Posted by: ahmedashfaque | August 22, 2014

What is SAP – inventory management 1

Inventory management is an important activity in most companies. Companies buy raw materials and store it. Companies make semi-finished or work in progress materials and need to store them until they are issued for further processing in manufacturing. Companies make or buy finished goods and need to store them until they are sold or used.

To ensure materials are in good condition, companies need to keep them in a safe and tamper proof environment so that they are not spoiled or damaged. Materials which have a expiry date must be stored in such a way that the batches of materials which have the nearest expiry date are consumed or sold before the ones which have expiry dates long in the future.

Many materials are kept inside boxes, bins or any other form of containers. To identify the materials, a label must be displayed on the container to know which materials are there inside. Which materials in what quantities need to be moved in or out also need to be considered. To have goods movements fast and efficiently through the storage location definitely needs good planning for stocking of materials.

Stocking of materials require space. How to use the storage space efficiently, stocking planning plays an important role. Which materials need to be moved faster than the other materials needs a removal strategy.

Many companies now a days have large storage facilities in the form of warehouses. To manage such large warehouses requires advance planning and strategies for all the factors mentioned in the above paragraphs.

SAP has a separate module called SAP warehouse to handle inventory management for companies. But even before we discuss warehouse management, it is important to understand the inventory management activities. In SAP materials management, there is a sub module called Inventory management (SAP MM IM) which takes care of inventory management activities at the top most level. All goods receipts,goods transfers and goods issues get initiated in SAP MM IM. In SAP MM IM you can define your inventory location in form of storage locations. So total increase in inventory quantity through all goods receipts are tracked at storage location level. Similarly total decrease in inventory quantity through all goods issues and goods transfers are tracked at storage location level.

In fact if you do not need to track which materials are kept at what place inside a storage location then you do not need the warehouse module. The SAP MM IM module is enough in such cases.

But if you need to divide the storage location in many storage areas and then need to identify which materials are kept in each storage area then you definitely need a warehouse management system.

Posted by: ahmedashfaque | August 21, 2014

What is SAP – pricing procedure in SAP

Posted by: ahmedashfaque | August 20, 2014

What is SAP – scheduling agreement

In my previous post i discussed about consignment process. Today i will discuss about scheduling agreement.

A manufacturer engages with its vendors in many ways depending on the requirements for kind of procurement needed. A manufacturer in industries like automobile, electronics, computers etc. does not make all the parts required for final assembly for creating the finished product. Some manufacturers in fact do not manufacture any parts at all. They just procure all the parts from vendors, assemble them and ship them to customers. One such example is Dell computers. Dell does not make any computer parts at all but procures them from its vendors. They also do not keep any inventory. For companies like Dell the time to get the procured parts to its assembly plant is very crucial. After a consumer orders a computer from Dell, the actual procurement for computer parts begin. At the time of order booking, Dell may have committed a delivery time of 3 business days to the consumer. This mean all required parts should be delivered to the Dell plant, assembly done and finished product shipped so that it reaches the consumer only in these 3 business days. How this business scenarios can be achieved with perfection?

The answer lies in having a scheduling agreement with the vendors. In this kind of procurement arrangement, the manufacturer has a tight scheduling arrangement for the required parts so that the vendor makes sure that they reach at manufacturer’s plant at exactly the same time committed by the vendor. If the vendor fails to do so then he will have to pay a penalty to the manufacturer. If on the other hand the manufacturer cancels delivery of a committed scheduled part then the manufacturer will pay penalty. This kind of no delays allowed set up makes sure that the manufacturer gets required parts always on time.

To make a better visibility into the expected volume of business transactions in the future, the manufacturer shares its forecast of expected business volumes with the vendor. The vendor thus knows about kind of demand expected in future and gears its own manufacturing and procurement activities accordingly.

