Case study material ledger implementation lessons learned

2. Topics • • • • • 3 Cooper Tire Strategy and Vision Implementation Options Lessons Learned at Cooper Tire Springboard to SAP Profitability and Cost Management Summary

3. Cooper Tire Strategy and Vision • 4 Cooper Tire weighed the pros and cons of activating SAP Material Ledger as part of their initial SAP implementation or during a future rollout phase. In this session we’ll cover: • Why Cooper Tire implemented SAP Material Ledger as part of their initial SAP implementation • Leveraging Material Ledger as a springboard to SAP Profitability and Cost Management software • Proper master data setup lessons learned • Best practices for configuring Material Ledger for long term requirements • Find out what Cooper Tire would advise companies embarking on this process including importance of understanding the impact on finance and non-finance process teams

4. Cooper Tire Implementation Timeline • • • • • • 5 2009: Cooper Tire made the decision to implement an ERP system Feb. 2010: SAP selected Aug. – Oct. 2010: Blueprint/requirement gathering • Requirements gathering process led to decision to implement SAP Material Ledger Oct. 2011: 1st Go Live was in the Mickey Thompson division (Sales & Dist.) Feb. – Nov. 2013: 2nd Go Live in Cooper US (Mfg, Sales, Dist) 2014 – 2015: 3rd – 5th go lives in Cooper Mexico, Europe, & Asia (Mfg, Sales, Dist)

5. Weighing the Pros and Cons of the SAP Material Ledger SAP – Without ML /LEGACY • • • • 6 NO Traceability of Actual Material Cost by product • Purchase Price Variance • BOM Usage Variance • Production Usage Variance • COGS at actual cost NO traceability of production efficiency by product NO Report Standard & Actual Value of Inventory by product NO Product level Profitability/Gross Margin Reporting without Intercompany Markup SAP – Material Ledger • • • • Traceability of Actual Material Cost by product • Purchase Price Variance • BOM Usage Variance • Production Usage Variance • COGS at actual cost Traceability of production efficiency by product Report Standard & Actual Value of Inventory by product Product level Profitability/Gross Margin Reporting without Intercompany Markup

6. Material Ledger Implementation Basics • • • • 7 Support externally calculated Double Extension LIFO Value Inventory in Multiple Currencies Support Different Global Statutory Reporting requirement by Company Code (FIFO/LIFO) Actual Cost by Cost Component by product • Actual Cost of Material by Product • Actual Cost of Labor by Product • Actual Cost of Depreciation by Product • Actual Cost of Sales • Actual Cost Component

7. Material Ledger Implementation Basics (cont.) • • • • • • 8 During the accounting period all material movements are valued at a standard cost and recorded by material in the material ledger Price Differences (Variances) for each material movement are recorded At the end of the period an actual cost (periodic unit price) is calculated for each material though out multiple levels of product produced Revaluation of Inventory and Cost of Goods Sold Distribution of usage variance is allocated to product Revolution of COGS

8. Streamlining the Cost Process • SAP Material Ledger streamlined their cost process into a fully integrated process as seen below: Cost Planning Evaluating master data Production Profitability Analysis  Planned prices  Planned activities  Planned yield 9  Consumptions  Yield & scrap  Purchasing & supplier invoices  Activities & time recording Recalculating the value flow using Reporting Costs and Contribution Margins  Actual quantity structure  Actual activity recording  Multi-level value flow  Actual raw material prices  Consumption Revaluation  Production costs  Sales Revenues  Distribution of Usage variances  Bill of materials  Routing Recording logistical information for controlling: Actual Costing  Customers  Actual cost Component Dimensions  Regions  Channels  Product Hierarchy

9. Streamlining the Cost Process (cont.) Cost center Raw material Finished product Semifin. material 1 Production order Distribution center Sales order Production order 2 3 4 1) Sale of Raw Material to the Production Profit Center within a Legal Entity 2) Sale of Semi-Finished Good to Affiliated Company 3) Use Semi-Finished Good in a production order and add value from activity in a cost center 4) Transfer finished product to distribution center including actual cost 10

