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I N T E G R AT E D B U S I N E SS P R O C E SS E S

with E R P SY S T E M S

S I M H A R . M A G A L J E F F R E Y W O R D

J O H N W I L E Y & S O N S, I N C.

Grand Valley State University SAP AG Manchester Business School

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Vice President & Executive Publisher Don Fowley Acquisitions Editor Beth Lang Golub Production Manager Dorothy Sinclair Senior Production Editor Anna Melhorn Marketing Manager Christopher Ruel Creative Director Harry Nolan Senior Designer Wendy Lai Editorial Assistant Elizabeth Mills Executive Media Editor Thomas Kulesa

This book was set in 10/12pt Times Ten by MPS Limited, a Macmillan Company, Chennai, India and printed and bound by RRD/Jefferson City. The cover was printed by RRD/Jefferson City.

Copyright © 2012 Simha R. Magal and Jeffrey Word. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions.

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Printed in the United States of America

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To Kajal, Anushka, and Vandana —SRM

To Chelsi, Benton, Davis and Maggie —JBW

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1 Introduction to Business Processes 1 The Functional Organizational Structure 2 Business Processes 4 Global Bike Incorporated (GBI) 15 How to use This Book 16

2 Introduction to Enterprise Systems 23 Enterprise Systems 23 Data in an Enterprise System 29 Reporting 37

3 Introduction to Accounting 49 Organizational Data 51 Master Data 52 Key Concepts 58 Processes 61 Reporting 72

4 The Procurement Process 83 Organizational Data 84 Master Data 89 Key Concepts 95 Process 102 Reporting 119

5 The Fulfillment Process 127 Organizational Data 128 Master Data 139 Process 145 Credit Management Process 167 Reporting 170

6 The Production Process 179 Master Data 182 Process 196 Reporting 215

vii

Contents

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7 Inventory and Warehouse Management Processes 221 Inventory Management 222 Organizational Data in Warehouse Management 234 Master Data in Warehouse Management 239 Processes in Warehouse Management 242 Reporting 257

8 The Material Planning Process 269 Master Data 271 Process 285 Reporting 304

9 Process Integration 315 Procurement, Fulfi llment, and IWM Processes 318 Procurement, Fulfi llment, Production, and IWM Processes 332

Index 349

viii Contents

*Additional Chapters available on WileyPlus

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ix

Preface

As more and more businesses around the world adopt enterprise systems, it becomes increasingly important for students to develop a more process-centric perspective that refl ects the realities of the modern business environment in which they will work. Because business operations and enterprise systems are so tightly integrated, we have designed Integrated Business Processes with ERP Systems to refl ect the ways in which real-world business processes are man- aged and executed in the world’s leading enterprise resource planning (ERP) system, SAP® ERP. Students, regardless of their functional discipline, will be able to apply the real-world concepts discussed in this text immediately upon entering the workforce and will be better prepared to succeed in their careers.

Integrated Business Processes with ERP Systems covers the key processes supported by modern ERP systems. This textbook is designed for use as both a reference guide and a conceptual resource for students taking ERP-focused courses at schools that are members of SAP University Alliances program (http://uac.sap.com). It examines in depth the core concepts applicable to all ERP environments, and it explains how those concepts can be utilized to execute business processes in SAP systems.

KEY FEATURES INTEGRATED PROCESS APPROACH

Integrated Business Processes with ERP Systems approaches ERP topics using an integrated process perspective of the fi rm. Each process is discussed within the context of its execution across functional areas in the company, with special emphasis on the role of data in managing the coordination between activities and groups. Students will gain a deep appreciation for the role of enterprise sys- tems in effi ciently managing processes from multiple functional perspectives.

ACTIVE LEARNING

Consistent with the focus on the process perspective of business operations, this book and the accompanying online supplements are designed to actively engage students through multiple learning activities. Students will be required to apply the concepts covered in the text to real-world situations and to the running case study used in their hands-on exercises. In this way, students can experience what the each employee in a process must do, what data they need, and how their actions impact other people in the company.

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RUNNING CASE STUDY

Many key examples, demonstrations, and assignments incorporated through- out the book are based on a fi ctional company, Global Bike, Incorporated (GBI). GBI exists virtually in the GBI ERP system, which is used to provide students with hands-on experience with executing the various processes in SAP ERP. Students will become intimately familiar with GBI’s operations and will develop a deep appreciation for the real-world importance of the process concepts in the course.

REAL-WORLD EXAMPLES

In addition to the integrated approach and the GBI case study, Integrated Business Processes with ERP Systems includes multiple scenarios from compa- nies in diverse industries that demonstrate how businesses actually utilize ERP capabilities. Real-world experiences associated with enterprise systems—both positive and negative—are integrated throughout the chapters to illustrate the key concepts.

GLOBAL APPROACH

The textbook content, GBI running case study, and real-world examples have all been designed from a global perspective. Differences between U.S. and European business practices are highlighted within the context of process execution to illustrate the global capabilities of ERP systems. In addition, the real-world stories are based on familiar global companies.

SAP® ERP SOFTWARE This textbook and its associated demos and exercises were prepared using the most current version of the software, at the time of printing: SAP ERP 6.0, Enhancement Pack 4. The key concepts contained in this textbook are unlikely to change in any signifi cant way. Nevertheless, as SAP continues to innovate and update the core SAP ERP solution, it may become necessary to adjust classroom content in minor ways to better refl ect the capabilities of the lat- est version of the software. Please speak with your SAP University Alliances contact to obtain additional information on utilizing SAP ERP software in your classroom.

PEDAGOGICAL STRUCTURE Consistent with this textbook’s focus on the integration of business processes with ERP systems, we have divided the book into two key areas. The fi rst area, which consists of Chapters 1–3, focuses on the integrated nature of business processes and the enterprise systems that businesses use to manage them. Chapters 1–2 introduce the foundational concepts, which are subsequently developed in the process chapters in the remainder of the book. Chapter 3 examines the basic concepts in fi nancial and management accounting, which are integrated into the subsequent chapters.

The second part of the book contains the process chapters, which are structured based on a standard template that is comprised of two main parts.

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The fi rst part of each chapter discusses the organizational and master data associated with the process, and the second part examines each step of the process in detail. Each chapter concludes with a discussion of the reporting capabilities needed to manage the process effi ciently.

