Blog Series: S/4 HANA Cloud Public Edition – 03 Advanced Intercompany Sales & Material Stock Status
Introduction:
In addition to S/4HANA On-premises/private cloud edition, SAP also offers SAP S/4 HANA Cloud Public Edition. SAP adds more features in SAP S/4 HANA Cloud Public Edition regularly. As of now, every year there are 2 major releases in February and August. Smaller fixes are released between these major releases and systems are upgraded automatically during these release cycles. Hence, it is important to keep track of the available functionalities in each release and frequently monitor the roadmap, so that companies can evaluate the product's suitability to their business requirements. Recently SAP has redesigned the classical intercompany processes, and the new solutions are available in S/4 HANA Cloud Public Edition as a standard out-of-the-box solution. This blog addresses a relatively complex requirement of stock statuses during the Intercompany sales process.
Intercompany Sales Process: For many businesses, it is common that one company arranges delivery of the goods (to the customer) from the stocks of another company belonging to the same corporate group. This is called the Intercompany Sales process.? For example, in the below scenario, a US Customer orders the goods/products from a US company. US company notifies the German/DE company and delivers the goods/products directly from the DE plant to the US customers. Some of the common scenarios are:
There are 3 entities and the transfer of ownership of products is a critical factor during this process. Incoterms play a very crucial role in determining when ownership transfers from one entity to another. Additionally, the valuated stock during transit is also a key audit topic.
Incoterms 2020: Set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sales of goods in international transactions. Incoterms specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, & other logistical activities and clarify the tasks, costs, and risks to be borne by buyers and sellers in these transactions. [1,2]
Stock-In-Transit: It refers to those goods that have left the physical plant, but the control of them isn’t transferred to the buyer at the same time. These goods are still in the control of the company that ships the goods and are still part of the valuated stock of that company. When companies draw up their balance sheet according to the International Financial Reporting Standards 15 (IFRS 15), they must fulfill the matching principle. The matching principle states that expenses should be recognized in the same period as the associated revenue. Revenue is recognized when goods are handed over to the customer at the mutually agreed place of delivery, provided that the contractual agreements are fulfilled. Usually at this point, the risk or control of the goods is transferred from the seller to the buyer.
The use of valuated stock in transit is not required if the risk is transferred directly. For example, for the EXW (Ex Works) Incoterm, the transfer of risk takes place with the goods issue in the delivering plant. This means that control is transferred directly to the buyer when the goods leave the physical plant. Valuated Stock in Transit (VSiT) becomes relevant when the risk is transferred later. This is the case for most of the Incoterms used in sales orders and purchase orders, for example, FOB (Free on Board) or DAP (Delivered at Place). Here, the goods leave the physical plant, but the risk and control aren’t transferred to the buyer at the same time. To avoid discrepancies in revenue recognition in such cases, an additional inventory segment must be used to indicate that the goods are still in the control of the company that ships the goods and are therefore still part of the valuated stock of that company. [3]
Business Requirement: Stock status during the Intercompany Sales process
Considering the Incoterm, Stock-In-Transit, and transfer of control of goods requirements as per IFRS or US GAAP accounting standards, it is critical to have the correct status of stock (products delivered to the customer) in the respective company.
For example, in the above Intercompany sales process if the Incoterm between German/DE Company and US company is FOB (Hamburg Port) and the incoterm between US company and US customer is DAP (Newark Port or Container Freight Station), then the goods should be In-Transit status in German Company/Plant as soon as it leaves the plant (Goods Issue). Since for FOB incoterm, transfer of risk (From DE Company to US company) happens at Onboard Vessel or Loading Port, the stock status should be still In-Transit at Port of Hamburg. But it should be recorded against US Company/Plant. Since the incoterm (DAP) between the US customer and US company is to deliver the products to Newark Port/CFS, once the consignment is handed over to the customer at Newark Port/CFS, the final goods issue must be recorded, and the inventory at US company/plant should be updated. This will in turn act as the trigger for revenue recognition
SAP Solution:
For years, Classical Intercompany sales process was available in SAP ECC and S/4 HANA. High level process flow and overview is available in the SAP community blog. [4]
In this process, based on the PO from the US Customer (17100001), US selling company (1710) creates a Sales Order with DE Plant (1010). Once the Goods Issue is processed and physical stock in Plant (1010) is consumed, the stock status will change to Stock-In-Transit (valuated) in Plant 1010 (optional process). After this, DE company can generate the Intercompany invoice which can be used for internal financial settlement. Once the goods are received by the customer at the named place, a POD transaction is executed for the final goods issued to the customer. Subsequently, Customer Invoice can be generated and sent to the US customer.
