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I N T E G R AT E D B U S I N E S S
P R O C E S S E S
with E R P S Y S T E M S
S I M H A R . M A G A L J E F F R E Y W O R D
J O H N W I L E Y & S O N S, I N C.
Grand Valley State University SAP AG
Manchester Business School
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Vice President & Executive Publisher Don Fowley
Acquisitions Editor Beth Lang Golub
Production Manager Dorothy Sinclair
Senior Production Editor Anna Melhorn
Marketing Manager Christopher Ruel
Creative Director Harry Nolan
Senior Designer Wendy Lai
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This book was set in 10/12pt Times Ten by MPS Limited, a Macmillan Company, Chennai, India
and printed and bound by RRD/Jefferson City. The cover was printed by RRD/Jefferson City.
Copyright 2012 Simha R. Magal and Jeffrey Word. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system or transmitted in any form or by
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1 Introduction to Business Processes 1
The Functional Organizational Structure 2
Business Processes 4
Global Bike Incorporated (GBI) 15
How to use This Book 16
2 Introduction to Enterprise Systems 23
Enterprise Systems 23
Data in an Enterprise System 29
Reporting 37
3 Introduction to Accounting 49
Organizational Data 51
Master Data 52
Key Concepts 58
Processes 61
Reporting 72
4 The Procurement Process 83
Organizational Data 84
Master Data 89
Key Concepts 95
Process 102
Reporting 119
5 The Fulfillment Process 127
Organizational Data 128
Master Data 139
Process 145
Credit Management Process 167
Reporting 170
6 The Production Process 179
Master Data 182
Process 196
Reporting 215
vii
Contents
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7 Inventory and Warehouse Management Processes 221
Inventory Management 222
Organizational Data in Warehouse Management 234
Master Data in Warehouse Management 239
Processes in Warehouse Management 242
Reporting 257
8 The Material Planning Process 269
Master Data 271
Process 285
Reporting 304
9 Process Integration 315
Procurement, Fulfi llment, and IWM Processes 318
Procurement, Fulfi llment, Production, and IWM Processes 332
Index 349
viii Contents
*Additional Chapters available on WileyPlus
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ix
Preface
As more and more businesses around the world adopt enterprise systems, it
becomes increasingly important for students to develop a more process-centric
perspective that refl ects the realities of the modern business environment in
which they will work. Because business operations and enterprise systems are
so tightly integrated, we have designed Integrated Business Processes with ERP
Systems to refl ect the ways in which real-world business processes are man-
aged and executed in the worlds leading enterprise resource planning (ERP)
system, SAP ERP. Students, regardless of their functional discipline, will be
able to apply the real-world concepts discussed in this text immediately upon
entering the workforce and will be better prepared to succeed in their careers.
Integrated Business Processes with ERP Systems covers the key processes
supported by modern ERP systems. This textbook is designed for use as both
a reference guide and a conceptual resource for students taking ERP-focused
courses at schools that are members of SAP University Alliances program
(http://uac.sap.com). It examines in depth the core concepts applicable to all
ERP environments, and it explains how those concepts can be utilized to execute
business processes in SAP systems.
KEY FEATURES
INTEGRATED PROCESS APPROACH
Integrated Business Processes with ERP Systems approaches ERP topics using
an integrated process perspective of the fi rm. Each process is discussed within
the context of its execution across functional areas in the company, with special
emphasis on the role of data in managing the coordination between activities
and groups. Students will gain a deep appreciation for the role of enterprise sys-
tems in effi ciently managing processes from multiple functional perspectives.
ACTIVE LEARNING
Consistent with the focus on the process perspective of business operations,
this book and the accompanying online supplements are designed to actively
engage students through multiple learning activities. Students will be required
to apply the concepts covered in the text to real-world situations and to the
running case study used in their hands-on exercises. In this way, students can
experience what the each employee in a process must do, what data they need,
and how their actions impact other people in the company.