Links to online demonstrations and additional online learning materials are embedded throughout each chapter to reinforce and expand on the most important concepts.

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xii

WileyPLUS

WileyPLUS is a research-based, online environment for effective teaching and learning. WileyPLUS is an integral part of the learning experience for this textbook. For this reason we have made it available to students 24/7 from any- where they connect to the Internet. WileyPLUS contains a wealth of supple- mental learning materials designed to enhance students’ understanding of the concepts introduced in the course. Plus, instructors can use these materials to customize the course to meet their particular objectives. Students will complete and submit their hands-on assignments and quizzes through the WileyPLUS environment. In addition, the authors have taken full advantage of the rich multimedia learning environment in WileyPLUS to provide demonstrations of each process step discussed in the text. We have also embedded videos of real- world examples that highlight the key concepts in each chapter.

WileyPLUS can complement the printed textbook. Alternatively, stu- dents can purchase the full textbook and additional materials digitally through WileyPLUS.

Hands-on Exercises Hands-on assignments are provided to students online. Students will access the assignments via WileyPLUS and complete them in a live SAP system (GBI 2.0). They will then submit the exercises digi- tally to the instructor for easy grading.

Demonstrations: Recorded demonstrations of each key process activ- ity in every chapter are available on WileyPLUS for both instructors and stu- dents. Instructors can use the demonstrations in class discussions to illustrate key aspects of the content. Students can also access the demonstrations on WileyPLUS either while they are reading the chapters, to enhance their com- prehension of the material, or when they are completing the hands-on exer- cises, to refresh their memory of the activity.

INSTRUCTOR’S SUPPLEMENTS

This text is supported by many valuable tools to help instructors prepare and deliver engaging lectures and robust testing for conceptual understanding. Instructor supplements are accessible via WileyPLUS and via the Instructor’s Companion Site at www.wiley.com/college/magal. Supplements include the following:

Instructor’s Manual: The Instructor’s Manual is the distillation of more than a decade of classroom experience in teaching an integrated process approach to ERP systems. It contains in–depth pedagogical materials designed

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to help instructors prepare their courses and deliver an engaging, multi-modal learning experience.

Classroom Presentation Slides: Each chapter includes detailed class- room presentation slides with key concepts, lecture notes, textbook graphics, and discussion questions.

Test Bank: A detailed test bank for each chapter is provided on the Instructor’s Companion Site. Each chapter contains multiple-choice, fi ll-in- the-blank, and true/false questions with multiple levels of diffi culty for each question type.

FEEDBACK The authors and publisher invite students and instructors to ask questions, provide comments, and communicate directly with the textbook team on the following Web site: www.extrabandwidth.com/forum

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xiv

“Innovation is a team sport.” Tom Kelley, IDEO

Integrated Business Processes with ERP Systems is the fi nal product of thousands of hours of work, including invaluable contributions from a diverse group of people located around the world. The authors wish to acknowledge the following individuals for their assistance in preparing and reviewing the book.

The authors are extremely grateful for the collaboration and technical efforts of Stefan Weidner and his team at the SAP University Competency Center at the Otto-von-Guericke-Universität Magdeburg to bring the GBI 2.0 system to life.

Faculty and students in the ERP program in the Seidman College of Business at Grand Valley State University (http://www.gvsu.edu/business/erp/) were also instrumental in developing the GBI system. In particular, we would like to acknowledge the contributions of the following Seidman students: James Anderson, Philipp Claus, Kevin Coolman, Jacob DeLuca, Morgan Hickman, Corey Holstege, Michael Martin, Steve Merritt, John Morrissey, Brandon Stickel, Alice Yamada, and Sandell Wall. We also appreciate the technical assis- tance provided by Chris Gillespie. Particularly helpful was Prof. David Cannon, who patiently clarifi ed numerous concepts in accounting.

We are very grateful for the efforts of Robert Weiss, our development editor, who tirelessly reviewed and edited our work and provided invaluable guidance in improving it. We also wish to thank the “super” reviewers and reviewers for their efforts to ensure that this book achieved the high standards we set for it.

“SUPER” REVIEWERS:

• Anthony Pittarese, East Tennessee State University

• Jane Fedorowicz, Bentley University

• Paul Hawking, Victoria University

• Rod Sager, Grand Valley State University

• Robert Szymanski, University of Central Florida

Acknowledgments

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Acknowledgments xv

REVIEWERS:

• Donna Everett, Morehead State University

• William Mackinnon, Clarkson University

• Earl McKinney, Bowling Green State University

• Jeff Mullins, University of Arkansas

• Al Pilcher, Algonquin University

• Pamela Schmidt, University of Arkansas

• Felicitas Ju Huang Seah, National University of Singapore

• Venkataramanan Shankararaman, Singapore Management University

• Catherine Usoff, Bentley College

• Bindiganavale Vijayaraman, University of Akron

• William Wagner, Villanova University

• Tom Wilder, California State University, Chico

A very special thanks to Lou Thompson at the University of Texas- Dallas, who helped to create the instructor’s manual and supplements, and to Ross Hightower from Texas A&M, who assisted us greatly with the Material Planning chapter.

Finally, we wish to recognize the efforts of Beth Lang Golub, Mike Berlin, Elizabeth Mills, and their colleagues at Wiley for keeping us moving and get- ting this book completed.

Writing a book can be stressful at times, especially for the authors’ fami- lies. Their patience and encouragement throughout this long and arduous pro- cess have been invaluable. They have our deepest gratitude and appreciation.

We are very grateful to Don Bulmer and Bob Lobue for their executive support for this book at SAP, with an extra special thanks to Charla Pachucki from SAP Education for ensuring that we stayed true to the SAP material.

The authors and publisher gratefully acknowledge SAP’s kind permis- sion to use its trademarks in this publication.

This publication contains references to the products of SAP AG. SAP, R/3, SAP NetWeaver, other SAP products and services mentioned herein are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius and other Business Objects products and services mentioned herein are trademarks or registered trademarks of Business Objects in the United States and/or other countries.

SAP AG is neither the author nor the publisher of this publication and is not responsible for its content, and SAP Group shall not be liable for errors or omissions with respect to the materials.

