SAP’s Material Ledger (ML) carries with it a certain amount of emotional baggage. Some are smitten, others more suspicious.
Those that have implemented ML had a robust business requirement: manufacturers with many levels of materials that wish to trace price variances; companies with compliance issues in using standard costs for inventory valuations; organisations with complex legal structures or large volumes of intercompany transactions that needed insight to eliminate profit in stock.
And there are thousands of ML customers with a compelling story to tell on the business benefit of a Material Ledger implementation. Indeed, Louisiana Pacific will present their Material Ledger story with Capgemini at Sapphire 2016 in Orlando on May 18 (“Taking the Mystery out of Material Ledger: Visibility of Inventory Value”).
It is clear then that ‘classic’ ML had its use cases and business benefits but generally interest was niche. Some customers may have seen some benefits but the pitch was not sufficient to warrant investment in implementation, hardware and process changes.
But in S/4HANA Enterprise Management, SAP’s new core product and the successor to the Business Suite, the Material Ledger is mandatory. So what does this mean technically and for customers implementing S/4HANA either through new installation or system migration?
Material Ledger at the strategic heart of S/4HANA
So now that SAP has positioned Material Ledger as a key part of its strategic direction in S/4HANA, what is the impact for new implementations and Business Suite migrations? And what does this mean for the S/4HANA Finance code line?
Let’s deal with S/4HANA first. It is true that Material Ledger becomes mandatory but only for material valuation. Actual costing – the monthly process of calculating a periodic unit price for materials and adjusting COGS based on purchase price variances – remains optional.
So why has SAP decided to switch inventory valuation to the Material Ledger? The shift continues the thread of simplification and adheres to the ‘principle of one’: only one valuation method (ML), instead of two (Inventory Management and ML). ML is more scalable in terms of valuation and supports the use of multiple currencies and valuation methods.
From a logistics perspective, there is a radical overhaul of the database architecture (just as we saw in finance with the release of Simple Finance). In the Business Suite, inventory management consisted of multiple tables: document header, item level table, aggregated actual stock quantity tables, material attributes held across multiple tables and a valuation table.
Valuation switches to ML with the other tables replaced by MATDOC, a new table in which former header and item data of a material document as well as some material attributes are consolidated. Actual stock quantity data is therefore calculated on-the-fly from MATDOC.
What about standard cost and moving average price control?
SAP’s messaging for S/4HANA is a good one: it is positioned as the digital core for the digital enterprise and therefore needs to be scalable for higher transactional throughput.
The standard cost price control enables this. Database table locking is removed entirely meaning that in high density interfaced environments there is a significantly reduced risk of transaction failure through locks on one material that cause failure in current and subsequent document processing. This change will simplify interface design and implementation and reduce the cost of maintenance and error correction.
Moving average price, however, requires table locking in order to perform calculation and update. The same increase of transactional data throughput therefore cannot be achieved for materials with moving average price control when compared to standard cost.
In the Business Suite a moving average valuation is also calculated for materials with standard price control (the "statistical" moving average price). The statistical valuation also requires exclusive locking and because this limits transactional data throughput, the parallel statistical moving average valuation is not available in SAP S/4HANA, on-premise edition 1511. Customers upgrading an existing installation to S/4 HANA may retain the statistical moving average price but will forego the performance enhancements of the new locking schema by doing so. If the new locks are implemented the decision is not reversible.
What about ML in the S/4HANA Finance code line?
In S/4HANA Finance (fka Simple Finance) the Material Ledger is not mandatory. The simplifications in Materials Management delivered in full S/4HANA are not available in S/4HANA Finance so inventory valuation does not change. The Material Ledger and actual costing can still be used optionally where industry solutions allow. SAP will optimise the ML database structures for HANA and initially enable these structures for selected customers.
What about customers migrating to S/4HANA?
Anecdotal evidence suggests that the imminent planned S/4HANA implementations are new installations (either net new customers for SAP, or re-implementations). As already discussed, the Material Ledger will be mandatory for material valuation.
For those that plan, and are able, to migrate their existing system to S/4HANA (from Business Suite or S/4HANA Finance) then the Material Ledger will be activated, if not active already, as part of the migration. Although I have completed Business Suite to S/4HANA Finance migrations, I haven’t as yet been involved in an S/4HANA migration so cannot verify this (although we are currently working to find a suitable internal system on which to complete this, in parallel to the work we are doing in our newly minted S/4HANA demo system).
So what does this mean for SAP customers?
ML activation brings with it an opportunity to enhance business processes with the multiple valuation approach (although it’s not mandatory to do so). A small project would be required to establish requirements, set configuration and test.
Actual costing although not mandatory can be considered more easily. Activation could deliver some key benefits around the traditional standard costing model, providing end-to-end analysis of production and procurement variances in historic performance. The periodic unit price concept in the ML gets around the timing differences and sequences that can artificially distort the moving average and also provides enhanced visibility for audit.
A larger preparation project would be recommended prior to activation to establish the inventory valuation principles, MM transaction classifications and the revised business processes to be employed.
It is clear then that the Material Ledger has shifted in terms of its overall strategic importance. And this provides opportunity for organisations considering S/4HANA to assess the benefit of a wider ML footprint than just mandatory inventory valuation.
This will be especially relevant for organisations with high volume supply chains for distribution, warehousing and retail, especially where foreign currency transactions and intercompany transactions are prevalent.
The market place will also need to develop to take ML skills out of the niche and into the commonplace. We will need to set aside any emotional baggage and learn to love the Material Ledger...
Writing credits also go to Julian Davies and Sai Krishnan, Capgemini UK's Material Ledger experts.