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http://uac.sap.com
x Preface
RUNNING CASE STUDY
Many key examples, demonstrations, and assignments incorporated through-
out the book are based on a fi ctional company, Global Bike, Incorporated
(GBI). GBI exists virtually in the GBI ERP system, which is used to provide
students with hands-on experience with executing the various processes in
SAP ERP. Students will become intimately familiar with GBIs operations and
will develop a deep appreciation for the real-world importance of the process
concepts in the course.
REAL-WORLD EXAMPLES
In addition to the integrated approach and the GBI case study, Integrated
Business Processes with ERP Systems includes multiple scenarios from compa-
nies in diverse industries that demonstrate how businesses actually utilize ERP
capabilities. Real-world experiences associated with enterprise systemsboth
positive and negativeare integrated throughout the chapters to illustrate the
key concepts.
GLOBAL APPROACH
The textbook content, GBI running case study, and real-world examples have
all been designed from a global perspective. Differences between U.S. and
European business practices are highlighted within the context of process
execution to illustrate the global capabilities of ERP systems. In addition, the
real-world stories are based on familiar global companies.
SAP ERP SOFTWARE
This textbook and its associated demos and exercises were prepared using the
most current version of the software, at the time of printing: SAP ERP 6.0,
Enhancement Pack 4. The key concepts contained in this textbook are unlikely
to change in any signifi cant way. Nevertheless, as SAP continues to innovate
and update the core SAP ERP solution, it may become necessary to adjust
classroom content in minor ways to better refl ect the capabilities of the lat-
est version of the software. Please speak with your SAP University Alliances
contact to obtain additional information on utilizing SAP ERP software in
your classroom.
PEDAGOGICAL STRUCTURE
Consistent with this textbooks focus on the integration of business processes
with ERP systems, we have divided the book into two key areas. The fi rst area,
which consists of Chapters 13, focuses on the integrated nature of business
processes and the enterprise systems that businesses use to manage them.
Chapters 12 introduce the foundational concepts, which are subsequently
developed in the process chapters in the remainder of the book. Chapter 3
examines the basic concepts in fi nancial and management accounting, which
are integrated into the subsequent chapters.
The second part of the book contains the process chapters, which are
structured based on a standard template that is comprised of two main parts.
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Preface xi
The fi rst part of each chapter discusses the organizational and master data
associated with the process, and the second part examines each step of the
process in detail. Each chapter concludes with a discussion of the reporting
capabilities needed to manage the process effi ciently.
Links to online demonstrations and additional online learning materials
are embedded throughout each chapter to reinforce and expand on the most
important concepts.
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xii
WileyPLUS
WileyPLUS is a research-based, online environment for effective teaching
and learning. WileyPLUS is an integral part of the learning experience for this
textbook. For this reason we have made it available to students 24/7 from any-
where they connect to the Internet. WileyPLUS contains a wealth of supple-
mental learning materials designed to enhance students understanding of the
concepts introduced in the course. Plus, instructors can use these materials to
customize the course to meet their particular objectives. Students will complete
and submit their hands-on assignments and quizzes through the WileyPLUS
environment. In addition, the authors have taken full advantage of the rich
multimedia learning environment in WileyPLUS to provide demonstrations of
each process step discussed in the text. We have also embedded videos of real-
world examples that highlight the key concepts in each chapter.
WileyPLUS can complement the printed textbook. Alternatively, stu-
dents can purchase the full textbook and additional materials digitally through
WileyPLUS.
Hands-on Exercises Hands-on assignments are provided to students
online. Students will access the assignments via WileyPLUS and complete
them in a live SAP system (GBI 2.0). They will then submit the exercises digi-
tally to the instructor for easy grading.
Demonstrations: Recorded demonstrations of each key process activ-
ity in every chapter are available on WileyPLUS for both instructors and stu-
dents. Instructors can use the demonstrations in class discussions to illustrate
key aspects of the content. Students can also access the demonstrations on
WileyPLUS either while they are reading the chapters, to enhance their com-
prehension of the material, or when they are completing the hands-on exer-
cises, to refresh their memory of the activity.
