Huge Presentation to Explain ERP

Turning the Organization on its Side

Most companies have four main functional areas: Marketing and Sales (M/S) Supply Chain Management (SCM) Accounting and Finance (A/F) Human Resources (HR)

Most companies have four main functional areas: Marketing and Sales (M/S) Supply Chain Management (SCM) Accounting and Finance (A/F) Human Resources (HR)

Each main functional area consists of a number of narrower business functions specific to the functional area.

Historically, businesses have organized themselves according to business functions

Each main functional area consists of a number of narrower business functions specific to the functional area.

Historically, businesses have organized themselves according to business functions

Functional Functional AreasAreas

Marketing Marketing and Salesand Sales

Supply Supply ChainChain

Finance Finance and and AccountingAccounting

Human Human ResourcesResources

Business Business FunctionsFunctions

Marketing Marketing a producta product

Purchasing Purchasing goods and goods and raw raw materialsmaterials

Financial Financial accountingaccounting

Recruiting Recruiting and hiringand hiring

Taking a Taking a sales ordersales order

Receiving Receiving goods and goods and raw raw materialsmaterials

Cost Cost allocation allocation and controland control

TrainingTraining

Customer Customer supportsupport

TransportiTransporting goods ng goods and and logisticslogistics

Planning Planning and and budgetingbudgeting

PayrollPayroll

Customer Customer relationshirelationship p managememanagementnt

Scheduling Scheduling production production runsruns

Cash flow Cash flow managememanagementnt

BenefitsBenefits

Sales Sales forecastingforecasting

ManufactuManufacturing goodsring goods

GovernmeGovernment nt compliancecompliance

AdvertisinAdvertisingg

Plant Plant maintenanmaintenancece

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Material & Product Flow

In a process-oriented company, the flow of information and management activity are “horizontal”—across functions

The “horizontal” flow promotes flexibility and rapid decision-making

Michael Hammer’s Reengineering the Corporation encouraged managers to take a “horizontal” business process view of their companies

In a process-oriented company, the flow of information and management activity are “horizontal”—across functions

The “horizontal” flow promotes flexibility and rapid decision-making

Michael Hammer’s Reengineering the Corporation encouraged managers to take a “horizontal” business process view of their companies

The Legacy

Before ERP, IS people designed software to reflect a company’s business practices

With ERP software, the software developers have used their experience with a number of companies to develop “best practices”

Best Practices represent the way an ERP company feels a particular business transaction should be carried out to maximize efficiency

While customers can customize their ERP systems to represent their own particular way of doing business, straying too far from “best practices” might mean that they will not get the benefits the ERP integration promises

Before ERP, IS people designed software to reflect a company’s business practices

With ERP software, the software developers have used their experience with a number of companies to develop “best practices”

Best Practices represent the way an ERP company feels a particular business transaction should be carried out to maximize efficiency

While customers can customize their ERP systems to represent their own particular way of doing business, straying too far from “best practices” might mean that they will not get the benefits the ERP integration promises

Some companies have chosen a Best of Breed approach, where they implement ERP modules from different vendors based on actual or perceived advantages

The Best of Breed approach may become obsolete due to implementation challenges

Software must be written to connect different systems Upgrading modules is more complicated with multiple

vendors Real-time data integration is frequently not available

Some companies have chosen a Best of Breed approach, where they implement ERP modules from different vendors based on actual or perceived advantages

The Best of Breed approach may become obsolete due to implementation challenges

Software must be written to connect different systems Upgrading modules is more complicated with multiple

vendors Real-time data integration is frequently not available

A business must analyze its own business strategy, organization, culture and operations before choosing an ERP approach

A company may not be ready to implement ERP The company’s business processes may not be well

defined or managed If a company is not prepared to make its processes

more efficient, then it will not gain the benefits an ERP system can provide

A business must analyze its own business strategy, organization, culture and operations before choosing an ERP approach

A company may not be ready to implement ERP The company’s business processes may not be well

defined or managed If a company is not prepared to make its processes

more efficient, then it will not gain the benefits an ERP system can provide

ERP software is designed around best practices, so companies are encouraged to adapt their processes to the way ERP software works

With SAP, companies can customize the software by creating custom capabilities using its Advanced Business Application Programming (ABAP) language

SAP is an open-source product, meaning that the customer has access to the software’s source code

ERP software is designed around best practices, so companies are encouraged to adapt their processes to the way ERP software works

With SAP, companies can customize the software by creating custom capabilities using its Advanced Business Application Programming (ABAP) language

SAP is an open-source product, meaning that the customer has access to the software’s source code

Some executives naively hope ERP systems will cure fundamental business problems

Some executives and IT managers don’t take enough time for proper analysis and planning for implementation

Some executives and IT managers skimp on education and training

Sometimes the ownership of the implementation project is not given to the employees who will use the system

Top executive support is not always given The organizational change process is not managed well

Some executives naively hope ERP systems will cure fundamental business problems

Some executives and IT managers don’t take enough time for proper analysis and planning for implementation

Some executives and IT managers skimp on education and training

Sometimes the ownership of the implementation project is not given to the employees who will use the system

Top executive support is not always given The organizational change process is not managed well

To maximize the value of their ERP systems, companies should:

Integrate: ERP systems must be integrated throughout the company to share data effectively

Optimize: Many implementations were rushed to avoid the Y2K problem. Companies can gain value by using their ERP systems to improve their business processes

Informate: Hard work is required to effectively use the rich information provided by ERP systems

To maximize the value of their ERP systems, companies should:

Integrate: ERP systems must be integrated throughout the company to share data effectively

Optimize: Many implementations were rushed to avoid the Y2K problem. Companies can gain value by using their ERP systems to improve their business processes

Informate: Hard work is required to effectively use the rich information provided by ERP systems

In most companies, the marketing function either decides or has a key role in deciding: What products to produce How much of each product to produce How the products are to be promoted and advertised How the products should be distributed for maximum

customer satisfaction What price should be charged for the products

In most companies, the marketing function either decides or has a key role in deciding: What products to produce How much of each product to produce How the products are to be promoted and advertised How the products should be distributed for maximum

customer satisfaction What price should be charged for the products

Marketing and Sales is involved in generating key data: Recording sales Creating customer bills (invoices) Allocating credit to customers

Marketing and Sales is involved in generating key data: Recording sales Creating customer bills (invoices) Allocating credit to customers

Fictitious Fitter Snacker Company produces two snack bars: NRG-A: “Advanced Energy” NRG-B: “Body-building proteins”

Fitter Snacker has two sales divisions: Wholesale: sells to middlemen who distribute bars to

small shops, vending machine operators, health food stores

Direct: large grocery stores, sporting goods stores, other large chain stores

Fictitious Fitter Snacker Company produces two snack bars: NRG-A: “Advanced Energy” NRG-B: “Body-building proteins”

Fitter Snacker has two sales divisions: Wholesale: sells to middlemen who distribute bars to

small shops, vending machine operators, health food stores

Direct: large grocery stores, sporting goods stores, other large chain stores

Direct Sales: offers volume discounts to encourage large orders which are more efficient to process

Wholesale: charges lower fixed price because customer orders are already large (otherwise, the customer would be handled by Direct division)

Both divisions offer terms of 2-10, net 30 Customers receive a 2 percent discount if they pay their

invoices within 10 days Invoice is due in 30 days

Fitter Snacker also sells bars in store-brand wrappers for some chains

Direct Sales: offers volume discounts to encourage large orders which are more efficient to process

Wholesale: charges lower fixed price because customer orders are already large (otherwise, the customer would be handled by Direct division)

Both divisions offer terms of 2-10, net 30 Customers receive a 2 percent discount if they pay their

invoices within 10 days Invoice is due in 30 days

Fitter Snacker also sells bars in store-brand wrappers for some chains

Fitter Snacker has separate information systems for three functional areas: Sales order processing Warehouse management Accounting

Sales transaction data is shared with accounting via periodic file transfers

Credit data is shared between accounting and sales via paper printout High number of manual transactions leads to many opportunities

for data error

Fitter Snacker has separate information systems for three functional areas: Sales order processing Warehouse management Accounting

Sales transaction data is shared with accounting via periodic file transfers

Credit data is shared between accounting and sales via paper printout High number of manual transactions leads to many opportunities

for data error

The Sales Process involves a series of steps that require coordination between: Sales Warehouse Accounting Receiving

Note that manufacturing is not generally involved in the sales process as NRG bars are usually sold from warehouse stock







Fitter Snacker’s current quotation process is a paper-based process

Sales quotes are written up on a 3-part form: Original goes to customer First copy is faxed, then mailed, to sales office Salesperson keeps second copy for personal records

