then the net requirements calculation determines the available stock according to the formula: Available stock = Plant stock + Receipts. Point out that for consumption-based planning, neither independent nor dependent requirements are relevant for these materials. Explain that 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 sufficient material exists to meet the requirement. The formula used in this situation is: Available stock = Plant stock - Safety stock + Receipts - Issues..

In the determine lot size task, if a procurement proposal is required, the ERP system uses the lot size procedure to determine how much material to procure. Explain that in the scheduling task, the purpose is to perform scheduling to determine whether the material can be acquired by the required date. MRP can employ two types of scheduling: backward scheduling and forward scheduling. Point out that the ERP system initially uses backward scheduling and employs forward scheduling only if backward scheduling is unsuccessful. Point out that 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 purchasing department processing time, planned delivery time, and goods receipt times are used.

Emphasize that MRP will schedule all procurement proposals until it has scheduled the raw materials at the lowest level of the BOM. If the resulting schedule in not acceptable, then the MRP controller can manually adjust the schedule. Figure 8-23 will assist you in explaining backward scheduling.

Explain that the determine procurement proposal task is used to determine the type of procurement proposal to generate. For materials with the procurement type of internal, MRP always generates planned orders. These orders must be converted to production orders by the MRP controller. This action triggers the production process. For procuring materials externally, there are three options. Which option is selected depends on the parameters defined in the MRP step. The first 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. Point out that when the system generates a planned order, 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 variation 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. Point out that the third option is to create schedule lines.

This option is relevant if the organization uses scheduling agreements. Remind the students

that scheduling agreements are a type of contract in which the vendor agrees to deliver materials according to a specific schedule. Emphasize that when deliveries follow predetermined schedules, the MRP controller cannot reschedule them. Figure 8-24 will assist you in explaining procurement proposals.

Explain that in the dependent requirement determination step, 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 by calculating requirements for successive levels of the BOM. Point out that if the company elects to use a 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. Emphasize that if any of components that have dependent requirements are assemblies, 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. Figure 8-25 will assist you in explaining BOM explosion.

Explain that control parameters determine how the steps in the MRP procedure are completed. The processing key is a control parameter that determines how the materials in the planning file are processed. The three processing keys are regenerative planning (NEUPL), net change planning (NETCH), and net change planning in the planning horizon (NETPL).

Identify the control parameters that determine the output of the MRP procedure: creation of purchase requisitions, schedule lines, create MRP list, planning mode, and scheduling. Figure 8-26 illustrates the BOM for GBI off-road bikes. Figure 8-22 displays the MRP procedure steps mentioned above. Explain that 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. The MRP step has no financial implications or movement of goods. Therefore no FI, CO, or material documents are created. You can use Demo 8.5 to review MRP.

3. Reporting Explain that the reporting options in material planning are not as extensive as those previously discussed with other processes or functions. For example, there are no work lists.

Three very important tools that are used to provide information about the material planning situation are stock/requirements list, MRP list, and planning result report.

Emphasize that the stock/requirements list is the most important reporting tool in material planning. The MRP controller can use this report to determine whether any actions need to be taken. The stock/requirements list displays MRP elements such as planned independent requirements (IndReq), planned orders (PldOrd), and customer requirements (CusOrd). In addition, it provides information such as existing stock level, safety stock, planning time fence, and exception messages. MRP generates exception messages when it encounters an issue

such as a scheduling problem that it cannot resolve. The MRP controller is responsible for managing exception messages. Figure 8-27 will assist in explaining the stock/requirements list. Figure 8-28 illustrates a stock/requirements list that has details for a planned order and exception messages. Explain that a report that can be obtained from the stock/requirement list is the order report, which highlights the components required for sales orders, planned orders, and production orders. Point out that the order report within the stock/requirements list indicates the date when the materials are required, the quantity required, and whether sufficient materials are available to fill the order. Emphasize that lightning bolt symbols to the left of the material numbers indicate that there is a problem with availability, and the error messages on the right side explain that sufficient quantities of the materials are not available.

Inform students that double-clicking on a material line in the order report retrieves the stock/requirements list for the material. The MRP controller can use the order report to investigate and resolve availability problems. Figure 8-29 will assist you in explaining the order report within the stock requirements list. Explain that the stock statistics report can be accessed within the stock/requirements list. In contrast to the order report, the stock statistics report presents details of the inventory of the material as well as planned issues and receipts.

The top of the report 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). Point out that fixed issues and receipts are those within the planning time fence, whereas the planned receipts and issues are outside the planning time fence. Figure 8-30 will assist you in explaining the stock statistics report.

Similarly, Demo 8.6 will assist you in reviewing the stock/requirements list. The MRP list is similar to the stock/requirements list; however, it displays static data as of the time the MRP step was executed. Emphasize that a comparison of the MRP list and stock/requirements list highlights changes to MRP elements that have occurred since MRP was executed. Figure 8-31 will assist you in comparing the stock/requirements list and the MRP list. Demo 8.7 provides a review of the MRP list.

Finally, the planning result report shows the results of MRP. This report aggregates quantities for MRP elements to make it easier to view the overall picture. Point out that individual MRP elements can be accessed and managed from this report similar to the stock/requirements list.

Emphasize that the planning result report can be generated for both individual materials and product groups. Figure 8-32 and Demo 8.8 will assist you in explaining the planning result report.

Review questions 1. What is the main objective of material planning? What are the basic questions addressed by material planning?

The main objective of material planning is to balance the demand for materials with the supply so that an appropriate quantity of materials is available when they are needed.

The basic questions material planning is concerned with are: (1) What materials are required, (2) how many are required, and (3) when are they required.