INSTRUCTORS SUPPLEMENTS
This text is supported by many valuable tools to help instructors prepare and
deliver engaging lectures and robust testing for conceptual understanding.
Instructor supplements are accessible via WileyPLUS and via the Instructors
Companion Site at www.wiley.com/college/magal. Supplements include the
following:
Instructors Manual: The Instructors Manual is the distillation of more
than a decade of classroom experience in teaching an integrated process
approach to ERP systems. It contains indepth pedagogical materials designed
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www.wiley.com/college/magal
WileyPLUS xiii
to help instructors prepare their courses and deliver an engaging, multi-modal
learning experience.
Classroom Presentation Slides: Each chapter includes detailed class-
room presentation slides with key concepts, lecture notes, textbook graphics,
and discussion questions.
Test Bank: A detailed test bank for each chapter is provided on the
Instructors Companion Site. Each chapter contains multiple-choice, fi ll-in-
the-blank, and true/false questions with multiple levels of diffi culty for each
question type.
FEEDBACK
The authors and publisher invite students and instructors to ask questions,
provide comments, and communicate directly with the textbook team on the
following Web site: www.extrabandwidth.com/forum
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www.extrabandwidth.com/forum
xiv
Innovation is a team sport. Tom Kelley, IDEO
Integrated Business Processes with ERP Systems is the fi nal product of
thousands of hours of work, including invaluable contributions from a
diverse group of people located around the world. The authors wish to
acknowledge the following individuals for their assistance in preparing and
reviewing the book.
The authors are extremely grateful for the collaboration and technical
efforts of Stefan Weidner and his team at the SAP University Competency
Center at the Otto-von-Guericke-Universitt Magdeburg to bring the GBI 2.0
system to life.
Faculty and students in the ERP program in the Seidman College of
Business at Grand Valley State University (http://www.gvsu.edu/business/erp/)
were also instrumental in developing the GBI system. In particular, we would
like to acknowledge the contributions of the following Seidman students: James
Anderson, Philipp Claus, Kevin Coolman, Jacob DeLuca, Morgan Hickman,
Corey Holstege, Michael Martin, Steve Merritt, John Morrissey, Brandon
Stickel, Alice Yamada, and Sandell Wall. We also appreciate the technical assis-
tance provided by Chris Gillespie. Particularly helpful was Prof. David Cannon,
who patiently clarifi ed numerous concepts in accounting.
We are very grateful for the efforts of Robert Weiss, our development
editor, who tirelessly reviewed and edited our work and provided invaluable
guidance in improving it. We also wish to thank the super reviewers and
reviewers for their efforts to ensure that this book achieved the high standards
we set for it.
SUPER REVIEWERS:
Anthony Pittarese, East Tennessee State University
Jane Fedorowicz, Bentley University
Paul Hawking, Victoria University
Rod Sager, Grand Valley State University
Robert Szymanski, University of Central Florida
Acknowledgments
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http://www.gvsu.edu/business/erp/
Acknowledgments xv
REVIEWERS:
Donna Everett, Morehead State University
William Mackinnon, Clarkson University
Earl McKinney, Bowling Green State University
Jeff Mullins, University of Arkansas
Al Pilcher, Algonquin University
Pamela Schmidt, University of Arkansas
Felicitas Ju Huang Seah, National University of Singapore
Venkataramanan Shankararaman, Singapore Management University
Catherine Usoff, Bentley College
Bindiganavale Vijayaraman, University of Akron
William Wagner, Villanova University
Tom Wilder, California State University, Chico
A very special thanks to Lou Thompson at the University of Texas-
Dallas, who helped to create the instructors manual and supplements, and to
Ross Hightower from Texas A&M, who assisted us greatly with the Material
Planning chapter.
Finally, we wish to recognize the efforts of Beth Lang Golub, Mike Berlin,
Elizabeth Mills, and their colleagues at Wiley for keeping us moving and get-
ting this book completed.