10. Material Ledger Benefits • • • • • • • 11 Integrate and align cost structure to reduce cost Provides global unit cost information across plants and legal entities providing an global transparent view of costs and variances Analytical information by scorecards, statutory reports, and performance analysis Provide accurate profitability information Maximizes corporate profitability to grow market capitalization and shareholder value Integrate planning with a single model across the enterprise to improve organizational alignment and financial performance Provide real-time information quickly

11. Cooper Tire Value Strategy Cooper Value Strategy • Legal valuation • Legal group valuation • If we had to do it again, we would use the following strategy Group valuation without markup Currency / Visional Legal Group / legal Profit Center • Cooper Value Strategy Proposal Company code Currency 10 30 32 • Currency / Visional Legal Group / legal Group Company code Currency 10 30 31 Why we would propose a different strategy: • • 12 Less maintenance – Only two cost roles Profit center valuation not needed – not using profit center transfer price

12. Define Individual Characterisitcs • 13 You cannot change the currencies, currency types and material ledger types after production startup

13. Currency and Valuation Profile 14

14. SAP Material Ledger Without Revaluation Cooper Implement Material ledger without revaluation What Cooper did was used the accrual method but report the accrual as part of there inventory value in there balance sheet using an inventory direct posting account 15

15. SAP Material Ledger Without Revaluation • 16 Cooper implement SAP Material ledger without revaluation • Used the accrual method, but reported the accrual as part of their inventory value in their balance sheet using an inventory direct posting account www.sap.com AC530 - Training actual costing/Material ledger

16. SAP Material Ledger Without Revaluation (cont.) • • 17 If you decide not to revaluate your materials with the actual price, the amount which would have been posted to the material stock account is posted to another price difference account using posting key LKW It is up to you which account you choose for this posting

18. Implementation Options • • • 19 Two methods to implement the Material ledger Activate Material Ledger to track material postings • Ability to do multi-currency inventory valuation • Recording business transaction • Structuring value chain – direct product only Activate Actual Costing • Revaluation of inventory based on actual cost • Multi level variance value chain • Gross margin analysis using both standard and actual cost

19. Implementation as Part of Initial Phase Pro ‘s Con’s No migration needed activation of all plant for company at once High level of Discipline needed when using material ledger Tracks variances across multiple product levels / plant and company codes Organization not ready for complicity and discipline needed Tracks purchase material price variances to finished products on the basis of consumption Additional training required Provides historical information on actual cost to facilitate the estimation of new standard costs from initial go-live Ability to track multiple valuations and/or currencies at the material level Ability to revaluate inventory on the basis of real cost calculation visibility of variances 20

20. Implementation After Go live Pro ‘s Con’s Low level of complexity after initial go-live Migration requirements • Closing of all open production order • Closing of all open purchase order • Conversion and activation by plant No discipline and restrictions to change cost after initial go-live Go-love migration long and slow process Faster closing process after initial go-live No historical information on actual cost to facilitate the estimation of new standard costs after initial go-live Organization do not have to deal with complicity and discipline after initial go-live No ability to track multiple valuations and/or currencies at the material level after initial go-live No ability to tracks purchase material price variances to finished products on the basis of consumption after initial go-live 21

21. Cooper Tire’s Decision to implement Material Ledger SAP – Material Ledger • Traceability of Actual Material Cost by product SAP – Without ML /LEGACY • NO Traceability of Actual Material Cost by product • 22 BOM Usage Variance • BOM Usage Variance Production Usage Variance • Production Usage Variance • • Purchase Price Variance • • • • • Purchase Price Variance COGS at Actual cost • Traceability of Production efficiency by product Report Standard & Actual Value of Inventory by product • Product level Profitability/Gross Margin Reporting without Intercompany Markup • COGS at Actual cost NO Traceability of Production efficiency by product NO Report Standard & Actual Value of Inventory by product NO Product level Profitability/Gross Margin Reporting without Intercompany Markup

22. Cooper Tire’s Decision to implement Material Ledger • • • • 23 Keep all companies with same valuation strategy • Standard vs. moving average in Sales & Distribution companies Visibility • Needed better visibility of variance analysis across production processes • Better product cost • Global product cost 1 time change management • Big Bang (kind of) Clean System • No open production order to delete and recreate • No open purchase order to delete and recreate

