In an integrated SAP ERP implementation, one of the key decisions that organizations have to make is choosing the type of manufacturing strategy process. This decision depends on various factors such as the type of product, customer-demand fulfilment strategy, and complexity of production process. This decision further influences many other downstream business processes such as production planning and scheduling, shop floor manufacturing execution, and type of product cost controlling. SAP provides you various options within product cost controlling to select the type of cost object that complements different manufacturing processes.

MTO Manufacturing Processes

Make-to-order (MTO) manufacturing processes are often characterized by the type of finished products that have multiple variants, such as customer-specific, customized options. Variant configuration functionality in an SAP system allows a customer to select product features according to their requirements when sales orders are placed. This functionality is part of the production planning process that automatically creates manufacturing orders to build the customized product. Examples of this kind of manufacturing include the production of desktop or laptop computers and cars.

In this regular MTO, scenarios producing the customized product are for a specific order quantity (or lot size) generated by the sales order item. Because configuring a product is dynamic, it is difficult to have one standard cost for all product variants. Therefore, the standard cost of the product variant is also dynamically created for each sales order and subsequently used for the valuation of the cost of goods sold and also for product cost controlling of the associated manufacturing order. For this regular MTO scenario, the most common cost object used to manage and collect costs is the production order.

Imagine a special manufacturing scenario in which a strategy based on MTO manufacturing is implemented. In this case, the finished product is not a variant configured material. The product is standardized, and there is no customer-specific customization of options.

Figure 1 shows this process scenario in which an MTO strategy is used. The sales order provides the quantity that needs to be produced and dates when the product needs to be shipped to the customer. Material requirements planning (MRP) creates one planned order for each sales order in daily buckets, and the quantity in the planned order corresponds to the order quantity in the sales order. The manufacturing process is repetitive; in other words, the production process happens on the assembly line and quantities are produced continuously. At the end of the manufacturing process, goods receipt is posted and the associated inventory that is generated is a valuated sales order stock.

Figure 1

Process flow for a special MTO scenario

One of the most common and frequently used business situations that would drive this choice of controlling and manufacturing process is when the same material is delivered to different customers in different packaging materials. Figure 2 shows this business scenario in more detail.

Figure 2

A business scenario to implement an MTO strategy for a standard product

To illustrate this special scenario, consider an example of an automotive supplier supplying products to an original equipment manufacturer. The supplier may need to ship the same finished product with correct labels as per each customer’s requirements, with one or more types of containers or packaging material assignment for one or different customers (handling units). A handling unit in SAP terminology is a combination of material and packaging material that enables tracking of packaging material and goods contained therein.

In this scenario, finished goods material (ZFG1) going to a different customer is standardized, but complexity or variants arise in how the goods are packed in containers and how they are labeled per each customer requirement. To have an integrative communication and coordination with the customer and also within the shop floor, the supplier needs to have visibility of demand and stock generated across all stages of the supply chain planning and manufacturing execution at the individual customer order level. This information enables the right quantity to be packed in each customer-related handling unit and shipped correctly. This process of manufacturing standardized products on a repetitive production line, but with an MTO strategy, provides the following advantages to a company:

• The ability to track the progress in production (e.g., produced quantity of a planned order for each customer-specified requirements)

• Actual inventory data of finished product by each customer or sales document

• The ability to handle customer-specific packaging and labeling requirements for the same product shipped to multiple customers within the manufacturing shop floor process
• Cost control not being required at individual sales order or production order level, but can be managed based on period accounting at a product level, thus resulting in simplified month-end close processes.

Configuration for Costing and Valuation of MTO Customer Stock

The configuration for costing and valuation of MTO customer stock is determined in a series of logical steps. I walk you through these steps now.

Specifying Requirement Type KEV for MTO Processing

To let the SAP system know that a particular sales order or scheduling agreement is relevant for MTO processing, you specify a requirement type in a sales order or scheduling agreement line item. You can view the value of requirements type entered in transaction VA03 (for Sales Order) and VA33 (for Scheduling agreement). Follow IMG menu path Logistics > Sales and Distribution > Sales.

Enter the order or sales document number in the selection screen and press Enter. Under the Shipping tab of the sales order/scheduling agreement line item, enter KEV in the RqTy column (Figure 3).

Figure 3

Requirements type in the sales document line item

The value of the requirement type in the sales document is determined automatically based on the combination of the sales order item category (the parameter that classifies the nature of the item and determines automatically based on assignment of the sales document type in IMG configuration menu) and MRP type (the parameter that determines how a material is planned and value assigned in the material master). To specify this configuration, follow IMG menu path Controlling > Product cost controlling > Cost object controlling > Product cost by Sales order > Control of Sales order Related production / Product cost by Sales order > Check control of requirements type determination

The requirements type is further linked to the requirements class (transaction code OVZH). This configuration parameter determines the costing and valuation of customer-valuated stock that is generated from the MTO process.

