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SVC Project

TO BE – Leaf Processes

Operations Finance & Projects


Lausanne, 08 August 2013
LEAF (Introduction)
 Packed tobacco in different types and from different origins used/(blended) to
manufacture of cigarettes and semi-finished products during the budget period.

Sample illustration: Tobacco Plant to Packed Leaf

 The packed leaf cost is the price reflected in the Worldwide Leaf System (WLS) used
as reference to calculate leaf consumption price.
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LEAF (Introduction)
 Sample of Leaf types:
 Burley – is a light air-cured tobacco that is majority produced in Brazil, Malawi
and Argentina.
 Flue Cured - tobacco that is high in sugar which is processed through hanging
in curing barns.
 Oriental – is a sun-cured, highly aromatic, small-leafed variety that is grown
mainly in Turkey and Greece.
 Homogenized tobacco (Cast Leaf and Recon): tobacco dust, fines, stems, by-
products, etc. that are finely ground, that may be mixed with a binding agent,
and that are cast, extruded and/or rolled into a flat sheet of uniform thickness
and quality

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Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

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Purpose of the SVC Leaf budgeting
 Provide the most accurate Leaf cost estimate (SVC rate) for every product
 The standard cost of Leaf is calculated by combining leaf assumptions
 The computed SVC rate is input to SAP (P1) & GMRB, where multiplied by
the volume of the product provides the SVC cost of the product

Target weight (BOM) Yield


FA027654 ML812
Target weight 634 [g] Primary Yield 104 %
Secondary Yield 96 % Blend formula
Factory Yield 99.8 %
Leaf price

TMC Details % inclusion Price


L33Z Burley US 8.3 % 4.2 $
L417 Burley MW 2.4 % 3.8 $
L22J FC US 1.8 % 7.1 $
….. …… ….. …..
Finished Good Blend 100%
FA027654 ML812
MARLBORO (RED) KS BOX 20 SUMSTONE
Blend assumption
Purchase Crop
Inventory
Price Mix
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OB cycle – Key assumptions list
Element Description Responsible System
Production Volumes Product Volume by product code (for both finished and Ops Planning (C&FP or OVF (Excel)
semi-finished goods) local)
Target Weight (BOMs) Bills of materials for each manufactured finished and semi- Product Development Excel
finished product

Yield Primary & Secondary Yield targets by Blend Affiliate Ops Planning Excel
Blending Blend Allocation of blends to finished goods products PD Blending WLS
Assumptions
Blend Formulas Leaf recipes showing the usage of Leaf TMCs by blend PD Blending WLS

Leaf Price LPP Prices LPP forecasted prices by TMC Leaf Planning WLS

Leaf Inventory Leaf inventory held by Affiliates and PMIM Ops Finance & PMIM P1

Crop Mix Leaf consumption split by crop Ops Finance Excel

Leaf Charges Additional charges e.g. admin, warehousing Ops Finance Excel

X-rates X-rates assumptions to convert leaf price from purchasing Ops Finance GMRB
to functional currency
Leaf Expense* All expenses related to Leaf Warehousing Cost Center in Leaf Logistics/SC LBPF/Excel
the affiliate (e.g. Warehousing cost, transportation, etc.)
Productivity initiatives** Cost reduction initiative assumptions , included in other Inputs by Ops, Excel
assumptions (BOMs, Yield, Blend Assumptions) calculated by Ops
Finance

* Leaf Expense budget consolidation follows the same approach as Conversion Cost
** Productivity initiatives will be covered in separate session
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OB cycle calendar
Source: Ops Finance OB 2013 calendar

Assumption May Jun Jul Aug Sep Oct Nov


New FA codes 8-20 Jun 19-31 Jul 29 -4 Sept

Shipment Volume 26-27 Jun 2-18 Aug 4-14 Sep 5-16 Nov
26-27 Jun
Inventory Targets 2-17Aug 19 - 25 Sep

Production Volumes 2-8 Jul OVF1 OVF3 1 – 12 Oct

BOMs (Target weight) 2 - 20 Jul Reference Reference

Yield 26 – 6 Aug 5-16 Nov


Targets setting

Blending Blend Formulas review 18 Jul Final LPP 30 Nov

LPP Prices Price Forecast

“Leaf Package” End July

SVC rates input 2 - 24 Aug 4-18 Sep 5-16 Nov

Budgeting cycle 1 Budgeting Cycle 2 Budgeting Cycle 3 Last Volumes input (used for RF)

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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield
Leaf Budget Price Actual Leaf Price
Leaf Price
Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Leaf charges

Currency

PCUs
Productivity
Initiatives

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Blending assumptions – AS IS process

Blending Assumptions:
Blend assumptions & Blend Formulas.
• These assumptions are managed in WLS by PD (Blending)
• Each blending assumptions are managed at FA code /production center (entity) level
• Both assumptions have steps (time bound versions)

Example – Blend Assumptions Example – Blend Formula ML812,


Production Center : TR( PHILSA) Production Center : TR( PHILSA)
Step 1 Step 2
Blend Brand Brand Name
TMC Details % Inclusion % Inclusion
ML812 FA027654 MARLBORO (RED) KS BOX 20 01-2013 03-2013
ML812 FA027655 MARLBORO (RED) KS SOF 20
L33Z Burley US 8.3 % 5.3 %
ML812 FA027978 MARLBORO FLAVOR MIX KS BOX 20
ML812 FA032880 MARLBORO (RED UPGRADE) KS BOX 20 L417 Burley MW 2.4 % 1.6 %
L22J FC US 1.8 % 2.8 %
….. …… …..
100% 100%

Products TMC Jan Feb Mar Apr May … Dec


FA027654
L33Z 8.3 % 8.3 % 5.3 % 5.3 % 5.3 % … 5.3 %
FA027655 Blend
L417 2.4 % 2.4 % 1.6 % 1.6 % 1.6 % … 1.6 %
FA027978 ML812
L22J 1.8 % 1.8 % 2.8 % 2.8 % 2.8 % … 2.8 %
FA032880
… … … … … … … …
100% 100% 100% 100% 100% … 100%10
Blending assumptions – AS IS process
Blend assumptions & Blend Formulas are
• Managed in WLS by PD (Blending)
• The impact of Changes in blending assumptions are reviewed mainly during the LPP Process

LPP aims at Planning Leaf purchases, for next 5 years.


LPP combines series of assumptions including volumes, inventories and current blending to plan
Leaf purchases per TMC and entity. As an outcome Leaf Blend formulas are reviewed as well.