Writing a book can be stressful at times, especially for the authors fami-
lies. Their patience and encouragement throughout this long and arduous pro-
cess have been invaluable. They have our deepest gratitude and appreciation.
We are very grateful to Don Bulmer and Bob Lobue for their executive
support for this book at SAP, with an extra special thanks to Charla Pachucki
from SAP Education for ensuring that we stayed true to the SAP material.
The authors and publisher gratefully acknowledge SAPs kind permis-
sion to use its trademarks in this publication.
This publication contains references to the products of SAP AG. SAP,
R/3, SAP NetWeaver, other SAP products and services mentioned herein are
trademarks or registered trademarks of SAP AG in Germany and in several
other countries all over the world. Business Objects and the Business Objects
logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence,
Xcelsius and other Business Objects products and services mentioned herein
are trademarks or registered trademarks of Business Objects in the United
States and/or other countries.
SAP AG is neither the author nor the publisher of this publication and
is not responsible for its content, and SAP Group shall not be liable for
errors or omissions with respect to the materials.
FLAST.indd xvFLAST.indd xv 01/02/11 9:02 PM01/02/11 9:02 PM
xvi
Simha R. Magal, Ph.D., is professor of management (MIS) and director,
ERP initiative, in the Seidman College of Business at Grand Valley State
University. He received his doctorate from the University of Georgia. His pri-
mary research interests include e-business and enterprise systems. Dr. Magals
articles have appeared in such publications as MIS Quarterly, Journal of MIS,
and Information and Management, among others, and he has served on the
editorial boards of several journals. He also served as co-chair of the inaugural
conference of the Midwest Association for Information Systems (MWAIS) in
2006 and as president of MWAIS during 20082009.
Dr. Magal has taught courses related to business processes and enterprise
systems that utilize SAP for more than a decade. He is an SAP-certifi ed associ-
ate consultant and a TERP10 academy instructor.
Jeffrey Word, Ph.D., is vice president of product strategy at SAP AG. He is
responsible for defi ning SAPs future product strategy and for fostering prod-
uct innovation within SAP. Dr. Word has worked for several Global 1000 com-
panies in the high-tech industry for nearly 20 years, specializing in business
consulting and IT strategy. At SAP, he has driven the evolution of the com-
panys enterprise technology strategy, with a special focus on corporate process
improvement initiatives and services-based IT architecture design.
Dr. Word earned his Ph.D. in information systems at Manchester
Business School in England. His research focused on event-driven process
design and next-generation enterprise architecture. He previously earned an
MBA in international management from the Thunderbird School of Global
Management and a BA in European studies and Spanish from the University
of Oklahoma.
Other books by these authors:
Magal, S. and Word, J. (2009). Essentials of Business Processes and Information
Systems. John Wiley & Sons. Hoboken, NJ.
Word, J (ed.) (2009). Business Network Transformation: Strategies to Reconfi gure
Your Business Relationships for Competitive Advantage. Jossey-Bass (Wiley),
San Francisco, CA.
Woods, D., and Word, J. (2004). SAP NetWeaver for Dummies. Wiley Publishing
Inc., Indianapolis, IA.
Author Biographies
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C H A P T E R 4 The Procurement Process 1
1
L E A R N I N G O B J E C T I V E S
After completing this chapter you will be able to:
1. Defi ne the functional organizational structure, and explain why
this structure creates problems for modern businesses.
2. Describe key business processes in an organization.
3. Identify the main integration points between and among
processes.
4. Understand the cross-functional nature of processes and their
relationship to organizational areas.
5. Adopt and apply an integrated perspective to business processes.
6. Describe organizational structure of Global Bike Incorporated.
7. Explain how the SAP ERP system promotes an integrated
approach to business processes.