Common problems include: Salesperson may make an arithmetic error or offer incorrect

discounts Customer may order before copy of quote is faxed Faxed copy may not be legible

Fitter Snacker’s current quotation process is a paper-based process

Sales quotes are written up on a 3-part form: Original goes to customer First copy is faxed, then mailed, to sales office Salesperson keeps second copy for personal records

Common problems include: Salesperson may make an arithmetic error or offer incorrect

discounts Customer may order before copy of quote is faxed Faxed copy may not be legible

Customers want delivery data when placing a sales order Warehouse supervisor provides shipping date based

on estimation of inventory and orders outstanding Sales clerk uses shipping date plus shipping method to

determine delivery date Sales clerk checks credit for existing customers against

credit report generated on a weekly basis by accounting Report may not reflect most current orders or

payments

Customers want delivery data when placing a sales order Warehouse supervisor provides shipping date based

on estimation of inventory and orders outstanding Sales clerk uses shipping date plus shipping method to

determine delivery date Sales clerk checks credit for existing customers against

credit report generated on a weekly basis by accounting Report may not reflect most current orders or

payments

Sales order is entered in customer order computer program that:

Stores customer order data for sales analysis Prints out packing list and shipping labels for

warehouse Produces data file to create invoices Provides data file for accounting department for

financial, tax and managerial accounting purposes

Sales order is entered in customer order computer program that:

Stores customer order data for sales analysis Prints out packing list and shipping labels for

warehouse Produces data file to create invoices Provides data file for accounting department for

financial, tax and managerial accounting purposes

Small customers buy in display box quantities Large customers buy in case quantities

Sometimes cases are opened to fulfil small orders▪ Expensive (wastes labour and packaging)▪ Leads to inventory inaccuracy

Inventory levels managed in a PC-based inventory program Production records and packing lists are used to update

inventory levels Monthly physical inventory count used to check and correct

inventory records

Small customers buy in display box quantities Large customers buy in case quantities

Sometimes cases are opened to fulfil small orders▪ Expensive (wastes labour and packaging)▪ Leads to inventory inaccuracy

Inventory levels managed in a PC-based inventory program Production records and packing lists are used to update

inventory levels Monthly physical inventory count used to check and correct

inventory records

When there is insufficient inventory to fill a customer order The order can be delayed until more bars are produced The available quantity can be shipped on time, with the

balance sent in a separate shipment when available The available quantity can be shipped on time, with the rest of

the order cancelled▪ Information that balance of order was cancelled must be conveyed to

accounting so correct invoice can be prepared How to make correct decision is complicated at Fitter

Snacker

When there is insufficient inventory to fill a customer order The order can be delayed until more bars are produced The available quantity can be shipped on time, with the

balance sent in a separate shipment when available The available quantity can be shipped on time, with the rest of

the order cancelled▪ Information that balance of order was cancelled must be conveyed to

accounting so correct invoice can be prepared How to make correct decision is complicated at Fitter

Snacker

Accounting prepares the invoice three times per week Accounting department loads data from disk provided

by sales department Manual adjustments are made for changes to sales

order (e.g. partial shipments)▪ When corrections aren’t made on time, faulty invoices are

sent

Accounting prepares the invoice three times per week Accounting department loads data from disk provided

by sales department Manual adjustments are made for changes to sales

order (e.g. partial shipments)▪ When corrections aren’t made on time, faulty invoices are

sent

Numerous problems occur in receiving customer payments Customers may not return a copy of invoice with payment,

making it harder to match payment to customer order Customer may pay correct amount, even if invoice was not

correct▪ Requires investigation by accounting

Making sure customer merits 2% discount for timely payment (2/10 net 30) requires manual effort

Numerous problems occur in receiving customer payments Customers may not return a copy of invoice with payment,

making it harder to match payment to customer order Customer may pay correct amount, even if invoice was not

correct▪ Requires investigation by accounting

Making sure customer merits 2% discount for timely payment (2/10 net 30) requires manual effort

Customers may return out-of-date or spoiled snack bars or damaged or defective cases

Customer receives a credit for returned items Customer is supposed to get a returned material authorization

(RMA) number from Fitter Snacker to put on the defective snack bars before shipping them back

Without RMA number, Fitter Snacker’s receiving department does not know how to process returned materials

Without RMA, accounting has a difficult and time-consuming task to credit proper account

Customers may return out-of-date or spoiled snack bars or damaged or defective cases

Customer receives a credit for returned items Customer is supposed to get a returned material authorization

(RMA) number from Fitter Snacker to put on the defective snack bars before shipping them back

Without RMA number, Fitter Snacker’s receiving department does not know how to process returned materials

Without RMA, accounting has a difficult and time-consuming task to credit proper account

If payments or return credits are not properly credited, Fitter Snacker may believe that a customer is over their credit limit and: Block a sales order that should be processed Send a dunning letter that should not be sent

If payments or return credits are not properly credited, Fitter Snacker may believe that a customer is over their credit limit and: Block a sales order that should be processed Send a dunning letter that should not be sent

There may be up to six events for a sales order Pre-sales activity Sales order processing Inventory Sourcing Delivery Billing Payment

There may be up to six events for a sales order Pre-sales activity Sales order processing Inventory Sourcing Delivery Billing Payment

Provide customer pricing information via: Inquiry: statement of prices for a particular customer for a

particular quantity of product Quote: a binding statement of prices for a particular customer

for a particular quantity of product Presales activities can also include marketing activities

such as sales calls, visits and mailings Customer and sales data stored in the ERP system helps in

preparing targeted marketing activities

Provide customer pricing information via: Inquiry: statement of prices for a particular customer for a

particular quantity of product Quote: a binding statement of prices for a particular customer

for a particular quantity of product Presales activities can also include marketing activities

such as sales calls, visits and mailings Customer and sales data stored in the ERP system helps in

preparing targeted marketing activities

Process can start by pulling data from inquiry or quote Taking data directly from inquiry/quote that customer has approved

minimizes errors Process includes:

Retrieving customer contact data Recording items to be purchased Determining pricing

▪ Quantity discounts▪ Customer-specific discounts▪ Done automatically by system based on configuration settings

Automatic credit check

Process can start by pulling data from inquiry or quote Taking data directly from inquiry/quote that customer has approved

minimizes errors Process includes:

Retrieving customer contact data Recording items to be purchased Determining pricing

▪ Quantity discounts▪ Customer-specific discounts▪ Done automatically by system based on configuration settings

Automatic credit check

Inventory records and production plans can be checked to determine whether sufficient material will be available to deliver customer’s order on time

This available-to-promise (ATP) check includes shipping times and considers weekend and holiday shutdowns System can recommend increased production based on higher than

expected sales Sales orders place a reservation on material so that the material can’t be

sold to another customer

Inventory records and production plans can be checked to determine whether sufficient material will be available to deliver customer’s order on time

This available-to-promise (ATP) check includes shipping times and considers weekend and holiday shutdowns System can recommend increased production based on higher than

expected sales Sales orders place a reservation on material so that the material can’t be

sold to another customer

Delivery in SAP means creating an electronic document that directs the warehouse to pick, pack and ship the customer’s order

Deliveries can be grouped and released to make warehouse operations more efficient

Delivery in SAP means creating an electronic document that directs the warehouse to pick, pack and ship the customer’s order

Deliveries can be grouped and released to make warehouse operations more efficient

The system creates an invoice by copying data from the sales order

The invoice can be printed and mailed to the customer, faxed or transmitted electronically by EDI (electronic data interchange) or the Internet

The accounts receivable account is debited (increased) and sales account is credited automatically

The customer can make a payment by mailing a check or electronically transmitting funds Timely recording of payments is important for properly managing a

customer’s credit limit

The system creates an invoice by copying data from the sales order

The invoice can be printed and mailed to the customer, faxed or transmitted electronically by EDI (electronic data interchange) or the Internet

The accounts receivable account is debited (increased) and sales account is credited automatically

The customer can make a payment by mailing a check or electronically transmitting funds Timely recording of payments is important for properly managing a

customer’s credit limit

To enter a sales order in SAP’s R/3, the sales order clerk must identify the customer and material ordered to the system SAP identifies customers and materials via a

unique number Search functions allow the sales order clerk to

find a customer or material number easily

To enter a sales order in SAP’s R/3, the sales order clerk must identify the customer and material ordered to the system SAP identifies customers and materials via a

unique number Search functions allow the sales order clerk to

find a customer or material number easily

Sold-to party: Where the customer’s identification number is entered

P.O. Number: The number assigned by the customer to this sales order

Req. deliv. date: The date when the customer would like to receive the order

Material and Order quantity: What thecustomer is ordering

SaTy: Sales Document Type

Clicking on Sold-to party field produces a search icon. Clicking on the search icon calls up a search window with numerous search options