In SAP, scheduling agreements have a 2 tiered structure. The header level of the agreement document contains a broad business agreement without specific and exact business volumes. The document also contains a scheduling part where a number of scheduling lines in the agreement document are created and maintained. Each scheduling line defines which parts in what quantities at what price and on what time is required at the manufacturer plant. As demand forecast is also maintained in this same area, this area is divided into 2 or 3 parts. First the forecasted scheduling lines are entered with a long time window in the future. As the time window nears the immediate future and into the exact requirement for procurement, the scheduling lines are firmed. When the firmed scheduling lines are actually delivered then the next scheduling lines which are next in line for delivery come into the firm zone. This process keep running unless the vendor or the manufacturer changes the schedule date.

The scheduling agreement does not require much maintenance. Mostly it is automatic. Whenever new scheduling lines are created in the agreement by the manufacturer, they are transmitted to the vendor through EDI or the internet. Whenever any changes are made to the scheduling lines either by the vendor or the manufacturer then again these changes are transmitted through EDI or the internet.

Scheduling agreements indeed provide a tremendous business benefit both to the vendor and the manufacturer.

In my next post, I will discuss inventory management.

Posted by: ahmedashfaque | August 19, 2014

What is SAP – consignment process

In my previous post we had seen how subcontracting process works in SAP. In this post we will see how consignment process works in SAP.

In many industries, manufacturer gets into agreement with vendors so that the vendor keeps inventory of its materials at manufacturer premises. The manufacturer issues materials from this inventory for manufacturing. Since the inventory belongs to the vendor, the manufacturer is not liable for the inventory. The manufacturer pays vendor only when material is taken from this inventory.

To implement consignment process in SAP, a pricing mechanism called info record is created. The info record category will be consignment. The consignment process should be activated in customizing in SAP. Now you can create a PO or contract of consignment type. Now you can do goods receipt for the material to come from vendor warehouse to vendor inventory in your premises. Once you have stock in vendor inventory you can do goods issue.

On the PO or the contract the price is not mentioned because the price will come from info record. The payment to the vendor is also not settled on PO level or the goods receipt level. The payment to the vendor is settled against goods issue from vendor stock to your own stock.

There could be many variations to this standard consignment procedure. For example a third party sales process can be easily mapped to this consignment process. The manufacturer can keep stock of vendor material at its own premises. When any material is sold to a third party, only then the manufacturer makes payment to the vendor. In some cases, it is also possible to combine the consignment process with any other procurement process.

In my next post, I will discuss about scheduling agreement.

Posted by: ahmedashfaque | August 18, 2014

What is SAP – subcontracting cycle

In my last post, we had seen how request for quotation works in SAP. In today’s post we will see how subcontracting works in SAP.

In many industries, manufacturer does not make all components required to manufacture the completely finished product. Instead, they subcontract many manufacturing activities to subcontractors who make these components and ship to the manufacturer. The manufacturer then assemble these parts to make the finished product. In industries like electronic goods, computers, automobiles etc. subcontracting to make many assembly parts is a common practice.

The raw material needed to make the parts is supplied to the vendors by the manufacturer. After finishing the assembly, the vendor ships it to the manufacturer. The manufacturer receives. The vendor sends invoices for the work performed. The manufacturer pays the vendor after verifying the invoice.

This is the standard configuration in SAP. Some variations on this standard scenario can happen. For example, the raw material to be supplied to the vendor may come from another vendor. So there can be an arrangement with both the vendors by the manufacturer so that the needed materials are supplied in this way. In yet another variation the finished assembly made by the vendor can be supplied to another vendor who will work on it to make another product.

All of these kinds of variations can easily handled in SAP.

In my next post, we will see how consignment is taken care of in SAP.

Posted by: ahmedashfaque | August 17, 2014

What is SAP – request for quotation

In my last post, we had seen what SAP materials management is all about. In this post, we will see how request for quotation is mapped in SAP.

Request for Quotation (RFQ) is a very common purchasing method used by companies when they want to place bids on vendors for procurement of goods at the best price, service or any other criteria. Since a lot of time and effort is required in the entire RFQ process both of the customer and vendors, RFQ is used only when a substantially large purchase has to be made.

