Introduction to SAP

What is SAP?

SAP is the leading Enterprise Information and Management Package worldwide. Use of this package makes it possible to track and manage, in real-time, sales, production, finance accounting and human resources in an enterprise.

SAP the company was founded in Germany in 1972 by five ex-IBM engineers. In case you’re ever asked, SAP stands for Systeme, Andwendungen, Produkte in der Datenverarbeitung which – translated to English – means Systems, Applications, Products in Data Processing. So now you know! Being incorporated in Germany, the full name of the parent company is SAP AG. It is located in Walldorf, Germany which is close to the beautiful town of Heidelberg. SAP has subsidiaries in over 50 countries around the world from Argentina to Venezuela (and pretty much everything in between). SAP America (with responsibility for North America, South America and Australia – go figure!) is located just outside Philadelphia, PA.

The original five founders have been so successful that they have multiplied many times over such that SAP AG is now the third largest software maker in the world, with over 17,500 customers (including more than half of the world’s 500 top companies). SAP employs over 27,000 people worldwide today, and had revenues of $7.34 billion and Net Income of $581 million in FY01. SAP is listed in Germany (where it is one of the 30 stocks which make up the DAX) and on the NYSE (ticker:SAP).

There are now 44,500 installations of SAP, in 120 countries, with more then 10 million users!

So what made this company so successful? Back in 1979 SAP released SAP R/2 (which runs on mainframes) into the German market. SAP R/2 was the first integrated, enterprise wide package and was an immediate success. For years SAP stayed within the German borders until it had penetrated practically every large German company. Looking for more growth, SAP expanded into the remainder of Europe during the 80’s. Towards the end of the 80’s, client-server architecture became popular and SAP responded with the release of SAP R/3 (in 1992). This turned out to be a killer app for SAP, especially in the North American region into which SAP expanded in 1988.

The success of SAP R/3 in North America has been nothing short of stunning. Within a 5 year period, the North American market went from virtually zero to 44% of total SAP worldwide sales. SAP America alone employs more than 3,000 people and has added the names of many of the Fortune 500 to it’s customer list (8 of the top 10 semiconductor companies, 7 of the top 10 pharmaceutical companies etc). SAP today is available in 46 country-specific versions, incorporating 28 languages including Kanji and other double-byte character languages. SAP also comes in 21 industry-specific versions.

SAP R/3 is delivered to a customer with selected standard process turned on, and many many other optional processes and features turned off. At the heart of SAP R/3 are about 10,000 tables which control the way the processes are executed. Configuration is the process of adjusting the settings of these tables to get SAP to run the way you want it to. Think of a radio with 10,000 dials to tune and you’ll get the picture. Functionality included is truly enterprise wide including: Financial Accounting (e.g. general ledger, accounts receivable etc), Management Accounting (e.g. cost centers, profitability analysis etc), Sales, Distribution, Manufacturing, Production Planning, Purchasing, Human Resources, Payroll etc etc etc. For a full description of the modules included in SAP, see the related articles. All of these modules are tightly integrated which – as you will find out – is a huge blessing … but brings with it special challenges.

SAP are maintaining and increasing their dominance over their competitors through a combination of

  • embracing the internet with (a confusing name we believe) to head off i2 etc
  • extending their solutions with CRM to head off Siebel
  • adding functionality to their industry solutions

What Makes SAP different?

Traditional computer information systems used by many businesses today have been developed to accomplish some specific tasks and provide reports and analysis of events that have already taken place. Examples are accounting general ledger systems. Occasionally, some systems operate in a “real-time” mode that is, have up to date information in them and can be used to actually control events. A typical company has many separate systems to manage different processes like production, sales and accounting. Each of these systems has its own databases and seldom passes information to other systems in a timely manner.

SAP takes a different approach. There is only one information system in an enterprise, SAP. All applications access common data. Real events in the business initiate transactions. Accounting is done automatically by events in sales and production. Sales can see when products can be delivered. Production schedules are driven by sales. The whole system is designed to be real-time and not historical.

SAP structure embodies what are considered the “best business practices”. A company implementing SAP adapts it operations to it to achieve its efficiencies and power.

The process of adapting procedures to the SAP model involves “Business Process Re-engineering” which is a logical analysis of the events and relationships that exist in an enterprise’s operations.



SAP Application Modules


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SAP Application Modules

SAP has several layers. The Basis System is the heart of the data operations and should be not evident to higher level or managerial users. Other customizing and implementation tools exist also. The heart of the system from a manager’s viewpoint are the application modules. These modules may not all be implemented in a typical company but they are all related and are listed below:

  • FI Financial Accounting–designed for automated management and external reporting of general ledger, accounts receivable, accounts payable and other sub-ledger accounts with a user defined chart of accounts. As entries are made relating to sales production and payments journal entries are automatically posted. This connection means that the “books” are designed to reflect the real situation.


