#S4HANA Cloud 2-Tier ERP series: 5 Manufacturing in 2-Tier ERP
Welcome back to the next blog in the SAP S/4HANA Cloud 2-tier ERP blog series.
In the last one, we discussed about Financial Consolidation, Cash Visibility and Planning in a 2-tier model and saw how S/4 HANA Cloud can support the organization and subsidiaries to have Financial Consolidation.
In this blog, let’s understand how Manufacturing Process can operate with 2-tier deployment model with two examples, few more will follow in subsequent blogs,
Manufacturing Processes in S4HANA Cloud for subsidiaries will help the corporates to be complete & more effective on a Global level, thus helping in reducing cost of Quality, time to Market and continually fuelling innovation specific to Subsidiaries need, as Innovations will be delivered by SAP at Cloud first. As Organizations wish to become more Competent in the market and wish to cater to Customer demand much faster as compared to their competition, Organizations are changing their business models and more mergers and acquisitions are happening. Organizations may acquire small manufacturing facility as their subsidiary which can process goods faster as per specific customer requirements in a particular region. This is not something new but getting such subsidiaries on their ERP solutions become time consuming and expensive, so to avoid this subsidiary continue to operate with whatever solutions they have. HQ allows this with the intention to have flexibility for the subsidiaries and also to save cost to become more cost effective, but on the other hand HQ is not getting visibility of operations from such subsidiaries. For monitoring the performance of such subsidiaries they have to rely on file based information from such subsidiaries. The option of Integrating such subsidiaries with HQ system will cost more because of different systems at HQ and Subsidiaries and high maintenance cost.
Today Manufacturers who have non-standard processes and inflexible ERP systems, with 2 Tier ERP where Subsidiaries which are manufacturer can have S4HANA Cloud and Corporate which will be on S4HANA OnPrem or ECC or any other ERP will now have Integrated processes and greater agility and reduced time to market and cost effective and integration as SAP provides standard out of the box integrations.
S4HANA Cloud will provide subsidiaries which are manufacturing centres with their own secure, standard best Practice ERP system delivered entirely online. The Best practices covers all the required processes which are sufficient to run manufacturing subsidiaries. Also, with S/4HANA Cloud Options, SAP releases Innovations every quarterly so the subsidiaries will be the first where Innovation can be applied and Organization then based on the experience can extend the same for themselves in their OnPremise SAP Solution or can think of shifting to S/4HANA Cloud solutions for themselves in future.
Manufacturing Subsidiaries can now with S/4HANA Cloud solution can overcome the Challenges of demand variability, fluctuating Production and regional compliance requirements by relying on S4HANA Cloud as an essential part of their 2 Tier ERP. 2 Tier ERP for Manufacturing Subsidiaries will help to have Customer centric growth by supporting new business model which doesn’t exist when ERP was implemented at HQ. With 2 Tier ERP where Subsidiaries will be on S4HANA Cloud and HQ will be on S4HANA OnPrem/ECC/any ERP will help Organizations to have Integrated Processes between HQ and Subsidiaries.
What all processes one can think of with regards to Manufacturing which can be integrated between Headquarters and Subsidiaries in 2 Tier worlds. I can think of the following Use case in 2 Tier worlds which comes to my mind immediately but one can think of additional scenarios as per business requirements or Industry requirements.
- Subsidiary acting as Production Unit and supplies material to HQ as normal vendor
- Subsidiaries acting as a Production Unit but Subcontractor to HQ
- Subsidiaries acting as Production Unit and Supplies Material to HQ as normal vendor
This is typical scenario or more common scenario which fits to 2 Tier and will be of great importance to HQ. In my past Consulting experience, I came across this scenario where the Headquarter has acquired a small vendor which used to manufacture certain niche products with great quality and use to supply to Headquarters bigger manufacturing facility. After acquisition, the HQ don’t want to disturb their flexibility and innovative way of doing things by the subsidiary. As this was a small subsidiary, HQ allow the subsidiary to continue with their systems (which normally we see the approach) but then getting the insight of how subsidiary is performing, getting the insight of subsidiaries Production plan or Communicating the Production plan to Subsidiary for the parts or to have the complete visibility of the inventory in the integrated process flows, there was bigger challenge as Integration with Subsidiary systems was costly and they have to rely on paper or file uploads. The Integrated process was not at all possible.
