Driving Profitability: Unraveling the Dynamics of Internal Charge Management in Transportation

In the intricate web of global supply chain operations, efficient internal charge management emerges as a pivotal factor influencing an organization’s profitability. These internal charges, meticulously allocated within an organization’s transportation processes, serve as the financial compass, guiding companies through the complexities of cost tracking and revenue management.

In our latest blog post, we delve into the realm of “Internal Charge Management and Profitability,” shedding light on how SAP solutions, backed by our expertise as a SAP Silver Partner, empower businesses to navigate the nuanced landscape of transportation operations.

Internal charges are used to allocate costs and revenues within an organization’s transportation processes. These charges help track and manage the financial aspects of transportation operations, such as fuel costs, handling fees, and other expenses incurred during the transportation process. By using internal charges, companies can accurately assign costs to various cost centres, departments, or projects, facilitating better financial analysis and decision-making.

Use Cases

Case 1

Using Internal Charges and Internal Settlement is an effective method for clearly distinguishing between the revenue generated and the costs incurred when executing a shipment. These charges can be calculated at Forwarding Order level, in some cases at forwarding Quotation Level as well which require enhancement.

To understand this case let’s take an example, Company ABC is a logistics service provider based out of Gujrat, India and delivers its services all over the globe. Company ABC gets its requirement from both Shippers and Agents in the market who works on the behalf of other customers and do all the engagement with carriers and prepare all the required documents during the whole shipment.

In this arrangement Company ABC and its customer (either Shipper or Agent) have established a forwarding agreement stipulating a fixed shipping fee of $1000 to facilitate the seamless transportation of cargo from City A to City B. Similarly, an internal agreement outlines the various cost components associated with this shipment, encompassing documentation, handling, and carrier expenses, which collectively amount to $800. After deducting the total cost of $800 from the fixed shipping fee of $1000, Company ABC yields a profit of $200. This calculated profit is the gross revenue generated through the forwarding agreement and denotes the effective management of costs, resulting in a healthy and sustainable profit margin for the company.

Case 2

Internal charges and internal settlement can be used in case when there is any involvement of intermediate company which is a Sub division of the parent company.

To understand this use case better let’s take an example, Company PQR, situated along the western coast of the Indian subcontinent, specializes in the production of chocolate cookies having customers all over the globe. Another company UVW, operating as an intermediary entity of company PQR is a coffee beans seller in the market. This arrangement entails that both companies, PQR and UVW, share a common GL account.

Company UVW sells its coffee beans both to its parent company PQR and to customers in the market. When UVW conducts transactions with external customers, the cost incurred, and the revenue generated can be seamlessly recorded in the GL account. However, when it engages in sales to the parent company, direct updates to the GL account are not feasible and may potentially lead to settlement disputes as both are sharing common GL and resource so cost and revenue can vary.

Prerequisites

• Check the org structure for Intracompany settlement
  To initiate internal settlements, ensure the ‘Intracompany Settlement’ checkbox is enabled within the organizational unit, along with the ‘GRP Logistics’ checkbox in PPOME.
  

For the sake of better understanding, here is a forwarding order created for a customer, having all the essential information required for charge calculation, such as

• Sales Org Info
  
• Transportation Mode, Shipping Type, Movement type, Container/Product info
  
  
• Business partners
  
  
• Locations
  
  
• Execution Org Info
  

Internal Charges and Profitability in forwarding order

The main concept here to understand here is that whenever a transaction takes place between the main company and intermediary company, we have internal charges in place through internal agreements. These charges enable us to determine the total cost incurred in the shipment. Conversely, the charges derived from the forwarding agreement indicate the total revenue from the parties and business partners involved.

To resolve this issue internal settlement is the easiest way and to configure this type of requirement the below mentioned steps can be followed.

1. Calculating Revenue using Forwarding Agreement
   

   Forwarding agreements help in tracking and documenting the revenue earned from various parties and business partners involved in the logistics and transportation process.
   By clicking on Calculate charges, the system checks if any forwarding agreement is there for the Business partners and calculate charges for the respective business partners.
   This charges logic is coming from Forwarding agreement present in the system.
   

2. Calculating Cost using Internal Agreement
   

   Internal agreements allow companies to allocate transportation costs accurately among different organizational units or departments. This is particularly important when a central transportation department provides services to various business units within the organization.
   By clicking on Calculate internal charges tab, the system checks if any internal agreement is there for the Business partners and calculate charges.
   This charge logic is coming from Internal Agreement present in the system which is a contract between sales org and the customer.
   

Now if both the agreements (Forwarding and Internal agreements) are at place then the profitability will be calculated automatically.

3. Profitability
   Expected Profitability can be calculated using calculate profitability icon from the drop down.
   This Profitability is Expected profitability, the actual profitability will get updated once the subsequent document is created such as freight order and freight booking. The charges from the Freight booking and Freight order will distribute back to the Forwarding order and Forwarding quotation using Cost distribution.

Conclusion

In summary, the intricate process of internal charge management and profitability calculation within SAP Transportation Management System plays a pivotal role in optimizing logistics operations and financial efficiency. Through the two case studies explored in this blog, we’ve seen firsthand how SAP TM’s robust framework can effectively handle complex charge calculations and profit assessments, providing businesses with the clarity and precision needed for strategic decision-making.

Author: Mayank Tak

Mayank, a dynamic and astute business analyst at SCMYUGA is known for his expertise in SAP Transportation Management System, bringing a wealth of knowledge and innovative insights to every project, as brilliantly demonstrated in the published blog. Stay tuned to read more.