The RFQ process starts when the customer creates a RFQ document. in the RFQ document, the customer mentions the goods or services to be procured, quantity or value of RFQ, expected delivery date and other relevant information or documents. Customer then sends this RFQ to selected vendors. When the vendors receive the RFQ then they complete the queries mentioned in the document as well their price and terms of delivery. They then send it to the customer. When the customer receives all of the completed RFQ (bid) documents then they perform evaluation of each bid. the find out which bid is the best depending on their criteria for price, quality of service, previous performance of the vendor etc. The customer finally selects the best bid and rejects the rest of bids. The customer then places the purchase order to the vendor with the best bid.

In SAP, the entire RFQ process is mapped so that all aspects of the RFQ, bid, price comparison, vendor selection is done entirely online and mostly automatic. If the customer requires that each RFQ process should pass through authorization to ensure that the purchasing activity is monitored and sanctioned before the actual purchasing takes place then a release procedure can also be configured. In that case, the RFQ document has to be released by the relevant sanctioning managers before it can be posted to vendors.

In my next post, we will see how a subcontracting cycle works in SAP.

Posted by: ahmedashfaque | August 16, 2014

What is SAP – SAP materials management

In my last post i discussed about integration of SAP modules. In this post, we will discuss what SAP materials management module is all about.

Any organization needs to procure goods and services. Goods and services can be procured using various procuring instruments like purchase orders (PO), contracts, request for quotation (RFQ), scheduling agreements etc. The organization creates these procurement documents and sends it to vendors. Vendors in turn ship goods or perform service. Later the vendors present invoice for the goods or services performed. The organization in turn verifies the invoices and processes them against the goods received or services performed. The finance department of the organization then pays to the vendors against the invoice receipt.

But even before these procurement documents are created, various departments of the organization need to demonstrate what goods or services need to be procured. A purchase requisition (PR) or indent is created by these departments for this purpose. The PRs can be created automatically or manually. Automatic creation of PR can be done using material requirement planning (MRP) tools.

Once the user departments create PRs, they are sent to the purchasing department. The purchasing department then finds out which kind of procurement document needs to be created for procuring the required goods or services. It depends on the situation on hand. If it is a one time purchase then a single PO can handle the purchasing. If a long term purchasing is required then a long term contract can be established with a vendor. If the required goods or services needs to be purchased using competitive bids from vendors then a RFQ will be created.

In my next post, I will elaborate on how RFQ process is mapped in SAP.

Posted by: ahmedashfaque | August 15, 2014

What is SAP – SAP integration

In my last post I discussed about SAP structure. In this post i will discuss about integration of various modules in SAP.

When any business transaction is performed, many accounting entries happen. For instance, when a product is purchased, then the purchaser’s financial account is debited and the seller’s financial account is credited. At the same time, stock of products at seller’s is debited by the quantity of purchase and the stock of products of buyer is credited.

This credit and debit business for both goods and financial accounts happen at all points where goods are either transferred or sold or destroyed or taken for sample etc. This means, a credit and a debit may happen for both goods accounts and financial accounts when a goods movement like goods receipt, goods issue, goods transfer etc. happens within or outside of any business organization. Goods receipts happen when goods arrive at the customer’s premises from a vendor. goods issue happens when goods are issues for production. A goods receipt will again happen when goods are moved from production to inventory or warehouse. Goods issue can again happen when goods are shipped to a customer from inventory against a sales order.

So you see, both financial and material transaction happen through out any business organization and also outside as well. This means when a procurement transaction is done then accounting entries also need to be done in financial documents. This is true for production transactions and sales transactions as well. In fact, any business transaction involves financial entries apart from entries into material stocks.

This means integration of financial book of accounts is necessary for any procurement, production or sales transaction.

In SAP integration of modules is achieved through various means. For example when a goods receipt happens for any material received from a vendor then both a material document as well as a financial document is generated in SAP. Similarly when a goods issue happens then again both a material document and a financial document is generated. The material document contains information about debit and credit entries for material stocks. The financial document contains information about debit and credit entries about financial accounts.

Posted by: ahmedashfaque | August 14, 2014

What is SAP – SAP structure

In my previous post, we have understood what is SAP. Now we will understand structure of SAP application.

Business applications which take care of many (if not all) business functions of any organization are called ERP (Enterprise Resource Planning) tools. What are typical business functions in any organization?