Process
Assumptions Source
Current Leaf Inventories P1
Deliverables
Previous LPP balances WLS
Purchase plans by TMC & entity (Production Center)*
Planned Production Volume OVF + RF outcome TMC purchases allocation to entities
Current Blending assumptions WLS Reviewed Blend Formulas*
Target weight PLM Reviewed Blend Assumptions
Yields Affiliate input * Only for main LPP review

LPP is performed twice a year, with and additional Blend review


Month Volume source Scope
July OVF1 Blend Formulas & Assumptions adjustment and Price Forecast SVC preparation
Nov OVF2 Full LPP calculation, used for purchases
Main LPP
Jan OVF3 Revised LPP, based on Dec inventories
Revised, optional
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LPP calculation
LPP Calculation schema

Current Leaf FG Production Current Blend


LPP balances (TMC) Target Weight
Inventories (LOT) Volume (OVF) Assumptions

Budget Inventories Leaf Volume Factory Yield


(TMC) Forecast

Leaf Consumption Current Blend


Forecast Formulas

Stock rupture
report

Blend Formulas Leaf Purchase


Target Duration
Adjustment Plan

TMC allocation to
destination entities

Strong dependency on the Production Volume accuracy


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Blend Assumptions - challenges

Latest assumptions reflection in SVC

Blending assumptions for SVC are prepared in July based on OVF1,


blends are later reviewed during LPP but changes are not always reflected in SVC

Reliability of OVF inputs

The LPP is performed based on the OVF production volume, while not all product
changes are reflected in the OVF, e.g:
- new product codes,
- resourcing not always reflected.
Manual adjustments are performed instead based on discussions with Affiliates.

OVF inaccuracy leads to wrong assignments of TMC purchases/inventories to entities


No governed process exist to further review the assignments.
e.g. OVF volumes were sometimes understated in EEMA Affiliates, which led to bigger
consumptions of older leaf crops.

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Blending assumptions
LPP Timing alignment
Assumption May Jun Jul Aug Sep Oct Nov
New FA codes 8-20 Jun 19-31 Jul 29 -4 Sept

Shipment Volume 26-27 Jun 2-18 Aug 4-14 Sep 5-16 Nov
26-27 Jun
Inventory Targets 2-17Aug 19 - 25 Sep

Production Volumes 2-8 Jul OVF1 OVF3 1 – 12 Oct

BOMs (Target weight) 2 - 20 Jul Reference Reference

Yield 26 – 6 Aug 5-16 Nov

Blending/OC Planning Blends & Price Forecast 18 Jul

LPP Prices Price Forecast

“Leaf Package” End July

SVC rates input 2 - 24 Aug 4-18 Sep 5-16 Nov

Enable reflecting of latest LPP assumptions, In SVC by aligning timing & automation
Prerequisite – available OVF assumptions
Benefits:
• Increased SVC accuracy due to reflecting latest assumptions
• Automatic refresh of inputs at each budgeting cycle triggering SVC recalculation
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Inventory allocation review
Central process to review TMC assignment by entities.

Anytime a significant volume change occurs :


- Resourcing Potential Actions:
- Footprint change Trigger - Adjust TMC purchases by entity
review
- Drive inventory transfers between affiliates
- OVF final calculation

Benefits:
• TMC crops assignment to entities in line with production volume requirements
• Balancing the crop mix usage by Affiliates

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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield
Leaf Budget Price Actual Leaf Price
Leaf Price
Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Leaf charges

Currency

PCUs
Productivity
Initiatives

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Yield – Operations KPIs
Current Process :

• Yield assumptions are gathered manually by Affiliate Ops Planning at blend/cutfiller level of details
• Gathered inputs @ blend/cutfiller level are used for leaf consumption calculation
• Results are aggregated cutfiller/from blend total factory level of details and submitted to IRVA

Leaf
Prepare a Aggregate consumpiton
Get current Provide KPI Approve KPI
template for results to
KPI results inputs targets Input KPI targets
OB inputs total factory
to IRVA

Ops Planning Manufacturing Ops Management Ops Finance

Challenges:

• Manual process for data gathering with out version controlling


• No common system repository of yield assumptions
• Yield inputs are used for LPP &SVC budgeting and reported to IRVA – no process to align the 3 inputs
• Yield inputs are not always phased

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Yield – Operations KPIs

• Gather yield assumptions @ blend in GSVC using dedicated input forms.


• Use yield inputs for leaf consumption calculation
• Apply appropriate data management (versioning, locking etc.)

Gather Yield Upload Yield Aggregate


Calculate Leaf
Assumptions inputs to Yield to total IRVA
consumption
input @ blend GSVC factory
GSVC system
Version control, locking, phasing
WLS
Ops Planning Leaf Planning/Blending Ops Finance

Yield Blend Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Primary Yield [%] ML901 103.2 103.2 103.3 103.3 103.3 103.3 103.3 103.3 103.4 103.4 103.4 103.4
Secondary Yield [%] ML901 95.1 95.1 95.1 95.1 95.1 95.2 95.2 95.2 95.2 95.2 95.2 95.3

Benefits:
• Common official repository of yield inputs @ blend and aggregated level of details
• Discipline and control of provided data thanks to locking & versionning
• “One source of truth” of KPIs in GSVC budgeting , LPP and IRVA

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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield
Leaf Budget Price Actual Leaf Price
Leaf Price
Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Leaf charges

Currency

PCUs
Productivity
Initiatives

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Leaf Price components – AS IS
Current Process :
• Price of consumed Leaf consist of 2 component groups:
• The Leaf price (LPP Price) – paid to the Vendor or Vertically Integrated Affiliate
• Additional charges added to the Leaf purchase price in the value chain

Component Description
Leaf Warehousing Warehousing Costs occurring while storing
2.5% leaf in a PMIM or Affiliate warehouse
Leaf Warehouse Expenses (LWE)
Import Duties 4.0% Import duties Duties paid for imported Leaf (according to
local legislation
ROCE* 5.0%
ROCE* Return on capital invested on PMIM Leaf held
Freight 3.0% for Affiliates
Crop Protection Agency (CPA) 0.3%
2.7% Freight costs Costs of shipping Leaf from to PMIM and
Leaf Admin charges
consecutively to the Affiliate

82.5% Leaf Admin incl. CPA Leaf Administration charges applied to all Leaf
Price
held by PMIM Tolling
(Vendor/VI)
Leaf Price Leaf Price paid to the vendor or VI Affiliate,
planned as part of the LPP price forecast

* Applicable only for Leaf held by PMIM

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Leaf value chain
All Leaf are going to be used from inventory and will contain below cost elements
The Leaf price budgeting aims at predicting the final cost at the time of consumption

Sample Leaf Value chain flow : Leaf Purchased via PMIM and consumed in local Affiliate
PMIM Affiliate (e.g. PM CR)
Non-
Vendor/ Bonded
Virtual Plant Bonded Primary
VI Affiliate Warehouse
Warehouse

BRL EUR CZK

Leaf Warehouse Expenses (LWE) 2.5%

Import Duties 4.0%

ROCE* 5.0%
Freight 3.0%
Crop Protection Agency (CPA) 0.3%
Leaf Admin charges (FME) 2.7%

Price 82.5%
(Vendor/VI)