This is typical 2 Tier scenarios and with S/4 HANA Cloud at Subsidiary, the HQ can overcome the challenges which they were facing. The S/4HANA Cloud allows the Subsidiary to operate with greater flexibility as it comes with sufficient best practice processes. The S/4HANA Cloud, also comes with innovations every quarter, which means encouragement to such Innovative subsidiaries. S/4 HANA Cloud also comes with pre-packaged APIs which can be used to connect Subsidiaries with HQ thus to have Integrated process. These APIs are identified by the experts which gives not only the integrated process but also gives visibility to HQ on how Subsidiary is performing at various stages of the Production process.
The HQ can raise the PO on Subsidiary and there will be automatic sales order created at Subsidiary. The Subsidiary can have their planning and after production can deliver the material to HQ with Billing. In the process of Production, the HQ will get the complete visibility of Stock at various stages, performance /yield of Production process and can plan better their production of FG. Secondly, on receipt of materials from Subsidiary, there will be normal GR against the PO which will automatically create the Subsidiary liability and on payment will clear the Account receivables at Subsidiary. With this, now the process have become completely Integrated and it got the automation so kind of error free Integrated process between HQ and Subsidiaries.
- Subsidiaries acting as Production Unit but acting as Subcontractor to HQ
The Other scenario can be Subsidiary which is a Production unit can act as Subcontractor to HQ where HQ will supply the parts and such subsidiaries will assemble or produce the FG and give it back to HQ. Such subsidiaries are very small subsidiaries with small setup and limited resources. These are also independent subsidiaries so will be operating independently with limited number of simple processes.
Here as well, the HQ after their planning can check the capacity of such subsidiaries and accordingly transfer the Materials to such subsidiaries using Subcontracting route against Subcontracting Purchase Order on Subsidiary as vendor. The subsidiaries can receive the materials as HQ stock and can initiate the Production process where they will consume the parts provided by the HQ and be ready with FG for HQ. The HQ on the other side can monitor the Subsidiary on how they are performing, what inventory they are holding and at what stage which is currently not possible. Also with Automation, the Subcontracting Purchase Order at HQ will create the Sales Order at Subsidiary automatically with HQ as customer. This will avoid issues of manual process of creation of Sales order based on emails.
The Subsidiaries can receive the Parts as HQ Stock without affecting their books of account as the ownership of the parts still lies with the HQ and it should not hit the books of account of the subsidiary. Subsidiary thus, assemble/process the parts/components and come out with FG which can be dispatched to HQ and proper billing can happen.
HQ can receive the FG against the Subcontracting PO and can generate the Subsidiary liability automatically which on payment will clear the Account receivables at Subsidiary. This is what the Integrated scenario can work between HQ and Subsidiary in 2 Tier world.
These are two 2 Tier scenarios in Manufacturing area to start with but you can think of many other scenarios eg Centralized planning at HQ and communicating the plans to subsidiaries etc.
We continue to explore more scenarios using API based Integration capabilities in 2-tier world in my next part of this blog. We will figure out additional usable 2 Tier Integrated scenarios between HQ and Subsidiaries which will give immense benefit to Organization in this competitive world where Organization has to respond to Customer ask at much faster rate. Customers are looking for innovative approaches in cost effective way so that they can be competitive and can serve the customer immediately and I am sure, 2 Tier approach is the right move in that direction.
Stay tuned for my next blog in this series.
For more information on SAP S/4HANA Cloud, check out the following links:
- S/4HANA cloud release information: http://www.sap.com/s4-cloudrelease
- SAP S/4HANA Cloud use case series
- Best practices for SAP S/4HANA Cloud here
- S/4HANA Cloud 2-Tier ERP series: The Collection here
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