Douglas Volz Consulting Does Rel. 12 Solve Global Inter-Company Issues for Multiple Ledgers, Profit in Inventory and COGS? Douglas Volz Douglas Volz Consulting doug@volzconsulting.com Doug and Jerry worked together at a mutual client, from which this presentation is based upon. Bini Mammen was not able to attend, his contributions towards this presentation are appreciated Jerry Devore CSC jdevore@csc.com

Agenda Example / Background Wow – R12 Features That Work Subledger Accounting Local vs. Corporate Reporting with SLA COGS Recognition R12 Intercompany Challenges SLA Inquiries and Reporting Profit in Inventory Time Sensitive Setups Multi-Org Inventory Reconciliation We will mainly concentrate on the Inventory/Cost Accounting/COGS side of inter-company accounting. Inter-Company Accounting is a HUGE topic to cover in 50 minutes. Inventory reconciliation issues become amplified with most Global Companies

Background Using Release 12.06 at a global pharmaceutical company Discrete costing with multiple inventory orgs, currencies, operating units and ledgers With internal transfers across most organizations, using multiple primary and secondary ledgers Inter-company pricing with profit in inventory and month-end elimination issues

Sample Background – Supply Chain Inter-Org Shipping and Billing Logical Shipping Transactions Distribution - Europe Medical Customers Logistic Service Providers - Europe Factory Switzerland Logistic Service Providers - Americas Distribution - United States Medical Customers Factory Korea Logistic Service Providers - Asia Distribution - Asia Medical Customers

Sample Financial Entities Use of Secondary and Primary Ledgers was specific to client situation with certain currency thresholds.

Release 12 Features That Work

Wow – R12 Features that Work! SLA for product line accounting, variance recognition Transactions Accounting Events Cost Management SLA Accounting Configurations Subledger Balances Journal Entries GL Journal Entries and Balances Accounting Program Journal Entry Setup

Wow – R12 Features that Work! SLA Basic Architecture Enter Transaction(s) One Common Accounting Subledger Table Same Cost Transaction Accounting Tables Cost Manager SLA Accounting Tables G/L Tables Transaction Accounting Tables GL_LEDGERS XLA_EVENTS Create Accounting GL_JE_BATCHES XLA_AE_HEADERS GL_ INTERFACE GL_JE_HEADERS XLA_AE_LINES GL_JE_LINES XLA_DISTRIBUTION_LINKS

More R12 Features that Work! COGS Recognition In R12 the customer shipment entries go to deferred COGS Run “Autoinvoice” & “Revenue Recognition Master Program” Run the “Inventory Cost Processor” or “Record Order Management” Run “Collect Revenue Recognition Information” Then run “Generate COGS Recognition Events” Deferred COGS “True” COGS We have had a number of bugs with this functionality, the latest patch is 9306124 -COG REC ERROR as of March 6th, 2010 Inventory 1. Customer Shipment 10 10 2. COGS Recognition 10 10

More R12 Features that Work! Primary and Secondary Ledgers In Release 12 Subledger Accounting replaced Global AX Primary to secondary ledger mapping is much better Outside of Asia-Pac countries, all primary ledgers are in USD Every month the primary ledgers are translated into the secondary ledgers for local reporting requirements Primary to secondary mapping is way more flexible in Release 12, with being able to map the four C’s (not just accounts to accounts as in Release 11i): Accounting Convention (SLAM), Chart of Accounts and account mapping for transactions may be different Calendars may have different financial starting and ending periods Currencies may be different (same in Release 11i) Ability to use secondary ledgers in this fashion depends on currency thresholds and local regulatory requirements

Release 12 Inter-Company Challenges We don’t have time for all of the issues we faced, however we wanted to concentrate on a few that everyone will face – profit in inventory and inventory reconciliation

Profit in Inventory Terms Current features Basic business needs and business scenarios Common solutions to solve the visibility and elimination of profit in inventory

Profit in Inventory - Terms Two commonly used terms for profit in inventory ICP – Intercompany Profit PII – Profit in Inventory

CST: Transfer Pricing Profile Option No Yes, Price Not as Incoming Cost Yes, Price as Incoming Cost No – works like an Inter-Org Transfer in Release 10 and 11, any difference goes to PPV Yes, Price Not as Incoming Cost – accrues ICP when received by Receiving ORG Yes, Price as Incoming Cost – ICP is not accrued, any differences go to PPV, usually the Price is the same as the Receiving Org’s cost

Profit In Inventory (O2) Profit in Inventory – Current Features (FOB Ship Example / CST: Transfer Price Option: Price Not as Incoming Cost) Transfer Price: $120 Sending Organization O1 Inventory Cost: $102 Receiving Organization O2 Standard Cost: $120 FOB Shipment INV Valuation (O1) INV Valuation (O2) Inter-Org PPV (O2) Profit In Inventory (O2) COGS (O1) In-transit (O2) Accrual (O2) Event 1. Shipment 102 102 120 18 120 18 120 120 2. Receipt Profit in Inventory Account is setup in the Shipping Network I/C Receivable (O1) I/C Revenue (O1) Accrual (O2) I/C Payable (O2) 3. I/C AR 120 120 4. I/C AP 120 120