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Leaf Price data sources
Current Process :
• The aim of Leaf price budgeting is to predict the final price of consumed Leaf,
the starting point of the analysis is to get Leaf price of
• Purchases (LPP)
• PMIM Inventory
• Local inventory.
• For each source different expenses would be added to obtain the consumption cost
• Currency exposure will be different for each Leaf source

Example: Consumption price calculation – Brazilian Leaf


X-rate X-rate
(EUR/BRL) (EUR/CZK)

Freight Freight Local Price of


Leaf Leaf Export Import Local
LPP Price LPP Price ROCE
+ To
+
Purchases (BRL) (EUR)
+ To
PMIM + Admin + WHS + (EUR) Price
PM CR
Duties
(CZK)
+ WHS
(CZK)
= Consumed
Leaf
(EUR) (EUR) (CZK)
(EUR) (CZK) (CZK)

X-rate
(EUR/CZK)

Freight Local Price of


Leaf Leaf Export Import Local
PMIM PMIM Leaf inventory price (EUR)
+ + ROCE
+ To
+ + Consumed

Inventory already includes purchase price & freight


Admin
(EUR)
WHS
(EUR)
+ (EUR) Price
(CZK)
PM CR
Duties
(CZK)
WHS
(CZK)
= Leaf
(CZK) (CZK)

Local Leaf Inventory price(CZK) Local Price of


Import* Local
Local + + Consumed

Inventory
Duties
(CZK)
WHS
(CZK)
= Leaf
Inventory already includes previously occurred costs (PMIM price, ROCE, admin etc. (CZK)

*Leaf can be already stored in the non-bonded warehouse thus already contain import duties Data source Leaf Controlling
PMIM (Leaf Controlling) Ops Affiliate
Local Finance
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Currency (exchange rate assumptions)
Current Process :
• When perform Leaf price budgeting the price assumptions need to be converted to local currency
in which the Leaf is going to be consumed
• Depending on the source of budgeting assumptions the currency exposure will vary

Local Affiliate
Purchases PMIM
(e.g. PMPSA)

Purchase Price Inventory Inventory


BRL EUR CHF

Currency exposure

Source for budgeting Currency Purchasing PMIM currency


currency exposure exposure
LPP Price Purchasing Yes Yes
(e.g. BRL)
PMIM Inventory EUR No Yes
Local Inventory Local (e.g. CHF) No No

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Leaf Price & Inventory - challenges

Visibility
• Inventory extracts provide only the final inventory value, without possibility to
split by cost components (freight, admin charges, warehousing etc.)
• No visibility of the currency in inventory impact

Manual Process
• The process of gathering leaf price information is manual and prone to mistakes
• The data gathering process from data extraction, communication (from PMIM to
Affiliates) and usage for budget computation is fragmented

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Leaf Price & Inventory
• Reporting solution to split Inventory by cost components – for budgeting, actuals &variance analysis
• Price assumptions to be transmitted to GSVC from WLS, potentially from GLS for VI Leaf
• Leaf charges to be provided as an input to GSVC
• Currency assumptions to be transmitted from GMRB

Leaf Budget Price by components


Inventory USD EUR CHF
P1 value
decomposition
Purcha s e Pri ce 4.11 2.95 3.63 LWE
CPA 0.01 0.01 0.01
Duties
• Decompose Leaf Lea f a dmi n 0.13 0.09 0.11
Frei ght - 0.09 0.11
Inventory into ROCE - 0.26 0.33
ROCE
components Loca l Frei ght - 0.04 0.08 Freight
• Calculate Duti es 0.21 CPA
Tota l Lea f Pri ce 4.25 3.44 4.48
purchasing & Purchasing x-rate in inventory Leaf Admin
Transfer to Affiliate x-rate
transfer currency EUR/USD = 1.39 EUR/CHF = 1.23

Leaf Purchase
WLS Price Price
(Vendor/VI)
Leaf Purchase
GLS Price (VI)

Leaf Charges

GMRB X-rates
GSVC system

Benefits:
• Increased visibility of the Leaf inventory price components – required also for indirect taxation
• Possibility to track the Leaf price evolution, including currency impact
• Base for the Leaf Price & currency variance analysis 25
Crop Mix Assumptions – AS IS
Current Process :
• The crop Mix assumption are showing the expected consumption mix between different crop years
• Leaf is mixed from different crop years within one TMC to achieve
• Crop mix will have a financial impact on Affiliates using the valuation method by LOT

2009 2010 2011 2012 2013


Main reason for applying the crop mix:
TMC1 5% 20% 25% 30% 20% • Mixing the leaf from different years
TMC2 12% 13% 35% 25% 15% to achieve product consistency
(Managing Tar/Ni/CO level in blend)
TMC3 10% 10% 40% 30% 10%
TMC5 18% 17% 30% 20% 15%
… Financial impact for Affiliates using
The valuation method by LOT.
Inventory Purchases (LPP)
Using Leaf from different years will have
An impact on final TMC price

Process

Group Propose crop


Extract Leaf Review Use crop mix
P1 inventory by mix
inventories proposal for budgeting
TMC/crop year distribution

Leaf Blending Ops Finance


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Crop Mix- challenges

Definition
Different understanding and application of what a crop mix is.: Crop Mix vs. LPP Mix
Definition Description

Crop Year Year when the Leaf was harvested


LPP Year Year for which the Leaf was planned to be purchased

No consistent approach in PMI for the crop mix usage


Manual process
• The crop mix calculation is entirely done in Excel, no system repository of budgeted data.
• Difficulty of performing Due to crop mix Variance Analysis

Crop Mix phasing & arrival date impact


• Usually one crop mix assumption is kept for the entire year, although new leaf coming from
new purchases will not be consumed as of the first day of the year
• In case when Affiliates calculate the new LPP availability the transportation time from
PMIM warehouse is not always taken into account
Leaf arrival to PMIM Leaf usage in the Affiliate

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Crop Mix – process & system approach
• Include crop mix assumptions in GSVC system
• Have a phased crop mix approach, driven by arrival date and transportation time

Leaf arrival to PMIM Leaf usage in the Affiliate

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 Inventory 30% 30% 30% 30% 30% 30% 30% 30% 30% 21% 21% 21%
2011 Inventory 40% 40% 40% 40% 40% 40% 40% 40% 40% 28% 28% 28%
2012 Inventory/LPP 30% 30% 30% 30% 30% 30% 30% 30% 30% 21% 21% 21%
2013 LPP 0 0 0 0 0 0 0 0 0 30% 30% 30%

P1 Leaf inventory Use crop mix


Propose Leaf Review crop
for SVC
crop mix mix
WLS Arrival dates budgeting
GSVC system
Version control, locking, phasing
Leaf Blending Ops Management Ops Finance

Benefits:
• Consistent global approach for crop mix calculation
• Standard process supported by system solution
• Base for Due to Crop Mix variance calculation
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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

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Leaf Assumptions – information flow– AS IS