Specifying the Requirements Class

You configure the requirements class using the customizing transaction code OVZG. Follow IMG menu path Controlling > Product cost controlling > Cost object controlling > Product cost by sales order > Control of sales order related production / Product cost by sales order > Check requirements class. Figure 4 shows the configuration of requirements class that enables the valuation of customer valuated stock based on the standard cost of the product.

Figure 4

Requirements class configuration for MTO valuated sales order stock

Note the following important settings in the requirements class that are relevant to the valuation:

• Acc Assignment Cat.  The account assignment category M in requirements class 045 indicates there is no sales order controlling in this scenario. Thus, the controlling processes are not carried out on the sales order; instead, they are carried out on the cost object that drives the manufacture of the product.
• Valuation. The Valuation entry M indicates that the sales order stock is valuated with reference to the sales document. Thus, the product being manufactured cannot be sold to another customer and can be shipped only against the specific sales document.
• Without Val. Strategy. This setting in the selected requirements class controls how the price for valuation of the first goods receipt is determined. When you enable this setting, the standard cost of the product is used to valuate the MTO stock.

By selecting the Without val. Strategy option in the requirements class, you indicate that your SAP ERP system can use the standard price in the material master record as the valuation price during first goods receipt of the valuated special stock segment. If the standard price is released based on a standard cost estimate for the material, the system can then also generate a cost component split as per the cost component structure defined in the product cost planning module. It then transfers a cost split to profitability analysis (CO-PA).

Material Master Data

The master data for a material controls many settings related to how a product is processed in an MTO-based repetitive manufacturing environment. Use transaction code MM01 or follow menu path Logistics > Materials Management > Material Master > Material > Create (General) > immediately (Figure 5).

Figure 5

Create the material master

Once these basic data values are entered, you proceed further to enrich the material master with different values as required in different views as follows:

• Material type. Create the material as a FERT (Finished Product [a standard material type SAP provides for a finished product]). Creating material as a FERT is one of the key differences between a regular MTO scenario and this special repetitive scenario. For an MTO scenario with configurable materials, you use a special material type, such as KMAT, but in this case, you can use the material type FERT, which is commonly used in any kind of repetitive manufacturing process.
• Input a material number and press Enter. Enter material description, ZFG_01A and FG, respectively.

Some of the key parameters relevant for MTO manufacturing that need to be entered in material master views are:

• MRP 1 view. Enter the value of MRP Type. This field is used in determining the requirements type in the sales order line item as explained earlier.
• MRP 2 view. Enter the value of the procurement type as E. This field signifies that the source of supply for this product is in-house manufacturing.
• MRP 3 view. In this view of the material master, you need to enter the value of planning strategy group as 50 (planning without final assembly). This value is the standard one provided in SAP ERP 6.0 relevant for an MTO process.
• MRP 4 view. In this view, you need to select the repetitive manufacturing indicator and specify the repetitive manufacturing (REM) profile. As shown in Figure 6, SAP ERP 6.0 provides REM profile 0002, which has to be selected for this type of manufacturing process.

Figure 6

Activation of repetitive manufacturing in the material master

• Accounting 1 view. In this view of material master, you enter the valuation class that is relevant for the account determination for inventory accounts.

• Costing 1 view. In this view, select the Qty Structure radio button to ensure that the standard cost estimate is calculated based on the manufacturing master data, including the bill of material (BOM) and routing.

Next, I explain how to execute an MTO-based repetitive manufacturing process with the product cost collector as the cost object.

Create a Standard Cost Estimate

Using the costing variant configured for standard costing, you can implement the transaction code CK40N to create a standard cost estimate for the material that needs to be manufactured in repetitive manufacturing. You can create the cost estimate once you have created the appropriate manufacturing master data (BOM and routing) for this material (Figure 7). SAP automatically picks up the BOM and routing for the material being costed based on quantity structure control settings associated to the costing variant. Details of this setting can be viewed in transaction OKKN. Follow IMG menu path Controlling > Product cost controlling > Product cost planning > Material cost estimate with quantity structure > Define costing variants.

The details of costs in the standard cost estimate can be viewed from transaction CK13N (Figure 7). This estimate is then released as the standard price of material.

Figure 7

Standard cost estimate of material to be manufactured

 Create Product Cost Collector

You create and maintain product cost collector data using transaction KKF6N or by following menu path Accounting > Controlling > Product cost controlling > Cost object controlling > Product cost by period > Master data > Product cost collector.

Create the Sales Order

You can now order the material as part of the sales order process. To create the sales order, use transaction VA01 or follow menu path Logistics > Sales and Distribution > Order > Create or alternately use transaction VA31 to create scheduling agreement.

You create the sales order (or scheduling agreement) with the material to be manufactured in the sales order line item. Note that entering the correct requirements type on the Shipping tab of the sales order line item (Figure 3) is important.

Execute MRP

You can execute the MRP run to create the planned orders. Use transaction MD02 to execute the MRP run with BOM explosion for a single material, creating the planned order with the reference to the customer (Figure 8).