There are many limitations to this process and especially from an audit perspective purchase/sale between the US and the Selling company is not sufficiently recorded. For example, there is no PO in the US company for the purchase of products from DE Company and there is no Sales Order in DE Company for selling the product to US company. Moreover, there is no valuated stock in the US company which is critical. For example, in the above example, since the INCO term between DE and the US company is FOB, the risk/ownership of products should be transferred to the US company at Hamburg Port (till the customer receives the product at Newark Port/CFS as per DAP incoterm).?
With the continuous feature delivery 2202.3 for SAP S/4HANA Cloud Public Edition, SAP launched two new scope items for the Advanced Intercompany processes - Advanced Intercompany Sales (5D2) & Advanced Intercompany Stock Transfer (5HP). More updates and fixes were released in subsequent releases. With this SAP has redesigned the Intercompany processes (both Sales and Stock Transfer) and most of the gaps and new requirements are addressed. Set-up, detailed process flow, test scripts, and other documentation related to the Intercompany Sales process is available for scope item 5D2 [5]. A simplified process flow for the process is also available in the SAP community blog. [4]?
In the Advanced Intercompany sales process, based on Customer PO, the US company creates a Sales Order with the plant as 1010 (DE plant). This automatically triggers an Intercompany Purchase Order (to purchase materials from DE company) and Intercompany Sales Order (to Sell Products to US company). After this, delivery is created against the US company sales order and post Goods Issue is completed. This automatically generates the material document to move the material from Unrestricted status to Stock-In-Transit.?
In Advanced Intercompany Process SAP has introduced the concept of Transit Plant and Internal/External Control dates in delivery document to cater to the Stock-In-Transit status requirements.
Transit plant: It is an organizational unit in the selling company that represents the plant for which stock in transit is managed and on which goods are valuated. It's used to determine, for each sales order item, the data related to financial accounting, for example, the profit center and profitability segment. If the delivering plant of the item belongs to a different company code than the sales area, the item is relevant for advanced Intercompany sales, and the transit plant is filled. The transit plant is the plant assigned to the company code of the sales organization. It's displayed on the sales order item level, on the shipping tab. [3]
Internal/External Transfer of Control dates: Planned and actual interna/external control dates are available in the shipment tab of the delivery header. These dates are used to trigger automated goods movements using the Valuated Stock in Transit (VSiT) feature. The system uses the internal transfer of control dates to book the goods issue from Stock-in-Transit (7a) in the delivering company, as well as the receipt of the goods into Stock-in-Transit (7b) in the selling company. The system uses the external transfer of control dates to book the goods issued from Stock-in-Transit (8) in the selling company. By default, the Planned Goods Issue Date?is mapped to the Planned ‘Internal Transfer of Control Date’ & Delivery Date?is used as the planned ‘External Transfer of Control Date’. Additionally, actual dates are also available against these control dates and all these dates can be manually updated. Moreover, BADIs LE_SHP_MODIFY_HEAD & LE_SHP_MODIFY_ITEM can be used to update the logic to fill these dates.
With the Define Delivery Types configuration activity, an offset for the internal and external transfer of control dates can be defined which can be used to delay the goods movements with reference to the Planned Transfer of Control Date. An offset is the time by which the scheduled execution of the transfer of control is delayed if only the planned execution time is given in the Planned Transfer of Control Date delivery header's field. If the Actual Transfer of Control Date is already filled, the planned date and the offset are ignored, and the actual date is used instead. [3]
After the goods are issued from the selling company, an Intercompany Invoice and Customer invoice can be generated against the Delivery document using the ‘Create Billing Documents’ App. This automatically generates an Intercompany Supplier Invoice and is posted with reference to the Intercompany Purchase Order. SAP has introduced the ‘Monitor Value Chains’ app to keep track of all the manual and automated processes. A process flow view is also available in the app, which helps to identify the various steps and greatly helps in troubleshooting and error handling.
Demo:
Before the Intercompany process, the Material (TG12) stock situation is such that DE plant (1010) has 5000 PC and the US plant (1710) has 50 PC (in unrestricted status).?