Extract Blend Convert Blend


Blending WLS Formulas & formula Steps to
assumptions monthly data

Extract Leaf
arrival dates
(DoR)

Extract LPP
Add leaf charges Add x- Leaf
LPP Prices WLS price (current
& previous LPP)
(Admin, ROCE etc.) rates Package
Calculate
Leaf
consump-
Leaf Charges GMRB tion
Price

PMIM Extract Leaf Add x-


P1 Add leaf charges
Inventory Inventories (Admin, ROCE etc.) rates

Local Extract Leaf


P1 Duties
Inventory Inventories

Local
WHS

Leaf Planning/ Blending PMI Leaf Controlling Affiliate Ops Finance 30


Leaf Assumptions – information flow

Data Integrity

The entire data gathering process is Excel based, no common repository of Blending
& Price information used for budgeting,

Data mistakes driven by Excel process and no formal validation steps


(e.g. missing TMC prices, Blend formulas discrepancies vs. P1/current blends)

Process Workload
The leaf assumptions from various systems and Functions are collected
and consolidated manually via Excel files and templates, causing higher workload

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Leaf Blending & LPP Price information
• Integrate assumptions with source systems (WLS, P1, GMRB)
• Store extracted data in dedicated system modules
• Build validation logic checking data integrity (e.g. if all codes have blends, price within range etc.)
• Apply data control mechanisms (versioning, locking etc.)
• Refresh inputs at each budgeting cycle

Release inputs
WLS Run validation reports,
for SVC
check data consistency
calculation

Release inputs
Run validation reports, Perform SVC
P1 for SVC
check data consistency calculations
calculation

Run validation reports, Release inputs


GMRB check data consistency for SVC
calculation GSVC system
Update inputs at Version control, locking, phasing
each budgeting cycle
Leaf Planning/ Blending PMI Leaf Controlling Affiliate Ops Finance

Benefits:
• Automatic refresh of inputs at each budgeting cycle triggering SVC recalculation
• Process streamlining by eliminating excel steps
• Discipline and control of provided data thanks to locking & versioning
• System validation rules increasing data integrity Common repository of blending information
• used for budgeting
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Leaf Assumptions Gathering – system landscape
WLS WLS WLS P1 GMRB

Blend Formulas
Leaf LPP Prices Direct Shipments Leaf Inventory X-rates Leaf SVC
Blend Assumptions

BOM Leaf
PLM Crop Mix Duties Yield
Target weight Charges

DM
DM Prices OPF % increase BOMs DM SVC
Wastage

Headcount Uptime CC budgets Conversion Cost

Shipment Production
Inventory targets
Volume Volume

GSVC system - Assumptions

Version control, locking, phasing


System functionalities:
• Dedicated modules for each budgeting assumption
• Possibility to perform inputs phasing
• Validation mechanisms x-checking integrity data during submission (completeness & accuracy)
• Refresh of inputs during each budgeting cycle, driving budget recalculation
• Discipline and control of provided data thanks to data versioning & locking
• Central, official repository of assumptions enabling reporting and variance analysis
• SVC calculation logic linked to the assumptions list
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Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

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Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

35
Budget Calculation
Current Process :
• The purpose of the Leaf Budgeting is calculating the Leaf Price per Volume (e.g. per ‘000 cigs)
for each sellable Finished and Semi-Finished product
• The calculation is performed by combining gathered assumptions in 2 major steps:
• Leaf consumption calculation (average Blend Formula)
• Leaf price calculation

Production Blend Blend PMIM Affiliate


Target Weight LPP Prices Arrival dates
Volume Formulas Assumptions Inventory inventory

Crop Mix
(valuation by LOT)
Yield
Freight
Exchange rates
Admin Charges

Blend Leaf Warehousing


consumption Other Charges Budget Leaf price
Leaf
(by TMC) by TMC
consumpion Budget Leaf Price

Leaf Budget
Avg Blend (SVC Rate and
Deviation) Standard price
Formula
By TMC
(costing BOM)

Inputs for P1 costing Inputs for P1 costing


Leaf SVC
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Leaf Consumption/Average Blend formula
Current Process :
• The process aims at calculating the average Blend Formula (Leaf “BOM”) for each Blend, consists of 3 steps:
a) Cut-filler consumption calculation [Cut-filler kg by Blend]
b) Tobacco Laydown calculation [Leaf kg by TMC]
c) Average Blend Formula calculation [Leaf inclusion by TMC]

FG Production Volume
Target Weight Blend Assumptions
(OVF)

Cut-filler in FG
Secondary Yield

Cut-filler export Cut-filler a)


(SF OVF) consumpion

Primary Yield Tobacco Laydown Blend Formula


to Primary steps

Tobacco Laydown Monthly Blend


by TMC Formula

b)
Tobacco Laydown IS ET Monthly Blend
by TMC (incl. IS ET) Formula

Average Blend
c) Formula
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Leaf Price calculation – AS IS
Current Process :
• The Budgeted Leaf Price is calculated by combining inventory & purchase prices taking into planned usage
• First a monthly price is calculated, later it’s weighted by leaf usage to obtain the average budget price
• The Calculation approach is influenced by the inventory valuation method
Moving Average Price (MAP) Crop Year Mix
• The price of the Leaf is calculated as a moving • The crop year mix approach the price within
average of the Leaf inventory by TMC. one TMC differs by crop year
• All LOTs in within the TMC have the same price • In order to calculate the budget leaf price a mix
• The price of Leaf is influenced by new Leaf purchases between crop years needs to be assumed

Affiliates having Moving Average by TMC valuation Affiliates having Actual by LOT valuation

Current year
Leaf inventory Current year usage
purchases

Year end inventory New purchases


Crop year mix
(AC by LOT Next year usage (arrival dates)
valuation)
Leaf usage

[kg&value]

Leaf budget price


(@TMC)
38
Leaf SVC & SVC Deviation calculation – AS IS
Current Process :
• The Leaf standard rate is computed by combining tobacco consumption and budget price
including Yield & weight assumptions
• Additional forecasted deviations may be planed e.g. due to phasing

Leaf budget price Tobacco Consumption /Avg Blend Formula


TMC Avg price ML234 Tobacco Inclusion
consumption rate
TMC1 5.00
TMC1 100 10%
TMC2 5.00
TMC2 250 25%
TMC3 7.00
TMC3 250 25%
TMC4 6.20
Yields TMC4 400 40%

Blend Primary Secondary Factory Leaf SVC rate calculation


Yield Yield Yield
Blend (ML234) Value
ML234 105% 95 % 99.75%
cost per kg dry blend 5.98
Target weight CF cost after Secondary kg 6.15 Leaf
FA code Weight SVC rate
Cost per ‘000 cigarettes 4.30
FA0001 700