2. List and describe the steps in the material planning process.

The process begins with sales and operations planning (SOP), which uses strategic revenue and sales objectives established by senior management to create specific 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 final procurement proposals for all materials. In turn, these proposals trigger the production or procurement processes that make or buy the needed materials. Ultimately the company uses these materials to execute the fulfillment process.

3. Which master data are relevant for material planning?

The master data relevant to material planning are bill of materials, product routing, material master, and product group.

4. Define and explain the relevance to material planning of the following data in the material master: a. 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 (via the production process), obtained externally (via the procurement process), both, or none.

b. MRP type MRP type specifies the production control technique used in planning. Common production control techniques are consumption-based planning, materials requirement planning (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. c. Lot size key A lot size is the quantity of material that is specified in the procurement proposals generated by the material planning process. The lot size key specifies the procedure that is used to determine the lot size. d. 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. e. Planning time fence The material planning process often has to adjust the quantities and schedules it creates for procurement proposals. The planning time fence is the time during which the planning process is not allowed to change procurement proposals. f.

BOM selection method 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 identifies the criteria the system should use to select the BOM.

g. Availability check group The availability check group defines the strategy the system uses to determine whether a quantity of material will be available on a specific date. The availability check group also informs the system which supply and demand elements to take into account when determining availability. h. Strategy group The strategy group specifies the high-level planning strategy to be used in production.

Production planning strategies fall into three broad categories: make-to-stock, make-toorder, and assemble-to-order. i.

Consumption mode The manner in which CIRs consume PIRs is determined by the consumption mode. Two commonly used consumption modes are forward consumption and backward consumption.

5. Define and distinguish between consumption-based planning and materials requirements planning.

Material requirements planning is based on future sales quantities that exist in the form of planned independent requirements, sales orders, and so on. You can use the material forecast to plan the total requirements or you can use it as an aid for calculating unplanned additional requirements or the safety stock. For materials that are produced in house, the system calculates dependent requirements for assemblies and components during the BOM explosion using the requirements for the finished product. MRP is usually used for planning finished products and important assemblies and components.

Consumption-based planning includes simple and easy-to-use procedures for materials planning that are used to achieve planned targets with relatively little effort. In consumption-based procedures, historical data are used as a starting point for planning. Future requirements are forecast using the information from these past consumption values. This planning procedure is mainly used in areas with no in-house production.

MRP tends to be more complicated planning compared with the consumption-based planning.

Consumption-based planning assumes that future consumption will follow the same patterns as past consumption. In contrast to consumption-based planning, the MRP technique calculates requirements for a material based on its dependence on other materials. For example, the need for wheels depends on the need to produce bicycles. In this case, consumption-based planning is not appropriate, MRP is. 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 significance, such as nuts and bolts.

MRP is commonly used in a production environment.

6. Explain how reorder point planning works.

Reorder point planning is used in consumption-based planning. The plan requires that the company receive a supply of materials by the time the inventory level reaches the safety stock level. 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 figure — and receiving the materials is called the replenishment lead time. The system uses past consumption data (historical data) to forecast future requirements. The system then uses these forecast values to calculate the reorder point and the safety stock level, taking the material’s replenishment lead time into account. When the stock level drops to the reorder point, then the company places an order for more materials.

7. Explain the differences between: a. Dependent requirements 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 requirements for wheel assemblies and seats are therefore dependent on the requirement for bicycles. Therefore, wheel assemblies and seats have a dependent requirement. In contrast, the requirement for bicycles, a finished good, is not dependent on any other material. Instead, it is based on customer demand. Thus, bicycles, and finished goods in general, have independent requirements. b. Planned independent requirements (PIRs) and customer requirements (CIRs).

Planned independent requirements are planned production or sales quantities that are based on actual and forecasted sales. These numbers are used in MRP to calculate procurement and/or production quantities for a material. In contrast, customer requirements represent the sales orders in the system.

8. Explain the common time estimates included in the material master.

Common time estimates include: a. In-house production time, which is the time needed to produce the material in house. b. Planned delivery time, which is the time needed to obtain the material if it is externally procured. c. 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 determine procurement time for internally procured materials. For externally procured materials, the planned delivery time and the GR processing time are used.

9. Identify and discuss the different types of in-house production times defined in the material master.

In-house production time is divided into three time elements: setup, processing, and interoperation. a. Setup time is the time required to set up the work centers used in production. b. Processing time is the time required to process materials in production. c. Interoperation time is the time required to move materials from one work center to another.

10. Compare and contrast the three production planning strategies discussed in this chapter.

Production planning strategies fall into three broad categories: make-to-stock, make-to-order, and assemble-to-order.

In the make-to-stock (MTS) strategy, customer orders are fulfilled from an existing inventory of finished goods. This strategy reduces the time required to fill 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 contrast to MTS, in a make-to-order (MTO) strategy the production of the finished goods and any needed semifinished goods is triggered by a sales order. The company does not maintain an inventory of these materials.

A variation of the MTO strategy is assemble-to-order (ATO), in which an inventory of components (semifinished goods) needed to make the finished good is procured or produced to stock. The production of the finished goods is triggered by a sales order and therefore uses an MTO strategy.

11. Explain, with an example, the process by which CIRs consume PIRs.

Consumption is relevant only when the company is using a planning strategy that considers both PIRs and CIRs (e.g., planning with final assembly). In such cases, procurement proposals take into account both PIRs and CIRs. Sales orders (CIRs) are expected to be filled from planned requirements (CIRs). Thus, CIRs consume PIRs. However, the proposals are not created by simply adding the PIR and CIR quantities. Rather, proposals are created in anticipation of CIRs consuming PIRs. Thus, if CIRs exceed PIRs, then proposals are created for the CIR quantity. In contrast, if PIRs exceed CIRs, then they are expected to consume the available PIRs, and proposals are created only for the original PIR quantity.

Example: 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 procurement proposal for the CIR of 60 units.