Profit in Inventory – Current Features By using “Price Not as Incoming Cost” profit in inventory is earned with the intransit shipment or receipt transaction (depending on FOB setting) But it is never relieved during subsequent transfers And you don’t have a Profit in Inventory Value Report You can also use Material Overheads for ICP, assuming a given item only comes from one inventory organization, or that the ICP amount is the same across multiple inventory orgs

Profit in Inventory – Basic Business Needs Two overall scenarios: Profit in inventory adjusted in local books (eliminate in local books) Profit in inventory adjusted in consolidation ledger (eliminate in consolidation books)

Profit in Inventory – Report in Local Books Requirements Profit in inventory recorded at a transactional level Need profit in inventory adjusted out of detailed margin analysis Accrued when receiving goods from source internal organization Relieved whenever the goods are consumed: Misc. issue COGS Interco-COGS WIP Scrap, WIP Variances, PPV, etc. Cost Margin Reporting drives this requirement

Profit in Inventory – Report in Local Books Solutions Use a material overhead sub-element in the Frozen or Average costs Allows you to earn ICP on PO and inter-org receipt transactions Add additional custom transactions to the material distributions layer (mtl_transaction_accounts) for the relief of profit in inventory Create custom profit in inventory and WIP valuation reports Create custom material and WIP distribution accounting reports to use the accounts from Subledger Accounting Caveats Customize the Margin Analysis Report to pick up the new COGS entries Potential throwaway if major changes are made to the business model Time-consuming and potentially expensive customization This custom solution would add more accounting entries to the same material and WIP transactions.

Profit in Inventory – Report in Local Books More Caveats with Average Costing For the end-of-month profit in inventory value report you need to calculate the average ICP item cost for each month This calculation has to compare the transactional selling price with the organization’s moving average item cost Accumulate by organization by item for the month Store it in a cost type Each month’s average ICP item cost may be different

Profit in Inventory – Report in Consolidated Books Requirements Don’t want local tax authorities to see “real” margins Keep profit in inventory in the Margin Analysis Report Need to eliminate in the consolidated ledger (not in detail) Requires end of month Profit in Inventory Value Reports Require the ability to support the consolidated entry with material transaction history or month-end inventory value reporting

Profit in Inventory – Report in Consolidated Books Solutions Create an item cost report to show the frozen costs in the source organization and compare it to the target organization standard costs, based on the Sourcing rules Use this intercompany item cost report to derive the intercompany profit for your items, for input into your intercompany profit cost type Conversely you could compare the transfer price list to the sending org’s standard cost For Average Costing you would have to calculate the end of period intercompany profit per item and put it into the respective cost type For Standard Costing you set the amount of intercompany profit per item and not recalculate until you change your transfer prices or your standard costs

Profit in Inventory – Report in Consolidated Books Solutions Store your ICP values in a non-Frozen cost type Add ability to calculate Receiving quantities at month-end Add ability to calculate ICP Value in WIP at month-end Report intercompany profit in inventory value at month-end for Receiving, Subinventories, WIP and Intransit Multiply the non-Frozen cost type by the stored quantities in the Costing Snapshot table (CST_PERIOD_CLOSE_SUMMARY) Multiply the non-Frozen cost type by the calculated quantities for Receiving and WIP components in inventory This Month’s ICP Inventory Value Reports Last Month’s ICP Inventory Value Reports Monthly Change in ICP Value – =

Profit in Inventory – Sample Reports (sample data only)

Profit in Inventory – Sample Reports (sample data only)

Profit in Inventory – Sample Reports (sample data only) Monthly Transaction Quantities Monthly Change in ICP Value X ICP Item Cost =

Profit in Inventory – Sample Reports (sample data only) Solutions Use this transaction offset report to get the offset accounts: Most ICP is offset by Inter-Company COGS, but you also have Misc. account issues/receipts, scrap and other transactions

Profit in Inventory – Sample Reports (sample data only) Solutions Use this WIP Component ICP Variance report to estimate the amount of ICP included in your WIP Variances Your WIP variances may be overstated by the ICP

Profit in Inventory – Report in Consolidated Books Caveats Wise to use 3rd party tools to speed ICP item cost data entry Currency changes will cause inaccuracies (i.e. Standard cost based on 1.3 USD/Euro, but inter-org transfers use the current daily transaction rate of 1.5) Transfer price changes will cause inaccuracies The weighted average ICP has to be kept by organization, or, Revalue your ICP amounts with transfer price changes In the ideal world, store the ICP item costs: by item, org and keep track of the average ICP item costs to accurately relieve profit in inventory and keep track of the original currency rate and ICP amounts in use

Inter-Company Setups are Time Sensitive

Time Sensitive Set-Ups Setups Effective When Entered Shipping Network Inter-Company Relationships If missing a portion of the setup Transactions will not play correctly No way to fix i.e. you might relieve inventory but not create the A/R invoice

