QUESTION

Report

As part of the restructure of management of the business process the management of ABC Organisation is looking at implementing a SAP solution.  The problems of mapping the current business process to the SAP systems are well understood and the management feel that they have secured the services of a capable firm to help with the process.  However before proceeding with the project the management still have a number of issues they would like to address before proceeding with the planed implementation.

Current system is based on centralised services where all the processing is done on a central IT infrastructure.  Most of the systems as they were designed and built in house means that they don’t conform to the usual standard used outside the organisation.  As a result there are questions regarding the process of making the data and services work with the SAP.

a) In order to move to the SAP platform the management would like some details on how the transition of the information and services to the industry standard should be implemented.  How does SAP access information and services that are not implemented within the SAP framework?

b) While the centralised structure was easy to implement and maintain the need to provide easy access to information and services to other business entities across continent means that the centralised design has become a bottleneck.  How can the implementation of the SAP in the organisation help to deal with the information processing bottlenecks in the organisation?

c) One of the problems the ABC organisation has been struggling with is the correct attribution of cost to the production process.  The paper based model makes the keeping track of the standard cost of production to the actual cost difficult to manage and trace.

• Explain why is the ability to correctly identify the actual production cost important to an organisation?

Discuss how variances between standard and actual costs result and how a product cost per unit sold can be calculated?

Describe why cost variances would be difficult to research in a paper-based system.

SOLUTION

Executive summary

The report is based on a case of ABC organization which is planning to implement SAP for its business processes. The first cut challenge for the organization is to identify the issues that may creep up while migrating from the old centralized information system and integrating the whole processes with the new SAP framework. The report identifies the issues and suggests how SAP modules and tools can help ABC in this procedure. The other big issue the organization see is the information bottlenecks in the current system and how SAP implementation would sort them out. BW module of SAP is described to suggest the best way to overcome the existing and future bottlenecks. The other problem ABC wants to solve is to develop an efficient cost structure through SAP. The current paper based systems are inefficient and inaccurate. SAP has cost estimation module that can go a long way in improving the cost estimation systems in ABC and hence provide a solid benchmarking and cost standards. The report ends with recommendations that ABC can follow to implement best possible SAP framework for their business processes.
Introduction

Background

The report is based on an organisation ABC, which is into manufacturing business. The organization wants to implement SAP framework in order to fine tune the current business processes. The current information management system works on central IT infrastructure along with the paper based systems for determining the cost structures. The management has certain issues in hand which they need to sort out before implementing SAP like- migration and integration of current processes with SAP; using SAP to remove information bottlenecks; and how to use SAP to replace the paper based systems.

Purpose of the report

The purpose of current report is to highlight various issues which come into picture while any organization implements the SAP. The report will also highlight how SAP is useful and effective in improving the business process altogether and setting benchmarks.

Scope of the report

The report covers the basic migration and integration process of SAP implementation along with key focus on two main areas- information management through SAP and strategic cost management with SAP.

SAP migration and integration

Before implementing SAP, it is important to understand that a successful ERP implementation depends upon three main factors- Business processes prevalent; Human resources involved in those processes; and the current systems in the organization which implement these processes. ABC should keep in mind that the objective of SAP implementation should be to align and integrate business processes with people and systems.

Migration and integration process and its challenges

(Kimbell, Ian; 2011)

In order to migrate from current central IT information system to SAP, ABC should approach in step-by-step manner. Assuming that overall organization readiness is there for SAP implementation, ABC should start with ‘requirements gathering’ from all the departments. Requirement gathering should be done in most exhaustive manner. The challenges at this stage can be- departments themselves may not be clear about their requirements from SAP; existing processes may not be very exhaustive; and improper documentation about Standard Operating Procedures (SOPs). These challenges must be dealt with proper communication among the departments.

