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Challenges in implementing SAP Solution in Engineering Industries

This is my first blog. Though I planned to blog in SCN for quite some time now, finally I managed to pull up my socks after spending time recently in Community Clubhouse at SAP TechEd 08 held at Bangalore last week.


I have tried here to bring up the typical scenarios and challenges faced while implementing SAP SCM/ERP solution in Engineering industry specifically in Indian context.


Before any major SAP implementation project is taken up at Engineering industry it is recommended to have a clear plan for Data Cleansing and Data Migration.  Most of the products in Engineering industry are ETO (Engineered-To-Order) so the quantum of Master Data especially Material Master, Bill of Material and Routing is huge. Also in today’s business scenario profit margin’s in SPARES business is very high and it has evolved as bread winner for most of the engineering industries, so it is all the more important now to make sure the Data Cleansing and Data Migration is planned and executed with minimal errors. I was involved in couple of SAP implementation project for Engineering industries where Data Cleansing and Data Migration become major blocker affecting implementation schedule and emerged as the key challenge for the implementation / project team.


From Production Planning perspective in Engineering companies Final products are generally ETO and the BOM is multilevel with very large number of components. For example, even a Small Steam Turbine of 3 Mega Watts capacity can have more than 1000 components with almost 8/9 levels. Production/procurement lead-time for some of the critical components would range from few days to few months. So the Planning Strategies and Production Scheduling plays a key role in ensuring material availability. There would be few imported components and Direct Bought-Out components (Material type – HAWA), which will be directly shipped by vendors directly to customer site for installation. Requirement Planning is even more challenging if Project Systems module is also integrated and Project Systems drives procurement and production of some high value/critical items.


Production Execution is closely integrated with Quality Management and Product Costing in Engineering industries. Though there is no major difference in regular Production Order processing, during manufacturing of some items scrap % is more due to non-standard production. It is all the more important to handle scrap processing during production process where all the operations are not completed and GR has not be carried out. This is specific to Engineering industries especially for ETO scenario. Coming back to the example of Steam turbines manufacturing, when critical items such as blades and nozzles etc are manufactured the scrap is relatively more. So if there was a production order to manufacture 30 Steam Turbine Rotor Blades and out of which 20 is the yield and 10 is scrapped it is an interesting challenge managing it in Product Costing. When ever there is a scrap it is advised to run over heads of the production order and subsequently note down the cost of the 10 items scrapped and cost of these 10 items are not to be settled to the material. At the end of the order the Settlement Rule is suitable modified to proportionally settle to the Material and Scrap Cost Centre.


Rework Processing

Along with Scrap processing, Rework Processing is very evident in Engineering industries. During production, if any rectifiable defect is notified a rework operation can be carried out in the same production order. Rework Control Key is defined and during Production Order Confirmation if Rework is identified a new operation is inserted in the Production Order with the Rework quantity and the Production Order processing continued. It could be tricky to carry out the settlement for the production order with rework operations. Here the settlement rule needs to be modified to settle the rework cost separately to a different cost center and so that, only the required actual cost goes to the material.


Work Centers Idle Time Booking 

Due to various constraints in the shop floor (like no power/breakdown, no Operator, no Job) the machines or work centers can lie idle.  In engineering Industries it also viewed important to report reasons for work centers being idle. This could be done with a work around. All possible reasons (no power/breakdown, no operator, no job) for work centre idle time are defined by different Operation Control Keys. When a Machine/Work Centers is idle Production Orders are created with out material and settled to a dummy Cost Center where cost is not booked.


Dynamic Subcontracting 

In engineering industries not all the production orders are possible to be executed completely in the factory. Due to various operational constraints, some of the operations in a Production Order need to be offloaded to subcontractor. This scenario needs a work-around in SAP to be handled.


Let us take a case of a Production Order in which some operations are confirmed and next operation is decided to be subcontracted. Overhead cost for the order is run and the cost in the Production Order is noted. One new intermediate material is created with the material price equal to the cost accrued in the order. Perform intermediate GR for the Production Order with the new material as the receiving material. After ensuring WIP value in the Production Order is zero, technically complete (TECO) the Production Order. Create the second intermediate material code with price equal to the sum of price of first intermediate code and the subcontract charge. Modify the Bill of Materials as below. (If project systems is used only Project specific BOM could be modified)

Modified BOM structure applicable for Dynamic Subcontracting Scenario

Final material (Output of original Production Order)

                    -> First intermediate material (to receive & close Production Order)

                                    -> Second intermediate material (to create Subcontract Order and receive it back)

                                                      ->  Raw materials (Input to Production Order) 

Subcontracting purchase requisition is generated for second intermediate product and subcontracting transactions are carried out and when the second intermediate product is received into the factory the new planned / production order for the final product is generated. Before new business transactions are carried out against new Production Order, ensure deletion of first few operations which are completed / subcontracted.


Other key scenarios pertaining to Engineering Industries are By-Product and Co-Product Processing, Safety Stock Planning, Serial Number management. I intend to present the challenges faced on these scenarios in my forthcoming blogs.

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  • Thanks for the great blog.

    I need one clarification – How to create a Production order without Material. ( You told so under the subhead “Work Centers Idle Time Booking “.

    Pl clarify.

  • I need following clearification for dynamic sub contracting process – as you aware that in  engineering to order scenario speacially fabricated assembly the BOM weight of assembly is varies with actual weight of assembly as at the time of BOM any cut outs,any odd shape components weight are not being considered. How to address this issue if we are carring out the activity of fabrication at sub contractors end.
    Secondly how to address the isssue of usable offcuts generated from standard sheets available. E.g. component size required 2486x 910 , the material size used for above is 1250 x 2500.