Information about Customers and Materials is stored in the central database as Master Data Master data is relatively stable data shared by modules

Organizational structures allow a company to group customers and salespeople Distribution channels provide different ways to sell and

distribute material to customers (e.g. wholesale, direct, etc.)▪ Allows for different pricing, delivery methods and

minimum order quantities

Information about Customers and Materials is stored in the central database as Master Data Master data is relatively stable data shared by modules

Organizational structures allow a company to group customers and salespeople Distribution channels provide different ways to sell and

distribute material to customers (e.g. wholesale, direct, etc.)▪ Allows for different pricing, delivery methods and

minimum order quantities

Inventory sourcing determines if sufficient inventory exists to meet a customer’s required quantity and delivery date If not, available-to-promise (ATP) logic provides

delivery proposals:▪ One-time delivery of partial quantity on required delivery

date▪ Complete delivery on later date▪ Two partial deliveries on different dates

Inventory sourcing determines if sufficient inventory exists to meet a customer’s required quantity and delivery date If not, available-to-promise (ATP) logic provides

delivery proposals:▪ One-time delivery of partial quantity on required delivery

date▪ Complete delivery on later date▪ Two partial deliveries on different dates

Three options proposed by SAP R/3

The customer refers to the sales transaction via their Purchase Order Number—a number that the customer generates

The seller (known as a supplier or vendor) creates a document number that they use to keep track of the sales order As a result, each party to the sales transaction has a different

number to refer to the sales transaction SAP creates the sales order number and records the

customer’s purchase order number▪ If the sales order is entered manually, an error may be

made in keying in the customer’s purchase order number

The customer refers to the sales transaction via their Purchase Order Number—a number that the customer generates

The seller (known as a supplier or vendor) creates a document number that they use to keep track of the sales order As a result, each party to the sales transaction has a different

number to refer to the sales transaction SAP creates the sales order number and records the

customer’s purchase order number▪ If the sales order is entered manually, an error may be

made in keying in the customer’s purchase order number

Every document in the SAP R/3 system is given a unique number

A large number of documents can be created in the sales order process: Multiple deliveries can be created for large orders Customers may make multiple payments, resulting in multiple invoices Payments may be made for multiple orders Returns create credits to the customer’s account

Document Flow is the tool in SAP that links the multiple documents in a sales order

With Document Flow, one document number can be used to find all documents related to a sales order

Every document in the SAP R/3 system is given a unique number

A large number of documents can be created in the sales order process: Multiple deliveries can be created for large orders Customers may make multiple payments, resulting in multiple invoices Payments may be made for multiple orders Returns create credits to the customer’s account

Document Flow is the tool in SAP that links the multiple documents in a sales order

With Document Flow, one document number can be used to find all documents related to a sales order

Accounting Document 90000002 is linked to sales order 5

The SAP R/3 system has a flexible system, called the condition technique, that can be configured to calculate pricing using a wide range of discount techniques Per item On all items Based on unit price Based on total value With or without shipping By customer or customer class

The SAP R/3 system has a flexible system, called the condition technique, that can be configured to calculate pricing using a wide range of discount techniques Per item On all items Based on unit price Based on total value With or without shipping By customer or customer class

Net price for order, including discounts

Base price is $240/case

Discount is 10 percent

The production cost of the 10 cases is $1,992

If a line in the order is over $1000, the discount is 5 percentIf a line in the order is over $1500, the discount is 10 percent

A major advantage of an ERP system is integration of accounting with other functions like sales

Whenever a sales order is processed, the appropriate accounts are affected.

Because sales transactions create the appropriate accounting transactions in real-time, accounting has up-to-date sales information

A major advantage of an ERP system is integration of accounting with other functions like sales

Whenever a sales order is processed, the appropriate accounts are affected.

Because sales transactions create the appropriate accounting transactions in real-time, accounting has up-to-date sales information

Accounting document 90000002, accessible from the document flow screen

Accounts affected by the sales order

Customer Relationship Management (CRM) helps a company streamline interactions with customers and make them consistent

Goal is to provide a “single face to the customer” Any employee in contact with a customer should have access to

all information on past interactions Information about a customer should reside in the ERP system,

not with the employee CRM also provides a company with tools to analyze the

vast quantities of sales data available from the ERP system

Customer Relationship Management (CRM) helps a company streamline interactions with customers and make them consistent

Goal is to provide a “single face to the customer” Any employee in contact with a customer should have access to

all information on past interactions Information about a customer should reside in the ERP system,

not with the employee CRM also provides a company with tools to analyze the

vast quantities of sales data available from the ERP system

One-to-One Marketing: Customers are categorized and products, promotions, and

pricing are tailored accordingly. Sales may be increased by cross-selling and upselling

Sales Force Automation (SFA): New customers are automatically routed to the appropriate

sales representative Customer needs are forecasted based on the customer’s

history and transactions Sales Campaign Management:

Helps a company organize a marketing campaign and compile its results.

One-to-One Marketing: Customers are categorized and products, promotions, and

pricing are tailored accordingly. Sales may be increased by cross-selling and upselling

Sales Force Automation (SFA): New customers are automatically routed to the appropriate

sales representative Customer needs are forecasted based on the customer’s

history and transactions Sales Campaign Management:

Helps a company organize a marketing campaign and compile its results.

Marketing Encyclopedias: Database of promotional literature Material can be routed to sales representatives or

customers as needed Call Center Automation:

Customer support can be improved with the assistance of a knowledge management database

New solutions to unique customer query can be added to the knowledgebase, making it “smarter”

Marketing Encyclopedias: Database of promotional literature Material can be routed to sales representatives or

customers as needed Call Center Automation:

Customer support can be improved with the assistance of a knowledge management database

New solutions to unique customer query can be added to the knowledgebase, making it “smarter”

SAP R/3 contains some CRM functionality: Contact management tool:

▪ Database of customer contact information Sales activity manager:

▪ Supports a strategic and organized approach to sales activity planning

▪ Helps ensure follow-up activities are accomplished

SAP R/3 contains some CRM functionality: Contact management tool:

▪ Database of customer contact information Sales activity manager:

▪ Supports a strategic and organized approach to sales activity planning

▪ Helps ensure follow-up activities are accomplished

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A separate CRM system has the advantage of not interfering with the performance of the ERP system

The SAP R/3 system provides the raw data for CRM R/3 and CRM can also interact with:

Business Warehouse (BW):▪ Flexible system for reporting and analysis of data

Advanced Planner and Optimizer▪ System to support flexible planning of the supply chain▪ Provides improved customer service with Global ATP





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SAP R/3 ERP

System

BWBusiness

Warehousemodule

APOAdvancedPlanner & Optimizermodule

mySAPCRM

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SAP’s CRM manages three basic task areas: Marketing Sales Service

The three basic tasks contribute to the cultivation of the customer relationship.

Cultivating a customer relationship involves four phases: Prospecting Acquiring Servicing Retaining

SAP’s CRM manages three basic task areas: Marketing Sales Service

The three basic tasks contribute to the cultivation of the customer relationship.

Cultivating a customer relationship involves four phases: Prospecting Acquiring Servicing Retaining

Prospecting: Potential new customers are evaluated and

development activities (e-mails, sales calls, mailings, etc.) are planned

Marketing tasks predominate in this phase. Acquiring:

Salespeople develop business prospects into customers

Sales tasks (processing inquiries, quotes, and sales orders) become increasingly important in this phase.

Prospecting: Potential new customers are evaluated and

development activities (e-mails, sales calls, mailings, etc.) are planned

Marketing tasks predominate in this phase. Acquiring:

Salespeople develop business prospects into customers

Sales tasks (processing inquiries, quotes, and sales orders) become increasingly important in this phase.

Servicing: Technical support, warrantee work, product returns,

quality problems, complaint handling, etc. are critical to maintain satisfied customers.

Retention The rate at which a prospect becomes a customer is

quite low, thus, retention is critical as it is easier to retain good customers than to find new ones

Timely delivery of quality products and services at a fair price is the focus

Marketing must anticipate changes in customer requirements

Servicing: Technical support, warrantee work, product returns,

quality problems, complaint handling, etc. are critical to maintain satisfied customers.