Once ABC has all requirements in hand, it can start configuring the SAP framework components. It should start with ‘migration’ and refinement of all the existing data to a central database connected to SAP. The existing data should then be mapped to the various modules in SAP. This can be accomplished by defining the interfaces, which act as bridges to connect different modules in SAP. The interfaces should be mapped with the information routes which will define the work flow. It must be noted that the interfaces as well as the work-flow should be in accordance with the business process followed for different systems like production systems, supply chain systems, inventory management systems etc.

Once all the interfaces and information routes are defined, the ‘integration’ process should be initiated. SAP provides ‘rules’ to be defined for this purpose. The essential modules like- materials management, production planning, finance, costing, quality maintenance, HR and sales and distribution modules; must be connected to central database and the rules must be set to define the kind of information and the information flow amongst themselves as well as within themselves. The obvious challenge at this stage is the data migration and refinement. SAP tools must be used to refine the database queries to fetch information in the system. In this manner, SAP helps in smoothening of the data migration process.

Once the integration is completed, the final phase is ‘testing’ of the system. The UAT (User Acceptance Testing) should be done component-wise first. Once all test cases are run successfully at component level, whole system must be tested. The challenges at this stage are- improper test case description and inaccurate knowledge about the interfaces and information flow through them. These challenges can be overcome by using automated testing systems provided by SAP.

Once the system is fully tested, the team must be trained to use the SAP system in most effective manner which will ensure the efficient working.

Information bottlenecks and SAP

(McDonald, Wilmsmeier et al; 2011)

As the ABC moves to SAP system, it aims at removing the bottlenecks in the information flow and analysis. Assuming that ABC currently relies on database warehouses, the bottlenecks in the existing system may be due to- inconsistent data, fragmented data points and the data redundancy. Moreover, there may be some concerns over data security and recovery of the lost data.

SAP provides a module named ‘Business Information Warehouse’ (BW) to solve such problems. The versatility of this module is such that it can be used independently in non-SAP environments as well. Thus, it can access the information which is beyond the framework of SAP modules.

BW performs a wide range of functions like- data mining, data archival, business intelligence through data analysis. BW integrates external and the internal sources of data thus providing an exhaustive data based decision making environment for the organization. In order to facilitate business intelligence, BW provides a platform to create customized reports based on the data. BW provides ‘Business Explorer’ tools to- create reports, re-use the existing reports to take any action, identify key performance indicators among the data points and create a presentation from the analysis outputs. (Data Protection Guide for SAP BW, 2003)
Using SAP to determine the cost structures

SAP has inbuilt features that help in determining the optimum cost structures. Following sections identify the features of SAP that can help ABC to improve upon its cost efficiencies.

Identification of costs and Cost benchmarking

 (Standard Cost Estimate- SAP library)

ABC should develop standard cost estimates for different product components. These standards should serve as benchmarks throughout the year so that actual variances in the costs of the components can be calculated. SAP provides with the basic cost components for products as per the components associated with them. Based on the experience, ABC should enter the component-wise standard costs break-ups in the material master record in SAP system. The system automatically integrates the individual costs of components to calculate the final standard cost of the whole product. So, the standard costs for all kinds of inventories such as ‘raw material’, ‘Work In Progress’ and ‘Finished goods’ are available in material master record.

SAP provides tool for ‘cost estimate’ for above calculations. Apart from the material master record, the inputs required by the tool are- the bill of material and the process route of the material in the production process. This tool uses the material data to associate it with the internal activities involved in converting it into final good to arrive at the final cost estimate. The tool can handle simple products as well as complex assemblies by making estimated in accordance with the hierarchy of the individual components (low level components to high level). The beauty of this tool is that once a cost estimate is created for a child component, wherever that component is used in any other product, the system automatically picks up its cost estimates from the system. This helps in determining the optimum cost for the integration of child components into finished product.

The standard cost estimates for the raw materials are determined by the system using the procurement price entered in the material master record. The splitting of the raw material cost indifferent components is automatically handled by SAP by classifying them as ‘direct’ costs (which can be directly associated with the component) and indirect costs (which are shared among the components in a same final product). SAP is flexible enough to allow the manual entries of these costs wherever required.