12. What are product groups? What is the role of product groups in material planning?

Companies generally place products with similar planning characteristics, such as similar types or similar manufacturing processes, into a product group or a product family. Materials and product groups can be members of more than one group for different planning scenarios. We can plan product groups as part of a planning hierarchy (in SOP or flexible planning).

13. Define and compare/contrast aggregation and disaggregation.

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 finished goods in the product group hierarchy. This process step is called disaggregation. Disaggregation is triggered when a new production plan is created.

The grouping of products, from the lowest material (finished good or trading good) level to the highest product group level, is called aggregation. That is, products are aggregated into groups.

Going further, 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 consists of materials, either finished goods or trading goods.

One difference between aggregated and disaggregated data is the level of planning. For aggregated data, the planning data will be generated at a more summarized level, whereas in disaggregation, the planning data will be displayed at a detailed level.

14. What is the role of the MRP controller in material planning?

The MRP controller is typically responsible for monitoring material availability and ensuring that adequate procurement proposals are created. He or she monitors the results of the planning processes using variety of reports and takes action as needed. 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.

15. Briefly describe the steps in the material planning process in terms of the triggers, data, tasks, and outcomes.

The material planning process has three major stages: SOP, demand management, and MRP. The MRP will generate the final procurement proposals, which is the outcome of the material planning process. These proposals then trigger the production or procurement processes that make or buy the needed materials.

Triggers, data, tasks and outcomes can be best summarized based on the three stages of the material planning process: a. SOP Triggers – periodic planning need, events affecting demand Data – organizational data, master data, transaction data, user input, sales plan Tasks – create/import sales plan, generate production plan, evaluate feasibility Outcomes – operations plan (production plan) b. Demand management Triggers – changes in PIRs (from SOP after disaggregation) Data – organizational data, master data, transaction data, user input, PIRs, CIRs Tasks – create revised PIRs Outcomes – revised PIRs c. MRP Triggers – changes to MRP elements Data – master data, MRP elements, user input Tasks – calculate net requirements, monitor exceptions, adjust schedules Outcomes – purchase requisitions, planned orders, dependent requirements

16. Explain the functions and components of a planning table. Discuss the different methods of generating a production plan with a planning table.

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 called the 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. The columns represent months by default, but users can specify other time periods. The table includes the following rows:

a. Sales: This row contains the sales plan. b. Production: This row contains the production plan, which is usually calculated by the system. c. Stock level: This row contains inventory levels, which are generated by the system when the production plan is calculated. d. Target stock: Desired stock (inventory) levels are entered in this row. e. Day’s supply: Day’s supply is the number of days the organization can expect to cover sales using only inventory. It is calculated by dividing inventory by sales per work day in the period. The number of work days is specified when the system is initially configured. This row is calculated by the system. f. Target day’s supply: The desired day’s supply is entered in this row.

Methods of generating a production plan:

a. 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. b. Target stock level: In this scenario, the company specifies a desired stock level, and the system calculates the production quantities needed to meet the sales plan and achieve the target stock level. c. 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 specific quantities. The target day’s supply is specified by the user, and the system calculates the quantities in the production row required to achieve that target. d. 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 existing 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.

17. What are the different options for disaggregating a sales plan or a production plan? a. Disaggregate the production plan to one or more levels or down to the material level. b. 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. c. Disaggregate the sales plan down to the material level, and calculate the production plan for each material.

18. Explain the differences between MRP and MPS. MPS operates within only one level of the BOM, while MRP can be utilized throughout all levels of a material’s BOM. MRP is normally carried out after the MPS planning is finished.

Materials planned by MPS are typically the finished goods at the top level of the BOM hierarchy.

MRP calculates the net requirements for materials and creates procurement proposals. MPS creates dependent requirements for the components of finished goods known as master schedule items.

MRP is the final step in the material planning process. MPS is a specialized form of MRP.

19. Describe the tasks completed in the MRP step of the material planning process.

a. Check planning file - which materials must be planned. Any change to an MRP-relevant material generates an entry in the planning file. b. Calculate net requirements – determine whether there is a need to procure the material. This step is accomplished by performing a net requirements calculation. c. Lot size calculation - 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 defined by the lot size field in the material master. d. 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. e. Determine procurement proposal - determine the type of procurement proposal to generate. For materials with the procurement type of internal, MRP always generates planned orders. f. Dependent requirement determination - 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.

20. Explain the different control parameters that determine the way the tasks in the MRP step are executed.

a. Processing key - determines how the materials in the planning file are processed. b. Creation of purchase requisitions - This parameter determines whether MRP (1) always creates purchase requisitions for externally procured materials, (2) creates planned orders or (3) creates only purchase requisitions in the opening period and then creates planned orders after the opening period. c. Schedule lines - 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. d. Create MRP list - This parameter determines whether the system will create the MRP list. e. 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. f. 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.

21. Discuss the different MRP processing keys.

Three processing keys are available: a. Regenerative planning: 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 file. Therefore, when there are a large number of materials, this process can be very time consuming. For this reason it is rarely used. b. Net change planning: In net change planning only the materials for which there has been an MRP-relevant change are planned. An MRP-relevant change is any activity in the system that affects material availability, such as changes in the MRP elements for the material. These changes are identified by an entry in the planning file. c. Net change planning in the planning horizon:

Net change planning in the planning horizon plans only those materials for which there has been an MRP-relevant change within a specified period of time called the planning horizon. The planning horizon is defined during the configuration of the ERP system as a number of workdays. The planning horizon is usually specified to extend beyond the replenishment lead time for most materials.

22. Describe the net requirements calculation.

Net requirements for materials are calculated in the final step of the material planning process – MRP. Net requirements calculation determines whether there is a need to procure the material.