J F M A M J J A S O N D
Leaf cost’ 000 4.00 4.00 4.40 4.40 4.30 4.30 4.30 4.30 4.40 4.40 4.40 4.40
Prod Volume 100 100 120 80 80 90 100 100 100 100 100 100
Avg Leaf rate 4.30
Leaf SVC Deviation -30 -30 12 8 - - - - 10 10 10 10 39
Budget Calculation - challenges

Manual process
• Budget calculation, incl. crop mix performed in Excel, which lead to mistakes
• The calculation model is fragmented (separate Excel spreadsheets used),
refreshing assumptions requires manual checking each of calculation steps
• Calculation in Excel requires additional effort to prepare files, running calculations,
checking results

Lack of simulation capabilities


• Calculation models fragmentation and decentralization makes simulations
difficult and time consuming (e.g. sensitivity analysis due to currency)

40
Leaf Budgeting
• Build a calculation model based on predefined formulas to calculate SVC & Deviations
• Calculation models to be standard and centrally governed

BOM Blend Formulas


Yield
Target weight Blend Assumptions

Leaf LPP Prices


(multicurrency)

Leaf Inventory
(multicurrency)
SAP P1
Crop Mix
Leaf consumption
X-rates (Avg Blend Formula) Leaf SVC rate

Leaf Charges
(multicurrency) GMRB

Direct Shipments

Leaf Budget Price


Duties Leaf SVC deviation
GSVC system

System functionalities:
• Centrally governed calculation model, standard calculations for Affiliates
• Multicurrency calculation (transactional, functional, reporting) based on sourced data
• Budget re-calculation after assumptions change
• Calculation performed In monthly buckets , SVC Deviation calculation due to phasing
41
Leaf Budgeting – simulation capabilities
Blend Formulas
Blend Assumptions

Yield

BOM
Target weight Leaf consumption

Leaf LPP Prices


(multicurrency) Leaf SVC rate
Leaf Inventory
(multicurrency)

Crop Mix
EUR/USD USD/BRL USD/RBL
X-rates

Leaf Charges
(multicurrency)
Leaf Price Leaf SVC deviation

Direct Shipments

Duties

System functionalities:
• Integrated calculation model will enable simulation capabilities and “ what if” analysis
• Simulations will be possible at Affiliate/Regional/ and total PMI level
42
Budget Calculation benefits

Benefits
• Budget calculation standardization and streamlining
• Considerable data preparation & calculation workload reduction
• System validation rules increasing data integrity
• Discipline and control of provided data thanks to locking & versioning
• Assumptions and calculation results visibility for Affiliates/Regions/PMI
• Automatic refresh of inputs at each budgeting cycle triggering SVC recalculation
• Simulation and what if analysis capabilities

43
Product Components Usage (PCU) calculation
Current Process
• PCUs are showing the usage of Intercompany purchased supplies in FG production
• PCU is a GMRB table, maintained by Production Center for these IC purchased supplies
(Filters, Cut Filler etc.).
• PCU is used for supply volume calculation as part of the I/C profit elimination
Example - PCU
TABAQUEIRA PM CR Market
Czech Republic
BBS production FG production, filter usage
• TABAQUEIRA sells BBS to • Once the FG is sold on the
• PM Cr. purchases the BBS
PM CR. Intercompany market, based on the PCU,
and uses for production
• Income received from the the related supply volume
• PM Cr. inputs IC supply to
transaction is calculated
PCU and adds usage
Process
FG Production Center input PCU based on Blend Formula information and semi-finished products sourcing (OVF)

PCUs input
Blend Formulas OVF SF
generation

Challenges
• Heavy workload required (maintaining supplies)
• Consequence of wrongly maintained supply could have high financial impact
44
PCU calculation

• Include PCUs calculation as part of GSVC scope


• Base PCU computation on SF production volume & Blend formulas
• Build validation logic checking data integrity (e.g. if all I/C purchased supplies have PCUs)
• Apply data control mechanisms (versioning, locking etc.)
• Refresh inputs at each budgeting cycle

Blend Formulas
Blend Assumptions
PCUs GMRB
Production
Volume

GSVC system

Version control, locking, phasing

Benefits:
• Considerable data preparation workload reduction
• System validation rules increasing data integrity
• Automatic refresh of inputs at each budgeting cycle triggering SVC recalculation
• Process streamlining by eliminating excel steps
• Discipline and control of provided data thanks to locking & versioning
45
Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

46
Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

47
Actual Posting – setting standards in SAP
Current Process :
• PMI applies the standard costing methodology, following that approach:
• Standard rates per products (SVC rate) and materials (Leaf Prices) are computed during budgeting
• Before new calendar year standard rates are uploaded to SAP and used for materials valuation
• PMI currently uses a “quantity based” standard calculation in SAP, meaning that the
• The SVC rates per product are recalculated in SAP
• A reconciliation needs to be done to ensure alignment of rates with budget calculation

Beginning of year:
Actual Process
Budget Process Loading standards
to SAP
Standard
Standards are maintained
Leaf Budget Price by TMC Standard Price by TMC in functional currency only

Average Blend Formula Costing BOMs

Yield Assumptions
Quantity
based
SVC rates = SVC rates standard
calculation
Reconciliation,
Ensuring matching budget rates
and SAP calculated standards

48
Actual Posting – Deviations Posting
Current Process :
• When actual transactions occur:
• Leaf goods issue to Primary
• Leaf usage in the Manufacturing process
SAP compares the actual price and usage with standards and posts the difference into deviation accounts

Actual Process

Standard Actual Deviation

Standard Price by TMC Actual Leaf Price Purchase Price Deviation

Actual purchase price is compared vs. the Standard price by TMC As part of month-end
The difference in costs is posted as Purchase Price Deviation process
deviations
NOTE: Purchase price deviation includes the Due to currency deviation, Granularity @
TMC/LOT
are capitalized to the
as standards are maintained in the functional currency. Balance sheet for
1 month
Costing BOMs Manufacturing (Usage)
Actual Usage
Deviation After that period
deviations are
released to P&L
Actual usage is compared with standard usage.
The difference in costs is posted as Manufacturing Deviation
Granularity @
Blend, TMC/LOT

Challenges:
• Currency deviation is not posted separately by SAP – needs to be manually isolated in Excel
• Despite having granular data in SAP deviations are not allocated to products based on usage 49
Actual Posting – Deviations Allocation
Selling
Purchasing Manufacturing (Real Usage)
FG/SFG

Finished/Semi-
Finished Good
Leaf in Whse Leaf Goods Cut-filler
@ MAP Issue @ Std Cutfiller
Usage
Leaf Price Deviation FG/SFG
Deviation: Standard
- Currency
- Price Loose Cost
Loose cig
cigarettes Usage
Deviation

FG/SFG
Deviation
Packed
cigarettes

Leaf Price FG/SFG 1


Deviation:
Cutfiller Loose cig FG/SFG
- Currency
- Price
+ Usage + Usage = Deviation
FG/SFG 2
Deviation Deviation
FG/SFG 3
Allocation by Volume (in GMRB)