Paper based systems v/s SAP

(Reis, Vanda; 2010)

Since ABC is currently following paper based systems to calculate cost for various components, it must be anticipating SAP to simplify the costing process and to arrive at accurate costing estimates. SAP provides different features that may help ABC to develop a better cost estimating system. The SAP cost estimation tool provides flexibility to input the cost for individual components and raw materials involved in the production. It is very easy to get the cost of individual components before they go through the production processes. The cost can be derived from the invoices and purchase orders and can simply be fed into ‘material master record’. Whenever a component is used in a certain product, SAP automatically picks up its cost and determines the optimum cost of the final product with the help of rules defined for the production process of manufacturing a particular product.

In the paper based system, the manual intervention at every stage is error prone. In such systems, the cost of components is transferred from invoices to the ‘bill of material’. The ‘bill of material’ is a manually prepared document which is developed when production planning is done. Cost estimates for final product cannot be accurately determined if the costs associated with the further production processes are not accurately determined. Moreover, the whole process of creation of ‘bill of material’ starts from scratch even if the components involved in the product are common. Paper based systems are thus inefficient, as well as inaccurate.

Besides, the information flow is also manual, so there are lots of bottlenecks in information routing and processing. SAP on other hand does the updates the real time data and avoids rework. It is because of the features of SAP, ABC should be able to identify better cost structure and hence set accurate benchmarks for future.

Cost variances description

(Variance calculation-SAP library)

SAP has tools which help in calculating cost variances. As per the identified cost structure, SAP provides variances for product costs, costs associated with the manufacturing orders and other miscellaneous costs. The purpose of variance calculation is to identify the gap between the planned costs and the actual net costs. SAP provides a detailed overview of cost variances. It also ascertains cost variances on the account of deviations in planned activities. SAP identifies the causes of deviation and classifies them into different variance categories.

The variances can be calculated for different periods, say a week, or cumulatively, say for a quarter. ABC as a production firm should identify the components for which they want to calculate the variances periodically as well as cumulatively. Different rules for each of the category are there in SAP as- ‘PER’ settlement for periodic costs; ‘FUL’ for cumulative product costs and ‘Product Material Periodic Settlement’ for manufacturing orders. Here BOM should be prepared keeping in mind the above classification and the target operations where the components will be used must also be specified to calculate the correct variances.

SAP assigns a unique key to each identified variance, which is ultimately linked to the master records of materials and components. Thus, an end to end costing of a raw material which is converted into finished goods can be determined at each processing stage.

In order to compare the standard cost i.e. the planned cost and the net cost of the product, it is important to arrive at the correct net cost incurred. The SAP calculates the net cost as; actual costs minus the work in progress inventory cost and scrap variance (which is to be entered manually). As described in the standard cost estimate, the variance can be calculated periodically for a particular period, as well as cumulative, say for a year.

In order to analyse the results of variance, ABC should first identify the processes and components that are causing the maximum variance. They should then be analysed by classifying them as- variance due to input prices, variance due to inefficient processes, variances due to excessive inventory, variances due to inefficient supply chain and packaging etc. Once identified, then the root cause of variance must be sought after and the bottlenecks, if any are there, should be removed. In order to facilitate all these steps, SAP provides a log of all the activities carried in a sequential manner and thus it becomes easy to track the bottlenecks.

References

Kimbell, Ian; 2011; Discover SAP; published by SAP Press

McDonald,Kevin; Wilmsmeier, Andreas; Dixon,David, C. , Inmon W. H.; 2011; Mastering the SAP Business Information Warehouse; Chapter 7

Reis, Vanda; 2010; Actual Costing with The SAP Material Ledger

Standard Cost Estimate; SAP library; viewed 17 October 2011; < http://www.sap-basis-abap.com/sapcostd.htm>

Unknown, 2003; Data Protection Guide for SAP BW; November 2003

Variance calculation; SAP library; viewed 17 October 2011; <http://help.sap.com/saphelp_470/helpdata/en/90/ba6228446711d189420000e829fbbd/content.htm>

GG80

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