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xvi

Simha R. Magal, Ph.D., is professor of management (MIS) and director, ERP initiative, in the Seidman College of Business at Grand Valley State University. He received his doctorate from the University of Georgia. His pri- mary research interests include e-business and enterprise systems. Dr. Magal’s articles have appeared in such publications as MIS Quarterly, Journal of MIS, and Information and Management, among others, and he has served on the editorial boards of several journals. He also served as co-chair of the inaugural conference of the Midwest Association for Information Systems (MWAIS) in 2006 and as president of MWAIS during 2008–2009.

Dr. Magal has taught courses related to business processes and enterprise systems that utilize SAP for more than a decade. He is an SAP-certifi ed associ- ate consultant and a TERP10 academy instructor.

Jeffrey Word, Ph.D., is vice president of product strategy at SAP AG. He is responsible for defi ning SAP’s future product strategy and for fostering prod- uct innovation within SAP. Dr. Word has worked for several Global 1000 com- panies in the high-tech industry for nearly 20 years, specializing in business consulting and IT strategy. At SAP, he has driven the evolution of the com- pany’s enterprise technology strategy, with a special focus on corporate process improvement initiatives and services-based IT architecture design.

Dr. Word earned his Ph.D. in information systems at Manchester Business School in England. His research focused on event-driven process design and next-generation enterprise architecture. He previously earned an MBA in international management from the Thunderbird School of Global Management and a BA in European studies and Spanish from the University of Oklahoma.

Other books by these authors:

Magal, S. and Word, J. (2009). Essentials of Business Processes and Information Systems. John Wiley & Sons. Hoboken, NJ.

Word, J (ed.) (2009). Business Network Transformation: Strategies to Reconfi gure Your Business Relationships for Competitive Advantage. Jossey-Bass (Wiley), San Francisco, CA.

Woods, D., and Word, J. (2004). SAP NetWeaver for Dummies. Wiley Publishing Inc., Indianapolis, IA.

Author Biographies

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CHAPTER 4 The Procurement Process 1

1

LEARNING OBJECTIVES

After completing this chapter you will be able to:

1. Defi ne the functional organizational structure, and explain why this structure creates problems for modern businesses.

2. Describe key business processes in an organization.

3. Identify the main integration points between and among processes.

4. Understand the cross-functional nature of processes and their relationship to organizational areas.

5. Adopt and apply an integrated perspective to business processes.

6. Describe organizational structure of Global Bike Incorporated.

7. Explain how the SAP® ERP system promotes an integrated approach to business processes.

A t this point in your university career, you have probably begun taking courses in accounting, operations, MIS, and other disciplines. These courses have introduced you to some basic business concepts and exposed you to different aspects of how a business operates. You have also begun to master several technology tools that will be very useful in your future career, such as offi ce productivity tools to create spreadsheets, presentations, and docu- ments. The course for which you are using this textbook deals with integrated business processes and the enterprise systems (ES) that support them. The con- cepts and skills you will gain from this course are different from what you have experienced previously, and you will need to approach this course with a different perspective.

Introduction to Business Processes

C H A P T E R 1C H A P T E R

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2 CHAPTER 1 Introduction to Business Processes

THE FUNCTIONAL ORGANIZATIONAL STRUCTURE To successfully master the concepts in this textbook, you must fi rst begin to think holistically about the operations of a business. The most common orga- nizational structure you are likely to encounter is the functional structure. Organizations that utilize a functional structure are divided into functions, or departments, each of which is responsible for a set of closely related activities. For example, the accounting department sends and receives payments, and the warehouse receives and ships materials. Typical functions or departments found in a modern organization include purchasing, operations, warehouse, sales and marketing, research and development, fi nance and accounting, human resources, and information systems. The vertical columns in Figure 1-1 identify the key functions in a typical company.

Figure 1-1: The functional structure

Although most companies maintain vertical (or functional) silos to compartmentalize their operational units, the integrated business processes that companies use to perform their work cut across these silos horizontally. Business processes, such as the procurement and fulfi llment processes dis- cussed later in the chapter, consist of activities that occur in different, seemingly unrelated functions or departments. In other words, these processes are cross- functional, meaning no single group or function is responsible for their execu- tion. Rather, it is a shared responsibility among many functional areas. The cross-functional nature of business processes is also illustrated in Figure 1-1. For a process to be successfully completed, then, the company must rely on each functional group to execute its individual steps in the process in a coor- dinated way, which, as we shall see, may not be an easy thing to accomplish.

THE SILO EFFECT

The functional structure served organizations well for a number of years because it enabled them to cope with the challenges generated by their rapid growth. Over time, however, this system developed a serious drawback. Put

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The Functional Organizational Structure 3

simply, people in the different functional areas came to perform their steps in the process in isolation, without fully understanding which steps happen before and which steps happen next. They essentially complete their part of the process, hand it off to the next person, and then proceed to the next task. By focusing so narrowly on their specifi c tasks, they lose sight of the “big pic- ture” of the larger process, be it procurement, fulfi llment, or any number of other common business processes. This tendency is commonly referred to as the silo effect because workers complete their tasks in their functional “silos” without regard to the consequences for the other components in the process.

A key point here is that the silo nature of the functional organizational structure and the cross-functional nature of processes are at odds with each other. That is, while workers focus on their specifi c function, each business process involves workers located in multiple functional areas. A major chal- lenge facing organizations, then, is to coordinate activities among the differ- ent functional areas. Viewing a company from a process perspective requires employees to “think sideways”—in other words, to view the business across functional boundaries and focus on the end-to-end nature of the process and its intended outcomes. Learning to view a process from end to end is essential to understanding how enterprise systems help businesses manage their pro- cesses effi ciently. Not surprisingly, then, this understanding has become a criti- cal skill that companies have come to demand from their employees.

ENTERPRISE SYSTEMS

As you can see from the previous section, business processes span different parts of an organization. In fact, in today’s global economy, the various process steps are increasingly executed by people in multiple locations throughout the world. That is, a company will manufacture its products in different countries, acquire the materials to make these products from different locations, sell the products in many countries, and so on. For example, a bicycle manufacturer may purchase components from Italy, produce bicycles in Germany, and sell those bicycles in the United States. Because the steps in business processes are performed in locations that are geographically dispersed, it is impossible to manage such processes effectively without the use of modern information sys- tems. Systems that support end-to-end processes are called enterprise sys- tems (ES), and they are essential to the effi cient and effective execution and management of business process.

