ERP Merged Slides.pdf

ERP Then and Now:
A Ma ager’s
Perspective
Thursday, September 03, 2015 1

What Defines an ERP?
• Integration
• Parameterisation
• Standardisation (of business
process)

Example of Integration
Purchase Requisition
Purchase Order
Goods Receipt
Invoice Receipt
Payment
Basic Purchase Cycle
User Dept
Purchase Dept
Stores Dept
Accounts
Dept
Stock
Accounting
3 Way Invoice
Verification
Accounts
Dept
Impact on Accounting
Dis-integrated
purchase and
accounts processes
leading to
discrepancies
Non integrated purchase and accounting process

Example of Integration
Purchase Order
Goods Receipt
Invoice Receipt
Payment
User Dept
Purchase Dept
Stores Dept
Accounts
Dept
Stock
Accounting
3 Way Invoice
Verification
Accounts
Dept
Integrated purchase and accounting process in SAP
Material
document
Accounting
document

Integration is not absolute!
Volume of
transactions
No Software is 100% integrated and no software is 100% disintegrated. It is only a
matter of degree.
Good ERPs t pi all i tegrate ore usi ess pro esses. No ore pro esses the lo g
tail a still e outside the pur ie of a i tegrated ERP.
Business Processes
Core Processes
under an
integrated ERP
Long tail of non
core processes

What is Para eterisatio ?
Parameterisation can be compared with the building blocks of
Lego to s . I a para eterised soft are, a trai ed professio al
can map business processes from various companies and
i dustries ha gi g the rele a t para eters a d without
changing codes.

Whi h ethod of o stru ti g the paper du k ill a hild or all fi d easier to do
(assuming he/she knows the use of scissors)?
What are the pros and cons of both methods?

“uppose ou a ted a paper du k as a o e?

Ca ou re erse e gi eer to reate the opti u
number of blocks to construct both the shapes?

Business Process 1
Business Process 2
Para eterisatio i ERP to ap
multiple business processes

E a ple of Para eterisatio
“che atic Exa ple of Para eterisatio i “AP.
The example shown is only for explaining the concept, it may not be technically accurate.
Movement
Type
Valuation
Class
Account Dr. Account Cr.
101 3000 1012345 2378908
261 3003 1037823 2984576
These are like Lego Blo ks , Greek to a or al user, ut ell k o
ter s to a “AP super user ho a use these for aki g pro esses
Usi g rele a t Lego lo ks like Mo e e t T pe, Valuatio Class, et ., a trai ed “AP
Consultant can create an integrated process for any type of movement of any type of
material in any type of industry and the corresponding accounting treatment. He/she can
do this without having to change any source code.

Configuration vs. Customisation
Configuration of ERP Packages can be done using parameterisation features of the ERP.
More parameterised an ERP is, there are higher chances of mapping any business
process of an organisation.
Customisation is NOT configuration. Customisation is writing programs to manage
business process that cannot be handled through configuration.
Industry
Process
Company
Process
ERP
Process

Why is Customisation not Recommended?
• It takes time and effort, costs money (more than configuration)
• The quality of code may not be as good as product vendor
• Testing may not be as rigorous as the product vendor
• The code may get over written and has to be re-written if the ERP software is
upgraded
You may still have to customise the ERP under certain circumstances e.g. if the
business requirement is of statutory nature and it cannot be mapped in SAP
through configuration

Standardisation of business processes
• When you implement a world class ERP be prepared for the fact that even
though ERP will not drive your business, it is going to drive your business
processes.
• You cannot implement ERP without changing your business processes.
• Good ERPs will help you to improve your processes because these ERPs have
the capability by which such improved business processes can be configured in
the ERP software
• After a company implements an ERP it is very common that users start talking
in ERP terminology for their normal business processes.

Genesis of ERP
Auto atio of i di idual depart e ts reated isla ds of auto atio . Buildi g ridges
between the islands was difficult and expensive in pre- SoA era. Business was not realising
benefit of automation because of inconsistent and fragmented business information available
from different departments.
ERP proposed an integrated system with a central database and unified processes that enable
business to get one information from all departments thereby facilitating decision making.

ERP transformed the IT and
Consulting Industry
• ERP made IT strategic to organisations
• ERP created the position of CIO
• ERP created a new profession
• ERP became the vehicle of large scale Business
Process Re-engineering (BPR) in organisations

Benefits of ERP
• It is hard to measure ROI of ERP in hard numbers
• But it is possible to have a qualitative view of the benefits of ERP
Value
Addition
Cost
Reduction
Business
Benefit
Cash
Liberation
Real time confirmation of
delivery date leading to
higher customer satisfaction
Reduction of inventory
Accurate information on
product cost leading to
possible reduction in cost

Does ERP Reduce or Increase Manpower?
• ERP enables organisations to extract more business information compared to that what
is feasible without ERP
• More information requires more input data
• Increase in input data post ERP to meet management expectation on information may
increase workload.
Data
input
effort
Before ERP After ERP
Information
output
Additional
Information
Output
desired by
Management
after ERP
Data input effort for same
information output prior to ERP
reduces dues to automation
But there is additional data
input effort required to meet
the expectation for additional
information.
Thus total data input effort
might increase

Does ERP Reduce or Increase Manpower?
• ERP redistributes work load between divisions of an organisation
• Thus, though total workload may reduce, workload of specific departments may
increase
• Excess manpower of one department may not be feasible to be deployed in another
department
• Thus, if an organisation does not have appropriate re-skilling, redeployment or
separation plans, it may end up with higher staff post ERP implementation
Workload
distribution
before ERP
Workload distribution after ERP:
Though overall workload of company
may come down, workload on
specific departments may increase

Critical Success Factors for
Successful ERP Implementation
• Managing Organisational Change
• Making Business Own the Implementation
• Managing Data
• Mobilisation quality internal manpower for
implementation
• Managing Scope of Implementation

What kind of Organisational
Change does ERP Bring?
• Change in business process (and, business process change is
inevitable in ERP implementation)
• Change in organisational roles
• Learning new software (and, learning ERP is not easy!)
• Transparency of information may cause discomfort to many in
the organisation
• Information is accessible to all, given the requisite authority
(and, statutory authorities have full authority to access such
information)

Mi hael Ha er’s “tud o
Success of ERP Implementations
Degree of Success
100%
0%
No. of
Companies
Michael Hammer identified that the single most important
reaso for the a or al distri utio is the i a ilit of
organisations to manage change with ERP brings.

Wh is there al a s a fight o
scope of ERP implementation?
User Defines Requirement Software Programmers Write Code
In Custom Software, there is no or minimal change in process. The users define the
requirement and the software programmers make software according to the requirement
define. If there is any subsequent change in requirement, it is understood by all.

Wh is there al a s a fight o
scope of ERP implementation?
User Defines As Is Process
Pro ess
I pro e e t
transforms As Is
defined by users
I ERP, usi ess pro ess ha ge puts the o ership of the ire fra e fro here the
final system will be configured under question. This results in frequent changes in scope
during implementation. This leads to delay in implementation too.
Who defi es To Be ? Users
point to Consultants and
Consultants point to Users.
“o e say Joi t O ership .
But e k o that We is the
most dangerous pronoun!
The final system is configured and
customised based on a wire frame
whose ownership was never
established at the time of its creation.
Result – changes to design after
configuration, frequent fights over
change in scope

Leading ERPs Today

How can I select the right ERP?
• You cannot do it by comparing a laundry list of
features of arious ERPs. Be ause, e ept at a high
le el, here ost good ERPs are si ilar, su h features
can be assessed only after configuring the ERP for your
business process.
• And, for configuring an ERP, you have to buy licenses
and pay consultants for configuring. Thus you have
alread su k a lot of o e i assessi g the right ERP
for you. In order to assess multiple ERPs you have to do
the same for every ERP you want to assess. Is it a practical
proposition?
The o l realisti ethod to assess the right ERP for ou is to talk to the gu e t door
i.e. some other similar company who has implemented the ERP.
This is pro a l o e of the reaso s for o solidatio i ERP produ t spa e ith ot
many people willing to bet on a new untested ERP vendor.