It takes into account all of the relevant MRP elements to determine if a shortage of materials exists. If more materials are needed, then procurement proposals are generated to meet the shortfall.

If the MRP type, specified in the material master, is consumption-based planning, then the net requirements calculation determines the available stock according to the following formula: Available stock = Plant stock + Receipts 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 sufficient material exists to meet the requirement.

Available stock = Plant stock – Safety stock + Receipts – Issues If the available stock in this calculation is negative, then a procurement proposal is generated.

23. Explain the scheduling process in MRP. MRP 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 system initially uses backward scheduling and employs forward scheduling only if backward scheduling is unsuccessful. 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.

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 scheduling. Essentially, it shifts the material with the earliest start date to the first available future date and then schedules all of the other materials from that date working forward using the same scheduling times. If the resulting schedule in not acceptable, then the MRP controller can manually adjust the schedule.

24. Define and discuss the types of procurement proposals that can be created in MRP. For materials with the procurement type of internal, MRP always generates planned orders.

Planned orders must be converted to production orders by the MRP controller.

For procuring materials externally there are three options. Which option is selected depends on the parameters defined in the MRP step.

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The first 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 last option is to create schedule lines. This option is relevant if the organization uses scheduling agreements.

25. Assess the advantages and disadvantages of creating planned orders and purchase requisitions for externally procured materials.

For externally procured materials, purchase requisitions are required to trigger the procurement process. However, the MRP procedure can be configured to create a planned orders instead of purchase requisitions. The advantage of creating planned orders is that the MRP controller has control of what happens to the planned order. He or she can convert to a purchase requisition as needed. If a purchase requisition is created instead, then it falls under the control of the purchasing group and the MRP controller cannont make changes if any are necessary to accommodate unanticipated events. The disadvantage is that until the MRP controller converts the planned order to a purchase requisition, the purchasing group is unable to include it in their planning.

26. Define MRP elements.

MRP elements are used in the MRP step to calculate net requirements and to generate procurement proposals. They represent a variety of activities that affect material availability in the different processes. Examples of MRP elements are planned orders, purchase requisitions, sales orders, production orders, planned independent requirements, and dependent requirements. MRP elements can be viewed in the stock requirements and MRP lists.

27. Discuss the different reporting tools that are useful in material planning.

a. 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. b. MRP list - displays static data as of the time the MRP step was executed. c. Planning result report - aggregates quantities for MRP elements to make it easier to view the overall picture. The various elements can be accessed and managed from this report.

28. Distinguish between the stock/requirements list and 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. It displays the result of the last planning run.

The MRP list ignores changes that have occurred between planning runs.

In contrast the stock/requirements list displays all changes in stock, receipts, and issues at the time the report was created.

Chapter 9: The Integrated Process Learning Objectives 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, fulfillment, and IWM processes interact when a company fulfills a customer order for trading goods.

3. Identify and discuss the various integration points among the procurement, fulfillment, production, and warehouse management processes.

4. Analyze the financial and material impacts of the various steps in the integrated processes

The concept of process integration posits that (1) the various processes are independent and (2) steps in one process can impact other processes. Remind the students that this concept was introduced in Chapter 1, and provide an example. Emphasize that Chapters 3-8 described in details the six processes (financial accounting, procurement, fulfillment, production, inventory and warehouse management, and material planning) and their interrelationships. Give examples of these interrelationships. Explain that this chapter will approach the same processes but from an integrative perspective to highlight the connections and operational dependencies among them. Figure 9-1 will assist you in explaining how the different processes interact.

Point out that the chapter illustrates process integration by presenting two scenarios that involve fulfilling a customer order. The first scenario presents an order for trading goods, so it involves procurement, fulfillment, and inventory and warehouse management processes, but not production. In contrast, the second scenario involves fulfilling a customer order for finished goods and therefore includes production.

Explain that for the make-to-stock, procure-to-stock, and sell-from stock strategies, the inventory of materials serves as the buffer between processes to make them less dependent on each other. In contrast, in the make-to-order and procure-to-order strategies, the company does not maintain an inventory of materials. Point out that the procurement process is triggered by either the fulfillment, production, or material planning process, and provide examples for process. Emphasize that in order to illustrate the integration among processes this chapter will not assume that there is a sufficient inventory of raw materials, finished goods, or trading goods to fulfill the customer order.

Chapter Outline and Teaching Suggestions

1. Procurement, Fulfillment, and IWM Processes a. Fulfillment process – initial steps b. Procurement process – initial steps i.

Procurement process – internal procurement ii.

Procurement process – external procurement c. Warehouse management steps related to procurement d. Fulfillment process - shipping e. Warehouse management steps related to fulfillment f. Fulfillment process – concluding steps

Identify the assumptions underlying the first scenario. Explain that the materials are vauled at the plant level, and they can be valued differently in each plant. Figure 9-2 displays the financial accounting and material valuation data for this scenario. Table 9-1 will also assist you in explaining the valuation of materials. Point out that Figure 9-3 illustrates the integration among the fulfillment, procurement and IWM processes. The steps that have a financial accounting impact are identified with the “FI” symbol, and the steps with a material impact are identified with an “M” symbol. Note the six logical groupings of process steps in the figure. Direct students to Demo 9.1, Review financials and inventory.

Emphasize that the fulfillment process is triggered by the customer purchase order. The process then continues with the next step, sales order processing, in which a sales order is created and an availability check is executed. Figure 9-4 and Demo 9.2 will assist you in explaining the initial steps of the fulfillment process.