A
t this point in your university career, you have probably begun taking
courses in accounting, operations, MIS, and other disciplines. These courses
have introduced you to some basic business concepts and exposed you
to different aspects of how a business operates. You have also begun to master
several technology tools that will be very useful in your future career, such
as offi ce productivity tools to create spreadsheets, presentations, and docu-
ments. The course for which you are using this textbook deals with integrated
business processes and the enterprise systems (ES) that support them. The con-
cepts and skills you will gain from this course are different from what you
have experienced previously, and you will need to approach this course with a
different perspective.
Introduction to Business Processes
C H A P T E R 1C H A P T E R
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2 C H A P T E R 1 Introduction to Business Processes
T H E F U N C T I O N A L O R G A N I Z AT I O N A L
S T R U C T U R E
To successfully master the concepts in this textbook, you must fi rst begin to
think holistically about the operations of a business. The most common orga-
nizational structure you are likely to encounter is the functional structure.
Organizations that utilize a functional structure are divided into functions, or
departments, each of which is responsible for a set of closely related activities.
For example, the accounting department sends and receives payments, and
the warehouse receives and ships materials. Typical functions or departments
found in a modern organization include purchasing, operations, warehouse,
sales and marketing, research and development, fi nance and accounting, human
resources, and information systems. The vertical columns in Figure 1-1 identify
the key functions in a typical company.
Figure 1-1: The functional structure
Although most companies maintain vertical (or functional) silos to
compartmentalize their operational units, the integrated business processes
that companies use to perform their work cut across these silos horizontally.
Business processes, such as the procurement and fulfi llment processes dis-
cussed later in the chapter, consist of activities that occur in different, seemingly
unrelated functions or departments. In other words, these processes are cross-
functional, meaning no single group or function is responsible for their execu-
tion. Rather, it is a shared responsibility among many functional areas. The
cross-functional nature of business processes is also illustrated in Figure 1-1.
For a process to be successfully completed, then, the company must rely on
each functional group to execute its individual steps in the process in a coor-
dinated way, which, as we shall see, may not be an easy thing to accomplish.
T H E S I L O E F F E C T
The functional structure served organizations well for a number of years
because it enabled them to cope with the challenges generated by their rapid
growth. Over time, however, this system developed a serious drawback. Put
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The Functional Organizational Structure 3
simply, people in the different functional areas came to perform their steps
in the process in isolation, without fully understanding which steps happen
before and which steps happen next. They essentially complete their part of
the process, hand it off to the next person, and then proceed to the next task.
By focusing so narrowly on their specifi c tasks, they lose sight of the big pic-
ture of the larger process, be it procurement, fulfi llment, or any number of
other common business processes. This tendency is commonly referred to as
the silo effect because workers complete their tasks in their functional silos
without regard to the consequences for the other components in the process.
A key point here is that the silo nature of the functional organizational
structure and the cross-functional nature of processes are at odds with each
other. That is, while workers focus on their specifi c function, each business
process involves workers located in multiple functional areas. A major chal-
lenge facing organizations, then, is to coordinate activities among the differ-
ent functional areas. Viewing a company from a process perspective requires
employees to think sidewaysin other words, to view the business across
functional boundaries and focus on the end-to-end nature of the process and
its intended outcomes. Learning to view a process from end to end is essential
to understanding how enterprise systems help businesses manage their pro-
cesses effi ciently. Not surprisingly, then, this understanding has become a criti-
cal skill that companies have come to demand from their employees.
E N T E R P R I S E S Y S T E M S
As you can see from the previous section, business processes span different
parts of an organization. In fact, in todays global economy, the various process
steps are increasingly executed by people in multiple locations throughout the
world. That is, a company will manufacture its products in different countries,
acquire the materials to make these products from different locations, sell the
products in many countries, and so on. For example, a bicycle manufacturer
may purchase components from Italy, produce bicycles in Germany, and sell
those bicycles in the United States. Because the steps in business processes are
performed in locations that are geographically dispersed, it is impossible to
manage such processes effectively without the use of modern information sys-
tems. Systems that support end-to-end processes are called enterprise sys-
tems (ES), and they are essential to the effi cient and effective execution and
management of business process.