Given the signifi cant impact that enterprise systems have on operational effi ciency (and, ultimately, profi tability), companies have invested enormous sums of capital and effort to plan, implement, and continuously improve enter- prise systems over the past 40-plus years. A great deal of research has con- fi rmed that investments in information technology (IT), particularly enterprise systems, have signifi cantly increased the profi tability, productivity, and com- petitiveness of corporations by removing the barriers to sharing information between functional areas and managing processes holistically.1, 2 The key driver for this productivity and effi ciency is the ability of modern enterprise systems

1 A. McAfee and E. Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,” Harvard Business Review, 86, No. 7/8 (2008): 98–107. 2 E. Brynjolfsson and L. Hitt, “Paradox Lost? Firm-level Evidence on the Returns to Information Systems Spending,” Management Science, 42, No. 4 (1996): 541–558.

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4 CHAPTER 1 Introduction to Business Processes

to effectively manage a business process from beginning to end in an inte- grated, consistent, and highly effi cient manner. Further, once a business pro- cess is managed by an integrated enterprise system, it can be monitored and improved very easily. As a result, we cannot discuss contemporary business processes without considering the role of enterprise systems. We will discuss enterprise systems in greater depth in Chapter 2.

In this chapter, we begin by identifying the key processes that typically exist in organizations. We then discuss enterprise systems and SAP, the com- pany that produces the most popular enterprise systems globally. We also introduce Global Bike Incorporated, a company that we will use as a case study throughout this textbook to illustrate important concepts in a practical format. We conclude with the plan for the remainder of the book.

BUSINESS PROCESSES Organizations exist either to serve some commercial purpose or to achieve some social objective. They differ depending on the purpose or goal they are trying to achieve, their ownership or management structure, and the regula- tory environment in which they operate. Some organizations create and deliver products or services to customers to make a profi t. For example, a bicycle manufacturer produces a variety of bicycles and accessories. It then sells these products to numerous retailers who, in turn, sell them to the fi nal consumers. Other companies provide services, such as repairs to the bicycles. Yet others provide the manufacturer with the parts and materials needed to make the bicycles. Achieving the organization’s objectives involves many different types of work. For example, the manufacturer must design the bicycles, identify what parts it will use to make them, determine where to obtain these parts, produce the bicycles, identify its customers, and market and sell the bicycles to them. In addition, it must determine how to manage its money, its various facilities such as factories and warehouses, and the many people that it must recruit, employ, train, and retain. This work is completed in numerous processes.

Although organizations exist for many different purposes, vary greatly in size and complexity, and operate in many different industries, they all exhibit similarities in the ways that they operate. Regardless of their type or size, suc- cessful organizations and industries use processes and enterprise systems to complete the work needed to achieve their goals. Processes may vary slightly depending on the unique characteristics of the industry or the structure of the organization, but the basic activities can be recognized by anyone who has developed a process view of business. Likewise, companies may employ differ- ent enterprise systems to manage their processes. However, you can apply the principles, concepts, and techniques explained in this textbook to most of the enterprise systems you are likely to work with.

A business process, illustrated in Figure 1-2, is a set of tasks or activi- ties that produce desired outcomes. Every process is triggered by some event, such as receiving a customer order or recognizing the need to increase inven- tory. The columns in the fi gure represent different parts, or functional areas, within an organization, such as sales, warehouse, manufacturing, and account- ing. Thus, the specifi c steps in the process are completed in different functional areas. For example, when a retailer (customer) places an order for bicycles, the manufacturer (seller) uses a specifi c process to ensure that the correct

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Business Processes 5

products are shipped to the customer in a timely manner and that payment for the order is received. These process steps can include validating the order, preparing the shipment, sending the shipment, issuing an invoice, and record- ing the receipt of payment. The sales department receives and validates the customer order and passes it on to the warehouse, which prepares and ships the order. The accounting department handles the invoice and payment steps. This is a very simplistic example. However, it highlights the fact that processes consist of interdependent steps that are completed in different parts of the organization.

Because the various process steps are carried out by different functional areas or departments, effective communication and collaboration among the departments is essential to the smooth execution of these processes. Without this interaction, the process cannot be completed effi ciently and effectively. For instance, if the customer order is not properly communicated to the ware- house, then it cannot be shipped on time. Similarly, if the order and shipment information is not communicated to the accounting department, billing and payment will not be completed effi ciently and accurately. Clearly, complet- ing a process successfully requires more than just communicating information. Close coordination of work among the people involved is also essential. For example, when the salesperson accepts the order, he or she must collaborate with the warehouse to determine when the order can be shipped. Without this collaboration, the salesperson may make promises that the company cannot realistically meet. If this occurs, then, the products will not be available when promised. The salesperson must also collaborate with the accounting depart- ment to verify that the customer is credit-worthy. Accepting orders and ship- ping goods to customers who have not made payments for previous shipments can cause major fi nancial problems for the organization.

An organization uses many processes to achieve its objectives, as illus- trated in Figure 1-3. Three processes are directly related to creating and deliv- ering products and services. They are buy, make, and sell. Organizations use specifi c terms to identify these processes.

• The procurement process (buy ) refers to all of the activities involved in buying or acquiring the materials used by the organiza- tion, such as raw materials needed to make products.

• The production process (make) involves the actual creation of the products within the organization. Whereas the production pro- cess is concerned with acquiring needed materials internally (by making them), the procurement process is concerned with obtaining needed materials externally (by buying them). Each is appropriate for different types of materials, as we will discuss later in the book.

Figure 1-2: A generic business process

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6 CHAPTER 1 Introduction to Business Processes

• Finally, the fulfillment process (sell ) consists of all the steps involved in selling and delivering the products to the organization’s customers.

Closely related to buying, making, and selling are four processes used to design, plan, store, and service products. Once again, organizations use specifi c terms for these processes.

• The lifecycle data management process (design) supports the design and development of products from the initial product idea stage through the discontinuation of the product.

