History and Overview of SAP R/3

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May 02, 2011 By Sekhar Suman

What is SAP?

The company SAP was founded in Waldorf, Germany, in 1972 by five ex IBM engineers (Dietmar Hopp, Hans-Werner Hector, Hasso Plattner, Klaus E. Tschira, Claus Wellenreuther). SAP stands for Systemanalyse und Programmentwicklung or "System Analysis and Program Development". This is chaged to Systeme,Anwendungen und Produkte in der Datenverarbeitung or "Systems, Applications, Products in Data Processing). Headquartered in Waldorf, Germany, SAP employs 29,000 people in more than 50 countries.


SAP Founders

                           SAP founders Klaus Tschira, Hasso Plattner, Dietmar Hopp, and Hans-Werner Hector

SAP R/1, financial accounting software real time business data processing was the first product and Imperial Chemical Industries (ICI), a British company is the first client. In 1979, SAP released a rudimentary version of its ERP product, R/2 with applications for accounting,manufacturing,supply chain and HR. By 1980 SAP had 50 of the largest 100 German companies as customers.

The original founders have been so successful in growing SAP into a global player such that SAP AG is now the third largest independent software supplier in the world, with over 140,000 installations, approx 109,000 customers, with approxmately 12 million people users using SAP software each day.


What made this company so successful?


The first big scale product SAP launched in 1979 was SAP R/2. Running on mainframe computers, R/2 was the first integrated, enterprise wide packaged software, and it was an immediate success in Germany. 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 another success for SAP, especially in the North American region into which SAP had expanded in 1988.

The growth of SAP R/3 in North America has been nothing short of stunning. Within a five 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. These solutions are tailored to meet the specific requirements of 23 different industry categories, from aerospace and defense to utilities, giving SAP a competitive advantage that no other company can match.

SAP R/3 is delivered to a customer with selected standard processes turned on, and many other optional processes and features turned off. At the heart of SAP R/3 are about 15,000 + 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. Functionality included ranges from financial accounting (e.g. general ledger, accounts receivable, accounts payable etc) and controlling (e.g. cost centers, profitability analysis etc) to sales and distribution, production planning and manufacturing, procurement and inventory management, and human resources.

The start of the internet age at the end of the 90’s was a big challenge for the big players of the enterprise software industry. While trying to grow at a high speed, the companies, SAP included, were racing not to miss the internet train. Businesses had to be internetnabled, ebusiness quickly became the buzzword of the decade, and the software companies introduced new concepts, new products.

Today, SAP offers solutions that improve virtually every aspect of business, government, and education.



Why SAP is 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:


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.


SAP FI Financial module is maybe one of the most important modules behind SAP. It was designed for meeting all the accounting and financial needs of an organization. Within this module Financial Information is available for revision in real time.


The real-time functionality of the SAP modules allows for better decision making and strategic planning. The FI (Financial Accounting) Module integrates with other SAP Modules such as MM (Materials Management), PP (Production Planning), SD(Sales and Distribution), PM (Plant Maintenance),and PS (Project Systems).

The FI Module also integrates with HR(Human Resources) which includes PM(Personnel Management), Time Management, Travel Management, Payroll.Document transactions occurring within the specific modules generate account postings via account determination tables.

Such a complex module is formed by several sub-components also known as sub-modules:


  • Accounts Receivables: Responsible for handling all account postings and records generated as a result of Customer sales activity.Postings are automatically updated in the General Ledger . Within this module aging of receivables and specific customer analysis can be done. This module is integrated with the General Ledger (FI-GL) Sales and Distribution (SD) and Cash Management Modules.


  • Accounts Payable: Records account postings generated as a result of Vendor purchasing activity. Automatic postings are generated in the General Ledger as well. Payment programs within SAP also enables the payment management of payable documents through several gateways.


  • Asset Accounting: Used for managing company’s Fixed Assets. SAP allows you to categorize assets and to set values for depreciation calculations in each asset class.


  • Bank Accounting: Management of bank transactions in the system including cash management.


  • Consolidation: combines financial statements of multiple entities within an organization. These statements provide an overview of the financial position of the whole company.


  • Funds Management: Provides budget management for revenues and expenses within the company as well as track these to the area of responsibility.


  • General Ledger/New General Ledger: These are fully integrated with the other SAP Modules. It is within the General Ledger that all accounting postings are recorded. Financial Impacts from other modules are posted on the GL. These postings are displayed in real-time providing up-to-date visibility of the financial accounts.


  • Special Purpose Ledger: defines ledgers for reporting purposes. Data can be gathered from internal and external applications and processed through SAP.


  • Travel Management: provides management of all travel activities including booking trips and handling of expenses associated with travel.


