Material ledger embedded in S/4 HANA – Benefits and challenges
Most of the organizations now running SAP are trying to ascertain the business benefits with S/4 HANA. Highlighted the design principles behind S/4 HANA in one of the previous blogs in URL http://scn.sap.com/community/s4hana/blog/2015/11/16/principles-features-directions-methodology-and-market-trend-with-sap-s4-hana-1511-update. Simplification list of Release 1511 states that the activation of material ledger is mandatory. Writing this blog to summarize ‘What is material ledger’, ‘ challenges in implementing in SAP ERP’ and ‘How S/4 HANA can simplify material ledger with its new data model’.
Material ledger (ML): Provides following main features
- Multiple currency : Traditionally inventory is mainly valuated with a single currency in SAP ERP. ML allows valuation in two additional currencies. Today’s global organizations operating in different countries desire to valuate inventory in multiple currencies. Like for example, a company in Norway dealing with oil needs to maintain their books in Norwegian currency (NOK) , they will also like to evaluate their inventory in USD as oil is traded in international market in USD. This functionality is available in Release 1511 of S/4 HANA.
- Multiple valuations : ML offers the option of three different levels of valuations (Legal ,group and Profit center) for a corporate group operating in multiple countries . Generally legal valuations are stored in local currency, group & profit center valuations are stored in group currency (mostly in USD). Parallel valuations support transfer pricing for internal sales between legal entities or profit centers within the group for worldwide supply chain. If a product is assembled in China with parts produced & procured from different units operating in different countries (within the same group) , then final cost price may get added up to a very high value (due to internal profits in cross company sales). If company wants to reduce this final cost price, then this multiple valuations help them to achieve that by eliminating internal profits for MNCs’. This functionality is expected to be ready in S/4 HANA in middle of 2016.
- Actual costing : Inventory and material movements are generally valuated either at Standard price (S) which is constant over a period of time or Moving average price (MAP) which gets adjusted (calculated) automatically based on every Goods receipt or Invoice receipt. Both of these two methods have their own pros and cons. Actual costing combines the advantages of standard price with advantages of using MAP.
ML captures all price variances (like purchase price variances, production variances etc) and allows (as optional period end activity) revaluation of ending inventories at period end and releases it as standard price (generally) for next period. Actual costing is optional in S/4 HANA.
Challenges with ML in SAP ERP : Material ledger functionality is present in SAP ERP , but not many companies have implemented it mainly due to
- Several configurations (perceived to be complex)
- Discipline in logistic process specially for actual costing and need for high quality master data (Material price can be changed at any time without ML , but there are restrictions in changing the price within a period if actual costing is active. Material posting needs to happen in current period only, Goods receipt should be done before Invoice receipt for purchase order etc)
- Production startup activity (Perceived to be complex with considerable business down time)
- Additional period end activities (Specially when actual costing is active)
- Performance (Transaction run time gets impacted due to update in several ML tables during goods movement , invoices and additional period end activities)
- Analytics (Analysis of price to be drilled down to individual document takes time)
Valuation on actual costing is a legal requirement in many countries like Brazil. Many MNCs’ have implemented ML only for their Brazil unit but not for units in other countries.
Simplified data model of S/4 HANA : Data will now be stored mainly in universal journal table ACDOCA , several ML tables have been replaced with HANA views with same name.
So, existing customers using ML will be happy as bottlenecks with performance and analytics will be eliminated through simplified data model, higher throughput, ‘on the fly’ aggregates, real time reporting. Some of the period end activities (for reconciliation etc) may not be needed with single table ACDOCA. But, other customer not using ML (for all of their plants) may not be happy for mandatory implementation of ML in all plants.
Undoubtedly ML has great features and global companies will reap benefits with parallel currency and parallel valuations with ML embedded in S/4 HANA , but many customers may like to get clarified on following questions
- Will requisite configurations be simplified? Will ‘guided configuration’ be useful or relevant?
- Will relevant business logic and certain restrictions with ML be simplified?
- Will there be explanatory logs for complex cost calculations for regular business users?
ML is just a single chapter in the story of S/4 HANA, there are several chapters in it and each chapter has its own nuances as highlighted in another blog in URL http://scn.sap.com/community/s4hana/blog/2016/02/03/transition-to-s4-hana-pre-checks-and-whether-migration-or-new-implementation.We will eagerly wait to read the chapters not yet released, predict what can or should happen next, but we must all agree that the story is very interesting, probably the right path for digital economy,but it is not simple !!