Retention The rate at which a prospect becomes a customer is

quite low, thus, retention is critical as it is easier to retain good customers than to find new ones

Timely delivery of quality products and services at a fair price is the focus

Marketing must anticipate changes in customer requirements

Companies spend significant sums on marketing campaigns

Successful planning, execution and evaluation are necessary to achieve the maximum benefit

mySAP CRM supports: Marketing and Campaign Planning Target Group Selection Campaign Execution Activity Management Campaign Analysis

Companies spend significant sums on marketing campaigns

Successful planning, execution and evaluation are necessary to achieve the maximum benefit

mySAP CRM supports: Marketing and Campaign Planning Target Group Selection Campaign Execution Activity Management Campaign Analysis

Marketing and Campaign Planning: Task scheduling, resource allocation and budgeting

Target Group Selection: Data from the SAP R/3 system (perhaps using BW) is used to categorize the

company’s customers to offer more individual product and service promotions Campaign Execution Activity Management:

Manage the execution of the marketing campaign, including handling sales calls, mailings, personalized e-mailings and Web-based promotional activities

Campaign Analysis: Evaluate the success of the campaign via lead generation and response rates Plan improvements for the next marketing campaign BW tools can support this analysis

Marketing and Campaign Planning: Task scheduling, resource allocation and budgeting

Target Group Selection: Data from the SAP R/3 system (perhaps using BW) is used to categorize the

company’s customers to offer more individual product and service promotions Campaign Execution Activity Management:

Manage the execution of the marketing campaign, including handling sales calls, mailings, personalized e-mailings and Web-based promotional activities

Campaign Analysis: Evaluate the success of the campaign via lead generation and response rates Plan improvements for the next marketing campaign BW tools can support this analysis

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Target Group Selection

•Modeling•Segment creation•Selection

BW

Campaign Analysis

• Success Measurement

• 3rd Party Data• Profiles

Phone Web Mobile e-mail

Campaign ExecutionActivity Management

Marketing and CampaignPlanning

• Planning• Budgeting• Monitoring

Target Group Selection

•Modeling•Segment creation•Selection

BW

Campaign Analysis

• Success Measurement

• 3rd Party Data• Profiles

Phone Web Mobile e-mail

Campaign ExecutionActivity Management

Marketing and CampaignPlanning

• Planning• Budgeting• Monitoring

A production plan answers two questions: 1. How many of each type of snack bar should we produce,

and when? 2. What quantities of raw materials should we order so we can

meet that level of production, and when should they be ordered?

A successful company must be able to: Develop a good production plan Execute the plan Make adjustments when customer demand differs from the

forecast

Three general production approaches: Make-to-stock: products are made for inventory in anticipation

of sales orders▪ Most consumer products are make-to-stock

Make-to-order: products are made to fill specific customer orders▪ Expensive products or products made to customer specifications

Assemble-to-order: combination of make-to-stock and make-to-order▪ Final product assembled for a specific customer order from stock

components

Snack bar line produces: 200 bars/minute 3,000 lb/hr

Production line operates for one 8-hour shift per day Raw materials are mixed in one of four mixers

Mixers can produce 4,000 lb of dough per hour▪ Excess capacity protects snack bar line from shutting down if a mixer breaks

The 4 oz snacks are packed 24 to a display box with 12 display boxes packed to a case

Changing from NRG-A to NRG-B bars takes 30 minutes

Raw

Mat

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l War

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se

Mixer

Mixer

Mixer

Mixer

Form Bake Pack

Snack Bar Line

Fitter Snacker’s production problem is deciding how many snack bars to make and when to make them

Fitter Snacker’s main production problems are in the areas of: Communication problems Inventory problems Accounting and purchasing problems

All of which are exacerbated by Fitter Snacker’s un-integrated information system

Communication problems exist in most companies Magnified in a company without an integrated information system

At Fitter Snacker, Marketing and Production do not communicate or coordinate planning Production is not always informed of sales promotions or unexpected

planned orders▪ Can result in depleted inventory, overtime production, expedited shipments and

material shortages Production may not inform Marketing about planned maintenance, which

will reduce production

Production manager schedules production based on experience, rather than formal planning techniques Primarily compares current warehouse inventory levels with

“normal” values▪ May include informal communications with marketing personnel

Inventory information is not available in real-time, and does not recognize inventory that has been sold but not shipped▪ Inventory available to commit to future orders is not known

Inventory shortages may mean unplanned production changeovers, resulting in: Lost production capacity Potential shortages of other products

Actual sales data is not available on a timely basis, because: It is hard to gather Lack of organizational trust

With access to sales forecasts and plans and real-time sales order data, production could make better decisions and manage inventory better

Most companies use standard costs to account for manufacturing costs Standard costs are based on historical costs for

materials, labor and factory overhead Manufacturing costs are estimated by multiplying

production quantities by standard costs Actual production costs invariably deviate from

estimates using standard costs, and adjustments must be made regularly

Production planning involves: Developing an aggregate production plan for groups

of products Breaking down the aggregate plan into more specific

plans for individual products using smaller time increments

Use the production plan to determine raw material requirements

Sales Forecasting: The process of developing a prediction of future demand for a

company’s products Sales and Operations:

Process of determining what the company should produce Requires starting inventory levels and sales forecast Capacity must be considered Inventory may be built to meet demand for seasonal products

Demand Management: Process of breaking production plan down into smaller time

increments Detailed Scheduling:

Development of a detailed production schedule based on production plan from demand management

Scheduling method depends on production environment Production:

Uses the detailed schedule to determine what products to produce and what staffing is required

Material Requirements Planning: Determines amount and timing of raw material

ordersPurchasing:

Takes quantity and timing information from MRP and creates purchase orders, which It transmits to qualified suppliers

In SAP R/3, sales (consumption values) are automatically recorded when sales are made in the SD module Additional detail (sales by region or sales office) can be

recorded by the Logistics Information System (LIS) Business Warehouse (BW) can be used for even more

detailed sales analysis With an integrated information system, accurate sales

data are easily available for forecasting

Jan. Feb. March April May JunePrevious Year (cases) 5734 5823 5884 6134 6587 6735Promotion Sales (cases) 300 300Previous Year base (cases) 5734 5823 5884 6134 6287 6435Growth: 3.0% 172 175 177 184 189 193Base Projection (cases) 5906 5998 6061 6318 6476 6628Promotion (cases) 500Sales Forecast (cases) 5906 5998 6061 6318 6476 7128

Sales Forecasting

Simple Sales ForecastSimple Sales Forecast• Sales based on simple adjustment to previous year's sales values

Input to SOP is sales forecast and beginning inventory Output is a production plan that balances market demand with production

capacity Developing an SOP answers the question:

“How can manufacturing efficiently produce enough goods to meet projected sales?”

Fitter Snacker Production Capacity:

bars/day 000,96day

.hr8

hr.min

60.min

bars200

cases/day 3.333boxcase

121

barsbox

241

bars/day 000,96

Sales and Operations Planning Dec. Jan. Feb. March April May June1) Sales Forecast 5906 5998 6061 6318 6476 71282) Production Plan 5906 5998 6061 6318 6900 67003) Inventory 100 100 100 100 100 524 964) Working Days 22 20 22 21 23 215) Capacity (Shipping Cases) 7333 6667 7333 7000 7667 70006) Utilization 81% 90% 83% 90% 90% 96%7) NRG-A (cases) 70.0% 4134 4199 4243 4423 4830 46908) NRG-B (cases) 30.0% 1772 1799 1818 1895 2070 2010

Sales and Operations PlanningSales and Operations Planning

When demand is forecasted to exceed capacity, a company might: Choose not to meet all demand or reduce promotional

expenditures Use overtime to increase capacity

▪ Will increase costs Inventory can be built up in earlier periods

▪ Will increase costs and inventory may be lost Try a hybrid approach

Because the SAP R/3 system is integrated, accurate historical sales values are readily available for forecasting

In forecasting, “correcting” historical sales data is valid if: Production was not able to meet demand, so that the

historical sales data does not represent actual demand Unusual conditions like weather affected demand The effect of sales promotions needs to be “backed out” of

the data In the SAP R/3 system, a number of forecasting models are

available

Sales provided fromSD module

Field where planner can “correct” the sales value

Historical Sales DataHistorical Sales Data

Forecasting Models in SAP R/3Forecasting Models in SAP R/3

HistoricalSales Values

Forecasted Sales

• Using graphs to evaluate forecasts is frequently the best method

Evaluating ForecastsEvaluating Forecasts

In SOP, rough-cut capacity planning can be used to evaluate plan feasibility

For simple products/processes like Fitter Snacker, the capacity estimations are pretty accurate

For complicated assemblies/manufacturing processes, accurate rough cut capacity estimates are hard to achieve

Capacity Requirements

Production Plan

ERP systems provide sophisticated SOP tools, but require commitment from both parties to be successful Without cooperation and agreement on forecasts, sales

promotions and production plans, a company will have:▪ Excess quantities of some products▪ Shortages of others▪ Higher costs due to overtime and expedited shipping

Successful SOP needs a culture of cooperation, which requires top management support to develop