Challenges:
• Deviations are currently not allocated to products based on purchasing & usage information
• Deviations are posted as one number to GMRB, allocated by volume to products (not in line with cost drivers)
50
Actuals posting – deviation analysis

Current Process :
• As part of month-end activities Affiliate perform the SVC Deviation analysis based on SAP data
• The purpose of this analysis is to further understand sources of deviations and bridge to Variance Analysis

Manufacturing (Usage) Process order closure


Purchase Price Deviation
Deviation reports
Produced quantities of finished
Purchase price deviation Usage deviation values by and semi-finished goods
posting by material Material & produced SF/
(LOT/TMC) Finished Good Production BOMs used in the
Manufacturing process

PPV split into Manufacturing


Budget assumptions Price and Currency deviations split

Split of manufacturing
Deviations into driven by:
- Specification changes
- Usage (yield)changes

Challenges:
• Manual process to analyze deviations, prone to mistakes
• Considerable workload spent on the process (extracting reports, data crunching, aggregation etc)

51
Actual posting - challenges

Manual SVC deviations analysis, calculation & allocation processes


• The manual process results in heavy workload 2 084 man-days*
Area Activity EU EEMA Asia LA&C Total PMI
Generating SAP reports 143 86 176 166 571
Leaf Deviation Analysis 153 84 80 107 424
Deviation
Analysis DM Deviation Analysis 363 96 116 113 688
CC Deviation Analysis 162 72 74 93 401
Total Deviation Analysis 821 338 446 479 2 084

SVC deviations are not allocated to products in SAP


• Deviations allocated to products/markets based on volume in GMRB, which not
always in-line with cost drivers
• Providing accurate real/actual costs of products might require manual reworks
* Man-days statistic based on Affiliates’ survey

52
Actuals Posting – proposal

Activate Material Ledger functionality in SAP


• Automatic deviations allocations to products based on material consumptions
• Actual product cost calculation
• Actual product cost decomposition reports

Calculation of actual Product cost


product cost decomposition
Automatic deviations
Leaf Goods allocations Actual cost
Issue Allocation to Actual
Consumptions costs of decomposition
By materials products
Manufacturing FA123456.01
Process Order Material Ledger Cut filler
Settlement Closing Process TMC…
DM Make/Pack
Filter
Allocation to Acetate tow…
Selling Goods Inventory Cig. Paper…
By materials

53
Actual

Reporting capabilities based on Material Ledger


• Activating ML in SAP will also enable actual reports, e.g. Leaf actual consumptions
and Leaf actual prices by materials and products
• Can be used as source of actuals information for variance analysis purpose in GSVC

FG actual cost decomposition


FA123456.01 Standard Actual Deviations

Qty: 1,000 Qty Price Value Qty Price Value Qty Price Value

Blend 0.650 5.38 3.50 0.700 5.03 3.52 (0.050) 0.356 (0.02)

TMC 1 0.300 5.00 1.50 0.330 4.85 1.60 (0.030) 0.152 (0.10)

TMC 2 0.250 6.00 1.50 0.260 5.38 1.40 (0.010) 0.615 0.10

TMC 3 0.100 5.00 0.50 0.110 4.73 0.52 (0.010) 0.273 (0.02)

Actual Leaf
Actual BOMs Actual Yield
Prices

54
Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

55
Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

56
SVC Variance Analysis - overview
Current Process :
• The SVC variance analysis is performed in 2 steps, followed by a reporting process
• GMRB Variance Analysis splitting the variance into volume, currency & cost
• Affiliate Variance analysis further explaining the cost difference

GMRB Variance Analysis Affiliate Variance analysis MCR Reporting process

• Excel reporting process to


• Based on GMRB • Provides further split of
gather Affiliate variance
submission the GMRB due to Cost to
analysis reports
• Splits the total cost business drivers
• Gathers comment on key
variance between 2 data • Covers productivity
business drivers
versions to Currency, initiatives analysis
• Is a source for
Volume, Cost, Other • Enables GMRB re-classes
management reporting
(Acquisitions) after analyzing Actual
(Flash report, OMT
• Operates on product results
presentation)
concatenates

57
GMRB Variance Analysis - overview
Current Process – GMRB Variance Analysis
GMBR splits the total variance between 2 periods into 4 drivers, based on submitted inputs.
• Due to Currency - based on currency split & current exchange rates
• Due to Volume/Mix - based on volumes aggregated to product concatenations
• Due to Cost - based on SVC & SVC Deviation submissions.

Current Reference
- = Variance
Period Cost Period Cost

Cost
Currency Volume/Mix Other
(Real Variance)

Currency Split Concatenation of FA High level per FA Acquisitions, etc


Codes Code
Variances run in GMRB
OB vs. PY OB, OB vs. RF PY AC vs. OB, AC vs. PY RF vs. OB, RF vs. PY

58
Current Stage
Current Process – Affiliate Variance Analysis
• The purpose of the Affiliate Variance Analysis is to further split the “Due to Cost” variance calculated
by GMRB to cost drivers predefined in MCR template
• Affiliates split the cost into manufacturing & productivity and track productivities execution

GMRB Currency Volume/Mix Cost Other


variance

Business Drivers
MCR Template:

Manufacturing Drivers Productivity Drivers


Price Development Sourcing
Opportunity Purchases Footprint Initiatives
Formula/ Spec. Changes Manufacturing Performance
Prior Year Deviation Spec Rationalization
Other Processing Technology

59
Affiliate Variance Analysis - overview

• In order to perform the Affiliate Variance Analysis vast amount of data


need to be combined in Excel coming from different sources:
• SVC Deviation reports <- manually analyzed in Excel based on P1 extracts
• Productivity tracking files <- manually updated Excel templates
• OB assumptions files <- Excel based/GSPS flat files (also in Excel)

No system solution supports the analysis, all steps done in Excel


The levels of granularity used by the GMRB and Affiliates are different, resulting in
reconciliation issues

Data Source Granularity


GMRB Variance Analysis Concatenations (grouping of product attributes)
Affiliate data FA codes
• Budgeting Assumptions
• Deviation Reports
Due to the manual process the workload of local Variances is very high
Total workload: 2 583man-days for OB/AC&RF

60
Affiliate Variance Analysis - overview

Example – Affiliate Variance Analysis Leaf (AC vs. OB)


Cost Variance
ISLE Variance Analysis by
Production Center, Account (3.2 Mio) Price Deviation
Material Group Cost Variance

Brazil (1.0 Mio)


Leaf Price Leaf Price Deviation by Leaf Price Malawi (0.2 Mio)
Deviation by TMC excluding currency Deviation by
TMC Origin
Spec Deviation
FA group Cost Variance
Process order Blend (0.6 Mio)
Leaf Spec & Usage by Leaf Spec & Yield
settlement Optimization
FA code, Blend by FA code, blend
reports
Spec Changes (1.2 Mio)

Yield Deviation
Initiative Value
Leaf Productivity tracking Blend DM Cost Variance
FTD 0.3 Mio
files ML001 (0.5 Mio)

Productivities Value Manufacturing Value


Blend Optimization (0.6 Mio) Price Malawi (0.2 Mio)
FTD 0.3 Mio Price Brazil (1.0 Mio)

Manufacturing performance (0.5 Mio) Spec Changes (1.2 Mio)


61
Challenges

Data Accuracy
The levels of granularity used by the GMRB (based on concatenations)
and Affiliates (based on FA codes) are different, resulting in reconciliation issues.

