#S4HANA Cloud use case series: 7 – Impact of manufacturing on the financial health of the company
After gaining some insight into the financial planning as part of SAP S/4HANA Professional Services Cloud last week, we will look at another use case with strong impact on finance. Today we will be considering the financial impact of manufacturing and operations.
End to end integrated manufacturing processes with Finance
For years, balancing the manufacturing and operations cost against the need to produce and delivery timely to meet market demand has been a big challenge for most companies. SAP S/4HANA enables companies to integrate and embed intelligence in manufacturing processes with one single source of live information. It provides an optimal coordination of planning and execution processes, covering aspects of the manufacturing cycle from planning to shop floor.
Manufacturing impacts the financial bottom line of a company heavily whether it is through the direct costs or through indirect costs. With the integration of production processes closely with finance, one can have an immediate view of the bottom line impact of manufacturing in real time. Additionally, with the material ledger and the single inventory table that collects all information on the material documents, we are now able to see the real-time impact of goods on costs at the time any action takes place.
In today’s use case series, we will focus on inventory valuation, production cost analysis and the impact on the financial statements.
Inventory costs contribute heavily to the bottom line of the company and has immediate impact on the financial health of the company. Latest trends in material management aim for reducing required system resources, improved scalability and throughput and flexible international valuation requirements with parallel currencies and parallel accounting standards on material / product level.
Inventory managers, as they analyze their turnover can immediately get financial value of the inventory and the trend of this value over time.
At the same time, Controllers can get a quick view on the impact on their financial results due to the actions on the manufacturing and logistics operations.
Inventory valuation can today be performed in accordance with local legislation (such as the German Commercial Code). Stock valuation can be determined with real-time updates for transparency over the cost of inventory for finished and semi-finished products and with comparison analysis. With the new material valuation in SAP S/4HANA, we can now handle up to 3 currencies, tracking historic rates in material master and handle local legal valuation (e.g. hard or trading currency).
Controller have applications to get details and take actions based on material inventory values. They can gain an understanding of the quantities and values of material inventories for a key date with balance summary, drill down to each line items and get a view on rounding differences.
Production cost analysis
Financial impact of manufacturing is not just limited to inventory costs. Reducing total manufacturing costs and streamlining activities requires total transparency of the issues. Today, we have one common view of actual costs based on the Universal Journal Entry, ability to do Cost comparison and component analysis based on flexible analysis key figures and a new user experience that enables our users to focus on the tasks at hand.
With S/4HANA Cloud, controllers can immediately get a view of overall and detailed production costs for manufacturing orders using which they can quickly and easily arrive at actual costs for each cost component. They can immediately get an overview of where the issues are and take actions on this. Exceptions, as defined by exception rules, are highlighted using a quickly identifiable visual indicator.
Impact on the Financial Statements
Finally, all the manufacturing related costs and inventory costs have a heavy impact on the financial health of the company. With the end-to-end fully integrated processes financial and logistics processes, the company can seamlessly view the impact of the operational costs on all the financial analysis and statements. With the Trial Balance, you can display debit or credit balances for a specified time range. You can do this for each ledger and all company codes. If you select individual periods only, you can show the balances of the previous and the following periods in the reporting year. You can use various attributes and account assignment objects from Financial Accounting and Controlling for more detailed analysis, for example Material Ledger. In a comparison view, you can compare the balances with the balances of a different time range. Here you can see the revenue and COGS analysis for a material over finished, semi-finished and planned production orders.
Additionally, you can also see the effect of the inventory costs, COGS and other manufacturing and logistics related costs directly on the financial statements down to the level of accounts granularity that you desire. With this, you can drill down, see your period balance, comparisons and the differences, all in one place. These reports are generated on the fly by analysing all the relevant line items with real time information.
How does SAP S/4HANA bring value with these use cases?
With these use cases, we can see how breaking down silos is made so effective with the SAP S/4HANA Cloud scenarios. By bringing end to end fully integrated processes across functions, there is complete transparency across the organization enabling the decision makers to identify and react quickly to any areas of concern. Hence of the three dimensions of increase efficiency”, “increase effectiveness” and “increase agility”, this use case relates most closely to “increase effectiveness”, the highest focus for these use cases or on increased effectiveness. We can signal action in time based on real time data enabling different functions to get full insight and take decisions to fix issues. Users from inventory managers to controllers can now act immediately when they detect exceptions and enable the company to effectively manufacture while keeping costs under control.
Stay tuned for the next use case, in which we will examine another SAP S/4HANA Professional Services Cloud use case and map it against the value levers and dimensions.
For more information on SAP S/4HANA Cloud, check out the following links:
- SAP S/4HANA Cloud release information: http://www.sap.com/s4-cloudrelease
- Product documentation and What’s new in SAP S/4HANA Cloud 1702 available here
- Best practices for all the cloud editions here
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