Kellogg achieved significant savings from coordinated SOP process

Key was changing focus of key players Focus was influenced by way players were evaluated

▪ Marketing and sales: tons of cereal sold▪ Manufacturing: tons of cereal produced

Neither party was evaluated on how much profit Kellogg was making Kellogg’s new SOP process, Integrated Business Planning (IBP),

is focused on making profit for the company Kellogg has reduced capacity, inventory and capital needs while

selling more cereal than ever before

Planning is done on aggregate product groups to make the process easier to manage and evaluate

Aggregate plans must be disaggregated to that more detailed plans can be made for individual products

In SAP R/3, the product group hierarchy, which is defined with fixed percentages for each member, is used to determine production quantities for each product

With Fitter Snacker, the product group consists of two products NRG-A typically accounts for 70% of sales NRG-B typically accounts for 30% of sales

NRG Group consists of 70% NRG-A Bars and30% NRG-B Bars

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The Stock/Requirements List shows: Current stock Required materials Material receipts planned Material availability

Anticipated demand for NRG-A Barsfrom Sales and Operations Plan

Demand Management links SOP with Detailed Scheduling and MRP via the Master Production Schedule (MPS)

Fitter Snacker’s Demand Management process splits the Monthly SOP plan into weekly and daily increments Demand Management process in SAP R/3 uses the factory

calendar to determine the number of working days in a particular week or month

111

752224

4134

322224

1772

Week 1 Demand Management 1/2 - 1/5 Monthly Demand NRG-A 4134

NRG-B 1772 Working Days in Week 4 Working Days in Month 22 MPS NRG-A 752 Weekly Demand NRG-B 322

752224

4134

112

Demand Management Jan 2 Monthly Demand NRG-A 4134

NRG-B 1772 Working Days in Month 22 MPS NRG-A 188 Daily Demand NRG-B 81

8122

1772

18822

4134

Fitter Snacker’s production plan for January: The first fiveweeks of production are followed by a day-by-day disaggregation of week 1.

Week 1 Week 2 Week 3 Week 4 Demand Management 1/2 - 1/5 1/8 - 1/12 1/15 - 1/19 1/22 - 1/26 1/29 - 1/31 2/1 - 2/2 Monthly Demand NRG-A 4134 4134 4134 4134 4134 4198

NRG-B 1772 1772 1772 1772 1772 1799 Working Days in Week 4 5 5 5 3 2 Working Days in Month 22 22 22 22 22 20 MPS NRG-A 752 940 940 940 Weekly Demand NRG-B 322 403 403 403

Demand Management Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Monthly Demand NRG-A 4134 4134 4134 4134 4134

NRG-B 1772 1772 1772 1772 1772 Working Days in Month 22 22 22 22 22 MPS NRG-A 188 188 188 188 188 Daily Demand NRG-B 81 81 81 81 81

Week 5

984422

Fitter Snacker’s factory calendar for July

Week 1 Week 2 Week 3 Week 4 Demand Management 7/2 - 7/6 7/9 - 7/13 7/16 - 7/20 7/23 - 7/27 7/30 - 7/31 8/1 - 8/3 Working Days in Week 4 5 5 5 2 3 Working Days in Month 22 22 22 22 22 18

Demand Management July 2 July 3 July 4 July 5 July 6 Working Days in Month 22 22 22 22 22

Week 5

Material Requirements Planning (MRP) is the process of determining the quantity and timing of production and/or purchase quantities needed to support the Master Production Schedule (MPS)

MRP would allow Fitter Snacker to accurately plan its raw material purchases

The Bill of Material (BOM) is a list of materials and quantities needed to make a product

For Fitter Snacker, the BOM is the “recipe” for a 500 lb. batch of snack bar dough

The bill of material (BOM) for Fitter Snacker’s NRG bars

Ingredient NRG-A NRG-BOats (lb) 300 250Wheat germ (lb) 50 50Cinnamon (lb) 5 5Nutmeg (lb) 2 2Cloves (lb) 1 1Honey (gal) 10 10Canola Oil (gal) 7 7Vit./Min. Powder (lb) 5 5Carob Chips (lb) 50Raisins (lb) 50Protein Powder (lb) 50Hazelnuts (lb) 30Dates (lb) 70

QuantityIngredient NRG-A NRG-BOats (lb) 300 250Wheat germ (lb) 50 50Cinnamon (lb) 5 5Nutmeg (lb) 2 2Cloves (lb) 1 1Honey (gal) 10 10Canola Oil (gal) 7 7Vit./Min. Powder (lb) 5 5Carob Chips (lb) 50Raisins (lb) 50Protein Powder (lb) 50Hazelnuts (lb) 30Dates (lb) 70

Quantity

The BOM can be used to calculate how much of each material is required to produce a finished product

Determining the timing and quantity of purchase orders requires information on lead-times and lot sizing

For purchased products, the lead time includes: Time for supplier to receive and process order Time to take material out of stock, package it, load it on a truck and deliver it

to the manufacturer Time required at manufacturer to receive the material:

▪ Unload the truck▪ Inspect the materials▪ Move to storage location or production line

Lot sizing is the process of determining production or order quantities

In many cases, lot sizes for purchased items are constrained by packaging and transportation

For Fitter Snacker: Oats need to be purchased in multiples of 44,000 lb. hopper truck

quantities Wheat Germ needs to be purchased in multiples of 2,000 lb bulk

containers Protein powder needs to be purchased in multiples of 1,250 lb. pallet

quantities

The MRP Process for oats requires the following steps:1. Convert MPS quantities from cases to 500 lb. batches2. Multiply the number of batches by the lb/batch quantities

from the BOM to determine gross requirements3. Subtract existing raw material quantities and released

purchase orders from gross requirements to determine net requirements

4. Plan purchase orders in multiples of the 44,000 lb lot size, allowing for the 2-week lead time, to meet the net requirements in Step 3

Scheduled Receipts are purchase orders that have been placed with the supplier and are scheduled to arrive on a particular date

The MRP process calculates planned orders, which are orders that should be placed with the supplier to avoid running out of the material

Planned orders appear in two places on the MRP Record Planned order release shows when the order should be placed

with the supplier Planned order receipt shows when the supplier should deliver

the order

The MRP record for NRG bars, weeks 1 through 5

Oats Lead Time = 2 weeks Week 1 Week 2 Week 3 Week 4 Week 5MPS NRG-A 752 940 940 940 984(cases) NRG-B 322 403 403 403 422MPS NRG-A 108 135 135 135 142(500 lb. batches) NRG-B 46 58 58 58 61Gross Requirements (lb) 44,090 55,087 55,087 55,087 57,667Scheduled Receipts 44,000 44,000Planned Receipts 88,000 44,000 44,000On Hand 11,650 11,560 473 33,386 22,299 8,632Planned Orders 88,000 44,000 44,000

MRP ProcessMRP Process

3.10850072

752

090,442504.463003.108

MRP list is similar to Stock/Requirements List MPR list shows results of MRP calculations Stock/Requirements shows results of MRP calculations,

plus any changes that have occurred since the MRP calculations were performed: Planned orders converted to production orders Material receipts

MRP calculations can require significant computer resources, so are usually performed daily or even less frequently

The MRP List in SAP R/3

The Stock/Requirements List in SAP R/3

Double-clicking on a planned order brings up a windowwhere the planned order can be converted to a purchase requisition

Planned orders are “recommendations” from the MRP calculation process on what materials should be ordered/produced to meet the MPS

Planned orders must be converted to purchase requisitions before the purchasing department will begin the process to create a purchase order

Planned orders can be converted to purchase orders manually, or the SAP R/3 system can convert a group of planned order to purchase orders e.g. all planned orders that should be placed this week can be converted

to purchase requisitions

Conversion of Planned Order to Purchase Requisition

Planned order release and receipt dates

Option to convert planned order to purchase requisition

Planned Order to Purchase RequisitionPlanned Order to Purchase Requisition

The purchasing department converts purchase requisitions into purchase orders

Purchasing specialists may group items from different purchase requisitions on one purchase order to save costs

Purchasing specialists may produce more than one purchase order for the items on a requisition

The SAP R/3 system provides tools to help the purchasing specialist select the best supplier (vendor) for a material Once the purchase order is complete, it is transmitted to the supplier

(vendor) A number of methods (mail, fax, EDI, internet) are available for

transmitting purchase orders

Source Overview screen for supplier selection

Options to evaluate vendors

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Detailed scheduling is a complex process Scheduling frequently involves a balance between:

