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Oracle BPEL

Oracle BPEL

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Internal Drop-Shipping: Multi-Org Inter-company invoicing in Rel. 11.5.10
David S. McCurryMcCurry and Company, Inc.
Introduction
Many large and multi-national enterprises are composed of numerous organizations that belong to differentoperating units and legal entities that conduct business in multiple sets of books. It is common that thelegal and reporting structures of these enterprises are complex and do not match the transactional structureof the business. Multiple Organization functionality is designed to accommodate multiple organizations andlegal entities within a single installation of the Oracle Applications and serves to define these organizationsand their logical relationships to each other so that business transactions can occur efficiently betweenthem. Multi-Org functionality was first introduced with the release of version 10.6 of the OracleApplications and the advent of Order Management, Advanced Pricing, and Workflow in Rel. 11i hasbroadened its extendibility. Now with the release of 11.5.10, yet further enhancements have been addedthat allow the functionality to be tailored to meet the most complex of business requirements.Inter-company invoicing functionality is a component of Multi-Org that facilitates the sourcing of shipments from physical warehouses, reducing stocks, freight and inventory carrying costs at distributionand service locations without legal structure complications and redundant procurement, inventory orderfulfillment processes. It can reduce order lead times by removing “corporate obstacles” to global inventoryplanning, making the legal structure of the enterprise transparent to the end-customer. It also automaticallygenerates inter-company receivables and payable invoices based on the logical transaction flow of thebusiness by using established transfer pricing policies, mitigating the risk of unbalanced inter-companytransactions that delay closings and consolidations. Most importantly, it can accomplish this in a way thatpreserves a clear, documented audit trail for inter-company transactions that complies with GAAP andSarbanes-Oxley.
Scope of this paper
The scope of this paper is to demonstrate how Multi-Org Inter-company Invoicing functionality can beutilized to automate the inter-company accounting and streamline the entire order process where orders aretaken in one operating unit but physically shipped from another. The standard functionality will bediscussed in detail as well as how and where it can be modified to customize the functionality to fit specificbusiness requirements. The topics covered include an overview of the Inter-company Invoicingfunctionality, and an outline of the process, business events, and accounting impact in each entities set of books. Required configurations and setups are discussed in detail as well as how Transfer Pricing, theCoGS Workflows, and the generation of Accounts Receivable and Account Payables invoices can becustomized to meet specific enterprise requirements. Global inventory planning is discussed and sampleSQL for creating reconciling inter-company transactions is provided. Enhancements to the functionalityincluded in Release 11.5.10 of the applications are also discussed. Finally, this paper attempts to addressconstraints and limitations of this functionality and suggests ways to mitigate possible risks andcontingencies.The target audience includes functional and technical resources that are involved in the implementation of the Oracle Applications. A basic understanding of Oracle Workflow and Advanced Pricing isrecommended. This paper is primarily aimed toward the functional user but sample PL/SQL packages anddiscussion of certain APIs are presented for reference. This paper is not intended to cover in detail thefunctionality of these applications and the reader is encourage to reference the Workflow, Multi-Org, andthe Application User’s guides.
OAUG Connection Point® 2006 Copyright 2006 by McCurry & Company, Inc. Page
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Business Requirement
 