• The material planning process ( plan) uses historical data and sales forecasts to plan which materials will be procured and pro- duced and in what quantities.

• The inventory and warehouse management (IWM) process (store) is used to store and track the materials.

• The asset management and customer service processes (service) are used to maintain internal assets such as machinery and to deliver after-sales customer service such as repairs.

Going further, two support processes are related to people and projects.

• Human capital management (HCM) processes (people) focus on the people within the organization and include functions such as recruiting, hiring, training, and benefi ts management.

Figure 1-3: Key business processes

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Business Processes 7

• Project management processes (projects) are used to plan and execute large projects such as the construction of a new factory or the production of complex products such as airplanes.

All these processes have an impact on an organization’s fi nance. This brings us to the last two processes, which track the fi nancial impacts of processes.

• Financial accounting (FI) processes (track–external ) track the fi nancial impacts of process steps with the goal of meeting legal reporting requirements—for example, the Internal Revenue Service (IRS) or the Securities and Exchange Commission ( SEC).

• Management accounting or controlling (CO) processes (track–internal ) focus on internal reporting to manage costs and revenues.

Each of these processes can include numerous subprocesses. For exam- ple, each of the components of HCM, such as recruiting and benefi ts manage- ment, is itself a process. Similarly, IWM can include complex processes for receiving materials from a vendor and shipping products to a customer. In addition, each process can impact other processes, as illustrated by the arrows between the processes in Figure 1-3. These arrows represent process integra- tion. For example, the procurement of raw materials has an impact on what can be produced and when. Similarly, the production process has an impact on what goods are available to sell and when. Going further, the arrows indicate that all processes have an impact on the organization’s fi nancials, a concept we explore throughout this book.

Clearly, then, in addition to understanding the details of how each process works, it is essential to understand the interrelationships among the processes. Signifi cantly, to prevent Figure 1-3 from becoming cluttered with arrows, we did not include every possible integration point. Instead, we highlighted only the key points.

In the next section, we briefl y describe the various business processes. We subsequently consider each process at length in separate chapters, where we also examine the linkages among the processes.

PROCUREMENT—BUY

The procurement process includes all of the tasks involved in acquiring needed materials externally from a vendor. A very simple example of a procurement process is diagrammed in Figure 1-4. As the fi gure illustrates, procurement is comprised of fi ve steps that are completed in three different functional areas of the organization.

The process begins when the warehouse recognizes the need to procure materials, perhaps due to low levels of inventory. The warehouse then docu- ments this need in the form of a purchase requisition, which it sends to the pur- chasing department. In turn, the purchasing department identifi es a suitable vendor, creates a purchase order, and sends it to the vendor. The vendor ships the materials, which are received in the warehouse. The vendor then sends an invoice, which is received by the accounting department. Accounting then sends payment to the vendor, thereby completing the process.

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8 CHAPTER 1 Introduction to Business Processes

In the preceding discussion a low inventory of materials was the trig- ger for the process. This discussion illustrates the link between procure- ment and the inventory and warehouse management process illustrated in Figure 1-3. Figure 1-3 shows, however, that procurement could be triggered by activity in other processes as well. The fi gure suggests at least three alternative scenarios.

1. The material planning process could indicate that the company needs to procure materials based on a forecasted demand for products.

2. The asset management or customer service process could trigger the procurement of a part needed to repair a machine or a product previously purchased by a customer.

3. A customer order (fulfi llment process) could trigger the need to buy something, such as raw materials or component parts needed to manufacture the product.

PRODUCTION—MAKE

In the preceding discussion the company met the need that triggered the pro- cess via external procurement; that is, it purchased the needed materials from a vendor. Other times, however, a company uses the production process to acquire needed materials internally. As we explained in the previous paragraph, a customer order can trigger the production process. Alternatively, the mate- rial planning process can trigger in-house production. Figure 1-5 illustrates the case where the warehouse notices that its inventory of products is low. Subsequently, it will request production. In turn, the production department will approve the request. The approval authorizes the warehouse to release the materials needed to complete production. Once the production depart- ment has completed its task, the warehouse places the fi nished goods into stor- age. Note that this last step in the production process, which is concerned with the storage of the fi nished goods, could trigger IWM processes.

Figure 1-4: A procurement process

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Business Processes 9

FULFILLMENT—SELL

Fulfi llment (Figure 1-6) is concerned with effi ciently processing customer orders. It is triggered by a customer purchase order that is received by the sales department. Sales then validates the order and creates a sales order. The sales order communicates data related to the order to other parts of the organization, and it tracks the progress of the order. The warehouse prepares and sends the shipment to the customer. Once accounting is notifi ed of the shipment, it creates an invoice and sends it to the customer. The customer then makes a payment, which accounting records.

As this scenario illustrates, fulfi llment triggers processes in IWM where the materials are stored. Of course, in many cases the ordered materials are not available in the warehouse. In such cases fulfi llment will trigger external procurement and/or production.

Figure 1-5: A production process

Figure 1-6: A fulfi llment process

MATERIAL PLANNING—PLAN

The term material encompasses all the products, components, parts, and so on that an organization uses. Businesses use and produce many types of materi- als. For example, material planning in a bicycle manufacturer would include: (a) fi nished goods, such as bicycles, that are sold to customers; (b) semifi nished goods, such as wheel assemblies, that are used to make the fi nished goods; and

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10 CHAPTER 1 Introduction to Business Processes

(c) raw materials, such as the tires, tubes, and wheels that are used to make the wheel assemblies. We examine the major material types in greater detail in Chapter 2.

The purpose of material planning is to match the supply of materials with the demand. The demand for fi nished goods is based on external factors such as customer tastes and preferences, economic conditions, and competitors’ actions. The demand for the other materials is dependent on the demand for fi nished goods. Consequently, organizations use different data and processes to plan for different types of materials.

The supply of materials is a function of many internal and external fac- tors. For example, the supply of materials procured externally (e.g., raw mate- rials) depends on availability from vendors as well as the lead time, which is the time between placing the order and receiving the shipment. Internally, the supply depends on available production capacity in the factories.

The outcome of material planning is the development of strategic and operational plans that match supply with demand as closely as possible. Excess supply will result in increased inventory costs, which are the expenses associ- ated with storing materials. Insuffi cient supply will result in a situation called stock-out in which the company cannot meet its customers’ demands. Both situations can undermine a company’s productivity and profi ts.