Given the signifi cant impact that enterprise systems have on operational
effi ciency (and, ultimately, profi tability), companies have invested enormous
sums of capital and effort to plan, implement, and continuously improve enter-
prise systems over the past 40-plus years. A great deal of research has con-
fi rmed that investments in information technology (IT), particularly enterprise
systems, have signifi cantly increased the profi tability, productivity, and com-
petitiveness of corporations by removing the barriers to sharing information
between functional areas and managing processes holistically.1, 2 The key driver
for this productivity and effi ciency is the ability of modern enterprise systems
1 A. McAfee and E. Brynjolfsson, Investing in the IT That Makes a Competitive Difference,
Harvard Business Review, 86, No. 7/8 (2008): 98107.
2 E. Brynjolfsson and L. Hitt, Paradox Lost? Firm-level Evidence on the Returns to Information
Systems Spending, Management Science, 42, No. 4 (1996): 541558.
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4 C H A P T E R 1 Introduction to Business Processes
to effectively manage a business process from beginning to end in an inte-
grated, consistent, and highly effi cient manner. Further, once a business pro-
cess is managed by an integrated enterprise system, it can be monitored and
improved very easily. As a result, we cannot discuss contemporary business
processes without considering the role of enterprise systems. We will discuss
enterprise systems in greater depth in Chapter 2.
In this chapter, we begin by identifying the key processes that typically
exist in organizations. We then discuss enterprise systems and SAP, the com-
pany that produces the most popular enterprise systems globally. We also
introduce Global Bike Incorporated, a company that we will use as a case
study throughout this textbook to illustrate important concepts in a practical
format. We conclude with the plan for the remainder of the book.
B U S I N E S S P R O C E S S E S
Organizations exist either to serve some commercial purpose or to achieve
some social objective. They differ depending on the purpose or goal they are
trying to achieve, their ownership or management structure, and the regula-
tory environment in which they operate. Some organizations create and deliver
products or services to customers to make a profi t. For example, a bicycle
manufacturer produces a variety of bicycles and accessories. It then sells these
products to numerous retailers who, in turn, sell them to the fi nal consumers.
Other companies provide services, such as repairs to the bicycles. Yet others
provide the manufacturer with the parts and materials needed to make the
bicycles. Achieving the organizations objectives involves many different types
of work. For example, the manufacturer must design the bicycles, identify what
parts it will use to make them, determine where to obtain these parts, produce
the bicycles, identify its customers, and market and sell the bicycles to them. In
addition, it must determine how to manage its money, its various facilities such
as factories and warehouses, and the many people that it must recruit, employ,
train, and retain. This work is completed in numerous processes.
Although organizations exist for many different purposes, vary greatly in
size and complexity, and operate in many different industries, they all exhibit
similarities in the ways that they operate. Regardless of their type or size, suc-
cessful organizations and industries use processes and enterprise systems to
complete the work needed to achieve their goals. Processes may vary slightly
depending on the unique characteristics of the industry or the structure of the
organization, but the basic activities can be recognized by anyone who has
developed a process view of business. Likewise, companies may employ differ-
ent enterprise systems to manage their processes. However, you can apply the
principles, concepts, and techniques explained in this textbook to most of
the enterprise systems you are likely to work with.
A business process, illustrated in Figure 1-2, is a set of tasks or activi-
ties that produce desired outcomes. Every process is triggered by some event,
such as receiving a customer order or recognizing the need to increase inven-
tory. The columns in the fi gure represent different parts, or functional areas,
within an organization, such as sales, warehouse, manufacturing, and account-
ing. Thus, the specifi c steps in the process are completed in different functional
areas. For example, when a retailer (customer) places an order for bicycles,
the manufacturer (seller) uses a specifi c process to ensure that the correct
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Business Processes 5
products are shipped to the customer in a timely manner and that payment
for the order is received. These process steps can include validating the order,
preparing the shipment, sending the shipment, issuing
