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Case Study: Texas Instruments
The Educational Division of Texas Instruments produces calculators, programmable calculators and educational software. Texas Instruments produces the main electronic elements of this product range in facilities in the Far East or in the US. Many in-house activities such as design and central procurement planning are conducted in a global manner with immediate participation from all regions. The specific regional activities are concentrated in sales, distribution, and some final packaging and assembly. Also, some multi-language user documentation is produced by subsidiary companies.
The Educational Division of Texas Instruments is operating through 16 different subsidiaries in Europe and Asia. All European subsidiaries are organized in Commissionaire relationships, all Asian ones in Buy-Sell relationships. The 'Principal', the US Corporation of Texas Instruments, is registered in Holland and in Singapore to operate a regional warehouse, to receive and ship goods. This corporation also owns all inventory stocks in the warehouse. While sales are processed through the appropriate country entity, all shipments are made centrally from the Netherlands directly to the customer. The customer will receive an invoice containing the legal information of the local company deemed to have made the sale. The sales, customer service, technical support and finance operations are concentrated into a small number of shared service centers (Brussels, Nice, Munich, Stockholm).
With the decision to upgrade to Oracle Release 11, Texas Instruments faced the challenge of how to best represent this multinational structure within the Oracle applications. Prior to this implementation Europe and Asia both operated on stand-alone systems that had been heavily customized to accommodate the organizational setup.
The standard approach for handling multiple companies within Oracle applications is to have each company represented separately. Each legal company has its own set of application modules: a Set of Books in GL, an Operating Unit with Receivables, Order Management, Payables and Purchasing, and Inventory Organizations dependent on each Operating Unit. This approach will provide a working solution and generally meet the legal and fiscal requirements. However, it does not represent the streamlined cross-entity business organization and tends to ignore the benefits of the 'Commissionaire' and Shared Service Center models. In fact, for purposes of the Oracle implementation Texas Instruments would have to establish and operate full trading companies in each country. This meant setting up each module for each legal entity, and maintaining them into the future. The significant effort involved in a full period end close procedure for each company independently, with the attendant reconciliation had to be addressed. Discrete company representation would break up the operation of the central warehouses into separate order allocations and pick runs by selling entity, instead of allowing the cross-entity prioritization and optimization.
The processing of inter-company transactions was problematic, but core to this trading model. Two inter-company transactions are needed for each customer sales transaction (deemed purchase and deemed sale). Oracle Release 11 has a suite of concurrent programs that will create inter-company Payables and Receivables invoices from a ‘drop ship’ transaction. However, in the current releases, inter-company pricing is based on a fixed inter-company price list by item, not on a flexible 'Sales price minus commission' or 'Inventory cost plus markup' price. Lastly, with standard inter-company transactions each of these Payables and Receivables transactions must be individually cleared through payment. Most companies prefer to settle with a single net inter-company transaction. Overall, the effort involved in the processing of these inter-company transactions had no added value to the organization.
Business analysis capabilities needed consideration. Inter-company transactions often tend to distort the analysis of enterprise sales and profits. They may inflate the sales figures through inter-company sales and distort the margins through inter-company markups. Only the month-end inter-company reconciliation and elimination provides a true financial picture. For daily operational analysis customized reporting or data warehousing facilities are needed.
The final consideration was over the operation of shared service centers. The standard approach (prior to R12) requires separate responsibilities to be used for the processing of data for each separate company. This requires users to frequently switch responsibilities in the normal course of their duties. This causes restrictions in visibility and processing of data across companies and makes cross-country shared service centers for sales and customer service particularly problematic and time consuming. As a shared service center is responding to activity across many different companies, it is not always obvious which company a transaction has been registered with, in order to find and process it further.
The alternative approach implemented for Texas Instruments streamlined the use of the Oracle applications and avoided these problems. The key for the organizational representation was in the understanding of the TI Commissionaire agreements. All the separate transactions, processed and reconciled across companies, are mirrored directly from the trade sale to the end customer through the Commissionaire agreement.
The key feature of the installation is to operate all the trade activity for all the separate legal companies through only one operating unit, and thus one Order Management and associated Receivables module. Although some impact occurs from this approach, the key issues around the logistics operation, shared service centers and full regional visibility disappear. This single operating unit that holds the data for all the legal companies is often referred to as a 'Virtual Operating Unit'.
As all the data is held within one operating unit, each responsibility can see and process data for all of the companies involved. All orders can be processed through a common point of entry. Picking goods for delivery can be accomplished in a single strike. Cash can be matched to invoices across different companies. Some customizations were necessary to provide printed invoices with the appropriate company details. A form was provided to maintain the static legal and commercial data about each of the Commissionaire companies. In addition a simple facility was produced to print the various headings and titles required on the invoice in appropriate languages.
A modification was provided to generate invoice sequence numbers based on the Commissionaire company responsible for the trade sale, to comply with local legal requirements.
From this base, two main functions could be provided. Firstly a program was provided to print all the Inter-Company Invoices directly from the associated trade sales.
These contained the details of the shipping organization, and the agreed inter-company prices. Secondly a program was provided to produce all the necessary data from which each subsidiary’s VAT/GST tax returns could be compiled. This included both the trade and inter-company transactions.
As all the financial transactions were within a single operating unit, Texas Instruments closed all order processing, receivables and payables for the 16 subsidiaries with a single period end close. Texas Instruments has a corporate ledger of record hosted within a separate SAP system. All the financial transactions posted to the Oracle GL for the invoices and cash receipts etc., were transferred to this ledger system. Each transaction provides sufficient information to identify the individual subsidiary, its customer trade transactions and the derived intercompany transaction. This Oracle application model for Texas Instruments went live in April 2000 and has operated successfully since then.