Material planning is infl uenced by the fulfi llment process, which provides sales data that companies use to forecast demand for fi nished goods. It is also infl uenced by procurement and production, which provide data on lead times and capacities, and by IWM, which provides data on material availability. In turn, material planning will trigger procurement and production processes to ensure that demand is met and IWM processes to ensure that materials are stored until needed.

INVENTORY AND WAREHOUSE MANAGEMENT—STORE

Inventory and warehouse management (IWM) is concerned with the storage and movement of materials. For a business to operate effi ciently, it is essen- tial that materials be stored so that they can be quickly and easily located when needed. This is especially true for large warehouses where thousands of different materials are stored in large quantities. In addition, companies must be able to move the materials quickly and effi ciently to wherever they are needed.

Figure 1-7 depicts four scenarios related to material storage and move- ment. Quadrant A (top left) shows a request for materials that will be used in the production process. These materials must be located and then issued to the production fl oor. In Quadrant B, the warehouse receives materials from the production process and then prepares them for storage. This process can include such steps as sorting and determining an appropriate storage location. Finally, the materials are moved into the selected locations. A similar process is used for materials that are received from a vendor via the procurement pro- cess (Quadrant C). Finally, when a customer order is processed by the fulfi ll- ment process, the warehouse must locate the materials and prepare and send shipments to the customer (Quadrant D).

These examples also clearly illustrate the integration between IWM and procurement, production, and fulfi llment. We will discuss integration points with other processes in later chapters.

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Business Processes 11

LIFECYCLE DATA MANAGEMENT—DESIGN

A successful organization must constantly improve its products and create new and innovative products that refl ect changes in customer tastes and preferences. Lifecycle data management provides a set of tools to manage product design and improvement throughout the lifecycle of a product. The product lifecycle begins with idea or concept development; progresses through production, marketing, and service; and concludes when the product is discontinued from the market. It can range from a few months for fad items to many years or even decades for products such as automobiles and bicycles. Products in the latter category typi- cally undergo small but continual improvements over the course of their lifecycle.

Lifecycle data management enables an organization to optimize its prod- uct development process, from design to market, while ensuring that it complies with industry, quality, and regulatory standards. At the same time, it provides users—that is, the organization’s employees—with access to product data at any point in the product’s lifecycle. This capability, in turn, enables the organization to react more quickly to take advantage of market and competitive opportunities.

ASSET MANAGEMENT AND CUSTOMER SERVICE—SERVICE

Asset management is concerned with both the preventive and corrective main- tenance of an organization’s equipment. Preventive maintenance is performed periodically—for example, the routine maintenance of a machine in a factory.

Figure 1-7: Inventory and warehouse management processes

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12 CHAPTER 1 Introduction to Business Processes

In contrast, corrective maintenance is done as needed—for example, repair- ing a machine when it breaks down. Figure 1-8 illustrates a simplifi ed main- tenance process. The trigger is a maintenance request, which can be either preventive or corrective. Production approves the request, and the mainte- nance is performed. The fi nal stage, settlement, involves an internal charge for the work done.

Figure 1-8: An asset management process

A similar process is used for service requests from customers, for exam- ple, to repair a product they purchased (Figure 1-9). In such cases, different functional areas may be involved. Sales receives a service request, which it approves and forwards to the department responsible for completing the repairs. Settlement will depend on whether the service is covered by a warranty. If it is, then the organization will absorb the cost of the repair. Otherwise, the organization will send an invoice to the customer and then record payment, similar to the steps in the fulfi llment process.

Figure 1-9: A customer service process

HUMAN CAPITAL MANAGEMENT—PEOPLE

Human capital management (HCM) consists of numerous processes related to all aspects of managing people in an organization. Examples of HCM processes are recruitment, hiring, training, compensation and benefi ts management, and

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Business Processes 13

payroll administration. In our brief discussion of processes in this chapter, we focused on tasks and the functional areas where they are completed. Clearly, however, it is the people in the functional areas who actually perform the tasks. Consequently, HCM touches every process in the organization. Moreover, it is not uncommon for people in different functional areas to complete many of the tasks in HCM processes. For example, the trigger for recruitment and hiring is a need for people with the requisite skills to complete process tasks. Consequently, the functional area in need of new employees will be involved in this process.

PROJECT MANAGEMENT—PROJECTS

Most business processes are ongoing or repetitive. For example, the lifecycle data management process spans the life of a product, and the procurement and fulfi llment processes are repeated frequently. In contrast, a project is temporary in nature and is typically associated with large, complex activities, such as the construction of a factory or an aircraft. As we discussed earlier, project manage- ment refers to the processes a company uses to plan and execute large-scale proj- ects. It involves the use of tools and techniques for managing complex projects.

Projects can be internal or external depending on the recipient of the fi nal outcome. For internal projects, such as constructing a plant, project man- agement is concerned primarily with costs. This is because the outcome of the project benefi ts the organization and is not sold to a customer. Because no sales are involved, no revenues are created. In contrast, external projects such as building an aircraft for a customer generate both costs and revenues.

Projects rely on resources and capabilities available in other processes. For example, building an aircraft involves purchasing materials (procurement process), making components from these materials (production), supervising people (HCM), and so on. External projects are also integrated with selling to customers (fulfi llment). Figure 1-10 illustrates a simplifi ed project manage- ment process. The diagram does not identify the specifi c functional areas in which the work needed to complete the project is performed because this will vary depending on which other processes are involved.

In the planning phase the scope of the project is defi ned, and the mile- stones and deadlines are set. The budgeting phase triggers the accounting pro- cesses to calculate and allocate the resources needed to execute the project. The project is not executed until management approves the budget. During

Figure 1-10: A project management process

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14 CHAPTER 1 Introduction to Business Processes

the execution phase the needed processes (e.g., procurement and production) are triggered. In addition, accounting processes are used to keep track of costs and revenues and, for external projects, to issue customer invoices. Finally, throughout the life of the project and at the end of the project an accounting process called settlement is periodically carried out to assign costs and revenues to the appropriate parties.

