Consumer Products Industry- Technological Solution

[Former Member]

Objective

The
objective of this white paper is to provide a detailed overview of challenges
in the area of Life cycle management of Installation Equipment business. This
white paper also describes the scope of Project management system currently
being used by Consumer products Industry. The reader will gain better
understanding of additional functions like Project Planning, Revenue
Recognition and Project delivery.

Key Challenges

1. Coordinating and
   reporting all aspects of Installation Equipment under one bucket.
2. Visibility of all
   resources and work related in installations
3. Ability to report
   customer specific job orders actual costs  and revenue on a near real-time
   basis
4. Ability to recognize
   revenue at a customer Installation Equipment level and exercise control of when
   to recognize
5. Integration with
   other business functions like Finance, Sales, Logistics Execution
6. Large data migration

Overview of Business Process

The CONSUMER
PRODUCT Industry business for Customer has typically the following steps

• External Sales
  creates estimate and submits the quotation to Prospect
• Prospect approves
  quotation
• External Sales
  informs Internal Sales
• Internal Sales
  creates job order and estimates of labor and material
• Internal Sales
  notifies design if any design work needs to be done
• Design
  department then assigns labor to the new Installation Equipment job and
  starts work
• The procurement team
  gets an email from the internal sales team , which in turn creates  PO’s
  for externally purchase material
• The ware house is
  confirmed by  the internal sales team to deliver material to
  subcontractor/customer location
• Notify technicians
  to start Installation Equipment once the material is received at site
• Installation
  Equipment group assigns technicians and creates PO if external sub-contracting
  is required.
• Material which is
  not required of damaged is sent back to ware house
• Installation
  Equipment team completed the Installation Equipment and confirms to accounting.
  Accounting team follows up with Installation Equipment team to raise an invoice
• Accounting team
  bills the  customer and recognizes the revenue
• At every stage
  reports are created by multiple teams, but there is no one real time
  consolidated report of all the processes for one installation

1. 1. Coordinating and
   reporting all aspects of Execution under one bucket.

The
key challenge in the above process is to consolidate the work done by multiple
teams working in islands with no visibility to the Installation Equipment work
entirety. Also data was flowing form one business process owner to another and
most of the time it was manual or delayed. This led to incorrect reporting and
poor visibility in terms or work progress.

The
suggested solution was to utilize functionalities of SAP Project System to plan
and organize all the activities of customer Installation Equipment under one
project. This also gives benefit to plan the entire resource requirement under
one umbrella. A Work break down structure allowed the user to detail the work
to the level of monitoring and planning. It also allowed segregating the Installation
Equipment by various systems, so that different teams responsible for various
systems were still working under one project.

The
high degree of integration between the Project System and other application
components meant that the user could plan, execute, and account for projects as
part of normal commercial procedures. This meant the Project System had
constant access to data in all the departments involved in the project.

The
result of this was better visibility to the entire work, allocated
responsibility, structure reporting, and material planning from the project

2. Visibility of all
resources and work related in Equipment Installation:

Work
related to the Installation Equipment of equipment in a particular customer
site location was very complex task. This involved coordinated effort to get
the work related expenses from various departments which was a challenge. Data
for quotation creation was difficult as it involved lot of manual costing
calculations and involved human error. Moreover there were no tool or
methodology available for the finance to find out whether an ongoing project
would generate revenue or run into losses as there was no methodology to
estimate the revenue affecting net income, capitalized costs etc.

For
efficient planning and execution of Installation Equipment jobs, it is
important to have a clear visibility of what resources are needed and what is
that availability of the same. Resources are categorized as Technicians,
Material and subcontractors.

Going by the Project approach
brought in defining and planning the work and associating the relevant
resources to the activities. So the internal sales rep new the job at a level
where he could define tasks and plans the resources by date.

The
Internal work was based on the work centers which were the internal technicians
& activity type cost planning helped in planning of the internal labor
work.

Adopting Project based approach
also helped in planning of the external activities, such as subcontracting
work. Service purchase requisition generated from the project created from the
default templates of the external activities, which was converted into service
purchase orders to book the externally procured services costs.

This also brought in visibility
to cost estimates at all level the cost structure was utilized to quote to the
customer and once the order was confirmed further detailing and budgeting was
done. This immensely benefited the client with respect to planning of the
activities with respect to the Job work. SAP functionality of Quotations and
sales pricing was used to get the generate quotations from the project after
planning all the resources required to complete the project such as the Installation
Equipment materials, internal, external activities etc.

The entire process helped in
integrating the purchasing department; accounts department and projects
department to function is an integrated approach and management could draw out
report on the holistic level on the work completion, billing and revenues and
profitability analysis.

Capacity utilization report
shows the resource assignment and utilization with respect to a particular
plant and functional location or the client Installation Equipment site.

Strong integration with external
Scheduling tools such as Click schedule brought in better control over resource
mobilization.

