SAP ERP Overview: Basics

Enterprise resource Planning (ERP) has been a popular business processing tool. It has helped many companies to gain a greater foothold on their business operations. If you are not familiar with ERP or have only a vague understanding of it, this article will help to get you up to speed with a brief ERP overview.

First of all, let’s get an understanding about what ERP is and how it works. Enterprise Resource Planning (ERP) is a software system (and sometimes hardware too) that can cut the operating costs of a business while at the same time increasing its productivity and profits. ERP does this by integrating all of a company’s businesses processes into one central cohesive repository of information with access for every sector of the firm’s staff that has a need to know. This means real time access to data, facts and figures to help a company make intelligent analysis and decisions.

So what you have with ERP fully integrated software systems which enable firms small, medium and large, to integrate all of their business processes, including manufacturing, finance and accounting, human resources, marketing an sales, inventory and warehouse, purchasing and distribution, customer relationship management, management planning, and more. It’s a comprehensive system that consists of applications or modules that can handle all of the essential tasks mentioned above and then some. It streamlines all company operations and gives you an up to date view of what’s happening in every department of the business. As such, it saves time and money. Every business should take time out to get a complete ERP overview and learn about re-engineering their business operations.

Enterprise Resource Planning gives you the opportunity to manage your business more efficiently as well as more effectively. It eliminates the need for calls or emails between different departments of the company to gather information. That’s old hat. With ERP everyone has access to the same information they need in order to do their job more proficiently. If you’re working in sales and marketing and you need information about inventory from the warehouse, you won’t have to go calling - or walking - in some instances to the warehouse. You will be able to interface with that information on your computer screen in real time, which will of course save you time.

Explanation above was taken from : http://www.erp.com/section-layout/337-erp-software/6825-taking-an-erp-overview.html

With that being said, lets take a step by step view on how this actually happens starting from a demand and ending with a payment from customer. 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.

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.

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.


Well, this is basically what SAP ERP is all about. There are other Modules such as PM-Plant Maintenance, QM-Quality Management, etc. I will try to explain it in my next post, using this same example.