Many large and multi-national enterprises are composed of numerous organizations that belong to differentoperating units and legal entities that conduct business in multiple sets of books. The merger-mania of the80’s-90’s created many business enterprises that appear to be one to the outside but still retained the legalstructure of many smaller companies on the inside. With the growth of the global economy in the lastdecade, many companies have grown beyond national borders and operate with multi-national businessstructures. Many un-related companies have attempted to leverage synergies by creating joint venturecorporations. Quite often, these JVs are managed by one of the JV partners using its production facilitiesand personnel but require separate transactional reporting. Finally, many corporations are simply comprisedof complex legal entity structures intentionally for tax benefits and liability limitation. Despite whatevercomplex and sometimes convoluted legal and reporting structure, the physical or literal structure of thebusiness has become very different from the legal structure. Many public-traded companies are brokendown into divisions based upon external reporting requirements that are based upon industry or marketsegment divisions, even though the products manufactured and sold into different business segments areproduced in the same location. As a result, it is not uncommon for a single enterprise in a single installationof the Oracle ERP applications to operate several companies, legal entities, production, and distributionoperations as independent organizations. Transactions are/must be handled as if they were 3
rd
partytransactions even though the products that are “manufactured and sold” by the different “childcorporations” are in fact produced and shipped from the same production facility using the same personneland transaction channels. The difficulty comes in where these transactions must captured and processedbased upon legal structure considerations.With the advent of Sarbanes-Oxley, there is a greater need to maintain accuracy and transparency for inter-company activities. Recent history has seen the abuse of these complex, convoluted, multi-nationalstructures to create fragmented business transactions that hide the true condition of the enterprise. Theresulting requirement of Sarbanes-Oxley is that a clear and auditable trail of these inter-companytransactions must exist while at the same time support the “legal spaghettithat make these businesstransactions appear legally to have occurred “arm’s length” between 3
rd
Party companies.The literal and obviously in-efficient process would be for these “companies” to generate transactionsbetween them that suggest totally different organizations. Consider an example of an enterprise operates amanufacturing business and a distribution business under a legal structure of separate companies but arelocated that the same physical facility. Company X gets an order from a third party customer and inresponse, generates a purchase order to Company Y, who acknowledges by creating a sales order toCompany X. When Company Y physically ships to the end customer, they must first “logically ship” theproduct to Company X, who “receives” it into inventory on the books and then executes a shippingtransaction to represent the transfer of ownership to the true customer. This is done strictly to simulate anarm’s length transaction with conveyance of title from Y to X to the customer when it literally did notoccur. But a paper trail of Purchase Order, Sales Order, Receiving Transaction, and Invoice are required.But this paper trail is fraught with pot holes and detours like duplicate or lost transactions, mis-matchedaccounting, unapproved and/or un-matched invoices, timing issues between AR and AP or betweencompany X and company Y, and many other types of dis-connects.
 
This configuration becomesincreasingly problematic as a considerable number of inter-company transactions are carried out on a day-to-day basis between the two “companies”. The distribution and service organization (company X) sourcesa great many of their inventory items from the production organization (company Y). Because theseorganizations reside at the same physical location and use the same shared-personnel to receive, stock, andship inventory, redundant transactions occur when the items are shipped from the production organizationdirectly to the customer of the service organization.
OAUG Connection Point® 2006 Copyright 2006 by McCurry & Company, Inc. Page
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The Objective
The objective is to utilize functionality resident within the Oracle applications to eliminate these duplicatetransactions and streamline the shipping process. Inter-company Invoicing is standard Oracle functionalitythat leverages the fact that these related parties exist in the same instance of the ERP applications. Thisfunctionality significantly streamlines the business process by eliminating the generation of redundantpurchase orders, inventory transactions, and sales orders between the related parties by automating theinter-company transaction flow by creating an internal customer-supplier relationship between the twocompanies that allows Company Y to internally drop-ship product for Company X.
“Internal” versus “External” Drop-Shipping: What’s the difference?
External Drop-Shipping functionality in Oracle Order Management uses purchase orders to outsidesuppliers that are automatically generated from sales orders for goods supplied directly from the supplier.The “external” supplier ships the goods directly to the 3
rd
Party customer and confirms the shipmentthrough the use of an Advanced Shipment Notice. Oracle uses this ASN to record a receiving transactioninto inventory followed by an immediate logical shipping transaction. From these transactions, conveyanceof title takes place and the customer can be invoiced and the supplier’s invoice can be processed. “Internal”Drop-Shipping functions in a similar fashion. The key difference is that no inventory transactions takeplace on the books of the selling operating unit; transfer of ownership of the goods from shipper to seller tocustomer with the only physical movement of the goods being out of the shipping organization.
Overview of Inter-company Invoicing
Inter-company invoicing has been available in the Oracle applications since Multi-Org was first introducedin Release 10.6. Multi-Organization functionality enables an enterprise to operate independent businessunits within a single installation of the software and still maintain segregation of the data by business units.These are called “Operating Units” in Multi-Org and are used to segregate Sales Orders, Purchase Orders,Receivables, Payables transactions by business units while leveraging the use of global item, customer, andsupplier registries. As it is discussed here, the purpose of Inter-company Invoicing is to “fill-in” theaccounting gap that occurs when goods are internally drop-shipped against a sales order from a warehousethat is part of a separate operating unit in a different set of books. When the shipping inventoryorganization is not part of the same operating unit as the selling entity, a gap is created as each operatingunit is “missing” half of the transaction. Inter-company invoicing fills in that gap by generating accountingtransactions in the form of inter-company receivable and payables invoices. Consider the example of Company X and Company Y presented above:
3
rd
Party Customer
Operating Unit X(Seller)Operating Unit Y(Shipper)Company XSet of BooksSales OrderCompany YSet of BooksProduct ShipmentWarehouseAR InvoiceAP InvoiceIntercompanyRelationship
 
OAUG Connection Point® 2006 Copyright 2006 by McCurry & Company, Inc. Page
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