SAP project system was tightly
integrated with Third party scheduling tools such as click, which was used to
schedule the various tasks allocated for the Installation Equipment job work.
Click helps in integrated planning of the tasks related to the Installation
Equipment and executing the same by assigning internal and external technician
to complete the job work in the site.

All the technicians were mapped
in the click system and which helped management to track the service and Installation
Equipment work related to the various client sites.

The technicians had access to
the 'Click Mobile' Client which is an integrated mobile based application which
helped in calls planning and answering questions on where, which clients to
attend during the day.

Client mobile client also helped
the technicians to confirm the work back to SAP which could be taken up for
billing plans. This helped in total work force mobilization enterprise wide
adding value not only to enterprise operation but also the better tracking and
reporting.

3. Ability to report
customer specific job orders plan/actual costs and revenue on a near real-time
basis

With the implementation of SAP, the
enterprise could improve performance, increase confidence in financial
reporting, and address changing financial compliance requirements:

• Improve financial
  and managerial reporting – With implementation of SAP Project system the
  business could had the flexibility to report performance by business unit,
  organization, or cost center as well as various project objects.
• Improve corporate
  performance – As there was better visibility on the aspects of
• Achieve faster
  closes – With SAP ERP Financials, you can streamline accounting, consolidation,
  process scheduling, workflow, and collaboration.
• Improve corporate
  governance and transparency – SAP ERP Financials provides broader support of
  accounting standards, federal regulations, and improved administration of
  internal controls.
• Improve cash flow
  and liquidity – SAP ERP Financials automates dispute, credit, and collections
  management – and offers electronic invoicing and payment capabilities that
  supplement traditional accounts receivable and accounts payable functions to
  accelerate and manage cash flow.
• Improve process
  integration between finance and operation – With SAP Financials &
  Controlling, you can integrate risk and transactions with core accounting and
  financial reporting processes.

4. Ability to
recognize revenue for customer Installation Equipment and exercise control of how
to and when to recognize

The
main purpose of the revenue recognition is to:

1. Maximize profitability of products, customers, and services

2. Equipexecutives to make sound, timely decisions about products, sales, and pricing

For many businesses, revenue recognition takes place when a payment is
received from a customer. By this point, the company has filled the order for
goods or services placed by the customer, and has either delivered the
products, or has processed the order and arranged for the shipment of the
products to the customer. In return, the customer has remitted payment for the
order. By posting the receipt of that payment into the accounts receivable
section of the accounting records, the business has recognized the receipt of
that revenue, and now counts it as income.

In case of CONSUMER PRODUCT Industry revenue is recognized at the point in time when
the Installation Equipment work is complete and customer formally sign off in
this process which was captured through Project system uses status and result
analysis is used to recognize revenue.

In any business scenario every company must charge more for a product or service
than it costs to provide.

But this is often easier said than done. In today’s complex business world,
developing an accurate and complete view of costs is a very substantial challenge
for an organization. Companies have direct and indirect costs of many kinds,
many of them interrelated and hard to pinpoint.

What will be the impact on revenues, and therefore on profit margins, of a change in
the pricing structure and getting accurate answers can take many what-if simulations
through profitability analysis. Accurate profitability analysis is vital for
deciding what products to offer and what price to ask for, how much to emphasize
a product in sales, and even whether it merits a presence in the portfolio at
all.

Profitability analysis can determine areas of your business in trouble and help pinpoint and
repair root causes. It is also important in closing the books. A high-quality
monthly, quarterly, or annual report presents results from your individual
product and service lines in detail, carefully explaining to investors why you
did what you did to maximize the profitability of each. Profitability analysis is
an important way to defend decisions, and performing this analysis quickly yet
thoroughly is the key to creating quality reports while speeding up the closing
process.

To address the complexities of understanding the true cost and profitability of a
product or service, the solution is to accumulate all the relevant data and
then perform multidimensional controlling and profitability (CO-PA) analysis
through result analysis in Project system.

Result analysis helps solve the above challenges of revenue recognition with the calculation of the Work in
process and cost of sales.

Work in progress (WIP) inventory
forms a part of the working capital or current assets of a firm appearing in
their balance sheet. Work in process or progress are partially completed goods,
parts, or subassemblies that are no longer part of the raw materials inventory
and not yet part of the finished products inventory

The guidance on measurement of cost of inventories is that, cost should include all:

a) costs of purchase (including taxes, transport, and handling) net of trade
discounts received

b) costs of conversion (including fixed and variable manufacturing overheads)
and

c) other costs incurred in bringing the inventories to their present location
and condition

This project revenue is recognized Project Result analysis through Completed contract method-Business
intends to recognize revenue at the final closure of the Project: Standard
Method '09'.

The Completed Contract Method enables the business to recognize the revenue after the project has been
technically completed. This method of result analysis also helps in accounting
for the expected revenues from the month end activities.

