Improved Intercompany Billing Flow

We were asked to facilitate reporting of the unrealized intercompany profit and to facilitate integral profitability reporting. This was for a technology company, focused on improving people's lives through meaningful innovation in the areas of Healthcare, Consumer Lifestyle, and Lighting.

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Background

The requirements of the project were all related to intercompany profits and transfer pricing. When you want to know the real profitability of a (consolidated) group of companies, you should remove the (intercompany) profits that are contained in the transfer prices.

What organizations normally do to gain a good understanding of the real profitability of different legal entities within a group (of consolidated companies) is to take out the intercompany margins. Mostly, that happens as part of the financial consolidation process. In traditional financial consolidation, the real margin (stripped from intercompany profits) will be made available on either legal entity level or profit center level. The first variant is called legal consolidation, while the second one can be called a managerial consolidation that will give insight into the profitability of countries, product groups, and/or business units. This traditional method of financial consolidation is mostly facilitated with general ledger accounts that capture the intercompany sales and intercompany purchases. To determine the consolidated result, you simply eliminate the intercompany sales (or cost of goods sold).

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Project focus

What we were asked to do, when we were asked to determine the integral profitability, was to determine the intercompany profit which was contained in each sales transaction and each goods movement, in real time. Because when you know this, you can determine, at each moment in time, the integral profitability and the intercompany profit that is contained in the stocks (or goods movement).

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Our approach

We worked with SAP’s Multiple Valuation functionality, which is based on the Material  Ledger module. This functionality facilitates the determination of integral profitability. With Multiple Valuation switched on, you can capture different material valuation prices for each material and store these different valuations in the different currencies in financial accounting. In this case a second group valuation flow was created (from product cost planning) next to the regular legal valuation flow.

Our point of departure was to set out the long-term vision. Next, we prepared the use case for the Multiple Valuation functionality, and then we switched on the functionality during the first go-live. Throughout the project, we were aware that the full implementation of the functionality would be a long-term process. Switching it on was the first step.

The Multiple Valuation functionality works best in one SAP kernel. Luckily, one of the aims of the project was to bring all the different SAP systems and different country systems together in one (central) kernel. However, we also investigated (on a conceptual level)  how this functionality would work with more than one SAP instance and how integration would need to be set up in such a situation. Later on, integration with SAP systems which were not part of the central kernel was also implemented.

Impact on the organization

The introduction of this functionality also had consequences for the way of working, and, more importantly, the way of thinking in the organization. Moving from a monthly consolidation process to a system that provides real-time, online visibility of consolidated results is powerful.

For the functionality to work fully, stock in transits also would have needed to be kept in different valuations (with IC profit and without IC profit). This would have meant that the logistical flows would have been affected as well, even though this was regarded as a finance and reporting project. This is a common challenge in SAP projects. For business reasons, the organization decided against using this part of the solution.

The organization already had a team that was responsible for reporting the integral profitability. This team based their reporting on calculations made in a separate database, and they were responsible for making it all work. A full implementation of the new functionality therefore could have affected this team, because integral profitability could have been calculated within SAP, and a separate database would no longer have served the same purpose. However, for this to be possible at a certain moment in time, the components defined in the product cost calculations and the reporting from profitability analysis needed to be on a certain level. This was (and maybe still is) a work in progress.

Outcome

We defined the vision for the organization and implemented the foundation for real time integral profitability reporting and unrealized intercompany profit reporting (this is the intercompany profits contained in the stock value)  with SAP standard functionality.

Activating Material ledger Multiple Valuation resulted in the following:

• Each material movement will carry the value including intercompany profit and the value excluding intercompany profit

• This makes it possible to report the margin according to legal valuation (including intercompany profit) and group valuation (excluding intercompany profit)

• The intercompany profits contained in the stock value is visible

• Facilitating a transparent and straightforward cost price buildup through the process chain

In the end it all came together in the reporting of the integral profitability. In SAP HANA this can be facilitated with the universal journal (with or without the use of profitability analysis).

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