Is ERP a Software Product?
NO! Even the best of breed ERPs are far from being a software product in its true sense.
U like soft are produ ts like M“ Offi e, Lotus Notes, et ., ERP is ot a produ tised
soft are though there has ee atte pts to do so that a e i stalled a d ade to
support your business processes almost instantaneously (like you install an MS Word and
can start using it almost immediately).
ERP is a para eterised i tegrated soft are hi h a e ade to support our usi ess
processes in a standardised form with relative ease of effort, compared to custom
software.

Can I Custom Develop an ERP?
You CAN, but it is HARD!
First, it may be hugely expensive to build a real custom developed ERP
Second, it may integrate your business processes but may not meet other qualifying
criteria of integrating different types of businesses, parameterisation and standardisation
of business processes.

Future of ERP: The Disruptive Forces
Volume of
transactions
Business Processes
Core Processes
under an
integrated ERP
Long tail of non
core processes
At the turn of the millennium, with the advent of E-Commerce, leading
ERPs tried to e pa d i to the lo g tail , ut ere ostl u su essful.

The isla ds of auto atio are a k, ut this ti e ith te h olog to uild
comfortable bridges between islands quickly and efficiently.
Where would you like to live? The place to your left or that to your right?
Service Oriented Architecture (SoA) disrupted the ERP Theory of Integration
The Disruptive Forces: SOA

Cloud made software available at low cost, sometimes free. Investments in
Software became an Opex expenditure from Capex. Organisations could build
soft are i frastru ture as the gre a d ot e essaril upfro t.
The Whack from SMAC!
Infrastructure
as a Service
(IaaS)
Software as a
Service (SaaS)
Platform as a
Service
(PaaS)

ERP will continue to be the primary software for enterprise core processes.
Some ERPs are proactively adopting SMAC either organically or inorganically
to keep pace with the new age technology. Most ERPs are yet to demonstrate
strong success stories, though.
The New ERP: Example SAP

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ERP for Managers
ERP Project Financials
Atanu Ghosh
atanu.ghosh@bluebeaks.in
2
Software Project and Program Management
ERP Project Cost and Price Models
Atanu Ghosh

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Software Project Investment Components
• Software
• Hardware
• Services
• One-time (Design, Development, Deployment)
• On-going (Support, Maintenance, Enhancement)
4
Software Project Costing
Cost = Effort * Rate
Effort is defined in units unique to professional services
industry e.g. Person Months, Story Points, etc.
Classical software project management uses techniques
such as Function Point Analysis.
In projects managed on Agile philosophy more
contemporary estimation methods like Story Point is used.

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Rate
Rate = Cost of Resource per Unit Time
e.g.
Rate = Cost of ABAP Developer per Hour
To define the cost per unit time, the various
components of cost e.g. salary, electricity, etc. that are
relevant for software industry need to be identified.
These components are called Cost Elements.
What are the cost elements that need to be included
for calculating the cost of resource?
6
Cost Elements in Rate
1. Direct Cost Elements – Cost elements that can
be completely attributed to a discrete unit of
output (e.g. an ERP project)
2. Indirect (Overhead) Cost Elements – Cost
elements that cannot be completely attributed
to the output but need to be allocated based on
defined allocation rules applied on cost drivers.

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Key Direct Cost Elements
1. Compensation usually calculated in terms
of Cost to Company (CTC)
2. Perks in cash or kind e.g. food coupons
3. Depreciation on asset specifically allocated
to resource e.g. laptop
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Key Direct Cost Elements - Example
A SAP ABAP developer planned to be deployed in
your project has a CTC of Rs. 12 lakhs per annum.
She is provided a laptop costing Rs.60,000.
Calculate the direct per month cost attributable to
this developer.

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Cost Head Amount
CTC of resource pre-rated per month Rs. 1,00,000
Cost of laptop assigned to employee Rs. 60,000
Per year depreciated cost on straight line
method considering a life of 3 years for laptop
Rs. 20,000
Depreciated cost of laptop per month Rs. 1,667
Total Direct Cost per month Rs. 1,01,667
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Cost Head Amount
CTC of resource pro-rated per month Rs. 1,00,000
Cost of laptop assigned to employee Rs. 60,000
Per year depreciated cost on straight line
method considering a life of 3 years for laptop
Rs. 20,000
Depreciated cost of laptop per month Rs. 1,667
Total Direct Cost per month Rs. 1,01,667
Can you identify the key challenges in this method?

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Key Challenge and Solution
Key challenge:
1. Different resources will have different CTC.
2. In many cases the resource to be deployed in a project
is not known before the start of the project. But project
cost in most cases need to be estimated before the
start of the project.
Solution: Standardisation of resource cost using
principles of standard cost estimate.
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Standard Cost Method for Resource CTC
1. Group resources into clusters consisting of resources having
similar CTC.
• These clusters are called by different names in different
organisations e.g.“Bands”,“Levels”, etc. For simplicity, lets
refer to such clusters as Bands in subsequent discussions here.
2. Calculate any relevant central tendency (mean, median, etc.) for
average salary for each Band.
3. Estimate the resources required from each Band.
4. In some cases a “blended rate” is arrived considering weighted
average salary of each Band.
Can you identify some of the challenges in this model?

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Challenges in Standard Cost Method
• Such clusters are based on compensation of resources which in turn
depends on market rate of resources with similar skills.This is required to
attract and retain resources with the required skills in the organisation.
• However, same classification rationale is also used to denote seniority of
employees in the organisation.
• For example, SAP HANA development skills may be much higher in
demand in market at present compared to a vanilla SAP ABAP
developer.Thus from cost perspective the SAP HANA developer may
be at a higher band compared to the SAP ABAP developer. However,
seniority of both employees may be same in the organisation.
• Similarly a higher market rate and hence a higher salary may lead to the
SAP HANA developer placed at the same band as a team leader of an SAP
ABAP project. But the organisation might require additional skills and
competencies in managerial roles that may not get captured in the
standardised skill and cost based groups.
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Challenges in Standard Cost Method
• Salary of IT employees can be very different from employees in other areas
or divisions e.g. HR, accounts, etc.This is especially a problem with non IT
companies.
• Actual resources deployed in the project may be different from the original
mix planned.
• Standard cost needs to be updated frequently as internal and market
salaries in software industry is subjected to high degree of volatility.

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Hourly Rate for a Cluster
An ERP consulting company has grouped its resources in 3 Bands – Band 1, Band
2 and Band 3.The above table shows the number of resources the company has
in each Band and their respective salaries.
Calculate the standard hourly rate for resources from each Band, considering
salary as the only cost element. Consider Mean as a measure of central tendency.
Employee Annual CTC
1 Rs. 10 lakhs
2 Rs. 9 lakhs
3 Rs. 11 lakhs
4 Rs. 10 lakhs
5 Rs. 12 lakhs
6 Rs. 9 lakhs
7 Rs. 10 lakhs
Band 1
Employee Annual CTC
8 Rs. 15 lakhs
9 Rs. 18 lakhs
10 Rs. 16 lakhs
11 Rs. 17 lakhs
Band 2
Employee Annual CTC
12 Rs. 22 lakhs
13 Rs. 25 lakhs
Band 3
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Hourly Cost Rate for a Cluster
Normal working hours in a year considered as 1920 (8 hrs a day * 20 days a
month * 12 months)
Employee Annual CTC
1 Rs. 10 lakhs
2 Rs. 9 lakhs
3 Rs. 11 lakhs
4 Rs. 10 lakhs
5 Rs. 12 lakhs
6 Rs. 9 lakhs
7 Rs. 10 lakhs
Cost Rate Rs. 528/ hr
Band 1
Employee Annual CTC
8 Rs. 15 lakhs
9 Rs. 18 lakhs
10 Rs. 16 lakhs
11 Rs. 17 lakhs
Cost Rate Rs. 859/ hr
Band 2
Employee Annual CTC
12 Rs. 22 lakhs
13 Rs. 25 lakhs
Cost Rate Rs. 1,224/hr
Band 3

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Band Mix and Blended Rate
Calculate
1. Planned vs Actual Band Mix
2. Planned vs Actual Blended Rate
3. Impact on cost of project for a calendar month
Band Planned Resources Deployed Resources
1 4 3
2 2 3
3 1 1
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Band Mix and Blended Rate
Calculate
1. Planned vs Actual Band Mix
2. Planned vs Actual Blended Rate
3. Impact on cost of project for a calendar month
Planned Actual
Band Mix 1.57 1.71
Blended Rate Rs. 722/ hr Rs. 770/ hr
Cost per Month Rs. 8,08,929 Rs. 8,61,905

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Indirect Costs
Can you give some examples of Indirect
Costs relevant to ERP Projects?
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Indirect Costs for ERP Projects
1. Infrastructure
2. General (not project specific) software
3. Business development
4. General (not project specific) training
5. Non-billable resource cost
6. Cost of bench of billable resource
7. Non-project travel

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Methods for Allocation of Indirect Cost
1. 2 Methods
• Allocate to monthly/ hourly resource rate
• Allocate to overall project
2. 1st method is preferred by most companies because in
that case same resource rate can be used for time and
material billing to clients.
3. Costs that are specific to a particular project e.g.
project related travel cost, cost of software used in a
project, project related training, etc. are not allocated
to the hourly resource rate but are charged to overall
project cost both at planning and actual stages.
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Indirect Cost Allocation: Use Case 1
Your company has 2 on-going ERP projects – Project A and
Project B. Project A has 5 resources and Project B has 3
resources. Monthly electricity bill for your office is Rs. 8,000.
How much cost will you allocate to Project A and Project B for
using electricity?