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.

sap controlling


The SAP CO (Controlling) Module provides supporting information to Management for the purpose of planning, reporting, as well as monitoring the operations of their business.


Management decision-making can be achieved with a high level of information provided by this module.

The CO (Controlling) Module has several sub modules as follows:

  • Cost Element Accounting: provides all information related to the costs and revenue within an organization. This module works fully integrated with FI so all postings are automatically updated from FI (Financial Accounting) to CO (Controlling). “Cost elements” are the basis for cost accounting since they enable the User to display costs for each of the accounts that have been assigned to the cost element. Examples of accounts that can be assigned are Cost Centers, Internal Orders, WBS (work breakdown structures).


  • Cost Center Accounting: provides information related to the costs incurred by the business. Cost Centers within SAP are normally assigned to departments or manager responsible for certain areas of the business, as well as functional areas within the organization. Marketing, Purchasing, Human Resources, Finance, Facilities, Information Systems, Administrative Support, Legal, Shipping/Receiving, or even Quality are normally handled with Cost Centers and specific Cost Centers are normally created for each functional areas.


  • Internal Orders: Internal Orders are used as a method to collect costs and business transactions related to a specific task.  This level of monitoring is very detailed. Management usually uses this functionality to review Internal Order activity for better-decision making purposes.
  • Activity-Based Costing (ABC): This sub module allows a better definition of the source of costs to the process driving the cost. Activity-Based Costing enhances Cost Center Accounting allowing a process-oriented and cross-functional view of the cost centers. It can also be used with Product Costing and Profitability Analysis.
  • Product Cost Controlling: Provides the ability to analyze product costs allowing optimal price(s) decision making to market products. Within this module of CO (Controlling) planned, actual and target values are analyzed. This module as well has two Sub-components:


o   Cost Object Controlling: includes Product Cost by Period, Product Cost by Order, Product Costs by Sales Orders, Intangible Goods and Services, and CRM Service Processes.

o   Actual Costing/Material Ledger: includes Periodic Material valuation, Actual Costing, and Price Changes.

  • Profitability Analysis: Provides the functionality and provides the ability to review information related to the company’s profit or contribution margin handled by business segment.  The CO (Controlling Module) within the Profitability Analysis provides support for the following two methods to handle the analysis:

o    Account-Based Analysis: uses an account-based valuation approach. In this analysis, cost and revenue element accounts are used. These accounts can be reconciled with FI (Financial Accounting).

o   Cost-Based Analysis: uses a costing based valuation approach as defined by the User.


  • Profit Center Accounting: provides visibility of an organization’s profit and losses by profit center. The methods which can be utilized for EC-PCA (Profit Center Accounting) are period accounting or by the cost-of-sales approach. Profit Centers can be set-up to identify product lines, divisions, geographical regions, offices, production sites or by functions. Profit Centers are used for Internal Control purposes enabling management the ability to review areas of responsibility within their organization. The difference between a Cost Center and a Profit Center is that the Cost Center represents individual costs incurred during a given period and Profit Centers contain the balances of costs and revenues.

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.

QM Quality Management--is a quality control and information system supporting quality planning, inspection, and control for manufacturing and procurement.


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.

Sales & Distribution (SD) is one of the core and most-used modules of SAP R/3 products beside Financial (FI),Controlling(CO), Material Management (MM), and Production Planning (PP) modules.

The Sales & Distribution (SD) module consists of various components also called sub-modules. Which are known as:

  • (SD-BF) Basic Functions and Master Data in SD Processing. (Also subdivided in several components as: Pricing, Output…etc)
  • (SD-BF-PR) Pricing and Conditions
  • (SD-BF-EC) Extra Charge
  • (SD-BF-CM) Availability Check and Requirements in Sales and Distribution Credit and Risk Management
  • (SD-BF-AS) Material Sorting
  • (SD-BF-OC) Output Determination
  • (SD-SLS) Sales
  • (SD-SLS-OA) Scheduling Agreements for Component Suppliers
  • (SD-SLS-OA) Customer Service Processing
  • (SD-FT) Foreign Trade/Customs
  • (SD-BIL) Billing
  • (SD-BIL-IV) Payment Card Processing
  • (CAS) Sales Support: Computer-Aided Selling
  • (SD-EDI) Electronic Data Interchange/IDoc Interface
  • (LE-SHP) Shipping
  • (LE-TRA) Transportation
  • (SD-IS-REP) Reports and Analyses

The main areas covered by this module and the sub modules are:

  • Written by

    Sekhar Suman

1 Review


Excellent Article on SAP

Thank you for this article. This gives me a good background of SAP.

June 2013

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