Any organization have customers. Marketing department of the organization is always focused on finding which of their products and services sell more, what are customer requirements, how customer requirements can be fulfilled better, which are target markets, how to penetrate target markets, how to beat competition etc. To get answers to these marketing related questions, they need to have customer data for analysis. They also need a tool which can crunch all this data and provide answers to their questions. The software applications which do these jobs are known as Customer Relationship Management (CRM) applications.

Next the organizations have a sales department which takes care of delivery of goods or services to customers. The sales department uses software applications which help them take orders from customers, track available products or services in the inventory to fulfill the orders, arrange shipping of the goods to the customer and finally get payment from customers against the billing they have done to the customer against the goods which were sold. This whole process is popularly known as sales to cash cycle.

If the organization manufactures goods which it sells then the production department needs information as to which goods to manufacture when and in what quantity, issue or procure raw material, arrange machines and men to get the manufacturing done and finally ship the manufactured goods to the inventory. The software which takes care of production operations is known as production planning & operations management software.

The organization needs to procure the raw materials which are needed for production. The procurement department needs to get information as to when and how much raw materials are needed, which vendor provides the required raw materials, what is the price of the raw materials, through what procurement arrangement the needed raw material can be purchased (long term contract, one time purchase, RFQ etc.) and finally arranging payment to the vendors for purchases made. This entire process is also known as procure to pay.

Apart from functional requirements, the organization also needs to have a finance department which manages all accounts payable and accounts receivables  for the organization. In fact the finance department is the controlling department which has controlling powers for all financial aspects about the organization. The finance department uses financial software to manage all of its activities.

Apart from these main functions in any organization, there are people management (human resource), payroll management, vendor management, IT management etc functions which need to be taken care of.

Any good ERP should have features which will take care of all these functions in any organization. SAP is the best ERP to take care of these functions for any organization.

To take care of these department specific functions, SAP application is divided into modules. Fro example, there is a Finance module in SAP application which is used by finance department, there is a sales & distribution module which is used by sales department, materials management module which is used by procurement department etc.

All of these modules are tightly integrated with each other in SAP application.

In my next post, i will discuss about how the integration of modules is handled in SAP.

Posted by: ahmedashfaque | August 13, 2014

What is SAP?

Many of my social media friends have been asking me, what is SAP? So let us understand, what is SAP after all!

Most people work in services industries. Some other people work in industrial, agricultural sector etc. It is also a fact that most people use some kind of software applications in their work. These software applications can be broadly categorized as personal productivity applications, business applications, financial applications etc.

Let us understand each of these kinds of software applications.

Personal productivity software applications:

You use word processors like Microsoft Word, spread sheets like Microsoft Excel, presentation tools like Microsoft Power Point etc. These are personal productivity software applications tools.

Financial & tax software applications:

You use programs like Tally to do accounting and prepare tax calculations. These are financial & tax software application tools.

Business software applications:

People use some business applications tools for accounting, business transactions etc. These applications can do things like procure to pay business transactions, sales to cash business transactions, productions / manufacturing to inventory transactions etc. Some of these tools are capable of doing these transactions for small volumes. Examples include Microsoft Great Plains, Microsoft Solomon, Microsoft access etc.

For large organizations, these smaller business application tools are not a good fit. These tools can not take care of thousands or even millions of transactions on daily basis. For these large corporations, another kind of business applications are needed which can take care of these large volume transactions. Examples of these applications include SAP, Oracle Applications etc.

What is capability of SAP 

A SAP system can take care of transactions for any very large corporation. Most of the largest fortune 500 companies use SAP as their business application tool. SAP applications suite is developed by SAP AG, a German company. To broaden their market, SAP AG also delivers pre-configured SAP systems for mid size companies. they also have pre-configured solutions for industry specific applications. For example, steel, paper, metals etc. industries need some special capability. SAP AG provides this capability in their solution for Mill Industries. Similarly they have packaged solutions for Oil & gas industry, defense industry, mining industry etc.

In my next post, I will discuss about structure of a SAP system.

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