24. Lessons Learned at Cooper Tire • • • • 25 Avoid those who only believe Material Ledger is difficult • SAP trainers • Sapphire sessions • Consultants Cooper Tire Accounting Managers • Overkill • Activity revaluation • Distribution of usage variances • Trusting the results • Complexity Focus on benefits and future capabilities Look at complexity/timeline/cost implementing ML in future

25. Results/Gains from Implementing Material Ledger • • • • • • 26 Impact of PPV on specific tire line Actual cost to support LIFO calculation Consolidated location to see In/Out transaction by material See actual cost of inventory by cost component Inventory valuation visibility without inter-company markup Ability to see actual product line profitability without intercompany mark up’s

26. Results/Negatives from Implementing Material Ledger • • • • • 27 Massive volume of data Increased time-to-close by at least 1 day maybe more as more plants go live Distribution of usage variances extremely time consuming Difficult to validate the accuracy of the posting at a high level Difficult for casual/non-users to comprehend

27. Material Ledger – Worth the Expense? • • • 28 Yes • Love the level of detail, tons of information! No • Takes too long, not worth the effort Maybe • See the potential, can’t wait for full rollout to be complete

28. Cooper Tire Lessons Learned • • • • • • 29 Make the final decision early Quality consultant/implementer Configure for all potential long term requirements • Make decision what material will be included • Actual costing • Cost component structure • Understand all ML component • Integration: The impact that Material Ledger has on other processes/teams Proper master data setup/conversion Cutover/client setups Ongoing validation/maintenance

29. Make The Final Decision Early • • • • • 30 Impacts Currency Profiles • Based on setup will impact costing process Material Master Defaults Costing Variants Resources • Make sure you have dedicated resources SME’s & Testing Validators • Make sure test cycles fit material ledger test requirements

30. Quality Consultant/Implementer • • 31 Closely review experience • Check references • Check results of prior ML implementations Contract through life of implementation and beyond • Most issue happen 3-4 month after go-live • Training cycle 3-4 months • Process and discipline related • Poor master data • Poor closing processes • Poor monitoring processes

31. Configure For All Potential Long Term Requirements • Configure for Long Term Needs Currency profiles • Actual cost component split • LIFO / FIFO The impact that Material Ledger has on other processes teams • Operations • Inventory Management • Sales & Distribution • Basis • • 32

32. Cutover/Client Set Up • • 33 Cutover/Client Set Up • Demand quite system during client start ups • Open/close clients to change default setting on price determination during material load/extensions • Ensure cutover team understands impact of improper ML start up Master Data Setup • Solid process established prior to go live • Importance of status controls • Product costing prior to material movements

33. Ongoing Validation/Maintenance • • • 34 Daily/weekly distribution of usage variances Set up detailed validation template • Pick a raw material and follow it through a sale Set up high level validation template

34. Resources • • Do not underestimate the effort Cooper staffing • One lead business analyst • Included plant accountant in each implementation • • One lead consultant – Make that sure that he/she knows Material Ledger Due to conversion, support time ( 3 plus months) and training required it could require additional business analyst • • 35 Learn the process Understand data flow and conversion

36. Springboard to SAP PCM • • • Integrated transaction and analytics solutions Totally integrated into transactional processing to PCM Cooper Tire phase II to integrate with PCM Cost Planning Evaluating master data  Bill of materials  Routing  Planned prices  Planned activities  Planned yield Producti on Actual Costing Recording logistical information for controlling:  Consumptions Recalculating the value flow using  Actual quantity structure  Yield & scrap  Purchasing & supplier invoices  Actual activity recording  Multi-level value flow  Activities & time recording  Actual raw material prices  Consumption Revaluation  Distribution of Usage variances Profitability Analysis Reporting PROFIT Reporting Costs and Contribution Margins  Production costs  Sales Revenues  Being totally integrated into transactional processing  materials ledger makes ideal place for Calculating the direct cost of product  Transferred to the profitability segment component and uploaded into SAP BOBJ & PCM  Actual cost Component Dimensions  Regions  Channels  Customers  Product Hierarchy 37 Profitability&Cost Management  Combining the strengths of the controlling components of SAP ERP with SAP BOBJ & PCM