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Electricity Cost
(Rs. 8,000)
Project A
(Rs. 5,000)
Project B
(Rs. 3,000)
5 Resources
3 Resources
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1. Cost Element = Electricity Cost
2. Cost Driver = No. of Resources
3. Allocation Rule = No. of Resources in the Project/ Total
No. of Resources in the Company
Assumption:There is no resource on bench and all
resources in the company are billable resources

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Your company has 2 on-going ERP projects – Project A and Project B.
Project A has 5 resources and Project B has 3 resources.There are total
8 resources in the company, all deployed in Project A and B.There are
no other resources in the company.The following charts give the
number of resources in each Band, the average compensation for each
Band and band mix of resources for both the projects.
The monthly internet cost of the company is Rs. 12,000. Past data
shows that the senior bands need to use internet more because they
need to communicate with external stakeholders more.The ratio of
internet usage by resources from Band 1, 2 and 3 is estimated as 1:2:3.
Calculate the hourly cost rate for resources in each band.
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Band Average Annual CTC
1 Rs. 10 lakh
2 Rs. 15 lakh
3 Rs. 20 lakh
Average Annual CTC for Bands
Band No. of Resources
1 3
2 1
3 1
Project A – Resource Mix
Band No. of Resources
1 2
2 1
3 0
Project B – Resource Mix

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Hourly Cost Rate: Use Case 2
Band No. of
Resources
Average
Annual
CTC
Hourly
CTC
Resource *
Internet
Usage
Hourly
Allocated
Internet Cost
Hourly
Cost
1 5 Rs. 10 lakh Rs. 521 5 Rs. 6.25 Rs. 527
2 2 Rs. 15 lakh Rs. 781 4 Rs. 12.50 Rs. 794
3 1 Rs. 20 lakh Rs.1042 3 Rs. 18.75 Rs. 1061
12
1. Normal working hours in a year considered as 1920 (8 hrs a day * 20 days a
month * 12 months)
2. Cost driver for indirect cost (internet cost) = Resource Band
3. Allocation rule = Usage weighted by no. of resources in the band
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Your company has 2 on-going ERP projects – Project A and Project B. Project A
has 5 resources and Project B has 3 resources. There are 3 resources on bench
i.e. not working on any project at this time. 2 of these resources are in Band 1
and 1 in Band 2.Take the hourly cost rate for each band is as that calculated in
Use Case 2.
1. Assuming that there is no other cost involved, what should be the
minimum monthly billing of Project A and B to make the respective
projects profitable?
2. How will this change if you have to consider company’s overall
profitability?
3. What would be the revised cost rate for each Band considering the
resources on bench?
Band Hourly Cost
1 Rs. 527
2 Rs. 794
3 Rs.1061

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1. Project A has 3 resources in Band 1 (Cost Rate = Rs. 527/hr), 1 resource in Band 2
(Cost Rate = Rs.794/hr) and 1 resource in Band 3 (Cost Rate = Rs. 1061/ hr).
Assume 160 working hours (8hr * 20 days) in a month.
2. Project A monthly cost on account of billable resources = Rs. 527*3*160 + Rs.
794*1*160 + Rs.1061*1*160 = Rs. 5,49,760.
3. Similarly,for Project B the monthly cost is Rs. 2,95,680.
4. Thus individually Projects A and B would be profitable for a monthly billing greater
than Rs. 5,49, 760 and Rs. 2,95,680.
5. However, this will not make the overall organisation profitable as the bench cost
has not been absorbed in the projects through which costs are recovered.
6. How would you calculate the monthly cost of Project A and B after allocating the
cost of resources on bench?
Cost Component Project A –
Monthly Cost
Project B –
Monthly Cost
Billable Resource Rs. 5,49,760 Rs. 2,95,680
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1. Identify the Cost Driver
2. Identify the Allocation Rule
3. Derive the total bench cost
4. Allocate bench cost to individual projects
Monthly Cost
Project B –
Monthly Cost
Allocated cost for
bench resources

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1. Cost Driver = Project Cost. It could have been some other relevant cost
drivers like project revenue, etc.
2. Allocation Rule = [Project Cost/ Cost of All Projects] * Total Bench Cost
3. Monthly Bench Cost = (2*527+1*794) * 160 = Rs. 2,95,680
4. Allocate bench cost to individual projects.
5. Now the projects have a higher revenue target to make the overall
organisation profitable because they have to absorb the bench cost
Monthly Cost
Project B –
Monthly Cost
Allocated cost for
bench resources
Rs. 1,92, 270 Rs. 1,03,410
Total Rs. 7,42,030 Rs. 3,99,090
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Bench Cost Allocation for Large Organisation
1. For large organisation this method requires a modification because
• No. of resources on bench may vary from month to month
• No. of projects and their resource mix may vary from month to
month
2. Thus large organisations adopt one of the following methods to
handle bench cost
• Define a target bench (utilisation, in reverse) for each group of
resources (bands).Take quarterly revenue or cost target for the
organisation. Use this data for bench cost allocation.
• Load the bench cost in the hourly/ monthly rate for each band

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Loading Bench Cost on Hourly Cost
Calculate the revised hourly cost for each band
considering the target utilisation
Band Hourly Cost Target Utilisation
1 Rs. 527 98%
2 Rs. 794 95%
3 Rs. 1061 92%
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Loading Bench Cost on Hourly Cost
Divide the Hourly Cost with Target Utilisation
Band Hourly Cost Target Utilisation Revised Hourly Cost
1 Rs. 527 98% Rs. 538
2 Rs. 794 95% Rs. 836
3 Rs. 1061 92% Rs. 1,153

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Hourly Billable Rate (Charge Out Rate)
Ratio of Charge Out Rate to CTC is an important profitability metric
for any professional services company including software companies.
The industry standard for this ratio varies from 1.2 to 10 depending on
type of professional service provided.
Heads Revised Hourly Cost
Hourly CTC Rs. 521
Hourly Cost Rs. 538
Gross Profit (GP) @ 30% of
Hourly Cost
Rs. 161
Hourly Charge Out Rate Rs. 699
Charge Out Rate/ CTC 1.34
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ERP Project Pricing Methods
• Fixed Price – A agreed fixed price is charged for an
agreed fixed scope.This is irrespective of the actual
effort (and hence cost) incurred in the project.
• Time and Material – A “rate card” for resources or
group or resources classified based on their cost is
agreed. Invoicing is done based on the number of
resources (material) used for a certain period (time).
• These pricing models get modified in Agile methods

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Fixed Price vs. Time and Material Models
Fixed Price Time and Material
Scope Assumes scope is well defined
and will remain fixed.
Scope is not relevant from
pricing perspective
Change in Scope Agreed change in scope is
estimated and priced separately
Scope is not relevant,so change
is scope is also not relevant from
pricing perspective.
Billing Milestone based.Hence clearly
defining milestones and their
completion criteria is important
for realisation of service fee
Period based e.g. monthly,
quarterly,etc.
Staffing
responsibility
Service provider has the
responsibility to staff the project
with adequate number and skill
and at appropriate time so that
quality and time of deliverables
are met.
Client decides the number, skill
and time required for the
resources.Service provider is
expected to provide the asked
resources as per SLA
Evaluation by
client
Primarily output (deliverable)
based
Input (quality and timely
availability of resources) based
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Fixed Price vs. Time and Material Models
Fixed Price Time and Material
Project
Management
Responsibility
Primarily with the service
provider,client plays a
supporting role
Client
Applicability In classical waterfall model of
project management
In on-going work (e.g. support
services) and/or when it is not
possible to define the scope up-
front
Risk of time and
cost over-run
Service provider Client
Risk of unplanned
bench
Unlikely Likely for a service provider if
recruitment of resources happen
before client acceptance
Return Low for client,can be high for
service provider if project
scope is managed well
Predictable and low for service
provider,can be high for client if
the client has the capability to
assess the resources and
manage the project

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ERP for Managers
ERP Project Investment and RoI
Atanu Ghosh
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Total Cost of Ownership (TCO)
Total Cost of Ownership (TCO) is the total incremental cost
of acquiring, deploying and maintaining the ERP system
for the entire period of the estimated life of the system.

