by Venkata Ramana Nethi CSCP, CPIM.; Business Process Lead - Operations, Schlumberger Organizations often experience challenges in a make-to-order (MTO) environment when managing “planned customer changes” mapping to standard product structure. This article will teach you how to separate “planned” vs. “un-planned” changes integrating planning, shop floor execution, inventory management and finance/controlling with accurate value on the books. It will explain inventory valuation with a step by step process for creating new custom MTO planning strategy configurations, implementing methodology, and interpreting the results. Learn how business can effectively manage MTO processes and avoid workarounds on month-end closing. Make-to-order (MTO) is a business production strategy that is used due to product uniqueness or erratic demand. It allows a company to build a product after it has received a sales order and customize the product to the customer’s requirements. When working with MTO strategies, the sales order is the only pegged requirement. In an MTO environment, the net requirements calculation is carried out individually for every individual sales order. It is assumed that stock cannot be interchanged between sales orders. All procurement elements that are planned are created with direct reference to the sales order line item and are managed in the individual customer segment. It is commonly described as production and procurement based on it individual sales order line item rather than group requirements emanating from multiple demand sources. This direct reference to the sales order is also maintained down to the resulting production orders (Figure 1). Figure 1: MTO Typical Scenario

SAP Planning Strategy 20

MTO strategy typically allows customer changes in both pull type and configurable manufacturing processes. This strategy has control over the allocated inventory pegged to sales order lines, so the production planner can review production order routing operations and components to meet customer specific requirements before releasing the orders to the shop floor. During this process, specific production orders need updates on the component list (as per customer requirements) or the standard hours (due to shop floor conditions) of one or more operations in the production orders. Standard SAP planning strategy 20 allows you to produce a product or material to a sales order line. However, in the real world the modified or updated components and routing operations become the base line planned cost to produce and deliver into the stock and the updates should not be considered as variances as the modifications will be charged back to the customer via sales order pricing strategies. One limitation of standard planning strategy 20 is that it always compares to the material master’s standard cost for inventory value and variances on production order, it does not allow use planned cost in ‘Goods Receipt’ of production order header material, resulting in variances even though it is not the case. Planners/shop supervisors always need to explain the variances to the finance/controlling department during variances and settlement of the production order. This results in month-end issues in most medium- to large-sized organizations.

Business Challenges with SAP Standard Planning Strategy 20

Product mix with make-to-stock (MTS) and MTO: When the organization has a mix of both MTS and MTO products, then a different approach is taken for MTS and MTO materials on month-end process. Execution: Planned changes of the production orders are projected as variances and the inventory value is listed as the same for all production orders in SAP standard planning strategy 20, which is not the case in manufacturing processes where each order is unique to customer requirements. Controlling: Finance and controlling teams need to settle sales order line, instead of following the same process of WIP, variance and settlement process like MTS products. If a material is set up with standard SAP planning strategy 20, in reality each production order has a separate planned cost after updating the component or routing information on individual production orders, goods issues and operations will be confirmed and tracked during the manufacturing process and when the goods receipt is completed; then value of the goods receipt quantity will be maintained against the material master standard cost instead of the planned cost of the production order. When SAP standard planning strategy 20 is used then goods receipt inventory value is at standard cost, which is not the realistic situation.

Understand Standard Cost vs. Planned Cost

It is very important do understand the terminology of costs used on production orders especially in make to order environments. Definition of Standard Cost:

• In MTS production, the target cost is the standard Cost.
• Standard cost - Every sales order item is valuated at the existing standard cost. The standard cost is the estimated cost for the production of a finish product based upon the standard conditions of production as of January 1

Definition of Planned Cost:

• In MTO production the target cost is the planned cost.
• Planned costs - Individual plan cost is calculated for every sales order item based on the production order for that sales order item using the order specific master data and the item is valuated at this plan cost from inventory valuation point of view.

If your organization allows workarounds to manage MTO production orders, answering the following questions will place you on the right path to explore how to resolve these challenges:

1. Is there a way my goods receipt (101 Movement type) from a production order has a planned cost (real value instead standard cost from material master costing tab) of the production order?
2. How can finance and materials management teams know the real value of the inventory on books when goods receipt occurred via production order goods receipt?
3. Is there a way that can I manage MTO production order settlement like MTS production orders?
4. Can I calculate variance (unplanned changes) against the production order planned cost instead of the material master standard cost?
5. Can I avoid the sales order line controlling and leverage best practices of month end settlement on WIP, variance and settlement process?

If the answer to all above is YES, the MTO planning strategy described in this article is the approach to take. This solution is applicable to both mid- and large-size manufacturing organizations using SAP ERP Central Component (ECC) as their ERP system. The following sections demonstrate how a business can efficiently manage MTO processing and resolve the above-mentioned challenges integrating sales, manufacturing, inventory and controlling.

Configuration of New MTO Planning Strategy

In this section we're going to configure a new MTO planning strategy called “Z9”. I will explain the reason behind the values by comparing to standard planning strategy 20 so that you understand the behavior during execution and review of the results.

Define Requirement Class

The purpose of this activity is to define requirement class, with which you control all functions relevant to requirements in logistics. Notes:  The requirement class controls the material requirements planning (MRP) and the requirements consumption strategy as well as the relevancy for planning. Specifications on the settlement of the requirement class, for example, the settlement profile and the results analysis key, are preferably used by materials management and do not have to be used when configuring the availability check and transfer of requirements. Allocate a requirements class to the requirements type in next step. This involved configuration in sales and distribution menu & controlling menu. Create requirement class in sales and distribution menu (Table 1). Table 1: Create Requirement Class in Sales and Distribution Menu   Step 1: Click New Entries and create requirement class (Figure 2). Figure 2: Transaction OVZG–Requirements Classes Configuration   Assign account & valuation in controlling menu (Table 2). Table 2: Assign Account & Valuation in Controlling Menu Step 1: Double click on Requirement class Y4B and maintain Account Assignment Cat as M and Valuation as M as shown in Figure 3. Step 2: Save your entries. Figure 3: Requirements Class Costing and Accounting   Assign account & valuation in controlling menu (Table 3). Table 3: Assign Account & Valuation in Controlling Menu   Step 1: Double click on requirement class Y4B and maintain account assignment cat as “M” and valuation as “M.” Step 2: Save your entries. Assign assembly processing in sales menu (Table 4). Table 4: Assign Assembly Processing in Sales Menu   Step 1: Double click on requirement class Y4B and maintain assembly processing as “0”  (Figure 4). Figure 4: Requirements Classes Assembly Processing 0   Let’s understand what’s in the custom requirement class settings comparing to the standard delivered. Figure 5 shows a comparison between the standard requirement class 040 used in standard planning strategy 20 and custom requirement class Y4B in custom planning strategy Z9. Note:

• Custom naming convention should be as per your organization standards.
• Involve your Controlling team as this needs their review during settlement and valuation policies

Figure 5: Requirement Classes Comparison -- Standard Vs. Custom (in this article)   Let’s take a closer look at the significance of the ‘Acct Assgt Cat.’ and ‘Valuation’ between standard planning strategy 20 and the custom planning strategy Z9 mentioned in this article (Figure 6). The account assignment category determines which account assignment data (such as cost center, account number, and so on) is necessary for the item. M   Ind. cust. w/o KD-CO                                         E   Ind. cust. w. KD-CO Figure 6: Acct Assignment Category—Standard Planning Strategy 20 vs. Custom Planning Strategy Z9   Differences between M and E is consumption posting

• M = Opposite of E
• E = Sales order item as cost- and revenue-carrying