Point out that the shortage of materials creates a requirement that triggers the procurement process. Explain that in the requirements determination step a purchase requisition is created and is subsequently converted to a PO in the purchase order processing step. Figure 9-5 will assist you in explaining the initial steps of the procurement process. Identify the two options for acquiring materials – internally from another plant and externally from a vendor. Discuss the steps within the context of the specific process scenario, involving the San Diego and Miami plants. Use Demo 9.3 to review the process of creating requisitions and POs. Point out that for the internal procurement process the chapter considers the simplest case – STO without delivery document. The goods issue and goods receipt are created during this step. Figure 9-6 will assist you in explaining the steps of the internal procurement. Explain that goods issue has a material impact and an FI impact. Emphasize that in a plant-to-plant movement, valuation occurs at the time of the goods issue and at the valuation price of the issuing plant. Table 9-2 can assist you in explaining the plant stock valuation at the start of the process. Use Figure 9-7 to help you explain the FI effect of the goods issue posting. Figure 9-8 can assist you in explaining the account balances at goods issue for STO. Emphasize that the

status of the materials being shipped at the receiving plant is “in transit.” Discuss the effects of the goods receipt posting at the receiving plant: (1) The status of the materials is changed from “in transit” to “unrestricted use,” and (2) the material document created. Emphasize that the goods receipt does not have a financial accounting impact. Explain the steps within the context of the specific process scenario, involving the San Diego and Miami plants. Figure 9-9 will assist you in explaining material document as a result of the goods receipt. Demo 9.4 highlights internal procurement for the first PO. Emphasize that external procurement involves dispatching a purchase order to the vendor.

Figure 9-10 will assist you in explaining the steps of the external procurement process. At the goods receipt step both a material and an FI document are created, and the moving average price is calculated. Use Figure 9-11 to clarify the material and FI documents for the goods receipt for a purchase order. Table 9-4 will assist you in explaining the moving average price calculation. Explain that the FI documents record a debit to the inventory account and credit to the GR/IR account. Figure 9-12 will assist you in explaining the FI effect. Point out that both the receive invoice and send payment steps have an FI impact. When a vendor invoice is received, the GR/IR account is cleared (debited), and the vendor subledger account is credited.

When making a payment to the vendor, the bank account is credited, and the vendor subledger account and accounts receivable reconciliation account are debited. Figure 9-13 will assist you in explaining the FI effect. Discuss the steps within the context of the specific process scenario. Use Demo 9.5 to review external procurement for the second PO. Explain that goods receipt in the receiving plant into storage location will trigger steps related to the warehouse management process. The goods received are placed in an interim storage area, and a transfer requirement is created that serves as a request to move them to an appropriate storage bin. The warehouse then creates a transfer order, which authorizes the warehouse personnel to move the materials from the interim storage area into storage bins.

The warehouse management process is complete once the transfer order has been confirmed.

Emphasize that no material or FI documents are created in the WM process. Figure 9-14 will assist you in explaining the warehouse management steps related to procurement. Demo 9.6 reviews WM steps for goods receipt for a PO. Point out that because the materials are located in a warehouse-managed storage location, the WM process is catalyzed by the creation of a delivery document. This document authorizes picking, packing, and goods issue. Figure 9-15 and Demo 9.7 will assist you in explaining the shipping step in the fulfillment process.

Explain that in the warehouse management steps related to fulfillment, the trigger that initiates the WM steps is the transfer requirement, which is automatically generated when the delivery document is created. The transfer requirement is a request to move the needed materials from the bins to the interim shipping storage area. There it is converted to a transfer order, the materials are moved from storage bins to the interim shipping storage area, and the transfer order is confirmed. This sequence of activities concludes the WM steps associated

with picking the materials for shipment. Emphasize that no material or FI documents are generated. Figure 9-16 will assist you in explaining the warehouse management steps related to fulfillment. Also, Demo 9.8 illustrates the WM steps for delivery.

Explain that the final steps in fulfillment process begin with the posting of a goods issue.

Figure 9-17 will assist you in explaining the concluding steps of the fulfillment process. The goods issue step involves both a material and an FI impact. A material document is created that indicates that the materials have been removed from inventory. Point out that with the creation of an FI document, the cost of goods sold account is debited and the inventory account is credited. Figures 9-18 and 9-19 will assist you in explaining the FI effects of posting a goods issue. Highlight the final two steps of the fulfillment process: billing and receiving payment from the customer. Figure 9-20 will help you explain the FI effects of these two steps.

You can also assign Demo 9.9.

2. Procurement, Fulfillment, Production and IWM Processes a. Fulfillment process – initial steps b. Inventory management (STO) – initial steps c. Production process – initial steps d. Procurement process (external) e. Production process – continued f. Inventory management (STO) - continued g. Warehouse management process related to STO h. Fulfillment process - continued i. Warehouse management steps related to fulfillment j. Fulfillment process – concluding steps

Remind students that the second scenario has many similarities to the first one, but, unlike the first one, it involves the production process. Figure 9-21 displays the bill of materials for touring bikes. Figure 9-22 displays the account balances before the start of the process.

Identify the underlying assumptions regarding the procurement, fulfillment, production, and IWM processes. Briefly note that Figure 9-23 illustrates the integration among the fulfillment, procurement, production and IWM processes. Identify the ten logical groupings of process steps as shown in the above outline (a - j). You can use Demo 9.10 to review financials and inventory.

Point out that in the second scenario the fulfillment process is triggered by the customer purchase order, and it involves a sales order processing step. Figure 9-24 will assist you in explaining the fulfillment process initial steps. Demo 9.11 highlights the creation of a sales order.

Emphasize that the initial steps in inventory management (STO) involve the creation of a stock transport order requesting that the materials be transferred from one plant to another.

Explain this step taking into consideration the assumptions made for this particular scenario.

Explain that the STO can trigger the production process if the other plant cannot provide the quantities required (which is what happens in this scenario). Use Figure 9 -25 and Demo 9.12 to explain the initial step in inventory management. A planned order (request for production) is created, and a production order is generated after the production is authorized. Materials are issued to the production order. Figure 9-26 and Demo 9.13 will assist you in explaining the initial steps of the production process.