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1. Hardware required to run the software. Hardware can be dedicated as well as shared. For example,
the server may be exclusively used for the software or it can be shared with other software. In case
of shared hardware, cost needs to be allocated based on cost driver and allocation rule.
2. Network required to run and distribute the software. Same method of cost allocation is used for
Network.
3. ERP Software. There are various methods of pricing for software products e.g. named used
perpetual license, concurrent user perpetual license, monthly or annual subscription, no of
installations, etc. Subscription based pricing is becoming common in cloud services environment.
4. Annual Maintenance for ERP Software. This is usually a percentage of one-time licensing or
installation cost. AMC is usually not required for subscription based pricing.
5. Annual Support for Configuration and Customisation of ERP. This is a separate cost for support
of the configuration and customisation done on the standard ERP product.
6. Services. This is the fee provided to external service providers for implementation and support
7. Incidental expenses. There are expenses incurred exclusively for the project e.g. travel, boarding
and lodging of project staff, any supporting software required exclusively for the project e.g. a
project management software like MS Project or Jira
8. Taxes and Duties.
9. Hidden Costs. There can be a number of costs that are not apparent and does not create a visible
cash outflow, but, none the less, they are incurred due to the project. One common hidden cost is
the cost of internal human resources whose time is used in the project either full-time or part-time.
42
TCO – Use Case
• Precision Manufacturing Company Ltd. (PMCL) has decided to implement SAP ERP. SAP
ERP software is sold primarily on the basis of named perpetual user licenses.The
company has decided to buy 500 such named user licenses with the average cost of
each license being Rs. 1 lakh.
• SAP charges an annual support service charge @ 22% of the license cost.
• 3 separate servers are required to install SAP – one for development,one for quality and
the third one for production purpose.The respective costs are Rs. 50 lakhs,Rs. 30 lakhs
and Rs. 1 crore.
• PMCL technical team has assessed that there is no need for additional network and
desktops or laptops for the new SAP installation.
• PMCL has engaged Best Consulting Services LLP (BCS) to implement the SAP project.
The agreed fixed fee for implementation is Rs. 8 crore.
• Anticipating that PMCL will require additional support services from BCS at least for 12
months after go live,PMCL has entered into an additional time and material contract
with BCS. As per the contract, PMCL will use on an average 5 resources of BCS.The
blended rate of resources from BCS is Rs. 5 lakhs per month.

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43
TCO – Use Case
• The ERP project is estimated to be completed in 12 months.
• The implementation team will be stationed in the head office of PMCL located at
Indore.Since BCS does not have any office at Indore (nearest BCS office is at Mumbai),
most of BCS consultants will be flying in and out from Mumbai.Besides,some of the
core team members of PMCL who are not based in Indore will also need to travel to
the project location.
• The estimated cost for travel,boarding and lodging for the project team for the entire
duration of the project i.e.12 months is estimated to be Rs. 1 crore
• PMCL has formed a core team of 20 members who will work full-time in the ERP
implementation project along with the BCS team to provide business inputs to the BCS
team and conduct user testing and training.The average monthly salary of the 20
members from PMCL is Rs. 2 lakhs.
• The project team will be using a project office and associated infrastructure.Taking
no. of seats occupied by the project team as the cost driver and using proportionate
allocation rule,the monthly cost of use of infrastructure is estimated to be Rs. 1 lakh.
• Calculate the TCO for the project
44
TCO – Use Case
Core team time and physical infrastructure costs are hidden costs.
Cost Element Cost
Hardware
Network
Software (SAP) Perpetual License
Software (SAP) AMC for 5 years at nominal rate
Consulting services for implementation
Support services for 1 year at nominal rate
Travel, boarding and lodging cost
GST for Hardware and Network @ 5%
GST for Software and Services @ 18%
Core team time cost
Physical infrastructure cost

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45
TCO – Use Case
Core team time and physical infrastructure costs are hidden costs.
Cost Element Cost
Hardware Rs. 1.8 crore
Network Nil
Software (SAP) Perpetual License Rs. 5 crore
Software (SAP) AMC for 5 years at nominal rate Rs. 5.5 crore
Consulting services for implementation Rs. 8 crore
Support services for 1 year at nominal rate Rs. 3 crore
Travel, boarding and lodging cost Rs. 1 crore
GST for Hardware and Network @ 5% Rs. 0.09 crore
GST for Software and Services @ 18% Rs. 3.87 crore
Core team time cost Rs. 4.8 crore
Physical infrastructure cost Rs. 0.12 crore
Total Cost of Ownership (TCO) Rs. 33.18 crore
46
KRA and KPI of an ERP Project
• Measuring the RoI of a ERP Project starts with defining
the KRA and KPIs of the Software Project.
• KRAs and KPIs varies from project to project
depending on the business objective of the project.

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47
Project KRA and KPI
Project Business Objective KRA KPI
GST Implementation
Online Portal for a
leading Sports
Company
ERP Implementation
for a Steel Company
Can you define the business objective, KRA and KPI for
the above 3 types of projects?
48
Project KRA and KPI
Project Business
Objective
KRA KPI
GST
Implementation
Statutory
Compliance
GST Processing in
software
1. Actual and potential loss
due to tax non-compliance
resulting from non existent or
faulty software
Online Portal for
a leading Sports
Company
Sale of products
through online
channel
Online sale value 1. Percentage of online sale
2. YoY growth of online sale
ERP
Implementation
for a Steel
Company
Operational
Efficiency
1. Inventory
2. Profitability
3. Order to cash
cycle time
1. Percentage reduction of
inventory carrying cost
2. Percentage improvement
of profitability
3. Percentage reduction in
order to cash cycle time

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49
Target KPI Value
• Next step is to define the target KPI value that the
organisation desires to achieve through the software
implementation.
• This process may be easy in some type of project while
for others this may be a difficult measure depending on
a lot of assumptions.
• Exercise: Classify the 3 projects mentioned here in
terms of the degree of difficulty in defining the target
KPI value.
50
Target KPI Value – Ease of Definition
• GST Implementation – Easy
• Statutory requirement.Without the implementation business
may stop.Thus in most such cases no formal KPI and RoI
calculation is even required.
• Online Portal – Intermediate
• Feasible to isolate the KPI and can be made solely attributable
to the project.
• In this case, the sole attributable business outcome is revenue
generated through online portal. No other initiative or project
can claim credit for this.

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51
Target KPI Value – Ease of Definition
• ERP Implementation – Difficult
• Present state must be known to measure the improvement e.g.
present order to cash cycle must be known to measure the
improvement post ERP implementation.
• Difficult to isolate KPI that can be solely attributable to the
project. For example, inventory carrying cost can reduce or
not reduce for a variety of factors or lack of them, not just ERP
implementation.
• Difficult to estimate the amount of improvement that can be
achieved e.g. the percentage improvement in the inventory
carrying cost.
• Difficult to estimate the timeframe by when the desired
improvement will be achieved.
52
Calculating RoI
• To derive the financial benefit for the software project, translate the defined
KPI into monetary value.
• Where estimated value is not available consider target value.Target can be
derived from benchmarking studies (what other companies have done).
• Consider the period over which the benefit will be realised.This is usually
the expected life of the software being deployed.
• Estimate the investment in the software project. Consider Total Cost of
Ownership (TCO) and not just the cost of hardware, software and services.
• Calculate the RoI by dividing the Net Benefit (Benefit – TCO) with TCO.This
is the RoI at nominal rate.
• To calculate the RoI at the present rate, the benefit need to be discounted to
the present rate.
• The payback period at nominal rate can be similarly calculated by
calculating the time when the benefit will equal the TCO.

