Maintaining hierarchies for cost centers and profit centers is always a challenging task for enterprises around the globe. Whether it is an addition of new attributes or changing existing attributes, it is a time-consuming task. The management reporting practice talks about Financial controllers and management accountants within an organization who intends to report and analyze their organizational costs and profits by different management reporting dimensions. Besides, there is a general practice at organizations to report their management accounts in a hierarchical re-presentation by geographical locations, legal entity structure, line of business, business functions etc. and that’s where Flexible Hierarchy maintenance plays a vital role.
Master data Hierarchy Maintenance (SAP ECC):
Traditionally management reporting requirements are addressed via the setup of master data (Profit Center, Cost Center) hierarchies in SAP and are designed in alignment with the management reporting structure of an organization. Figure 1 below demonstrates a sample design for the profit center hierarchy in SAP ECC.
Figure 1: Profit Center Hierarchy in SAP ECC
In SAP ECC, the maintenance of these profit center and cost-center master data hierarchies can get very complex and time-consuming with frequent organizational changes and realignments. Every new profit center and cost center master is added manually under the respective hierarchical node.
Flexible Hierarchy Maintenance with SAP S/4HANA
SAP S/4HANA On-Premise and Cloud Product equipped with a Flexible Hierarchy application tool enables design of multiple alternate cost centers and profit center hierarchies on different internal management reporting requirements. These hierarchies either use the profit center or the cost center master data attributes like country, department, and segment for designs. Business users need to tag the master data attributes as respective levels within the hierarchy. The profit center and the cost center master data created with the appropriate values in the labelled master data attributes automatically allocates under the respective hierarchical node.
To further understand, let’s take an analogy where an organization has two business lines named LOB1 and LOB2. Financial controllers responsible for LOB1 would like to analyze their costs by geographical location and legal entity structure. However, the financial controllers for LOB2 would like to report their costs by departments i.e. business functions. To address this requirement, follow the below steps to create two cost center hierarchies:
Step 1: Cost center master data (attributes) update via Manage Cost Centers app
Update the department (as a business function) and country in the cost center master based on which cost center hierarchical levels will be defined for LOB1 and LOB2 (as outlined in step 3 below).
Custom business attributes (fields) can be further added in the cost center or profit center master data using Side-by-Side Extensibility options (explained separately in our Custom Fields creation blog). You can also use these custom fields to design the management reporting hierarchies.
Step 2: Create (alternate) cost center hierarchies using Manage Flexible Hierarchies app
2A: Cost Center hierarchy for LOB1 based on geographical location and legal entity structure à Select country and company code as hierarchy levels
Preview of the hierarchy
2B: Cost Center hierarchy for LOB2 based on Business Functions à Select Department as hierarchy level
Preview of the Hierarchy
Step 3: Running cost center transactional reports using the above designed hierarchies
Cost Center Report for LOB1 – By Country and Company Code
Cost Center Report for LOB2 – By Business Function
Flexible Hierarchy Maintenance with SAP S/4HANA undoubtedly represents an improvement to the classic master data hierarchy maintenance. It gives an upper hand to the super users and makes their life easy as it is user-friendly, highly scalable, and offers a wide range of options.
- User-friendly –Easily configurable and highly maintainable hierarchies make them user-friendly, and all the business super users without prior IT knowledge can use it.
- Scalable– Business users with any future organizational changes or realignments do not need any complex re-organization project. They can smoothly transition the hierarchies to meet the requirements.
- Wide range of choices– A wide range of profit center/cost center hierarchies are available to choose from and can be used to set up different business units within an organization based on the internal management requirements.
Author: Kunal Gupta, SAP S/4HANA Cloud Practice Head