Alignment
Variance Analysis needs to be performed by Affiliates to reconcile with GMRB
variance analysis results. That gap is driven mainly by:
a) Different product structure
(GMRB uses concatenations vs. FA codes used for budgeting)
a) Not using transactional data by GMRB for Due to Currency calculation
b) GMRB Variance analysis setups
(e.g. allocating deviations to costs, allocating SF goods variance to volume

Process Workload
As a consequence, Affiliates’ variance analysis and reconciliation is done in Excel.
Due to the manual process the workload

62
Variance Analysis
Automate Variance Analysis in GSVC based on budget and transactional data
• Gather actuals data at detailed level from SAP (e.g. material, vendor etc.)
• Compare actuals with the budget assumptions already available in GSVC
• Enable a more flexible analysis with its drill down and slice and dice functionalities in GSVC

Budget Actuals

GSVC SAP P1
Budget Assumptions: Actuals:
- Blend Formulas - Actual Blend
- Yield KPI - Actual Yield
- Leaf prices (split by - Actual Leaf Prices (split by
price components) price components)
- Price

Variance Analysis in GSVC


• Drill down, slice & dice capabilities
GSVC

63
Leaf Variance Analysis Model

FG
DM CC
Leaf

Price var. Production var.

Currency Real price Usage Spec

Price Productivity Crop Year Factory Yield


development Mix/Inv Mix

Purchase Price Productivity Blend


Sourcing maintenance
productivity
Freight Spec
Logistic rationalization
Duty
initiatives
Processing
Leaf Warehouse technologies
Others (CPA, Leaf Admin)
Leaf initiatives
• By leaf type & origin 64
Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

65
Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

66
Due to currency calculation
Currency variance – Cost Variance between 2 periods resulting from purchasing exchange rate differences

Example
Purchases in EUR Functional currency USD
Vendor Affiliate
• Affiliate purchases 1 000 units of a products at the price of 5 EUR during each year
• Purchased goods are used to produce finish goods sold on final market
• The purchase price does not change between years
• Although the exchange rates varies between periods

Year 1 : Purchase of 1000 units @ 5 EUR EUR/USD 1.20 COGS= 1000*6.00 USD = 6 000 USD

Year 2 : Purchase of 1000 units @ 5 EUR EUR/USD 1.30 COGS = 1000*6.50 USD = 6 500 USD

Due to Currency = (500 USD)

Unfavorable impact of 500 USD due to Currency movements

67
PMI Leaf Currency methodology
Methodology alignment for Leaf currency calculation

Leaf value chain specifics


Multilevel supply chain Leaf usually purchased by PMIM Tolling , held on inventory for ~ 12 month
and resold to the manufacturing Affiliate
Long Inventories Leaf is held on inventory for long periods (up to several years), thus the
currency effect is released to P&L with long delay
Multiple shipments
PMIM Tolling Affiliate (e.g. PMPSA)
Vendor/
VI Affiliate Avg. 12 month inventory Avg. 3 month inventory

Original purchasing currency PMIM currency

Current Status:
• most Affiliates besides PMIM do not include original purchasing currency changes in Due to currency (treated as price)
• Only PMIM Tolling & Affiliates having direct shipments reflects the original purchasing currency variances

What is the due to currency variance: What is the due to currency :


- Last currency variance (PMIM?) - For entire PMI?
- Entire value chain currency variance ? - For Affiliates?

Challenges:
• Align approach on what is the currency variance
68
Currency Variance
Currency variance – definition alignment (how far should we go back?)
• Original vs. purchasing currency

Multiple shipments
PMIM Tolling Affiliate (e.g. PMPSA)
Vendor/
VI Affiliate Avg. 12 month inventory Avg. 3 month inventory

Original purchasing currency PMIM currency

Balance Sheet Analysis* Income Statement Analysis

Currency Variance Tracing currency back


only to last selling
party:
Leaf Price Variance - Vendor for PMIM
- PMIM for Affiliates

*Extraction of the original purchasing currency from the system is to be validated during the
technical design phase. 69
Due to Currency Computation
Current Process – Due to Currency (Currency Split)
• The official source of currency variance is GMRB
• GMRB does not have the information about the underlying transactional currency information.
It uses instead currency split to calculate the Due to Currency variance.

Currency split table showing the percentage currency exposure of purchased raw material (DM, Leaf).
The table is maintained by account (SVC and Deviation accounts)

Account Currency Split %


Leaf Budget Currency exposure
GMRB 4510 – Leaf SVC EUR 80
Calculation by account
4510 – Leaf SVC USD 20

Split is input based on OB assumptions, but not updated in the Actual periods during the year.

The currency split is further used by GMRB to translate the SVC costs to underlying
purchasing currencies and based on that calculate the Due to Currency variance.

70
Current Stage
Currency Split - challenge
• Because of inventory duration there is a timing differences between the purchases
and the release of SVC
• In case of Exchange rates fluctuation that may lead to discrepancies
• Significant differences vs. the Due to Currency need to be re-classed

Rate used by GMRB


X-rate = 41 RUB/EUR X-rate = 38 RUB/EUR to calculate due to
Purchase of 10 mio kg of currency
Finish goods sale,
Leaf @ 10 EUR/kg SVC posting

Inventory
January April

In order to calculate the “real” Due to currency effect Affiliates need to either:
 Analyze purchasing data to retrieve the currency variance
 Recalculate the Due to Currency taking into account the average inventory duration

71
Due to Currency - challenges

Data Accuracy
The variance generated by the currency split may differ from transactional data
because GMRB does not store purchasing/transactional currency info

Process Workload
Calculating and validating the impact of historical/purchasing currency in
the deviation is a manual process requiring effort from Affiliates, Regions, PMI

Alignment
No system solution or standard approach to automatically identify the
transactional currency info on Actuals. Affiliates commonly derive high level
assumptions to compare budget vs. actual purchasing currency rates

(e.g. average the X-rates over the last 3-4months, depending on leaf duration)

72
Due to Currency computation
Automate Currency calculation based on transactional data

• Gather budget assumptions in transactional currency in GSVC & translate using budget
exchange rates
• Gather actual transactional data from SAP P1
• Perform Variance Analysis in GSVC by comparing the budget & transactional data,
Due to Currency result to be sourced to GMRB
Thus, removing the need for currency split
Actuals
OB