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53
RoI: Use Case 1
• PMCL is executing GST Software Implementation
project.TCO of the project is Rs. 1 crore.
• PMCL has a turnover of Rs. 10,000 crore with an average
gross margin of 10%
• How would you calculate the RoI of the project?
• Assume the lifetime of the software as 5 years.
• Note: Since this is a project required for statutory compliance, most cases
management will not ask for a formal RoI. Nevertheless, it is a good
practice to make one.
54
RoI: Use Case 1
• Since GST is a compliance issue, entire business of PMCL is at risk if this
project is not executed.
• Thus, the financial benefit can be the gross margin derived from the full
turnover of the company as the company may stop functioning if this
project is not executed.
• If PMCL turnover is Rs. 10,000 crore, for 5 years (the assumed lifetime of the
software), the benefit is 10% of Rs. 10,000 crore * 5 = Rs. 5,000 crore
• RoI = ((Rs. 5,000 crore – Rs. 1 crore)/ Rs. 1 crore) * 100% = 4,99,900%
• Thus RoI for most statutory projects is almost infinite. Hence, most
management do not ask for a formal RoI calculation for statutory
compliance projects.

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55
RoI: Use Case 2
• A leading sports equipment manufacturing company Boxer plans to
implement a portal for selling its sports equipment online.
• Annual GMV (Gross Merchandising Value) of the company is Rs.
10,000 crore with an average Gross Margin of 10%.
• The company targets to achieve a 10% share of its present turnover
through online channel by the 5 year assuming a linear growth in
percentage of online sale. Assume the total sales volume does not
change in 5 years.
• TCO of the online portal is Rs. 5 crore.
• Calculate the RoI of the project. Assume lifetime of the present
portal as 5 years. Calculate based on present rate, ignore
discounted value.
56
RoI: Use Case 2
• GMV through online channel on 5th year = 10% of Rs. 10,000 crore =
Rs. 1,000 crore.
• Average annual GMV during the 5 year period = Rs. 500 crore.
• Average annual gross profit during 5 year period = 10% of Rs. 500
crore = Rs. 50 crore.
• Total profit from online sale in 5 years = Rs. 250 crore.
• RoI = ((Rs. 250 crore – Rs. 5 crore)/ Rs. 5 crore)*100% = 4,900%

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57
RoI: Use Case 3
• PMCL Board has decided to implement an ERP solution for improving operational
efficiency. PMCL has a annual turnover of Rs. 10,000 crore with a gross margin of 10%.
• The estimated TCO of the ERP implementation project is Rs. 33.18 crore.The estimated
lifetime of the software is 5 years.
• The target KPIs for the project are:
• 10% reduction in inventory carrying cost
• 1% improvement in profitability
• 5% reduction in receivables
• The annual cost of raw materials as per last year’s balance sheet of PMCL is Rs. 2,000
crore.PMCL carries 30 days of raw material inventory.
• The annual cost of semi-finished and finished goods produced by PMCL as per last
year’s balance sheet is Rs.4,000 crore and Rs. 6,000 crore respectively.PMCL carries
20 days of semi-finished goods inventory and 10 days of finished goods inventory.
• PMCL carries on an average 30 days of receivable.
• Calculate the RoI for the project. Assume cost of capital @ 10% Assume nominal rates
for all calculations.
58
RoI: Use Case 3
• 10% target reduction in inventory carrying cost
• Cash locked up in raw material inventory annually = (30/365) *
Rs. 2,000 crore = Rs. 164 crore
• Cash locked up in semi finished product inventory annually =
(20/365)* Rs. 4,000 crore = Rs. 219 crore
• Cash locked up in finished product inventory annually =
(10/365) * Rs. 6,000 crore = Rs. 164 crore
• Total cash locked up annually in inventory = Rs. 547 crore
• Annual inventory carrying cost = 10% (cost of capital) of Rs. 547
crore = Rs. 54.7 crore
• Inventory carrying cost over 5 year period at nominal = Rs.
273.5 crore
• Target savings on inventory carrying cost = 10% of Rs. 273.5
crore = Rs. 27.35 crore

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59
RoI: Use Case 3
• 1% target improvement in profitability
• Annual gross profit = 10% of Rs. 10,000 crore = Rs. 1,000 crore
• Target annual improvement in profitability = 1% of Rs. 1,000
crore = Rs. 10 crore
• Target benefit from improvement in profitability over a
period of 5 years at nominal rate = Rs. 50 crore
• 5% target reduction in receivables
• Present no. of days of receivable = 30 days
• 5% reduction in receivables leads to 5% reduction in days of
receivables i.e. 1.5 days
• Cash locked up for 1.5 days of receivables = (1.5/365)*Rs.
10,000 crore = Rs. 41 crore
• Interest cost saved annually from reducing days of receivables =
10% of Rs. 41 crore = Rs. 4.1 crore
• Savings due to reduction in receivables in 5 years at
nominal rate = Rs. 20.5 crore
60
RoI: Use Case 3
• Total target savings in 5 years from ERP implementation = Rs.
97.85 crore
• RoI = ((Rs. 97.85 crore – Rs. 33.18 crore)/ Rs. 33.18 crore) *
100% = 195%
• If you are the management what would be your “go-no go”
decision for the ERP project based on the projected RoI?

SAP for Managers:
An Overview
Friday, February 27, 2015 1

SAP Fundamentals
• Full name of SAP translates into English from German as
“Systems, Applications and Products in Data Processing”
• The full name of SAP is rarely used now
• SAP is pronounced as “ES-AYE-PEE” and not “SAP”
• SAP’s architecture is based on “3-tier” client-server
technology (GUI layer, application layer and database layer)
• Hence the name “R/3”
• “R/3” does not stand for “Release 3”
• ABAP/4 (Advanced Business Application Programming
Language Version 4) is the proprietary programming
language in which the SAP product is programmed and
customisation done
• SAP has categorised basic business processes in an
organisation.
• These “building blocks” of processes are called “modules”
• SAP’s “honeycomb structure” depicts the “core R/3 modules”
• SAP upgrades to new features through version management
• The latest version of SAP is mySAP ECC (Enterprise Core Component) 6.0
• Previously SAP versions were named as 4.xa. The last version is this series
was SAP version 4.7. After this SAP discontinued this nomenclature and
moved to ECC nomenclature
• To cater to specific country needs, SAP has various “country
versions” to be bolt-on the base R/3. Now some country
version is built in ECC
• Country Version for India is called CIN (Country India Version)
• To cater to industry specific requirements, SAP has various
Industry Solutions (IS) e.g. IS-Oil for Oil and Gas, IS-Mills for
Mill Products, IS-Retail for Retail
• E-commerce based modules like CRM, SRM are added
components to R/3
Sales &
Sales &
Distribution
Distribution
SD
SD
MM
MM
PP
PP
QM
QM
PM
PM
HR
HR
FI
FI
CO
CO
TR
TR
PS
PS
WF
WF
IS
IS
Materials
Materials
Mgmt.
Mgmt.
Product
Product
Planning
Planning
Quality
Quality
Mgmt.
Mgmt.
Plant Mainte
Plant Mainte-
-
nance
nance
Human
Human
Resources
Resources
Financial
Financial
Accounting
Accounting
Controlling
Controlling
Treasury
Treasury
Project
Project
System
System
Workflow
Workflow
Industry
Industry
Solutions
Solutions
R/3
R/3
R/3
Client/Server
ABAP/4
Client/Server
Client/Server
ABAP/4
ABAP/4
Sales &
Sales &
Distribution
Distribution
SD
SD
MM
MM
PP
PP
QM
QM
PM
PM
HR
HR
FI
FI
CO
CO
TR
TR
PS
PS
WF
WF
IS
IS
Materials
Materials
Mgmt.
Mgmt.
Product
Product
Planning
Planning
Quality
Quality
Mgmt.
Mgmt.
Plant Mainte
Plant Mainte-
-
nance
nance
Human
Human
Resources
Resources
Financial
Financial
Accounting
Accounting
Controlling
Controlling
Treasury
Treasury
Project
Project
System
System
Workflow
Workflow
Industry
Industry
Solutions
Solutions
R/3
R/3
R/3
Client/Server
ABAP/4
Client/Server
Client/Server
ABAP/4
ABAP/4
SAP’s famous “honeycomb structure”
depicting the core R/3 modules