FINANCIAL ACCOUNTING—TRACK FOR EXTERNAL REPORTING

Financial accounting is concerned with tracking the fi nancial impacts of processes with the primary goal of meeting legal and regulatory reporting requirements. Thus, it is externally focused. Common reports include the income statement or profi t and loss (P&L) statement and the balance sheet. The income state- ment indicates the organization’s fi nancial condition within a specifi ed period of time. It identifi es revenues, expenses, and net profi t (or loss) for the period. In contrast, a balance sheet indicates the fi nancial condition of an organiza- tion at a given point in time. It identifi es assets, liabilities, and shareholders’ equity. All of these reports must comply with prescribed standards, such as the generally accepted accounting principles (GAAP) in the United States and Handelsgesetzbuch (HGB) in Germany. These reports must be submitted to regulatory agencies at prescribed times, such as annually or quarterly. Finally, these reports are country specifi c. Therefore, an enterprise that operates in multiple countries must track fi nancial data separately for each country, using that country’s prescribed standards.

Various steps in the different processes introduced earlier in this chapter have an impact on an organization’s fi nancial status. Organizations analyze this impact using four key processes based in fi nancial accounting: general ledger, accounts receivable, accounts payable, and asset accounting. The general ledger process records the impacts of various process steps on a company’s fi nancial position. The impacts are recorded in a number of accounts in the general ledger that represent an organization’s income, expenses, assets, and liabilities. These accounts are used to store accounting-relevant data from process steps. Accounts payable is associated with the procurement pro- cess and is used to track money that is owed to vendors. Similarly, accounts receivable is used to track money owed by customers. Accounts receivable and accounts payable automate the general ledger entries associated with the procurement and fulfi llment processes so that the fi nancial impact of these processes is recorded automatically. Finally, asset accounting is concerned with tracking fi nancial data related to assets such as machinery and cars.

MANAGEMENT ACCOUNTING—TRACK FOR INTERNAL REPORTING

Whereas fi nancial accounting is concerned with external reporting that is man- dated by laws and regulations, management accounting, or controlling, is concerned with tracking costs and revenues for internal reporting that is intended to help management control costs and revenues and assess the profi tability of various products and market segments. Management creates these reports to support its decision making. Unlike fi nancial accounting reports, management

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accounting reports are produced as needed and can contain any information that management deems necessary.

Among the major costs management accounting tracks are materials costs, labor costs, and overhead costs. Management takes these costs into account when it establishes prices for its products or services. It then combines these data with information concerning revenues to determine the profi tability of various products and services in different market segments. Ultimately, management utilizes all of this information to make key strategic decisions that affect the organization’s prod- ucts market mix as well as tactical decisions that infl uence day-to-day operations.

GLOBAL BIKE INCORPORATED (GBI) GLOBAL BIKE INC.

Throughout this book, we will use the case of Global Bike Incorporated (GBI) to illustrate important concepts, processes, and techniques. GBI is a fi ctional company, and its operations have been greatly simplifi ed to make its business processes and its SAP ERP system easier for you to work with. Although GBI might seem complex as you progress through the chapters of this textbook, rarely will the business operations of a real-world company be as simple as those found in GBI.

Much the data used in this textbook are based on GBI and represent the many aspects of its fi ctional suppliers, customers, employees, and materials. In addition, all of the hands-on exercises are intended to be completed in a func- tioning (live) SAP ERP system that is confi gured with GBI data. (Enterprise Resource Planning, or ERP, systems integrate a company’s various functional and cross-functional business processes. We explain ERP systems in greater detail in Chapter 2.) It is very important that you quickly become familiar with GBI and their business operations in order to master the key concepts in this course and to complete your course assignments.

The following paragraphs provide a brief overview of GBI. However, you must retrieve the detailed GBI Annual Report from the WileyPLUS course site (explained later) or the SAP University Alliances Community (SAP UAC) at http://uac.sap.com to learn the full story of how GBI came into existence and to familiarize yourself with the specifi cs of the company’s operations. The SAP UAC is a free site for all university students who are enrolled in an SAP course. The registration process is very simple and is free. In addition to the detailed GBI information on the SAP UAC site, you will also gain access to several SAP career services, including certifi cation information and internship and job opportunities. Your instructor can show you where to access the GBI Annual Report on the SAP UAC site once you have registered.

GBI was founded in 2001 following the merger of two bicycle manufac- turers, one based in the United Sates and the other in Germany. GBI has three lines of business: deluxe and professional touring bikes, men’s and women’s off-road bikes, and bike accessories. GBI sells its bikes to a network of spe- cialized dealers throughout the world, and it procures its raw materials from a variety of suppliers globally.

GBI has two manufacturing facilities, one in the United States and one in Germany. It also has three additional warehouses, two in the United States and one in Germany. GBI has more than 100 employees globally. The organization uses SAP ERP to support its processes. Figure 1-11 illustrates GBI’s enterprise structure.

Global Bike Incorporated (GBI) 15

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16 CHAPTER 1 Introduction to Business Processes

HOW TO USE THIS BOOK This edition of Integrated Business Processes with ERP Systems does not cover all of the processes introduced in this chapter. Chapter 2 is an introduction to enterprise systems, and Chapter 3 discusses fi nancial accounting. Chapters 4-8 address the key logistics processes: procurement, fulfi llment, production, warehouse management, and material planning. Finally, a concluding chapter discusses all of these processes from an integrated perspective. In addition, the exercises and demonstrations included in this book are available online via WileyPLUS.

CHAPTER STRUCTURE

As the previous paragraph indicates, most chapters will focus on a specifi c process, such as procurement, fi nancial accounting, and production. Most of these chapters share a common structure. Each chapter begins with a review of the simple presentation of the process introduced earlier in this chapter. The chapter then segues to a detailed discussion of data, key concepts, and process steps. General concepts related to data—organizational data, master data, and transaction data—will be introduced in Chapter 2. Each subsequent chapter will focus on the specifi c concepts and data that are relevant to the process discussed in that chapter. Most chapters require you to understand a few fun- damental concepts, which are discussed next. Note that many of the concepts related to organizational and master data are relevant to more than one pro- cess. In such cases, we do not repeat the discussion of these concepts. Rather, we refer you to previous chapters where they were discussed.