Point out that the external procurement process in this scenario will be triggered by the requirement for raw materials. Figure 9-27 will assist you in explaining the steps of the external procurement. Emphasize that like in the external procurement process of the first scenario, here, the final three steps will involve creation of FI documents. Those steps are: goods receipt, receive invoice and payment to vendor. Explain the financial impact of the steps in the external procurement. Figure 9-28 will assist you in explaining the financial impacts at the conclusion of the procurement process. Discuss the various process steps in terms of the underlying assumptions for this scenario. Refer students to Demo 9.14.

Discuss the relationships between the procurement and production processes. After the materials have been purchased and received, the production process can continue. Explain the steps of the production process, using Figure 9-29. Point out that the production process now includes three steps: goods issue, confirmation, and goods receipt. Discuss the effects of these steps. Figure 9-30 will assist you in explaining the account balances after production. Demo 9.15 highlights the final steps in the production process.

After the bikes have been received into inventory, the requirement in the STO can be addressed. The bulleted points below will assist in explaining this step.

-At the goods issue step a material document and an FI document are created.

Consumption accounts are debited, and material accounts are credited. Explain that this posting moves the raw materials and semifinished components from the material account to the consumption account, indicating they are going to be consumed in the production process for creating finished goods.

-At the confirmation step there is a CO impact in the form of a transfer of labor costs from the work centers to the production order.

-At the goods receipt step a material document and an FI document are created. The finished goods inventory account is debited, and the manufacturing output settlement account is credited.

Emphasize that because the finished goods are produced in a plant that will ship them to another plant rather than directly to the customer, the company must issue a stock transport order. Once the production process has been completed, the inventory management process will post a goods issue at the sending plant. Point out the status of the shipped materials at the receiving plant is now “in transit.” The FI impact of the goods issue consists of a decrease in inventory in the sending plant and a corresponding increase in the receiving plant. Figure 932 will assist you in explaining the financial impact of goods issue against an STO. After the materials have been received at the receiving plant, a goods receipt is posted, and their status is changed to “unrestricted use.” Point out that there is no FI impact at the time of goods receipt. Demo 9.16 will be helpful here.

Explain that the warehouse management process related to an STO will proceed the same way as the WM process related to procurement. It includes steps that apply to the warehouse in a specific plant. That is why there is no difference whether the materials are procured externally or internally. Explain that in both cases, the goods receipt will trigger steps related to the WM process. The condition here is that the plant should be warehouse-managed. Refer to Figure 933 and Demo 9.17 for the steps in warehouse management process related to STO. Explain that when the materials are stored in the receiving plant, the fulfillment process continues with the creation of a delivery document. This step is the same as the one covered in the first scenario after the transfer order has been confirmed. As in the first scenario, the delivery document authorizes warehouse personnel to pick, pack, and ship the order. Figure 934 and Demo 9.18 will assist you in explaining these steps in the fulfillment process.

Explain that the last two steps of the second scenario are the same as those in the first scenario: warehouse management steps related to fulfillment and the concluding steps of the fulfillment process. The one significant difference is that in the goods issue step the accounting document will impact the inventory account for finished goods. In the first scenario this step involved a posting to the inventory account for trading goods. Use Demos 9.19 and 9.20 here.

REVIEW QUESTIONS 1. Explain the various strategies for the procurement, fulfillment, and production processes.

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Procurement • Procure-to-stock Procurement is triggered by fulfillment (trading goods) or production (raw materials).

The company executes the procurement process to maintain an inventory of materials, from which it fills customer orders.

This strategy uses inventory as a buffer between processes (production, procurement, fulfillment), to de-couple them or to make them less dependent on each other.

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Procure-to-order Procurement is triggered by material planning (either raw materials or trading goods).

The company does not maintain an inventory of materials. Customer orders received in the fulfillment process trigger the production and procurement processes.

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Fulfillment • Sell-from-stock The system determines availability based on current inventory and planned receipts from either procurement or production.

This strategy uses inventory as a buffer between processes (production, procurement, fulfillment), to de-couple them or to make them less dependent on each other.

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Production • Make-to-stock In the make-to-stock (MTS) strategy customer orders are fulfilled from an existing inventory of finished goods. MTS strategy is usually employed by firms that produce a high volume of identical products. This strategy reduces the time required to fill 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 final 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.

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Make-to-order In contrast to MTS, in a make-to-order (MTO) strategy the production of the finished goods and any needed semifinished goods is triggered by a sales order. The company does not maintain an inventory of these materials. 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 introduced a line of high-end racing bikes designed specifically for individual riders, it would use MTO to manufacture 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 (semifinished goods) needed to make the finished good is procured or produced to stock. The production of the finished 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 configurations of end items. For example, different computer configurations are possible using a number of different options for monitors, storage devices, and memory. A sales order for the finished product can usually be filled quickly because only the final assembly has to be executed. (The components are already in stock.) In SAP ERP, the ATO strategy is also referred to as planning without final assembly (STRATEGY 50) or subassembly planning. Variations to both the pure MTO and MTS strategies offer more flexibility in meeting customer requirements.

2. Explain the role of inventory in reducing the interdependence among processes.

The company executes the production and procurement processes to maintain a stock or inventory of materials, from which it fills customer orders. In other words, if it maintains inventory at appropriate stock levels, then it might not need to initiate the production or procurement processes (procure-to-stock, sell-from-stock, make-to-stock strategies), and the processes will be less dependent on each other. Conversely, if inventory is not maintained as a buffer between processes, then filling customer orders will require the procurement or production processes to be executed first, thus making these processes highly dependent on each other.