Long production runs, which reduces lost capacity due to equipment setups, and

Short production runs, which result in lower inventory levels Because the mixing capacity at Fitter Snacker is greater than the

baking line capacity, scheduling at Fitter Snacker is focused on the baking line

Repetitive manufacturing can be used to schedule production at Fitter Snacker

Repetitive manufacturing schedules production run times instead of specific production quantities

Repetitive Manufacturing Planning Table in the SAP R/3 system

Data can be entered into the SAP R/3 system through a PC, bar code scan, wireless PDA or RFID technology

Because SAP R/3 is integrated, information entered for a material movement will be used to automatically update accounting records One data entry activity provides data for two functions

(materials management and accounting) simultaneously, providing data consistency

For example, the Goods Receipt screen simplifies the connection between the material received from the supplier and the purchase order that created it

Accurate data requires company personnel to consistently and accurately enter information into the system

Goods receipt screen in SAP R/3

Fitter Snacker is part of a supply chain that starts with farmers growing oats and wheat germ and ends with a customer buying an NRG bar from a retail store

Historically, participants in the supply chain have used competitive bidding to achieve low prices This frequently leads to adversarial relationships

The supply chain is frequently more efficient if participants work collaboratively to: Improve products Reduce paperwork Reduce inventories and costs Increase responsiveness to the customer

Supply-chain management (SCM) from raw materials to consumer

Traditional Supply ChainsTraditional Supply Chains• In the traditional supply chain, information is passed through the

supply chain reactively• Information on changes to customer demand may not reach suppliers

for days or week• Information is filtered by purchase order process

ERP systems can facilitate supply chain efficiency Production plans can be shared along the supply chain in real time Integration of accounting allows managers to evaluate impact of plans on

total supply chain costs Measures of supply chain performance include:

Cash-to-cash cycle time Total SCM costs Initial fill rate Initial order lead time On-time performance

Before ERP, Hoyt Archery performed a complete inventory count twice a year Manufacturing plant closed for 3 days at a cost of $5,000 per

day With ERP, Hoyt had accurate, real-time inventory information

and could implement an ongoing cycle- counting process▪ Rather than count all items twice a year, with cycle counting a few

inventory items are counted each day Hoyt also simplified customer interaction with its

configure-to-order (CTO) process

Most growth in e-commerce has been in business-to-business (B-to-B) commerce, not business-to-consumer (B-to-C) commerce

Vanity Fair had no problem complying with the Web-based order tracking requirement of government agencies because it had an ERP system

“If you are going to begin to collaborate with your suppliers, you will have to have real-time information available to them” Tim Lamberth, VP of Global Processes, Vanity Fair

Wal-Mart uses data to gain competitive advantage with its supply chain Purchase data from bar code scanners is recorded in a massive data

warehouse at Wal-Mart headquarters Wal-Mart uses data mining techniques to predict what customers will buy

at different times of the year▪ This data is shared with Wal-Mart suppliers to plan production

Wal-Mart also allows its 5,000 suppliers to directly access its data warehouse through its Retail Link program

Wal-Mart is leading the effort to include RFID technology SAP’s R/3 software has RFID capabilities

VDO had problems in the highly-competitive automotive industry due to: Four manufacturing plants, each with its own business processes No real-time information system

VDO’s survival was threatened as its competitors provided lower cost products with better delivery accuracy

To solve this problem, VDO implemented SAP using the ASAP (now Solution Manager) methodology First plant in 8 months Remaining 3 plants in four months

An ERP system can improve the efficiency of production and purchasing processes Begins with Marketing sharing sales forecast Production plan is created based on forecast and shared

with Purchasing so raw materials can be ordered properly. Production planning can be done without an ERP

system, but an ERP system that contains MRP allows Production to be linked to Purchasing and Accounting This data sharing increases a company’s overall efficiency.

Companies are building on their ERP systems and integrated systems philosophy to practice SCM. In doing this, the company looks at itself as part of a

larger process that includes customers and suppliers.

By using information more efficiently along the entire chain, significant cost savings can result.

• Accounting is a functional area that is tightly integrated with other functional areas like:• Marketing and Sales• Supply Chain Management

• Accounting activities are necessary for decision making

Firms require three types of accounting activities Financial Accounting

▪ Documents all transactions that have an impact on the firm▪ Uses this transaction data to make external reports for various agencies

(FASB, SEC, IRS) Managerial Accounting

▪ Determine costs and profitability of a company’s activities▪ Managerial Information is used for planning and to control a company’s day-

to-day activities Tax Accounting is a specialized field that used Financial

Accounting information

Common Financial Accounting statements include: Balance Sheet

▪ Shows account balances at a particular point in time▪ Gives a good picture of the overall financial health of a

company Income Statement

▪ Shows sales, cost of sales and overall profit for a period of time (quarter, year)

Fitter Snacker sample balance sheet

Fitter Snacker sample income statement

Early information systems gathered data primarily for their own functional area (sales, production, payroll, etc.)

Data sharing with accounting did not occur in “real time” Accountants and functional area clerks frequently had to

do significant research to gather the data needed for reports

ERP systems, with centralized databases, avoid these problems Materials Management module sees a goods receipt as an

increase in inventory Accounting module sees goods receipt as an increase in the value

of inventory▪ A single data entry transaction provides the data for both

A company’s accounts are kept in the general ledger In SAP R/3, input to the general ledger occurs

simultaneously with the business transaction in the functional module Sales and Distribution (SD)

▪ Sales to customers create accounts receivable entries Materials Management (MM)

▪ Purchase orders create accounts payable entries Human Resources (HR)

▪ Payroll processing creates expense entries

151

Other modules also create general ledger entries Financial Accounting (FI)

▪ Manages the accounts receivable and accounts payable items created in SD and MM

▪ Module where general ledger accounts are closed at the end of a fiscal period

Controlling (CO)▪ Tracks the costs associated with producing products

Asset Management (AM)▪ Manage fixed-asset purchases (plant, machinery, etc.) and associated

depreciation

A company with an un-integrated information system can have accounting data that is out-of-date or inaccurate

Out-of-date or inaccurate data can lead to bad operational decisions

Fitter Snacker has this problem with credit management Companies routinely sell to customers on credit Sound credit management gives customers enough credit

to promote sales while minimizing the risk from default Making the correct credit management decision requires

accurate and timely sales and payment data

At Fitter Snacker: The sales clerk uses a weekly printout of all customer

balances and credit limit to see if credit should be granted for a new order

Sales data are transmitted to accounting 3 times per week▪ Both sales and accounting work off data that is not real-time

and may be more than a week old▪ Customer orders that would bring them over the credit limit may be

accepted▪ Customers may be denied credit because recent payments are not

available to the sales clerk

SAP R/3 allows for a number of configuration options to determine how the system responds to an order that would cause a customer to exceed its credit limit The system may block the sales order The system may prevent the sales order from being saved The system may issue warning messages to the sales order clerk

Credit is a sensitive issue, so the system response must be configured to match a company’s procedures

Typically, sales orders are blocked, with no warning given to the sales order clerk A credit specialist would regularly review blocked orders and take

corrective action

Credit management configuration

Dynamic credit check Only orders

for the next two months are considered

Reaction C: warning message is issued when order is saved

Credit management for Health Express

Credit limit for Health Express

Outstanding obligations

Blocked sales order

Options to release, reject or forward blocked sales orders

Accounting data is used to determine the profitability of a company and its products Inaccurate and/or incomplete data can lead to a flawed

analysis The three main causes of data problems are:

▪ Inconsistent record keeping▪ Inaccurate inventory costing▪ Problems consolidating data from subsidiaries

At Fitter Snacker: Sales data is not maintained so that sales reports are easily

generated▪ Analyzing sales data by region or division usually must be done by hand

Production data is maintained with paper records▪ Data must be typed into a spreadsheet from paper records before it can be

analyzed▪ Manual entry leads to errors

Without an integrated information system, much of the effort in generating reports is devoted to working around the limitations of the systems

160

Correctly calculating inventory costs is an important and challenging task in any manufacturing company

A manufactured item’s cost has three elements: Cost of raw materials used in the item Labor used specifically to produce the product (direct labor) Overhead: all other costs

▪ Factory utilities▪ General factory labor (custodial services, security)▪ Manager’s salaries▪ Storage▪ Insurance

Materials and labor are called direct costs Direct costs are relatively easy to tie to the production of specific

products Overhead is an indirect cost

Indirect costs are difficulty to associate with a specific product▪ e.g. the relationship between the cost of heating and lighting and a specific

batch of NRG-A bars To determine the cost of a manufactured product, indirect costs

must be allocated to products

Allocating indirect costs One method is to use total machine hours

▪ Total overhead cost divided by the total machine production time (hours) available for a period to get an overhead rate per machine hour

Example:▪ Overhead costs per month: $152,500▪ Production line capacity: 50 cases/hour