Figure 8

Output from an MRP run

Post Goods Receipt for Sales Order Stock

At the end of the production line when the manufacturing run is completed, the quantity of completed finished goods is confirmed and backflushing is carried out. The backflushing process for manufacturing is important because it confirms the completion of planned orders in repetitive manufacturing. For most clients, a backflush is performed via a handheld device by scanning the manufacturing label and having the system perform transactions automatically in the background. In exceptional situations, a backflush process is done directly in SAP via transaction MFBF (REM backflush without handling unit) or MFHU (handling unit backflush in repetitive manufacturing).

During the backflush, the system accomplishes the BOM explosion and checks if components are available on stock. If conditions for a successful backflush of all components are fulfilled, the system proceeds with producing a finished product goods receipt and goods issue of component materials. The system also posts labor and other conversion costs to the cost collector and creates material and accounting documents. In this process, the following costs are booked to the cost collector:

• Credits to the product cost collector. For the goods receipt of valuated sales order stock, the product cost collector is credited with the quantity delivered multiplied by the standard price value in the material master. As explained in a previous section, if the indicator Without Val. strategy is set in the requirements class, the system reads the standard price in the material master record and uses this price as the valuation price during goods receipt of the valuated special stock segment.
• Debit to the product cost collector. The product cost collector is debited with the costs for the material components and activity quantities. Valuation is performed in accordance with the valuation variant for simultaneous costing as defined in customizing.

Users can analyze the cost bookings in the product cost collector using SAP transaction KKBC_PKO. Follow menu path Controlling > Product cost controlling > Product cost by period > information system > Reports for product cost by period > Detailed reports. In this transaction, you enter the material number, plant code, and period for which cost booking analysis needs to be carried out. The output of this transaction is shown in Figure 9.

Figure 9

Cost bookings to the product cost collector

Display Valuated Sales Order Stock

You can view valuated sales order stock received at the time of performing goods receipt against the product cost collector in inventory management using transaction MBBS. Follow SAP easy access menu path Logistics > Materials Management > Inventory Management > Environment > Stock > Valuated Special Stock (Figure 10). Enter the material number and plant as required in the selection screen. Execute the transaction to get the output by clicking the execute icon .

Figure 10

Display of valuated sales order stock

In transaction MBBS, when you position the cursor on a material in the output list and choose Environment > Valuation (function key F5), the system displays details about the valuation of the special stock. In particular it displays details about the strategy used to value the goods receipt in the special stock and standard price used for valuation (Figure 11).

Figure 11

Display valuation strategy of valuated sales order stock

Shipment of Product to an External Customer

Once the product is manufactured using an MTO process and customer valuated stock is received in inventory, the next step in the process is to ship the valuated special stock to the customer by creating an outbound delivery against the sales document. This process creates accounting entries for cost of goods sold (COGS) following standard cost accounting. Valuated sales stock inventory is credited and the COGS account is debited, both based on valuation price of material (standard price) as defined in material master. The accounting treatment for goods issue of a valuated customer stock in this MTO scenario is the same as goods issue of regular stock created from an MTS manufacturing process.

Refer to the complete sales document flow in Figure 12. You can view the document flow from any sales document transaction (e.g., Display Scheduling agreement – VA33, Display delivery – VL03N, Display billing document – VF03) by clicking the display document flow icon . For illustration, I show this document flow from the scheduling agreement display VA33.

Figure 12

Goods issue delivery and billing document flow in a sales cycle

This is the last step in the transaction processing from a logistics perspective, and finally, at the end of the month, you execute regular period-end close processes for the product cost collector. In an MTO-based repetitive manufacturing scenario, because goods receipt and goods issue happen at same time, there is no work in progress. Also, scrap variances cannot be determined for an MTO-based process. The rest of the variance categories and values can be calculated and settled to FI/CO-PA. Settlement distributes the values to the different individual customer requirements stock segments according to the delivery values of the delivered quantities.

The process steps for an MTO-based repetitive manufacturing process provide a simplified logistics processing with inventory and demand visibility for each customer requirement separately. Standard cost accounting is possible in this form of MTO process. From a cost object controlling perspective, there are no additional period-end close activities and the accounting value flow is identical to an MTO-based manufacturing scenario.

Muralidharan Sethuraman

Muralidharan Sethuraman is director enterprise ERP IT finance at Johnson Controls. He has more than 16 years of industry experience leading and managing multiple SAP implementation and business transformation programs across geographies. Muralidharan is currently leading the SAP S/4HANA program at Johnson Controls. He specializes in SAP Financials and has done design lead, solution architect roles in global SAP implementation programs. Muralidharan is a subject matter expert in the areas of product cost analysis and management, inventory and working capital management, management reporting and profitability analysis, financial analytics and reporting, and business planning. He has published multiple articles in Financials Expert in these areas.

If you have comments about this article or publication, or would like to submit an article idea, please contact the editor.