3. Identify and discuss the steps in the integrated process that includes the procurement, fulfillment, and IWM processes. Analyze the financial and material impact of the various process steps.

a. Fulfillment process – initial steps. Triggered when the company receives a purchase order.

-Sales order processing: The sales order is generated, and an availability check is executed.

-Shipping step: If there are sufficient materials in stock. b. Procurement process – initial steps. Triggered by the fulfillment process – there are not enough available materials in stock.

-The plant creates a purchase requisition.

-The purchase requisition converted to a purchase order. c. Procurement process – internal procurement (from another plant).

-A stock transport order (STO) is created to transfer materials from one plant to another.

-The sending plant executes a goods issue against the STO. Material (with two line items) and FI documents are created.

Materials are valued at the price of the issuing plant.

There s no change in the value of the materials in the general ledger.

The moving average price is calculated. The new price can be different or the same for both the receiving and the sending plants.

The status of the materials being shipped is “in transit” in the receiving plant.

-A goods receipt is recorded at the receiving plant.

A material document with a single line item is created.

The status of the materials is changed from “in transit” to “unrestricted use.”

No financial impact is recorded at this step. d. Procurement process – external procurement (from a vendor).

-A purchase order (PO) is created and sent to the vendor.

-When materials are received, a goods receipt against the PO is issued.

A material document with single line item is created.

An FI document is created to record the debit to the inventory account (reflects general ledger) and the credit to the GR/IR account. This results in an increase to the value of the inventory.

A new moving average price calculated that can be different from or the same as the existing one.

- The vendor invoice is received and verified A debit posting to the GR/IR account is executed.

The vendor subledger account is credited by the amount of the invoice -The company makes payment to the vendor.

The bank account is credited with the payment amount.

The vendor subledger account and accounts payable reconciliation account are debited by the same amount. e. Warehouse management steps related to procurement.

-The receipt of goods into the storage location in the receiving plant will trigger steps related to the warehouse management process (in scenarios in which the storage location is warehouse managed).

-The received goods are placed in an interim storage area.

-A transfer requirement (TR) is created that serves as a request to move materials into an appropriate storage bin.

-In response to the TR, the warehouse creates a transfer order (TO).

-The TO authorizes the warehouse personnel to move the materials from the interim storage area into storage bins -The TO is confirmed after the materials are moved into storage bins.

No material documents or FI documents are created. f.

Fulfillment process – shipping.

-In cases where the warehouse management process is involved, it will trigger the fulfillment process.

-A delivery document is created authorizing picking, packing, and goods issue.

g. Warehouse management steps related to fulfillment.

-The delivery document in the shipping step will trigger WM process (if the storage location is warehouse managed).

-A transfer requirement (TR) is automatically generated with the creation of a delivery document. The TR is a request to move materials from the bins to the interim shipping storage area.

-A transfer order (TO) is created based on the delivery document.

-Materials are moved from the storage bins to the interim shipping storage area.

-The TO is confirmed.

No material documents or FI documents are created.

h. Fulfillment process – concluding steps.

-A goods issue is posted.

A material document is created showing the removal of the materials from inventory.

An FI document is created. The cost of goods sold account (COGS) is debited, and the inventory account is credited. The current moving average price is used when calculating the amount.

-A customer invoice is generated (FI document).

A debit is posted to the customer subledger account with an automatic posting to the accounts receivable reconciliation account, and a credit is posted to the revenue account.

-A payment from the customer is received.

An FI document is created. The bank account is debited, and a credit is posted to the customer account with an accompanying automatic posting to the accounts reconciliation account.

4. Identify and discuss the steps in the integrated process that includes the procurement, fulfillment, production, and IWM processes. Analyze the financial and material impact of the various process steps.

1. Fulfillment process – initial steps.

-It is triggered when a company receives a purchase order (PO).

-A sales order is created.

-An availability check is performed.

2. Inventory management (STO) – initial steps.

-A stock transport order (STO) is created to request that materials be transferred from one plant to another (if the availability check indicates insufficient quantities).

3. Production process – initial steps.

-The STO can trigger the production process if the other plant cannot provide the quantities required.

-A planned order is created (request for production).

-A production order is created when production is authorized.

-The materials are issued to the production order 4. Procurement process (external).

-The requirement for raw materials triggers the procurement process to acquire the materials.

-A purchase requisition is created.

-A purchase order is issued.

-A goods receipt against the purchase order is created to indicate the materials received from the vendor.

A material document with a single line item is created.

An FI document is created to record the debit to the inventory account (reflects general ledger) and the credit to the GR/IR account. The value of the inventory is increased.

A new moving average price is calculated that might be different from or the same as the existing one.

- A vendor invoice is received and verified.

A debit posting to GR/IR account is performed.

The vendor subledger account is credited by the amount of the invoice.

-The company makes payment to the vendor.

The bank account is credited with the payment amount.

The vendor subledger account and the accounts payable reconciliation account are debited by the same amount.

5. Production process – continued.

-A goods issue is posted against the production order.

A material document is created.

An FI document is created. The consumption accounts are debited, and the material accounts are credited.

-Confirmation.

There is a CO impact in the form of the transfer of labor costs from the work centers to the production order.

-A goods receipt is created. The materials are received into finished goods inventory.

A material document is created.

An FI document is created. The finished goods inventory account is debited, and the manufacturing output settlement account is credited 6. Inventory management (STO) – continued.

-The goods issue against the STO is executed.

Inventory is decreased in the sending plant and increased in the receiving plant.

Material documents (with two line items) and FI documents created.

Materials are valued at the price of the issuing plant.

There is no change in the value of the materials in the general ledger.

The status of the materials being shipped is “in transit” in the receiving plant.

-A goods receipt is recorded at receiving plant.

A material document with a single line item is created.

The status of the materials is changed from “in transit” to “unrestricted use.”

There is no financial impact at this step.