Time Sensitive Set-Ups – Shipping Network

Time Sensitive Set-Ups – Inter-Co Relationships

Release 12 Inventory Reconciliation

R12 Challenges – Inventory Reconciliation Typically more inventory reconciliation issues The differences between the perpetual and accounted-for inventory balances are trapped in a table the users cannot see Limited use for the Period Close Reconciliation Report Most users and analysts don’t know about it Limited to a single warehouse Shows zero quantity items – which is not efficient Need a Multi-Org Perpetual vs. Accounted-For Report

R12 Challenges – Inventory Reconciliation Sample Period Close Variances Report From the CST_PERIOD_CLOSE_SUMMARY table You can also use this information to get your month-end perpetual quantities and values for intransit and subinventories

New Reconciliation Challenges in R12 Subledger Accounting and Inventory Reconciliation Which accounts represent inventory and WIP valuation? Harder to reconcile manually with no valuation accounts on the Inventory Value Reports Receiving Value by Destination Account Report is disabled The Inventory Value Report, subinventory sort, summary option has no valuation accounts The Receiving Value by Destination Account Report has been disabled Release 12 dropped the valuation accounts on most inventory reports

Material and WIP Distribution Inquiries and Reports Release 12 mat’l and WIP distribution inquiries & reports do not reflect the SLA results SLA Journal Reports do not show operational information Release 12 records the material accounting and WIP accounting entries by cost element – rendering these inquiries and reports more difficult to use, especially for Standard Costing. Release 12 forces Standard Costing to record WIP & Material entries by Cost Element / you can summarize in SLA but you don’t have the same detail reporting in SLA

Basic Table Structure for SLA Module Specific Transaction Accounting Tables Enter Transaction(s) One Common Accounting Subledger Table Accounting Processor SLA Accounting Tables G/L Tables Transaction Accounting Tables GL_LEDGERS XLA_EVENTS Create Accounting GL_JE_BATCHES Receiving Material WIP XLA_AE_HEADERS GL_ INTERFACE GL_JE_HEADERS XLA_AE_LINES GL_JE_LINES XLA_DISTRIBUTION_LINKS

Summary Subledger Accounting solves many account classification issues Still have same inter-company accounting challenges as Rel. 11i, examples: Non-Shippable Items Non-Invoiced Items Internal Fulfillment returns External reporting issues in Release 11i still exist in Release 12 Invoice dates should be customer acceptance dates, not ship dates

Summary (continued) Inter-company profit solutions are not standard functionality Need to plan ahead for workable solutions Inventory reconciliation issues are amplified in Release 12 Inventory value reports have as “as of date” But most reports have no valuation accounts Still only single warehouse Period Close Reconciliation Report not well used

Acknowledgements Oracle Cost Development Bini Mammen, Next Generation Consultants Hans Kolbe, lead for OAUG Multi-Org SIG

Jerry Devore (Jerry.Devore@csc.com) Professional Background Jerry DeVore is a Senior Consultant with CSC. His 25 years of industry experience as a plant controller and Supply Chain manager make him uniquely aware of requirements in Manufacturing Cost and Supply Chain. He has been involved with the conversion of multiple legacy systems both peer to peer and to Oracle ERP solutions. Jerry has implemented and converted into Oracle for the last seven years. These implementations included a variety of manufacturing operations from continuous process manufacturing to batch operations to large distribution and inventory management solutions. Most recently he was the Manufacturing Cost/Supply Chain lead for an Oracle Release 12 implementation, with a global footprint, having multiple currencies, ledgers, operating units and inventory organizations. . Core Expertise Experience Data Conversion – Data Cleansing Standard and Average Costing Manufacturing Process Cost Management Inventory WIP Bills of Material Supply Chain Extensive Industry Experience Oracle Implementation Cycles in Release 11.5.9 through Release 12.06 Clients Served: USG Corp. Canadian Mining Company Celgene Corp

Douglas Volz (doug@volzconsulting.com) Professional Background Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in Project and Cost Management. He has 30 years accumulated experience, including 5 years in Oracle Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and Accounting Management positions. His Manufacturing and Cost systems experience covers project management, software design/development, delivery and consulting services, for both Oracle Corporation, and multiple international consulting firms. Prior to his systems career, Mr. Volz also held numerous management accounting positions for telecommunications, defense, and electronics companies. In his consulting roles, Doug has served over 100 clients. Many of these were multi-org, multi-currency with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C., Norway, Japan, Italy and Germany. Doug leads the Cost Sub-Committee, for the OAUG Discrete Manufacturing Special Interest Group. He also advises and participates on the Oracle Customer Advisory Board for Fusion Costing. Core Expertise Experience Sample of clients served: Beckman Coulter (US) Matsushita (UK, Mexico) NTL (now Virgin Media) Logitech (US, Taiwan, P.R.C.) TCI International (US) Onninen AS (Norway) Multi-organization, Multi-currency ERP Implementations Project Management and Senior Project Advisor Core manufacturing processes Cost Management Inventory Bills of Material WIP Systems Integration and Data Conversions

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