160 hours/month

hourmo

/950$hour/mo. 160

./000,152$ case/19$

case/hour 50hour/950$

163

Allocating indirect costs Another method is to use direct labor hours

▪ The assumption with this method is that overhead costs are incurred so workers can do their jobs

For Fitter Snacker, the snack bar bake line is the fundamental production process as well as capacity constraint, so allocating indirect costs using machine hours (snack bar bake line hours) would make sense

Costs are typically recorded using standard costs, which are based on historical cost data

At the end of an accounting period, adjustments to accounts must be made as actual costs will differ from estimates made using standard costs Balance sheet: cost of inventory held will need to be adjusted Income statement: cost of goods sold will have to be adjusted

Difference between actual costs and standard costs are called cost variances

Cost variances arise with both direct and indirect costs

In ABC, records are kept on overhead costs and the activities associated with overhead cost generation

The goal is to more precisely associate costs with the causes (drivers) and avoid rough allocation procedures

Profitability of particular products is more accurately determined ABC is often used when:

Competition is stiff Overhead costs are high Products are diverse

Not all overhead costs can be linked to activities

ABC requires more bookkeeping than traditional cost- accounting approaches

ABC is often used for strategic purposes in parallel with standard cost accounting

A recent study noted that: ERP companies had nearly twice as many cost-

allocation bases to use in management decision-making ERP companies’ managers rated their cost-accounting

system much higher

Companies with subsidiaries must prepare financial statements for each subsidiary, plus be able to provide a consolidated statement for the entire company

Different currencies and transactions between subsidiary companies can make the consolidation task challenging

Currency translation is challenging because exchange rates fluctuate daily

Intercompany transactions must be handled properly Sales from one subsidiary to another within a company do not

result in a profit or loss, because no money has entered or left the consolidated company

Microsoft must consolidate financial information from 130 subsidiaries

Prior to installing SAP R/3, each subsidiary did accounting in its own system, then transmitted the files to another system, where manipulation of the data was required Subsidiaries used different systems, with different field sizes,

types of characters, account structures, etc. Consolidation took over a week

With SAP R/3, Microsoft can look directly at financial activity at any subsidiary around the world

Reporting accounting information is often challenging Without an ERP system, obtaining the information needed

for a report is frequently a monumental task With ERP, the information is in a single system, however:

The system configuration must be set to gather the correct “raw data”

The appropriate reports are needed, which may require custom coding (e.g. ABAP)

170

In SAP R/3, Document Flow is a tool that finds, organizes and displays a summary of all documents related to a sales order

Sales orders can be very complicated, with: multiple products multiple shipments multiple invoices multiple payments

Being able to find all related documents easily is important in providing efficient customer service

Document flow of a transaction in SAP R/3

Details of any document can be viewed from the document flow screen—a process known as “drilling down”

Because ERP systems use a database, the database can be queried to provide a wide range of reports and analyses

Because reports access the same database where transactions are recorded, reporting and analysis requests can slow down the processing of regular business transactions SAP R/3 has built-in information systems (SIS, LIS, etc.) with their

own data tables for analysis Business Warehouse (BW) is a completely separate system that

extracts data from the SAP R/3 system▪ BW provides greater reporting flexibility and can combine data from other

information systems

173

Enron was a trailblazing energy company that was revolutionizing the oil and gas business and making millionaires of its investors

On Oct. 16, 2001, Enron’s creative financial arrangements began to unravel

On Dec. 2, 2001, Enron made the largest bankruptcy filing in history A primary cause of the collapse was Enron’s partnerships that

shifted billions of debt off Enron’s books so that Enron could borrow money more cheaply

Arthur Andersen, a highly regarded accounting firm, had annually issued annual reports attesting to the validity of Enron’s financial statements

Arthur Andersen was indicted for, among other things, the destruction of Enron documents in the face of an SEC investigation

As a result of the Enron collapse: Enron’s 20,000 creditors will receive approximately 20% of the $63

billion they are owed Shareholders will receive nothing

▪ Many employees invested large sums of money in Enron stock via 401K savings plans

Arthur Andersen, once a firm with 28,000 employees, has been all but dismantled

31 individuals either have been tried or will be tried on criminal charges The Sarbanes-Oxley Act was passed

The Sarbanes-Oxley Act is designed to encourage top management accountability Top managers in recent scandals (Enron, WorldCom, Global

Crossing) have claimed ignorance of accounting abuses Title IX of Sarbanes-Oxley requires a company’s CEO and CFO to

sign a statement that financial statements comply with SEC rules▪ Penalties can be up to $5 million and 20 years in prison

Title II restricts the non-audit services that an auditor can provide

Title IV of the act specifies more stringent requirements for financial reporting Section 404 requires a public company’s annual report contain

management’s internal control report The control report outlines management’s responsibility for:

▪ Establishing and maintaining adequate internal control over financial reporting

▪ Assess the effectiveness of its internal control over financial reporting

▪ To meet the internal control report requirements, a company must document the controls that are in place and verify that they are not subject to error or manipulation

An integrated information system provides the tools to implement internal controls Controls cannot necessarily prevent a pervasive effort to

circumvent standard processes by a company’s leadership (e.g. Enron)

Companies with ERP systems in place will have an easier time complying with Sarbanes-Oxley than those without

In SAP R/3, there are limited situations where data can just be deleted

If data could just be deleted, an unscrupulous employee could: Create a fictitious vendor Post an invoice from the vendor Make payment to a Swiss bank account Delete all records of the transactions so the fraud won’t be detected

In SAP R/3, most data must be archived before it can be removed from the system, so auditors can reconstruct the company’s financial position at any point in time

Transaction options for material master data

Data on a company’s materials cannot be deleted directly, but must be archived for deletion

Change record for material master

SAP R/3 maintains detailed records on all changes made to material master data

A fundamental tool to avoid fraud is separation of duties and user authorizations To complete critical business processes, more than one employee

must participate so that a single employee cannot commit a fraud User authorizations ensure that employees can only perform

those transactions required for their job SAP R/3’s Profile Generator provides a simple method for creating

user authorizations based on the functions (transactions) a user should be allowed to perform

Pre-defined roles make developing authorizations easier

Role for material management master data

Menu paths/transactions that a person assigned the role of maintaining management master data can perform

Another way to ensure that employees do not exceed their authority (and to minimize the risk from fraud and abuse) is to set limits on the size of a transaction that an employee can process

Tolerance groups are predefined limits on an employee’s ability to post a transaction

Tolerance limits can be set on items like: Line items in a document Total document amount Payment difference Discounts

Default tolerance group

No group specified, so this is the default tolerance

The default only allows posting of documents for $1,000 or less

Payments can differ by $10 or 1%

185

An advantage of an ERP system is the ability to “drill down” from a report to the source documents (transactions) that created it

“Drill down” capability makes it easier for auditors to verify the integrity of reports and financial statements

By double-clicking on an item in a report in SAP R/3, the user will be taken to the document(s) that created the created the item

G/L (general ledger) account balance for raw material consumption

Double-clicking on the 8,810.00 debit will provide details on the transactions that make up the item

187

Figure 5.12 Documents that make up G/L Account Balance for Raw Material Consumption

Selecting the 10.00 item and clicking on the details icon will provide more information on the item

Details on $10.00 line item in G/L account for raw material consumption

Some companies strive to “close the books” in one day Other companies take days, weeks and even months to get all the financial

figures correct and in balance Some companies perform virtual closings, simulating the closing

process at various times during the month to see how well the company is doing

Cisco’s closing went from 2 weeks to 1 day by switching from un-integrated systems to Oracle ERP

With ERP, companies can streamline their financial supply chains, holding less cash in the same way supply chains hold less inventory

• A company’s employees are its most important resources• The Human Resources Department is responsible for:

• Attracting• Hiring• Rewarding• Terminating

employees• The importance of HR processes to all functional areas has led to the

use of the term Human Capital Management (HCM) to describe them

• A company’s employees are its most important resources• The Human Resources Department is responsible for:

• Attracting• Hiring• Rewarding• Terminating

employees• The importance of HR processes to all functional areas has led to the

use of the term Human Capital Management (HCM) to describe them

Attracting, selecting, and hiring new employees using information from resumes, references, and the interview process

Communicating information regarding new positions and hires throughout the organization and beyond

Ensuring that employees have the proper education, training and certification to successfully complete their duties

Handling issues related to employee conduct Making sure employees understand the responsibilities of

their jobs

Using an effective process to review employee performance and determine salary increases and bonuses

Managing the salary and benefits provided to each employee and confirming that the proper benefits are disbursed to new and current employees