SAP Core Modules
Sales and Distribution (SD)
Customer Master, Enquiry, Quotation, Sales Order Processing, Pricing, Credit Management, Transportation, etc
Materials Management (MM)
Vendor Master, Enquiry, Quotation, Purchase Orders, Pricing, Inventory Management, Inventory Valuation, Stock Transfer, etc
Production Planning (PP)
Planning Strategy, MRP, BOM, Routing, Work Center, Production Orders, etc
Quality Management (QM)
Inspection Plan, Incoming Quality, In-process Quality, Finished Goods Quality, Quality Certificates, etc
Plant Maintenance (PM)
Maintenance Orders, Breakdown Maintenance, Preventive Maintenance, Maintenance Notifications, etc
Human Resources (HR)
Payroll, Training, Recruitment, Performance Management, etc
Financial Accounting (FI)
Chart of Accounts, Accounts Payable, Accounts Receivables, Invoice Verification, Asset Accounting, etc
Controlling (CO)
Cost Center Accounting, Profit Center Accounting, Internal Orders, Product Costing, etc
Treasury (TR)
Funds Management, Cash Management, etc
Project Systems (PS)
Work Breakdown Structure (WBS), Internal Projects, External Projects, Project Costing, etc
Workflow (WF)
Not a separate module actually but the feature is built into most modules

SAP “New Dimension” Product Portfolio
Non R/3 modules – With the advent of e-business and various other specific business
requirements, SAP added new modules around 1998-99
CRM – Customer Relationship Management intended to capture sales transactions over the net and
also other features like call center activities. This product is a close competitor to Siebel.
SRM – Supplier Relationship Management intended to capture purchases over the net
PLM – Product Lifecycle Management
APO – Advanced Planner and Optimiser intended to provide features of rule based shop floor
scheduling and optimisation, global availability checks across multiple plants, transportation
optimisation, etc. This product is a close competitor to i2.
BW – Business Warehouse intended to provide management reporting and data mining
SEM – Strategic Enterprise Management intended to provide financial consolidation for group
companies, balance score card, etc
DMS – Document Management System
EHS – Environment, Health and Safety
SAP has now reorganised its module based components into process based components and
included e-business components into it. But module based terminology is still popularly
used in most cases.
SCM – includes erstwhile MM, PP, PM, APO and SRM modules
CRM – includes erstwhile SD and CRM modules
Financials – includes erstwhile FI, CO, SEM and BW modules
PLM – includes erstwhile QM and PLM modules
Industry Solutions (IS)
Various Industry specific solutions like IS-Oil, IS-Mills, IS-Auto, IS-Banking, IS-Retail, etc

SAP Technical Areas: ABAP and BASIS
Technical areas of SAP consist of
ABAP
BASIS
BASIS involves
Server sizing
SAP system installation
Database administration
Performance tuning
Transports (i.e. transporting configuration and customisation
from one system to another)
User authorisations
“Patch” and “Hot Pack” applications
Patches or hot packs are pieces of “correction codes” released by
SAP from time to time or when there is a product problem
SAP version upgrade

SAP Technical Areas: ABAP and BASIS
SAP’s Source Code
SAP identified
“user exit” at pre-
defined points in
source code
You can write your
own code here
and return to
source code
You will require a special
key from SAP to modify
“source code”. It is
strongly discouraged as
SAP may consider to
withdraw its warranty
support if source code is
modified
ABAP involves programming in ABAP
language for customisation popularly
called “RICEF”
Reports (customised reports)
Interfaces (with other systems)
Conversions (for migrating data from
legacy system to SAP)
Enhancements (to address unique
business conditions by writing a piece of
code through “user exits” or “module
pool”)
Forms (for document outputs like
Invoice, Purchase Orders, etc.
Minimum customisation is strongly
recommended for
Faster testing
Easier maintenance
Easier upgrade
SAP has introduced Netweaver
technology which is an SOA (Service
Oriented Architecture) in 2003

Printed MIS vs. SAP “Drilldown” Report:
A Change in Mindset for Managers
Country Region State Target Sale ($) Actual Sale ($)
India North Delhi 100,000 110,000
India North Punjab 120,000 125,000
India North UP 80,000 75,000
India West Maharashtra 200,000 230,000
India West Gujarat 150,000 180,000
India East West Bengal 50,000 20,000
India East Bihar 30,000 25,000
Traditional MIS is comes in two dimensional printed format. Many managers today
feel comfortable in this format as they do not have to learn to extract the report
directly from the system. This comes from DYFM (Do it for me) mindset as
opposed to DIY (Do it yourself) mindset. Such MIS formats can only provide static
and limited information and cannot adequately highlight exceptions.

Printed MIS vs. SAP “Drilldown” Report:
A Change in Mindset for Managers
Country Target Sale ($) Actual Sale ($)
India 1,000,000 850,000
USA 10,000,000 10,100,000
China 5,00,000 6,00,000
“Drill-down” MIS reports, which most standard SAP reports are, can present
information in a better way enabling management by exception.
But managers need to be conversant with using the system to view and analyse
MIS online and real-time, as opposed to reports printed and given to them by
their assistants.
Region Target Sale ($) Actual Sale ($)
North 30,000 35,000
West 40,000 50,000
East 10,000 5,000
State Target Sale ($) Actual Sale ($)
West Bengal 5,000 4,000
Bihar 3,000 3,500
Jharkhand 2,000 2,200
City Target Sale ($) Actual Sale ($)
Kolkata 3,000 500
Durgapur 1,000 1,500
Siliguri 2,000 2,000

Interfaces: A Key Element in Customisation
Complexity of Interfaces depend on factors like whether
they are one-way or two-way, real-time or batch, etc.
Core Processes
including HR is in SAP
3rd Party Payroll
Software
Employee Master Data
Consolidated Financial Entry

Conversion Programs: Key to
Successful Data Migration
Conversion Programs assist in large volume transfer of
data from legacy systems to SAP
Raw
Data
Cleaned
Data
Full
Data
Data
Upload
Data in
SAP

SAP Products in ERP Space
SAP ECC is the flagship product of SAP meant for core
business processes of large enterprises
SAP has various non-ERP (CRM, SRM, APO, BI, BO, etc.)
and Industry Solutions (IS). Mostly Companies use them
as add-ons to ECC, though some of them can be
interfaced with non-SAP ERPs
SAP Business One (SAP B1) is a product purchased by
SAP to cater to the requirements of small and medium
enterprises
SAP Business By Design is SAP’s attempt to provide a
cloud based ERP platform
SAP Business All in One (A1) is not a separate product. It
is a Brand promoted by SAP in an attempt to
“productise” SAP ECC for Medium Enterprises

All-in One: SAP’s Attempt to
Productise ERP
Manufacturing, Financial Services, Education
Discrete, Continuous
Automobile, Electronics
Passenger Vehicle,
Auto Ancillary
Steering
Manufacturing
Your
Company
Traditional SAP Deployment: SAP ECC
configured/ customised ab-initio to
support company’s business process
SAP ECC pre-
configured to
“productise”
for a micro-
vertical
Remnant configuration/
customisation done for a specific
Company in the micro-vertical.
Expected to reduce time, effort
and cost of SAP deployment

Popular Licensing Policy in ERPs
• Based on named users. E.g. SAP, Oracle
• Based on Concurrent users. E.g. Microsoft
• There are other licensing policies based on
number of employees, no. of articles, etc.

