Managing non-evident Capital Costs with SAP Bank Analyzer – Chapter I.

Dear,

I mentioned in previous posts that I’ve been doing Bank Analyzer consultancy for the last 9 years, but before that I worked in other SAP areas, particularly Supply Chain Management.

In fact, years ago I took part in one of the first SCM implementations of SAP APO by a Japanese Industrial Company in its European branch.

In that project I learned for the first time that managing Capital Costs have a direct impact in the non-financial areas of the company, including Supply Chain Management.

For instance, in some deals, the company requests to the customer opening a letter of credit for reducing credit risk, and then the Sales Orders insured by the letter of credit receive more priority in the Production and Distribution process.

Actually we implemented a rule in the Supply Chain Management System (SAP-APO) for giving more priority to them.The reason is that these are very reliable deals in which the company wanted to offer the best service.

The above sounds reasonable, but the question is, is this logic properly modeled in the current Information Systems?

When a customer is opening a letter of credit, it’s actually reducing the Credit Risk of the deal by including collateral.On the other hand, the vendor receiving the letter of credit is reducing its capital costs, as the expected loss of the deal, due to credit risk, has been mitigated.

The letter of credit is effectively a vehicle for transferring capital from the customer to the vendor.Let’s come back now to the requirement of giving more priority to the “very reliable”, collateralized with letters of credit, sales orders.

Giving priority to those sales orders means allocating capital for serving the order; increasing production costs, inventory costs, storing costs and/or distribution costs, even commercial costs as the service to other customer will be lower, because they have less priority.

From an accounting perspective, the vendor is receiving capital from the customer (highly collateralized deal), and it’s allocating logistic capital (production costs, inventory costs, etc.) by giving more priority to these highly reliable deals.

But what happens if a very solvent customer places an order without including a letter of credit, which he does not need as his rating is good enough.

Should his orders have more priority than others?

If so, how can we model the rule?

Efficient management would require that the executives compare the value of the financial capital they’re receiving with the cost of “logistic” capital they’re allocating.

If the value of the capital you’re receiving is higher than the costs you’re suffering it looks like a good deal, if not you probably should reconsider the deal.

Before the financial crisis, Capital was abundant, and companies could live without this kind of analysis; but today it is scarce and expensive, and estimating all capital costs of economic activities has become very important.

But we don’t have tools for running this kind of analysis. Even the most sophisticated accounting systems, like the Financial and Management Accounting modules of SAP-ECC, can’t provide the Capital costs of the sales deals.

Fortunately, SAP has developed Bank Analyzer, which is perfectly capable of providing answers to the challenges of this new environment of Capital scarcity; we just have to model the business process properly.

But this post has become too long, we’ll discuss about it in a future one.

Looking forward to read your opinions.

Happy New Year and all the best for 2015.

Ferran.

Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860