Communicating changes in salaries, benefits, or policies to employees

Supporting management plans for changes in the organization (expansion, retirements and so on) so that competent employees are available to support business processes

Paper job vacancy form allows for inconsistent job details and descriptions: Qualifications incomplete Requires skills not spelled

Paper form can be lost, delaying hiring process Functional department left shorthanded Good candidates lost due to drawn-out hiring process

Keeping track of resumes submitted from different sources is problematic Being able to retrieve resumes on file that fit a job description is difficult, time-

consuming and fraught with error

Interviewing Process Problems: Without group appointment software, HR has difficulty scheduling

interviews when all interested parties are available Similarly, collecting feedback on the job candidates is difficult Managing travel arrangements and reimbursing candidates for

travel expenses is also a problem▪ Delays may result in losing a top candidate

Gathering new employee information and enrolling employee in correct benefits plan is difficult May take months to get employees proper compensation and

benefits

Performance Evaluations Important to maintain sufficient documentation on

underperforming employees in case termination is warranted▪ Without proper documentation, lawsuits may follow

Difficulties in managing performance evaluation data makes it difficult to identify employee problems and take corrective action (counseling, transfer) before problem leads to termination

Maintaining proper control of sensitive data is also difficult with a paper system

Employee satisfaction is strongly related to job turnover Well compensated employees with satisfying jobs are less likely to

leave the company Human Resources can help maintain a satisfying work

environment through:▪ Training programs through supervisors and managers▪ Conducting employee satisfactions surveys▪ Conducting employee exit surveys

Human resources should ensure compensation levels are competitive and applied fairly to all employees

In 1996, the Labor Department’s Office of Federal Contract Compliance Programs (OFCCP) ran a routine investigation of Boeing’s Philadelphia plant Because Boeing works on government contracts, the

Federal Government has the right to audit Boeing’s compliance with anti-discrimination laws

By comparing median pay of male and female employees and their median job experience, the OFCCP found a “prima facie” (at first view) case of discrimination

Boeing conducted its own internal analysis, Diversity Salary Analysis project, which concluded “gender differences in starting salaries generally continue and often increase as a result of salary planning decisions”▪ The DSA project showed a gap of $3,741.04 for entry level managers

Boeing attempted to keep the DSA project study confidential, but was ordered by Judge George Pinkie to release it

On May 17, 2004, Boeing settled a class-action lawsuit for $72.5 million

The Society for American Baseball Research uses a statistical technique called sabremetrics to analyze player performance in a number of situations, e.g.: Probability of getting a hit with players on base and type of hit likely

Boston Red Sox are using the measures to analyze its roster and determine the type of player it should recruit

Department store chain Target is using this analytical approach to screen job applicants

Dow Chemical used data on its PeopleSoft ERP system to find that its most successful MBA candidates came from Michigan State, Brigham Young and Purdue, not Ivy League schools

Managing a company’s human capital is information intensive Electronic storage of data greatly simplifies the retrieval of

important data The SAP R/3 HR module provides tools to:

▪ Manage an organization’s structure, job roles and responsibilities, and definitions

▪ Personal employee information▪ Time management▪ Payroll▪ Travel management▪ Employee training

Most companies have an organizational chart or plan to help define an individuals responsibilities in the organization

With ERP, the organizational chart provides a structure to support additional tasks

SAP R/3 provides an Organizational and Staffing Plan tool to define a company’s management structure and define positions within the organizational structure The plan can also define the individuals that hold each position

Organization and Staffing Plan in SAP R/3

Organizational Units

Positions

Person holding position

SAP distinguishes between Task, Job, Position, and Person An employee is a Person who performs Tasks Tasks can be assigned to:

▪ Jobs, which are generic descriptions of an employee’s work responsibilities▪ Positions, which are the specific organizational assignments a person holds

If Tasks, Jobs and Positions are well-defined and current, then recruiting is simplified and compensation levels can be set more consistently and fairly

Assignment of a Task to a Job in SAP R/3

Job

Task assigned to Job

The SAP HR Module provides the Manager’s Desktop, a tool that provides access to all Human Resource data and transactions in one location

Human Resource data is very sensitive, so controlling access is critical

With an integrated information system, controlling access is simplified as a range of authorization tools are available See User Authorizations in Chapter 5, pp. 128-129

Manager’s Desktop provides single-point access to HR functions

Employees in manager’s organization

Functions in task area

Time Management Cross Application Time Sheets (CATS) record employee

working times and provide data to:▪ Controlling (CO), for cost management▪ Payroll, for calculating payroll data, which is transferred to FI for

payment▪ Production Planning (PP), to manage labor required for

production

Payroll Management Paying employees the correct amount at the correct time is critical

for employee satisfaction Payroll calculations are complicated, involving:

▪ Remuneration Elements:▪ Base pay, bonuses, gratuities, overtime and sick pay, vacation allowances

▪ Statutory and Voluntary Deductions▪ Taxes: Federal, State, Local▪ Medicare and Social Security▪ Benefit contributions▪ Company loans

Travel Management Companies can spend a significant

amount of money on employee travel Managing travel planning and expenses

requires a number of tasks▪ Travel authorizations▪ Travel reservations

▪ Must meet trip requirements while controlling costs

▪ Recording expenses and providing reimbursement

Fuji Xerox Information Systems (FXIS) wanted to be able to close its books two days after the end of the month

To do this, FXIS chose to implement SAP R/3 FXIS chose to implement the SD, MM, FI, CO, PS and HR

modules Integration of HR data was emphasized

To meet the two-day closing, FXIS needed expense information from its sales force, plus time charge data from software developers and system administrators FXIS developed its Web-based DI system to collect this data DI was so successful, FXIS formed an ERP solution business

Training and Development The Personnel Development component of the SAP R/3 Human

Resources module supports planning and implementation of employee development and training activities

Employee development is driven by Requirements and Qualifications▪ Requirements: Skills or abilities associated with a position▪ Qualifications: Skills or abilities associated with a specific employee

Two perspectives on the same concept

Training and Development An employee’s qualifications can be compared to the requirements of a

position to which the employee aspires▪ The comparison identifies gaps and allows a manager to plan

development and training efforts to close the gap▪ The comparison can serve as a basis for employee evaluation, and

can motivate the employee by providing a goal and a means to achieve it

Succession Planning Companies should have plans for replacing key employees when they

leave the company Small companies can lose business if customers are unclear about

succession plans for key people

Succession Planning allowed McDonalds to announce Charles H. Bell as new CEO hours after CEO James Cantalupo died of a heart attack Unfortunately, McDonalds had to announce Jim Skinner as CEO

in November of the same year when Charles Bell was diagnosed with terminal cancer

Quest Diagnostics CEO Kenneth W. Freeman began planning for his successor nearly 5 years before he planned to step down

Freeman identified Surya Mohapatra as his top candidate after screening 200 Quest executives

Mohapatra had extensive technical skills as a scientist, but needed to develop his abilities in other areas: Public speaking: Freeman had Mohapatra make

unscripted presentations to employees, shareholders and industry analysts

Decision making: Freeman spent 5 years engaging Mohapatra in lengthy telephone conversations discussing his management style

Board of Directors Relations: Freeman changed the seating chart for board meetings so that Mohapatra had more “face time” with each director

Mobile Time Management: Allows employees who spend significant time “on the road” to use cellular phones and other mobile devices to record work times, time charges, absences, and leave requests

Management of Family and Medical Leave: The SAP R/3 HR system can now determine employee eligibility for FMLA leave and track usage

Domestic Partner Handling: Companies that provide for domestic (unmarried) partners can now manage benefits for domestic partners and their children more easily

Administrative and Long-Term Incentives: Sarbanes-Oxley requires companies to account for expected costs for long-term incentives like stock options

Personnel Cost Planning: Scenarios can be developed for major organizational changes like expansions, acquisitions and downsizing to determine the cost impacts

Management and Payroll for Global Employees: Managing global employees involves complicated issues including relocation, visas, work permits, housing, taxes, and bonus pay

Management by Objectives: MBO, outlined by Peter Drucker in 1954, encourages managers to focus on results, not activities, and negotiate a “contract of goals” SAP R/3 now provides a comprehensive set of tools to support MBO

The United States Postal Service (USPS) signed a deal with SAP in August 2004 to provide HR software to replace its current systems written in the 1980’s

The USPS employs roughly 70,000 employees, about one-third of the civilian government workforce

SAP was chosen as it has experience providing HR systems to about 50 other postal systems worldwide

Postal Service Managers expect the SAP software to help them better control costs and manage employees

Managers expect to be able to view information company-wide and allocate resources as needed

Huge Presentation to Explain ERP

Business

erp systems

erp company

erp modules

erp integration

way erp software

flow of information

business strategy

companys business practices