The third main component of each chapter consists of a detailed discus- sion of the various steps involved in the process. Each process step will be discussed using the following framework:

• Triggers: the event(s) that cause(s) the process step to be initiated

• Tasks: the specifi c steps needed to complete the process step

Figure 1-11: GBI enterprise structure

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How to use This Book 17

• Data: the information associated with each process step

• Outcomes: the specifi c products or consequences of the process step

The fourth component of each chapter is reporting. This section exam- ines how the data generated during the process steps are converted into meaningful information. It also provides examples of the types of reports that can help managers improve process performance.

Going further, each chapter employs three pedagogical tools— demonstrations, real-world cases, and exercises—to reinforce the material. Demonstrations illustrate either a particular concept or the execution of a pro- cess step in the SAP ERP system. These demonstrations are in the form of ani- mations that can be viewed multiple times. Real-world cases are vignettes from actual companies that illustrate a concept or demonstrate how that company executes a process. Exercises to be completed in an SAP system confi gured with GBI data provide a fi nal reinforcement of the chapter’s key concepts.

SAP SOFTWARE

SAP (pronounced by saying each letter individually, like IBM or ABC) is the pioneer in enterprise systems. SAP was the fi rst company to build a packaged enterprise system, which means that it designed a single piece of software that is used by many companies. Prior to that time, software developers had to cre- ate customized software for every company, which was prohibitively expensive.

SAP introduced the fi rst integrated, end-to-end enterprise system, called SAP® R/3, in 1992. The “R” in R/3 stands for “real time.” Prior to the develop- ment of enterprise systems, companies typically employed a number of differ- ent systems, each of which supported a single function or department. Thus, there were sales systems, accounting systems, manufacturing systems, and so on. These systems were not integrated, so sharing data between and among them was problematic. As you might expect, this architecture regularly expe- rienced delays in executing business processes because data had to be trans- ferred from one system to the next as the process was being performed.

SAP R/3 was designed to eliminate these ineffi ciencies by executing an entire process from start to fi nish and consolidating all of the process data in a single database. Consequently, regardless of which individuals were completing a step in the process, all of the data were available to them in real time. In addition, everyone else in the company could see the status of the process in real time as well. In today’s age of Twitter and RSS feeds, this development might seem trivial. At the time, however, it was a crucial innovation. SAP R/3 was quickly adopted by one major corporation after another, and it catapulted SAP software onto the “must do” list for nearly every large company. By 2010, SAP had more than 110,000 customers in over 120 countries, including nearly every Fortune 1000 company. In 2008, SAP’s market share in the ERP category was equivalent to the market share of the next four largest ERP vendors—combined.3, 4 Today, more than 75% of SAP’s customers are small and medium-sized businesses.

3 C. Pang, Y. Dharmasthira, C. Eschinger, and K. Motoyoshi, Market Share: ERP Software, Worldwide, 2008, July 2008, Gartner. 4 A. Pang, Worldwide ERP Applications 2009–2013 Forecast and 2008 Vendor Shares, October 2008, IDC.

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18 CHAPTER 1 Introduction to Business Processes

Enterprises of every size, in every industry, all over the world use SAP software to manage their business operations. Regardless of where you live, nearly every major corporation, government entity, and nonprofi t organization you are famil- iar with runs the same SAP software that you will use in this course.

Before you start to think that this book is a marketing brochure for SAP, you should understand why we have explained SAP’s strategic importance in business and have selected SAP ERP as the reference system for this textbook. One of the most lucrative and rewarding careers in the IT industry for nearly 20 years has been that of an SAP consultant.5 Contrary to what you may have heard, most SAP consultants are not programmers. Rather, they are MIS and business majors who have developed a process perspective on business and have become competent in a specifi c capability of the SAP ERP system. However, even technical programmers who wish to work with SAP must have a deep understanding of how business works in order to program applications that enable business processes to operate more effi ciently. In other words, they are people just like you who have mastered the material in this textbook.

Integrated Business Processes with ERP Systems will incorporate a num- ber of demonstrations, examples, and hands-on exercises using SAP ERP. Several other companies offer enterprise systems that have similar capabili- ties, but it would be very diffi cult to explain how processes are executed in each of them. We have chosen to include the most prevalent and widely used ERP system that you are likely to encounter in your career. Although some of the concepts in this textbook are specifi c to SAP ERP, you can easily trans- fer nearly everything you learn to whichever system is used in the companies where you will work.

When SAP fi rst introduced R/3, almost anybody could claim to be an R/3 expert and thus become a highly paid consultant. Unfortunately, this practice led to quite a few well-publicized project failures. In response, SAP introduced certifi cations for the various modules and technical skills required to be a properly trained consultant. This arrangement enabled consultants who participated in SAP training programs and demonstrated a high degree of skill to distinguish themselves for potential employers. Today, SAP provides more than 100 certifi cation types, classifi ed by solution, focus area, and role. Each certifi cation type specifi es three levels of skill: associate, professional, and master. It can take many years and tens of thousands of dollars to progress up to master-level certifi cation. SAP is very proud of the high level of knowl- edge and skills that are required to earn certifi cation. As you probably suspect by now, the SAP testing process is extremely rigorous. Because an SAP cer- tifi cation is such a highly valued credential, once you have earned one, SAP provides you with a certifi cation number that can be listed on your resume or CV and verifi ed by potential employers—the thousands of consulting com- panies that implement SAP software and the more than 110,000 (in 2010) companies that run SAP software.

As an added benefi t to students enrolled at universities or technical schools that are members of the SAP University Alliances Program, SAP offers special certifi cation academies on campuses around the world where students can earn the same certifi cation as professionals at a reduced cost. This textbook and the additional online materials are based on the content in the

5 J. Sahadi, Hot 6-fi gure jobs now, 2007 [Online], CNN/Money. http://money.cnn.com/galleries/ 2007/pf/0708/gallery.hot_six_fi g_jobs_now/index.html.

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How to use This Book 19

SAP course, which results in an offi cial SAP Associate Application Consultant certifi cation and can be used as a supplement to the SAP course materials. Alternatively, students who master the concepts in this textbook and the additional online materials can take the SAP certifi cation exam at one of over 8,000 global testing centers without participating in a certifi cation academy.