Which Inventory Valuation Method Is Right for Your Make-to-Order Scenario?

  • by Srihari Subramaniam, Manager, Capgemini US LLC
  • April 2, 2010
/Financials
In a make-to-order scenario, you have three inventory valuation methods you can use. It is crucial to choose the right method for each order — if you choose the wrong one, you cannot correct it, so you must cancel the order and re-enter it in the system. Walk through each method and find out when to use each.
Key Concept
Inventory valuation is the act of quantity and value updates to the material master. It is one of the key processes for an inventory controlling team. This team has to understand the end-to-end (E2E) process — from purchase order to goods receipt and updating inventory by quantity and value into stock ledger — to make sure the valuation is done correctly. Incorrect valuation affects financial reporting. With make-to-order scenarios, you can perform inventory valuation in three different ways.

Inventory valuation in a make-to-order (MTO) process in an SAP system can be done in many different ways, though you have to be sure the inventory valuation is set correctly for MTO, no matter which method you choose. Otherwise, created orders update the stock ledger as unrestricted stock instead of being restricted to a specific customer’s sales order. This negatively affects your inventory valuation because it updates the moving average price (MAP) of the article as opposed to stock being restricted to the sales order. Fixing those orders after an update is difficult. The SAP system doesn’t allow you to change the requirement type in the order once it is created. You have to cancel the order and create a new order after you fix the requirement type or class.

With these different types of methods to choose from, it is important to select the best one for each scenario.  First I will explain the concept of inventory valuation and then I will explain how the inventory updates the material master for an MTO goods receipt.  Then I will take you through the three scenarios and explain how to use each method.

Srihari Subramaniam

Srihari Subramaniam is an SAP manager at Capgemini US LLC, with 14 years of experience in SAP consulting. He has thorough knowledge in the integration of SD, MM, FI/CO, POS DM and PP. Srihari has worked in projects for industries such as high-tech manufacturing, telecommunications, chemical, retail (IS-R), and apparel.

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