37. Profitability Analysis Ideal Staging Area • • 38 Profitability Analysis is an ideal staging area for: • Capturing revenue and sales data at the customer and product level • Furthermore, having functionality such as the materials ledger makes the controlling component the ideal place for calculating the actual direct cost of products • Transferred to the profitability analysis component and then loaded into SAP BusinessObjects Profitability and Cost Management Combining the strengths of costing and profitability reporting functionality provided a makes it easier to use the two solutions in tandem, enabling organizations to tailor a cost and profitability reporting solution to match their needs

38. SAP Best Practice • • • • 39 Integrate ECC, business intelligence and enterprise performance management SAP BusinessObjects Profitability and Cost Management is the selected solution on the SAP product road map for delivering cost and profitability management These tools can also be used for detailed scenario modeling, such as assessing how changing the price of an individual product or the discount given to an individual customer impacts profitability SAP uses integration with enterprise performance management delivers true business performance optimization

40. Material Ledger Benefits Tracks variances Across Multiple product levels / plant and Company codes Provides historical information on Actual Cost to facilitate the estimation of new Standard Costs Ability to revaluate inventory on the basis of real cost calculation 41 Tracks purchase material price variances to finished products on the basis of consumption Ability to track multiple valuations and/or currencies at the material level. Enables faster and more effective decision making to management

41. Actual Cost Flow Integration Actual Cost Flow Integration MM-PO Price Variance Variances CO-CCA MFG Cost Center Business Process Material Ledger • Receipts/Consum ption Activity type PP-PO Production Variances Production Orders CO-CCA MFG Overead Cost Center Actual CC Allocations ABC Template Allocation • Single Level Price Determination WIP Variances • Closing Entries DUV usage variance Actual Cost Calculation During the month Month end Month end closing activity Material Ledger Actual Costing 42 CO-PA Documents Actual Cost Component Split • Price Differences • Multi level Price Determination MM Movements Scrap/Cycle/ Transfer Activity Price revaluation FI-GL Documents Revaluation Inventory COGS

42. Springboard to SAP PCM • • • Integrated transaction and analytics solutions Totally integrated into transactional processing to PCM Cooper Tire phase II to integrate with PCM Cost Planning Evaluating master data  Bill of materials  Routing  Planned prices  Planned activities  Planned yield Producti on Actual Costing Recording logistical information for controlling:  Consumptions Recalculating the value flow using  Actual quantity structure  Yield & scrap  Purchasing & supplier invoices  Actual activity recording  Multi-level value flow  Activities & time recording  Actual raw material prices  Consumption Revaluation  Distribution of Usage variances Profitability Analysis Reporting PROFIT Reporting Costs and Contribution Margins  Production costs  Sales Revenues  Being totally integrated into transactional processing  materials ledger makes ideal place for Calculating the direct cost of product  Transferred to the profitability segment component and uploaded into SAP BOBJ & PCM  Actual cost Component Dimensions  Regions  Channels  Customers  Product Hierarchy 43 Profitability&Cost Management  Combining the strengths of the controlling components of SAP ERP with SAP BOBJ & PCM

43. Resources • • • • • • 44 SAP Finance • www.sap.com/solutions/businesssuite/erp/financials/featuresfunctions/index.epx SCN • www.scn.com AC530 - Training actual costing/Material ledger Actuhttp://www.sap-press.com/ al Costing with the SAP Material Ledger - Vanda Reis 2011 Edition

44. Key Ideas • • • • • • 45 Avoid those who only believe ML is difficult Keep all companies with same valuation strategy Material ledger visibility • Integrated across multiple level and company codes Variances included in all reporting One time change management Value quantities of inventories with three different valuations • Legal valuation, group valuation and profit center valuation

45. Questions • • Now: • Ask questions now for immediate answers Later: • Johannes Le Roux - leroux@jari-consulting.com • Chris Crim - cacrim@coopertire.com Q&A 46

46. Disclaimer SAP®, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver®, Duet®, PartnerEdge, and other SAP® products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. ERP Corp is neither owned nor controlled by SAP.

Case study material ledger implementation lessons learned

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