  • CO Controlling–represents the company’s flow of cost and revenue. It is a management instrument for organizational decisions. It too is automatically updated as events occur.
  • AM Asset Management–designed to manage and supervise individual aspects of fixed assets including purchase and sale of assets, depreciation and investment management.
  • PS Project System–is designed to support the planning, control and monitoring of long-term, highly complex projects with defined goals.
  • WF Workflow–links the integrated SAP application modules with cross-application technologies, tools and services
  • IS Industry Solutions–combine the SAP application modules and additional industry-specific functionality. Special techniques have been developed for industries such as banking, oil and gas, pharmaceuticals, etc.
  • HR Human Resources–is a complete integrated system for supporting the planning and control of personnel activities.
  • PM Plant Maintenance–In a complex manufacturing process maintenance means more than sweeping the floors. Equipment must be services and rebuilt. These tasks affect the production plans.
  • MM Materials Management–supports the procurement and inventory functions occurring in day-to-day business operations such as purchasing, inventory management, reorder point processing, etc.
  • QM Quality Management–is a quality control and information system supporting quality planning, inspection, and control for manufacturing and procurement.
  • PP Production Planning–is used to plan and control the manufacturing activities of a company. This module includes; bills of material, routings, work centers, sales and operations planning, master production scheduling, material requirements planning, shop floor control, production orders, product costing, etc.
  • SD Sales and Distribution–helps to optimize all the tasks and activities carried out in sales, delivery and billing. Key elements are; pre-sales support, inquiry processing, quotation processing, sales order processing, delivery processing, billing and sales information system


Each of these Modules may have sub-modules designed for specific tasks as detailed below.

System-Wide Features


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System-Wide Features

SAP uses certain system wide features that should be understood at the outset. These are used to logically, safely and flexibly organize the data in a business enterprise.


  • Customizing

is the configuring of the system to represent your organization’s legal structure, reporting requirements and business processes. Internal reporting is a managerial tool in the daily operations. External reporting is required by governmental units controlling the legal structure of the corporation, such as, the IRS state taxing authorities, SEC etc.

  • Organizational Elements
    • Financial–
      • client is a legal and organizationally independent unit at the highest level in SAP
      • company is an independent legal entity within a client
      • business areas are used to produce profit and loss statements and balanced sheets across marketing lines
    • Materials Management
      • Purchasing units
      • Plants
    • Sales and Distribution
      • Sales Organization
      • Distribution channel
      • Division
  • Master Data is records that remain in the database over an extended period of time. Examples:
    • Customer Master
    • Vendor Master
    • Material master
    • Account Master

This structure eliminates redundant data and is shared by all SAP Modules. It is a critical aspect of the robustness of the system.

  • Employee Self Service--your employees have access to the own HR records over the Internet.
  • Security is administered for objects, profiles and authorizations. Users are only authorized to see or change the parts of the system required by their job responsibilities.
  • Classification is the assignment of objects to a class. Each class has standard characteristics.
  • Matchcodes are query tools used to find specific information using search methods.

Business Processes and SAP Functionality

In order to understand a system like SAP a thorough understanding of the events and relationships that take place in a business is required. It is not enough to just realize the Sales, Production, Finance and Accounting have jobs to do in a business. The exact details of each action, the timing of that action and its interrelationships with every other process must be understood. In many large operations there may be no person that has a complete grasp of the situation. Before an operation can be automated or computerized a thorough study of the business must be undertaken. This task is called Business Process Engineering.


Sequential Walk Through


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Sequential Walk Through

  • Sales
    • Pre-sales activity–planning and availability support for the sales personnel
    • Sales Order–The actual entry of the sales order into the system done by the salesperson at the point of sales perhaps using a PC and Internet connections.
    • Determining where the most efficient source of the ordered product is in inventory and shipping it.
    • Delivery
    • Customer Billing
    • Customer Payment


  • Production
    • Sales and Operations Planning SOP where the sales forecasts are used in a production planning model to check feasibility.
    • Master Production Scheduling MPS–The actual plan for the whole production process
    • Material Requirements Planning MRP–Where the production plan is actually converted into raw materials input requirements.
    • Planned Order–When materials are available and capacity exists this plan is created and then converted into a
    • Production Order.
    • Shop Floor Control where the actual production takes place and is registered into the system as finished goods.
  • Purchasing
    • Requisition–Once the Production manager plans to manufacture something a requisition for the raw materials required but not on hand must be prepared.
    • Vendor Selection–made by the purchasing department
    • Purchase order sent
    • goods receipt increasing inventory
    • Invoice verification as it is received from vendor
    • Payment to vendor.
  • Finance and Accounting
    • Sales events must be captured at the proper time into the ledger system
    • Inventory must be adjusted to match goods shipped
    • Inventory must be adjusted to match raw materials received
    • Inventory must be adjusted to move value from raw materials to work in process
    • Inventory must be adjusted to increase finished goods when they are produced
    • Accounts Payable must be set up for purchases
    • Accounts Receivable must reflect goods billed but not yet paid for

Business Process Engineering must not only identify all these steps but must also find the most efficient way to minimize redundant actions. For example, when sales are made, inventory and manufacturing plans should be automatically updated. When manufacturing plans are updated raw materials should be automatically ordered from vendors. When finished goods are shipped customers should be automatically billed at the same instant. Real situations are far more complex than the simple explanation above.