Types of Licenses: Example SAP
• Developer License – Meant for developers
• Professional License – Meant for users expected to
transact in multiple modules
• Semi Professional License – Meant for users
expected to transact in one module
• Employee License – Meant for users expected to
only view information and reports

SAP Licensing – Facts and Caution
• Price of Employee License < Semi Professional License < Professional
License < Developer License
• Hence, the total licensing cost not only depends on the number of
licenses and discount offered by the vendor, but also on the mix of
licenses
• There are means to reduce the number of named licenses like using
common user id based on role or designation, using a common user id yet
capturing user information through customised tables and enhancements,
using a portal to capture transactions and then programmatically
pumping the data in SAP . Most of these techniques are violation of SAP’s
licensing agreement and hence must be avoided unless a specific
clearance is obtained from SAP

Commercial Elements in ERP License
• License Price
• Annual Maintenance Contract (AMC) as a percentage of
License. To be paid annually in advance. For product bug fixes,
minor upgrades, etc. Not for maintenance of configuration
and customisation
• Taxes and Duties
• Service Tax for AMC
• Both VAT/ CST and Service Tax for License

SAP Enterprise Structure: Financial
• Company Code = Legal Entity
• Profit Centre = Division below legal entity where profit
and loss statement can be obtained
• Business Area = Division below legal entity where
balance sheet can be obtained
• Controlling Area = Area where management reporting
can be obtained. Can cut across multiple legal entities
• Segments = Used for segmental reporting
• Cost Centre = Element that captures cost and passes
on to Profit Centre (where ever applicable)

Financial Enterprise Structure Relationships
• Company Code to Profit Centre = 1: n
• Company Code to Business Area = 1: n
• Company Code to Controlling Area = m : n
• Profit Centre to Cost Centre = m : n

Financial Enterprise Structure: Application
Company
FMCG Tobacco Hotel
Legal Entity,
hence Company
Code
Profit Centres, if
only P&L
required
Business Area,
Balance Sheet
required

Plant 1 –
Product
1
Plant 2 –
Product
1
Plant 1 –
Product
2
Plant 2 –
Product
2
Plant 1 Plant 2
Product 1
Product 2
Segment

Company 1 Company 2 Company 3
Consolidated view
of same business
run across multiple
companies

Profit
Centre 1
Profit
Centre 1
Revenue
Cost
Centre 1
Cost
Centre 2
Cost
Centre 3
Cost
Centre 4
100%
40%
60%
100%
Cost not allocated to any Profit Centre. Gets consolidated at
Balance Sheet for financial reporting
Less: Expenses
= Profit/ Loss Cost allocation
based on rules

Enterprise Structure for
Inventory Management
Plant
Storage Location
(Raw Material)
Storage Location
(WIP)
Storage Location
(Finished Goods)
Storage Bin 1
Storage Bin 2
Valuation of Inventory
is at Plant level

Enterprise Structure for Inventory
Management: Example
Manufacturing
Plant
Warehouse
Inventory
valued at $100
Transportation
Cost $10
Inventory may be valued
differently from
manufacturing plant
Manufacturing Plant and Warehouse are defined as
separate Plants in SAP as inventory may be valued
differently in these two locations.

Enterprise Structure: Purchasing
Purchasing Organisation – Administrative unit responsible for certain type of
purchases e.g. Central purchases for above certain value, local purchases, etc.
Purchasing Group – Groups under a Purchasing Organisation responsible for
certain category of purchases, e.g. Raw material group, Spares and consumables
group
Purchase Organisation to Purchasing Group = 1 : n
Purchase Organisation to Plant = 1 : n
Purchase Organisation to Company Code = n : 1

Purchasing Enterprise Structure: Example
Head Office
Central Purchasing
Organisation for high value
purchase
Manufacturing Plants
Plant Purchasing Organisation
for urgent lower value plant
specific purchase
Regional Offices
RO Purchasing Organisation for
office supplies

Enterprise Structure: Sales and Distribution
Sales Organisation – Administrative unit responsible for sales, typically over a
particular region
Distribution Channel – Supply Chains through which products are distributed e.g.
Retail, wholesale, internet, etc
Division = Similar product groups
Sales Area = Combination of Sales Organisation, Distribution Channel and Division
Sales Office = Organisational units responsible for sale under a Sales Area
Sales Employee = Employees in a Sales Office

Sales and Distribution
Enterprise Structure: Example
Tobacco FMCG
North
West
East
South
Wholesale Retail
Sales
Organisation
Division
Distribution
Channel

What is Master Data?
• Master Data refers to data that is relatively “static” compared to
the other type of data i.e. Transaction data
• For example, Material Master is a Master Data, while Purchase
Order is a transaction data
• In SAP Master Data does not only carry information about the
data element (e.g. Material code, material description, etc. in case
of Material Master, but also data that defines certain business
processes, e.g. MRP type, Planning Strategy, Valuation Class, etc.
• Hence, maintaining master data with correct value is of utmost
importance in SAP

Example: Material Master
“Views” of the master for an
organisational element (e.g. Company
code, plant, etc.) define what the
master is and how the master should
drive the transaction for different types
of transactions e.g. Accounting
transaction, costing transaction, MRP
transaction, etc., for the particular
organisational entity

Example: Customer Master
Customer’s Head Office
From where PO was issued
Sold-to Party
Customer’s Plant
Where the goods have to be
shipped
Ship-to Party
Customer’s Regional Office
From where payment is made
Bill-to Party

Example: Bill of Material
• Bill of Materials (BOM) refers to a structured
multilevel hierarchy depicting the components
that are required to manufacture the finished
products including the quantities of the
components required for one unit of the finished
product and then the components that are
required to manufacture the components.
• In the example here, 2 units of B and 1 unit of C
are required to manufacture 1 unit of A and then
3 units of X and 2 units of Y are, in turn, required
to manufacture 1 unit of B
• The final product which is not further processed
and sold to the customer (A, in this example) is
called “finished product”. The intermediate
products made out of raw materials and that go
as input to the finished product are called Semi-
finished product (B, in this example). The
materials which are procured from outside (X and
Y in this example) are called “raw materials”
A (1)
B (2) [1] C (1)
X [3] Y [2]

Example: Routing
• Routing is a set of manufacturing processes that are required to manufacture a product from its
components
• In the above diagram, an oval shaped sheet is to be manufactured from a square sheet. For this, the square
sheet needs to be “cut”, then the edges of the oval sheet needs to be smoothened through “chamfering”
process and finally the oval shaped sheet needs to be “packaged” before sending to the customer. These
manufacturing steps are called “Operations”
• These operations are executed in a machine or group of machines or by a group of people. These or they
are called “Work Centers”
• Each operation takes a certain number of hours to be completed, in general. This is called “Standard Time”
Operation No. Work Centre Operation Standard Time
(Hrs.)
10 Lathe Cutting 20
20 File Chamfering 10
30 Labour Packaging 5

Understanding Plant Operations with SAP:
Procurement
Purchase Order
Goods Receipt
Invoice Receipt
Payment
User Dept
Purchase Dept
Stores Dept
Accounts
Dept
Stock
Accounting
3 Way Invoice
Verification
Accounts
Dept
Material
document
Accounting
document

Sales Planning
• Towards the end of Month M0, you plan for M1, M2 and M3 with the requirement of Month M1 as
Firm (F) and requirements of Months M2 and M3 as Tentative (T).
• When you come to end of Month M1, you revise the requirement of Month M2 and make it Firm,
you also revise the requirement of Month M3, but still keep it Tentative and you forecast the
requirement of Month M4 also.
• Since the plan “rolls over” at the end of each month to new set of firm and tentative plan, this type
of planning is called “Rolling Plan”.
• In this particular case, it is a “3 month Rolling Plan”
M0 M1 M2 M3 M4 M5
100 (F) 120 (T) 130 (T)
110 (F) 120 (T) 150 (T)
125 (F) 140 (T) 160 (T)
Rolling Plan for Product A
At Month M0
At Month M1
At Month M2

Deterministic and Consumption Based Planning
• Deterministic Planning is a type of MRP applied to components or products whose demand is determined by the
demand of the final product and hence controlled by the Bill of Materials. Normally materials used for production
including raw materials, semi finished products and finished products are planned based on deterministic planning
• Consumption based planning is a type of MRP applied to materials which are consumed in the organisation but whose
demand is not directly determined by the demand of the products the company produces or sells. Spare parts,
consumables like stationary, etc. are planned using Consumption based planning. Important determining points in
Consumption based planning are
• Reorder quantity (based on Economic Order Quantity or EOQ)
• Reorder point
• Lead time of procurement
• Safety Stock
A (1)
B (2) [1] C (1)
X [3] Y [2]
Reorder
Qty (EOQ)
Reorder
Point
Lead Time
to Procure
Safety
Stock

