SAP ERP Overview: Advanced

Welcome back guys. I will be using the same example as the one from my previous post, cut and paste to be exact :) I strongly recommend that you go through the previous post first before reading this one. However, the additional information can be found by referring to the words in Italics.

Hi guys, I would like to share with you on what SAP ERP(Enterprise Resource Planning) is all about.
For example purposes, we would be focusing more on a manufacturing based company. In this case, we assume that we are producers and seller of Laptop X.

SD-Sales and Distribution

Lets also assume that we have a Customer XYZ that wants to buy 100 Laptop X. In the real world, for a customer to legally request for purchase, is by giving us a Purchase Order. In this Purchase Order, Customer XYZ states the product that he wishes to purchase along with the quantity and price. Other information such as delivery address are also in the document. When we receive this document, we are legally responsible in providing the products to the Customer. So, upon receiving the Purchase Order from Customer XYZ, we convert it to a Sales Order in SAP ERP. Once we create this Sales Order in SAP ERP, the following processes will commence.

MM-Materials Management 

Now, we have to remember, to produce 1 Laptop X, we would need Raw Materials correct? Lets list down the Raw Materials Required to produce 1 Laptop X.

• 1 Casing
• 1 Battery
• 1 Processor
• 1 Keypad
• 2 Speakers

What do we call this particular relationship between the Finished Product (Laptop X) and its components above? BOM: Bill of Materials. This is vital, because without it, SAP ERP would not be able to know the required quantities and components to produce 1 Finished Product (Laptop X).
Do we produce the Raw Materials above? In 99% of the cases, chances are that we would be purchasing them from an External Vendor. Lets assume that we are purchasing all these Raw Materials from Vendor ABC.
If you recall from earlier in this post, I mentioned that the legal document used when purchasing is the Purchase Order. So now, we would be creating a Purchase Order for all of these Raw Materials. Now the question is, how would the person from the Purchasing Department know what is pending for purchase? The answer, is MRP (Materials Requirement Planning). If you studied economics, you would very well be aware of the term Supply and Demand right? Well, that applies here as well. Based on the Sales Order that we received from Customer XYZ, we know we need to to produce 100 quantity of Laptop X. So this would be our Demand. Now, since there is demand, we would need to Supply them to the customer right?
At this point, BOM plays its vital role. SAP will use the BOM as reference to find that to produce 1 Laptop X, it requires 1 Casing, 1 Battery, 1 Processor, 1 Keypad, and 2 Speakers. So to produce 100 Laptop Xs? It wouldn't be too hard for SAP to just multiply each of the above to find out the total requirements :)
With the above in mind, SAP generates a Planned Order for each of the Raw Materials above stating the required quantities for each to produce 100 Laptop Xs.
Now, another person plays a key role called the Materials Planner. He would now convert these Planned Orders into Purchase Requisitions in the SAP System. Purchase Requisition is an internal document used within a company to initiate a Purchase Order.
At this point in time, the Purchaser takes ownership. The Purchaser would now convert these individual Purchase Requisition and include all of them to 1 Purchase Order, since they are being purchased from the SAME Vendor. *Note* that 1 Purchase Order is valid for 1 Vendor only.
With the Purchase Order in place, you decide to Print it out and send it to Vendor ABC. Vendor ABC responds by acknowledging this Purchase Order and sends all the required Raw Materials to us 2 days later.
We now perform Goods Receipt and place the Raw Materials in our Storage location.

QM-Quality Management

For Industries such as Pharmaceutical, it is extremely important to ensure that the goods received from Vendor are quality checked. We assume that we require quality checking for each and every Raw Material received from Vendor ABC.
During Goods Receipt, we tell the system that we would like for it to Store the Raw Materials in Quality Inspection storage location. When the raw materials are in Quality Inspection storage location, we are not able to use it yet for Production. Once the raw materials are inspected and passed the inspection test, the raw materials are then transported to the normal storage location.

To complete the process for MM, we would process the Invoice sent by Vendor ABC which states the amount to be payed to him. *Note* that Vendor ABC sends the invoice after he has delivered the goods. This would be the link between MM and AP (Accounts Payable) which is part of the FI Module. It is called Accounts Payable because we owe the vendor money.

PP-Production Planning

Remember above in the MM section i mentioned about Planned Orders being generated for Raw Materials? Well, this also applies for the Finished Product Laptop X. But in this case, the Materials Planner would not convert it to a Purchase Requisition, but instead, convert it to a Production Order.
With the Raw Materials available in storage area, we are now able to start out Production.
Once we have finished produced 100 Laptop Xs, we transfer it to Finished Product Storage location while waiting to be delivered to Customer XYZ.

QM-Quality Management

Before transferring the 100 Laptops to Finished Product storage location, we can actually send it for Quality check first. So, upon completion of production, we send these 100 Laptop Xs to Quality Inspection storage. Once it is inspected and passed, then we would transfer it to Finished Product storage location.

PM-Plant Maintenance

Do you know that the machines that you use to produce your Laptops requires regular service? It is just like our cars that we drive. The service here can be in the form of Planned Service where it can be based upon usage hours e.g. after 1000Hours of meter reading, or based upon a fixed period such as after 3 months, regardless if we use the machine or not. The way of servicing is already stored in SAP in the form of Task List. This means that, SAP will check the task list to see what kind of services that needs to be performed on the Equipment. Another type of service can be Unplanned services such as Breakdown Maintenance. For this type of Maintenance, it happens suddenly and requires immediate attention. Based on the Technicians expertise, he would determine whether internally within the company, they are able to fix the problem, or he requires help from an external vendor to perform the breakdown maintenance.

SD-Sales and Distribution

Now that we have 100 Laptop Xs waiting in our Finished Product storage location, we can now Pick it from the storage, and deliver them to Customer XYZ.

To complete the SD process, we would issue an Invoice (similar to the above where Vendor ABC issued us an Invoice) to Customer XYZ. This would be the link between SD and AR (Accounts Receivable). It is called Accounts Receivable because the customer owes us money.


With this, it should give you a clearer picture on what SAP ERP can do for you. Note that this is only the very basics and not to its full potential yet. There are other modules such as WM-Warehouse Management, HR-Human Resources, etc. It will only make things complicated if we put it all in this post. Hope this helps.