7. Warehouse management process related to STO. -Materials placed in the interim storage area.

-A transfer requirement is created that triggers the WM process.

-A transfer order is created (manually or automatically) that authorizes the placement of the materials into bins.

-The materials moved into specific storage bins.

-The transfer order is confirmed.

No material documents or FI documents are created.

8. Fulfillment process – continued.

-Shipping step. A delivery document is created that authorizes warehouse personnel to pick, pack, and ship the order.

No material documents or FI documents are created.

9. Warehouse management steps related to fulfillment.

-A transfer order is created for the delivery document.

-The transfer order is used to move the materials from storage bins to the interim shipping storage area.

-Once the movement is completed, the TO is confirmed.

No material documents or FI documents are created.

10. Fulfillment process – concluding steps.

-A goods issue is posted.

A material document is created showing the removal of the materials from inventory.

An FI document is created. The cost of goods sold account (COGS) is debited, and the inventory account is credited.

-A customer invoice is generated (FI document).

A debit is posted to the customer subledger account with an automatic posting to the accounts receivable reconciliation account, and a credit is posted to the revenue account.

-A payment from the customer is received.

An FI document is created. A debit is posted to the bank account, and a credit is posted to the customer account with an accompanying automatic posting to the accounts reconciliation account.

5. Prepare a process diagram that displays the steps that GBI must execute in order to fill a customer order, based on the five assumptions listed below. Make certain to include the financial 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 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 to purchase 300 helmets from Spy Gear at $25.54 each.

e. GBI sells road helmets for $50 each.

a. Fulfillment process – initial steps.

-Triggered by the creation of the purchase order.

-Sales order processing: The sales order is generated and an availability check is executed. b. Procurement process – initial steps.

-Triggered by the fulfillment process – There are no (or not enough) available materials in stock.

-San Diego creates a purchase requisition.

-The purchase requisition is converted to a purchase order. c. Procurement process – internal procurement (from another plant).

-A stock transport order (STO) is created to transfer 100 road helmets from Miami to San Diego.

-The Miami plant executes a goods issue against the STO. Material (with two line items): one for the Miami plant and one for the San Diego plant.

FI documents created. A debit and credit are posted to the inventory account.

Materials are valued at the price of the issuing plant, so the amount of the FI document will be $2,525.00 There is no change in the value of the materials in the general ledger.

The moving average price is calculated as follows: At the Miami plant the moving average price remains $25.25.

At the San Diego plant a new moving average price is calculated as follows: (50 x $25.13) + (100 x $25.25) = $1,256.50 + $2,525.00 = $3,781.50 / 150 = $25.21.

Status of the materials being shipped is “in transit” in the San Diego plant.

-A goods receipt is recorded at the receiving plant.

A material document with one line item is created to show that the helmets are received in storage location in San Diego plant.

Status of the materials is changed from “in transit” to “unrestricted use.”

No financial impact at this step. d. Procurement process – external procurement (from a vendor).

-A purchase order (PO) is created and sent to Spy Gear for 300 helmets of the price of $25.54 each totaling $7,662.00.

-When the materials are received, a goods receipt against the PO is issued.

A material document with a single line item is created to show the receipt of 300 helmets at the San Diego plant.

An FI document is created to record the debit to the inventory account (reflects general ledger) of the amount of $7,662.00 and a credit for the same amount to the GR/IR account.

A new moving average price is calculated as follows: (50 x $25.13) + (100 x $25.25) + (300 x $25.54) = $1,256.50 + $2,525.00 + $7,662.00 = $11,443.50 / 450 = $25.43.

- The vendor invoice is received and verified.

A debit is posted to the GR/IR account for the amount of the invoice: $7,662.00.

The vendor subledger account is credited by the same amount.

-The company makes payment to the vendor.

The bank account is credited with the payment amount: $7,662.00.

The vendor subledger account and accounts payable reconciliation account are debited by the same amount. e. Warehouse management steps related to procurement.

-The goods receipt into storage location in the San Diego plant will trigger steps related to the warehouse management process (if the storage location is warehouse managed).

-The goods received are placed in an interim storage area.

-A transfer requirement (TR) is created that serves as a request to move materials into an appropriate storage bin.

-In response to the TR, the warehouse creates a transfer order (TO).

-The TO authorizes the warehouse personnel to move the materials from the interim storage area into storage bins.

-The TO is confirmed after the materials are moved into the storage bins.

No material documents or FI documents are created.

f.

Fulfillment process – shipping.

-If XXX is warehouse managed, then XYZ will trigger the fulfillment process.

-A delivery document is created authorizing picking, packing, and goods issue.

g. Warehouse management steps related to fulfillment.

-The delivery document in the shipping step will trigger the WM process (if the storage location is warehouse managed).

-A transfer requirement (TR) is automatically generated with the creation of delivery document. The TR is a request to move materials from the bins to the interim shipping storage area.

-A transfer order (TO) is created based on the delivery document.

-Materials are moved from the storage bins to the interim shipping storage area.

-The TO is confirmed.

No material documents or FI documents are created.

h. Fulfillment process – concluding steps.

-A goods issue is posted.

A material document is created showing the removal of 250 helmets from San Diego’s plant inventory.

An FI document is created. The cost of goods sold account (COGS) is debited to the amount of $6,357.50 (250 x $25.43), and the inventory account is credited with the same amount. A current moving average price of $25.43 is used when calculating the amount.

-A customer invoice is generated (FI document).

A debit is posted to the customer subledger account with an automatic posting to the accounts receivable reconciliation account, and a credit is posted to the revenue account for the amount of $12,500 (250 x $50).

-A payment from the customer is received.

An FI document is created. The bank account is debited, and the customer account is credited with an accompanying automatic posting to the accounts reconciliation account for the amount of $12,500.