Where

R (PA) =the revenue affecting
net income and the costs affecting net income are zero.  

C (PA) =the capitalized costs
are equal to the actual costs.       

R(r) =the revenue surplus equals
the actual revenue. The revenue surplus is basically a reserve.           

C (Z) =the capitalized costs and
the revenue surplus can be transferred to FI and EC-PCA- Profit Center
Accounting where it is settled.   

Project settlement posts the settlement documents to COPA for further analysis from accounting perspective.

Project user status was used to control when the revenue for a project is to be recognized: User status 'Sign
off received' would signify that the Installation Equipment work is completed
and the work completion signoff has been received from the client.

Result analysis of each project shows the details of actual revenue, actual costs, calculated and planned
profits and income reserves and most importantly WIP.

Where

R (PA) =the revenue affecting net income and the costs affecting net income are zero.  

C (PA) =the capitalized costs are equal to the actual costs.       

R(r) =the revenue surplus equals the actual revenue. The revenue surplus is basically a reserve.           

C (Z) =the capitalized costs and the revenue surplus can be transferred to FI and EC-PCA- Profit Center
Accounting where it is settled.   

Project settlement posts the settlement documents to COPA for further analysis from accounting perspective.

There are numerous methods of recognition revenue such as dynamic line item method in Time and material
resource related billing projects.

5. Integration with
other business functions like Finance, Sales, Logistics Execution

The business of Installation Equipment of various security systems wasdisintegrated and the process was done in isolation and had high dependency of
manual inputs. All the reporting for one Installation Equipment was spread into Sales, operations, Ware house, Accounting and onsite Installation Equipment(technician's team). It was very difficult to summarize the report for every order being executed.

Solution:

The Solution provided was to have a Project based approach, where in all the processes from getting an order to signoff from customer were brought under one umbrella. Reporting at all levels and phases of Project was possible.

This improved overall efficiency and profitability by enabling leaders to obtain real-time accurate information for decision making and performance management.

Benefits achieved:

All labor hours for ever Installation Equipment were traced and this enabled to know the work men capacity for capacity planning. All costs and revenues for Client order were booked and project profitability by business line was reported.

Various controls through User status were brought in to confirm process flow was maintained.

Manual effort and human error were removed as all the data flowing to operation and Finance was integrated.

Complex integration delivery and billing:        

As  deliveries are based out of the Project which involves shipping and handling charges, which were to be passed on to the customers. Project orders which were created from quotation which were in turn created from 'quotation & Sales pricing functionality' in projects.

Orders
were milestone based billing based on the completion of the project phases.

Also
business never wanted the materials delivered for the Installation Equipment
job work at the client site should not be available in the invoice raised to
the client. Therefore it was necessary to pass on the delivery shipping & handling
charges from delivery document to the customer and integrate the sales and
distribution function on a nutshell.

Solution:

Milestone
based billing created Invoices from order related billing were blocked for
posting in accounting.

A
batch program was created which collated all the freight charges in the
deliveries and passes the same to the invoices which were earlier created order
based invoices and eventually release it to accounting.

Project
system and Sales and distribution process were also integrated in the Project
builder screen by document flow functionality which connected the sales orders,
delivers & invoices associated with the project.

Advantages:

Project
execution which was a disintegrated business process spread out between sales
and distribution functions were integrated together completing the order to
cash cycle. Also it gave a better visibility on the day to day transactions,
tracking of the materials issues and complaints processes sing.

Author
Bio(s)

Amlan Sarkar is SAP Certified
Solution Consultant Supply Chain Management (SD) - Order Fulfillment with 7
years of experience in areas of Professional services, Engineering Construction
& operations (EC & O), Manufacturing & Healthcare industry
verticals in implementation and support projects. Over the period of SAP career
worked in various SAP modules like Sales & distribution (SD), Customer
service (CS), Project system (PS) and materials management (MM), Plant Maintenance
(PM), Document management system (DMS).

Sachin Deshpande, is a
SAP-certified PS-FICO consultant.

Mr. Sachin Deshpande, Bachelor of Engineer and a SAP functional consultant, has
15 years of working experience in the field of Project Management, Production Planning,
and SAP. He has thorough knowledge of SAP Project system and Controlling
Processes. Senior Consultant, with consulting experience of nine years of SAP
Experience. Worked on Global Roll outs, Implementation, Production support, and
Product development projects in multiple modules of SAP R/3- Focus module —
Project Systems (PS), and Production Planning (PP). Interfacing modules: Plant
Maintenance (PM), Production Planning (PP), and Materials Management (MM), CO
and Result analysis.

Worked on Projects in diverse
industries — High End Manufacturing, Ship Building, Construction, Real Estate,
Consumer Products, Utility with focus on ‘Engineered To Order’ industry
processes six years of functional experience in Project Management, Production
Planning and Control of Automotive Equipment, large engines and metal forming.