Based on the PO (ICPO001) received from US Customer (17100001), Sales order 98 is created with Sales Org as 1710 (US Sales Org) and Plant as 1010 (DE Plant) for 250 PC of TG12 material. Incoterm used is DDP with incoterm location as US Port/CFS at Newark (USEWR).
Since plant 1010 is assigned to the DE company code and Sales org is assigned to the US company code, the system recognized this as an Intercompany Sales process and automatically generated the Intercompany Purchase Order (4500000060) and Intercompany Sales Order (60000008). These can be tracked using the ‘Monitor Value Chains’ App.
After this, delivery (80000058) is created against the Sales Order (98) to ship the products from the DE plant (1010) to the US Customer (17100001). In the shipment tab of the delivery header, planned internal and external transfer of control dates are automatically filled from the Planned GI and Delivery date respectively.
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Overall process status is updated in the Monitor Value Chains App with additional documents.
As the next step Pick/Pack process is completed in DE Plant (1010) / SLoc (101A) and PGI is executed for the delivery (80000058). This automatically created the material document (4900000190) with movement type 687 to move the stock from Unrestricted to Stock-in-Transit? at DE Plant (1010).
Overall process status is updated in the Monitor Value Chains App. Material document to Goods Issue the stock at DE Plant 1010 from Stock-In-Transit is in schedule status as the planned control date (10th July) is not current.
Ideally, the actual internal control date in delivery (80000058) should be populated based on the actual shipment status (Arrival or Loading Complete at Port of Hamburg). However, for the demo, the actual date is updated manually to the current date (9th July). This automatically generated the 3 material documents to move the stock from the DE plant to the US plant (In-Transit status) and transfer the ownership of material and risk to the US company.
When the shipment reaches the Port or CFS of Newark, US as per the DDP incoterm the actual external control date in delivery should be updated. This initiates the Goods Issue from Stock-In Transit (at Plant 1710) and transfers the risk to the customer. For demo purposes, the external control date is updated to the current date (9th July) and the system automatically generated the material document (4900000193) with movement type 601 to Goods issue the Stock-In-Transit.
After the Goods Issue is completed Customer Invoice (90000028) and Intercompany Invoice (90000029) are created using the ‘Create Billing Documents’ App and Supplier Invoice (5105600121) is generated automatically. All these documents are updated in the Monitor Value Chains App with the respective status.
Please note that, to reduce the complexity, this blog focuses on only the stock status aspect of the Advanced Intercompany Sales process. Other focus areas such as pricing, financial accounting, setup, master data, outputs, and order management are not addressed. Additionally, there can be multiple variations for this process depending on the various Incoterms between the entities. This can become more complex once we incorporate Cloud Transportation Management and Warehouse Management process steps. Moreover, the Intercompany Stock Transfer solution is also provided by SAP in S/4 HANA Cloud Public Edition. All these areas can be topics for future blogs.?
Business Benefits: [5]
Conclusion:
Software-as-a-Service (SaaS) or Public Cloud Edition of SAP S/4 HANA, has high standardization and less flexibility to configure/modify. Over the years SAP has added multiple features (as of now, every year there are 2 major releases in February and August) and many complex and critical cross-functional business requirements can now be handled. Moreover, SAP is redesigning some of the established processes and deploying them in S/4 HANA Cloud Public Edition which customers can evaluate.
The classical intercompany sales process in SAP had some gaps and new business requirements were building up for many years. The critical requirement of change in stock status and risk transfer from one company to another and then to the customer was a long pending demand from multiple customers and audit teams. It is a welcome step to see that SAP has redesigned this process to meet most of the latest requirements and the Advanced Intercompany Sales process is available in Public Cloud Edition. Similarly, SAP has redesigned the intercompany stock transfer process including the integration with Cloud Warehouse & Transportation management solutions and are available (in S/4 HANA Public Cloud) with detailed process flow and documentation.
With these new intercompany solutions as the base, SAP should be able to cater to any future demands and can quickly deploy the updates/fixes in Public Cloud Edition. Customers can explore, evaluate, and implement these new features as per the business requirements. Hence potential SAP customers must evaluate whether S/4 HANA Cloud Public Edition with its current functionality and future roadmap is suitable for their business process and should monitor the evolution of the product.
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