Planning Strategies
• Planning Strategies are primarily 2 types
• Make to Order – When a company procures the components and manufactures the semi-finished and
finished products after receiving confirmed order from customer
• Make to Stock – When a company procures the components and manufactures the semi-finished and
finished products based on forecast before receiving confirmed orders from customers
• Make to Order and Make to Stock strategies optimise two counter-acting forces (a) speed of service or
delivery (b) inventory carrying cost
• Hence, most companies try to balance these two counter acting forces by adapting a hybrid of make to
order and make to stock strategies
A
B C
X Y
Make to
Stock
Make to
Order
If the company forecasts at the
level of finished product, it is called
“Planning without Final Assembly”
If the company forecasts at the
level of semi-finished product, it is
called “Planning at assembly level
Fixing this “bar” depends
on (a) value addition from
B to A (b) variability at
finished product level
At what level a company can
forecast depends on (a) if B
is also sold (b) variability of A

Understanding Plant Operations with SAP: MRP
• Demand Elements create demand e.g. PIR (Planned Independent Requirement), Dependent Requirement, Sales Order (if Sales Order is both a
Planning AND Execution Instrument, if Sales Order is ONLY an Execution Instrument, then it is not a Demand element)
• Supply Elements satisfy the demand created by Demand Elements, e.g. Stock, Planned Order, Purchase Requisition, etc.
• MRP Run ATTEMPTS to balance the Demand Elements and Supply Elements i.e. after an MRP Run Demand Element <= Supply Element
• Lot Size determines the quantity in which the products can be produced from an engineering perspective. In a fixed lot size scenario, products
can be made only in specific lots, neither more nor less. In that case, multiple planned orders can be created and Supply Element may become
greater than Demand Element after execution of MRP. In the example above, if the manufacturing process of A dictates to produce based on
fixed lot size of 50, then 2 planned orders each of 50 will be created. Thus Supply Element will be greater than Demand Element by 20 after MRP
Run. The Production Planner can then decide whether to produce 2 lots of total 100 (and hence have an excess inventory of 20) or 1 lot of 50
and risk loss of sale of 30 units
• If there is a Sales Order of 20 units, whether it will be considered as Demand Element or not depends on whether the Planner considers this
order a part of forecast (PIR) which has got converted (in which case the Sales Order is just an Execution Instrument) or this is an additional
Demand Element over and above the forecast of 100 (in which case the Sales Order is both a Planning and Execution Instrument). In the former
case there will be no change in the Planned Order of 80. But, in the latter case, a Planned Order of 100 will be created.
Demand (-)/ Supply (+)
Elements
Value
PIR 100-
Stock 20+
Planned Order 80+
A (1)
B (2) [1] C (1)
X [3] Y [2]
MRP Run Output for A
Demand (-)/ Supply (+)
Elements
Value
DReq 160-
Stock 40+
Planned Order 120+
MRP Run Output for B

Shop Floor Planning
• Material Availability Check
• Capacity Planning
• Scheduling
• SAP ECC supports planning assuming “infinite
capacity”. Overloaded capacity can be manually
(i.e. not algorithmically) levelled

Capacity Planning
Forging
Machine
Lathe
Machine
Packaging
Machine
Input
Material
Output
Material
P1
(1 unit)
10H 20H 5H
P2
(1 unit)
30H 10H
0 HR 10 HR 10 HR 30 HR 30 HR 35 HR
0 HR 30 HR 30 HR 40 HR
Infinite capacity planning scenario
• Throughput time for P1 is 35 hour and that for P2 is 40 hour
• No wait time
• No bottleneck capacity

Capacity Planning
Forging
Machine
Lathe
Machine
Packaging
Machine
Input
Material
Output
Material
P1
(1 unit)
10H 20H 5H
P2
(1 unit)
30H 10H
0 HR 10 HR 30 HR 50 HR 50 HR 55 HR
0 HR 30 HR 30 HR 40 HR
Finite capacity planning scenario
• Throughput time for P1 is 55 hour and that for P2 is 40 hour
• Wait time of 20 hour for P1
• Lathe machine is a bottleneck capacity
BOTTLENECK
Wait time = 20 HR

Production Execution (Discrete)
Planned Order
generated from MRP
Make
or Buy?
Purchase
Requisition
Buy
Procurement
Process
Production Order
Check Availability
of Materials
(Available to
Promise – ATP)
Capacity Planning
Scheduling
Goods Issue from
Stores to Shop
Floor (Material
Requisition Note
or MRN and
Goods Issue Slip)
Goods Issue of
input materials
(copied from
BOM) to
Production Order
Confirmation of
Operations in
Production Order
(copied from
Routing)
Good Receipt
from Production
Order to Finished
Goods Storage
Material in WIP
(Work in
Progress)
WIP gets
converted to FG
(Finished
Goods)

Costing
Fixed Variable
Indirect
Direct

Product Costing
A (1)
B (1)
C (1)
MAP = $10
Standard Processing Cost = $ 20
Standard Cost = $30
Standard Processing Cost = $ 50
Standard Cost = $80
Actual units
issued = 2
Actual units
issued = 1
Actual Cost = $10 *2 + $ 30 = $ 50
Variance for process = $ 20
Inventory valuation at standard = $ 30
Inventory valuation at actual = $ 50
Actual Processing Cost = $ 30
Actual Processing Cost = $ 70
Actual Cost = $50 + $ 70 = $ 120
Variance for process = $20
Inventory valuation at standard = $ 80
Inventory valuation at actual = $ 120

Sales and Distribution
Sales Order
Availability Check
Credit Check
Picking and Packing
Post Goods Issue
Transportation

Types of ERP Projects
• Greenfield Implementation
• Roll-out
• Enhancement
• Upgrade (Functional and Technical)
• Maintenance

Delivery Models
In-house Outsourced
Onsite
Offshore
Near Shore
Greenfield Implementation Maintenance

Greenfield SAP Implementation Method: ASAP
Project
Preparation
Business
Blueprint
Realisation
Final
Preparation
Go Live and
Hyper Care
Support

Project Preparation: Key Activities
• Detailed Project Plan
• Detailed Project Scope
• Project Governance
• Hardware and Network Sizing
• Implementation Strategies
• Interface Strategy
• Data Migration Strategy
• Reports Strategy
• Authorisation Strategy
• Training Strategy
• Organisational Change Strategy

Business Blueprint: Key Activities
• To Be Process
• Key Data Structure Design
• Functional and Technical Specs for RICEF
• Authorisation Matrix Definition
• Organisational Impact Analysis
• Training Calendar
• Raw Data Collection and Cleaning

Realisation: Key Activities
• Configuration
• Customisation
• Unit Testing
• Integration Testing
• User Acceptance Testing
• Authorisation Profile Setup and Testing
• Full Data Preparation for Migration
• Training Manual Preparation
• Change Management Communication

Final Preparation: Key Activities
• Master Data Migration
• End User Training
• Cut-Over Strategy
• Help Desk Setup

Go Live and Hyper Care Support: Key Activities
• Go Live
• Hyper Care Support
• Monitor SLA
• Project Closure

Go Live and Cutover
Implementation Start
April 1, 2015
Go Live
April 1, 2016
Cut Over
April 5, 2016
Black Out

Types of Commercial Arrangements
• Fixed Fee
• Time and Material
• Mixed Mode

Components of Total Cost of
Ownership in ERP Projects
• License Fee
• AMC for License
• Hardware and Networking
• Consulting Fees
• Travel and Living Expenses
• Taxes and Duties
• Hidden Costs – Cost of Internal Resources, Change Management Costs

Calculating “Charge-out Rate”
Heads $
Direct Salary 100
Company Overheads 30
Non Billable Resource Cost 20
Sales and Marketing Cost 40
Bench Cost 30
Margin 80
Charge Out Rate 300
Charge Out Rate: Direct Salary = 3

Effort Estimation Template
Module Level of
Resource
Charge-
out Rate
PP BB BB RZ RZ FP PIS
Prj. Mgr PC 100 1 1 1 1 1 1 0.5
SD SC 80 1 1 1 1 1 1 0.5
SD AC 50 0 1 1 2 2 1 1
MM SC 80 1 1 1 1 1 1 0.5
MM AC 50 0 1 1 2 2 1 1
FI SC 100 1 1 1 1 1 1 0.5
FI AC 60 0 1 1 2 2 1 1
ABAP SC 70 1 1 1 1 1 1 0.5
ABAP AC 40 0 1 1 4 4 2 1
BASIS SC 70 1 1 0.5 0.5 0.5 0.5 0.25
BASIS AC 40 0 1 1 1 1 1 1

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