SAP P1
GSVC
Actuals:
Budgeting Assumptions: - Transactional purchasing data
- Inventory in Affiliate/purchasing currency (in transactional and Affiliate currency)
- Planned purchases in purchasing currency - Actual exchange rates
- Budget exchange rates

GSVC Sourcing GMRB Variance Analysis


Removing currency split
73
Due to Currency computation example
Base period (AC 2010)
Price - Price
Purchase Purchase x-rate transfer transferred x-rate Transfer to Consumption
Volume mix price currency (EUR/USD) to PMIM currency Value (EUR/CHF) PMP SA currency value
2008 1,000.00 33% 5.00 USD 1.25 4.00 EUR 4,000 1.35 5.40 CHF 5,400
2009 1,000.00 33% 5.00 USD 1.30 3.85 EUR 3,846 1.30 5.00 CHF 5,000
2010 1,000.00 33% 5.00 USD 1.35 3.70 EUR 3,704 1.25 4.63 CHF 4,630
Total 3,000 100% 5.00 USD 1.30 3.85 EUR 11,550 1.30 5.01 CHF 15,030
Average original purchasing currency by TMC Average transfer currency by TMC

Current period (AC 2011)

Purchase Purchase x-rate transfer transferred x-rate Transfer to Consumption


Volume mix price currency (EUR/USD) to PMIM currency Value (EUR/CHF) PMP SA currency value
2009 1,000.00 33% 5.00 USD 1.30 3.85 EUR 3,846 1.30 5.00 CHF 5,000
2010 1,000.00 33% 5.00 USD 1.35 3.70 EUR 3,704 1.25 4.63 CHF 4,630
2011 1,000.00 33% 5.00 USD 1.40 3.57 EUR 3,571 1.20 4.29 CHF 4,286
3,000 100% 5.00 USD 1.35 3.71 EUR 11,121 1.25 4.64 CHF 13,915
Average original purchasing currency by TMC Average transfer currency by TMC

Total Variance 1 114 CHF

Currency Price Production variance

Original Affiliate

537 CHF 577 CHF


74
Agenda
 Leaf Budget assumptions flow
 Leaf Budget Calculation
 Actual values posting
 Reporting & Variance Analysis
 Due to Currency Calculation
 Leaf variance analysis Models

75
Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

76
TO BE solution
Leaf Price Variance: FG
Further decomposition
DM CC
of price to drivers. Leaf

Price var. Production var.

Currency Real price Usage Spec

Price Productivity Crop Year Factory Yield


development* Mix/Inv Mix

Purchase Price Productivity Blend


Sourcing maintenance
productivity
Freight Spec
Logistic rationalization
Duty
initiatives
Processing
Leaf Warehouse technologies
*Maintain variance analysis at AS IS
Others (CPA, Leaf Admin) granularity—per leaf type origin, Leaf initiatives
• By leaf type & origin TMC, etc. 77
Price Decomposition
Decompose only the significant components and group/bucket together the small leaf
cost items.

Budget Actual
Decompose leaf cost component to Maintain PO Conditions
SAP P1 GSVC
drivers Condition Leaf Cost
Cost Component Type
Purchase Price XX Purchase Price
Freight XX Freight
Duty XX Duty
ROCE versus XX ROCE
Others (CPA, Leaf Admin,WHS, etc) XX Others (CPA, Leaf Admin, WHS, etc)

VA
Leaf Price Deviation Amount By TMC/Lot
Purchase Price xx
Freight xx
By type/Origin
Duty xx
ROCE xx By plant

Others (CPA, Leaf Admin, WHS, etc) xx


By Purchase Order
Total Leaf Price Deviation xx
VA Model

78
Leaf Price Variance
- Due to Crop Year FG
- Mix/Inventory Mix DM CC
Leaf

Price var. Production var.

Currency Real price Usage Spec

Price Productivity Crop Year or Factory Yield


development Inventory Mix

Purchase Price Productivity Blend


maintenance
Freight Sourcing Spec
productivity rationalization Blend
Duty Averaging
Logistic Processing
Leaf Warehouse technologies
initiatives
Others (CPA, Leaf Admin)
Leaf initiatives
• By leaf type & origin 79
Crop Year Mix -
Automatically calculate Due to Crop mix using budget & transactional data
Budget Actual

Crop year mix assumption


Per TMC SAP P1
GSVC
Leaf consumption report grouped by
TMC/crop year

Crop Year Crop Mix Price (EUR) Value Crop Year Crop Mix Price (EUR) Value
Y-3 (2009) 20 % 3.00 60.00 Y-3 (2009) 25 % 3.00 75.00
Y-2 (2010) 30 % 3.50 105.00 Y-2 (2010) 20 % 3.50 70.00
Y-1 (2011) 30 % 4.50 135.00 Y-1 (2011) 15 % 4.50 67.50
Y (2012) 20 % 5.00 100.00 Y (2012) 40 % 5.00 200
Average price by TMC 4.00 400.00 Average price by TMC 4.13 413.00

By TMC

Due to Crop Mix


By type/Origin

By plant GSVC 80
Process Flow
Budget Budget Reporting &
Actuals posting
Assumptions Calculation Variance Analysis

Production
Volume / OVF

Budget BOM

Leaf Blending Leaf consumption/ Actual BOM


Avg Blend Formula Currency
Blend Formula
\
Blend Assumption
Actual Yield (Usage)
Price
Yield

Leaf Price Leaf Budget Price Actual Leaf Price


Specification
LPP Price

Leaf Inventory Leaf Actual Costs


Leaf Budgeting
• SVC Rates • SVC Usage
Crop Mix
• SVC Deviations • SVC Deviations
Currency

Productivity PCUs
Initiatives

81
Leaf Production Variance:
Enhancing variance analysis of FG
Leaf Usage & Spec deviation in
DM CC
GSVC. Leaf

Price var. Production var.

Currency Real price Usage Spec

Price Productivity Crop/mix Factory Yield


development

Purchase Price Productivity Blend


Sourcing maintenance
productivity
Freight Spec
rationalization *Maintain
Logistic
Duty variance analysis
initiatives
Processing at AS IS
Leaf Warehouse technologies granularity—per
blend, FA code, etc
Others (CPA, Leaf Admin)
Leaf initiatives
• By leaf type & origin 82
Leaf Production Variance Analysis

• Perform variance analysis in GSVC by gathering actuals data at the detailed level
from SAP (per process order, blend formula, TMC, lot, etc). These will be compared
with the budget assumptions already available in GSVC.
• GSV tool will enable a more flexible analysis with its drill down and slice and dice
functionalities. The standard deviation reports in SAP are static.

Costing BOM Prod BOM Actual Usage


Spec Deviation Usage Deviation
SAP P1

Spec Deviation Usage Deviation

Blend Averaging Primary Yield


GSVC
Blend Maintenance Secondary Yield

Target Weight
By blend code, process order, etc
83
Backup

84