About organization modeling
An organization represents a company, department, cost center, division, sales unit or any other organizational unit within a business.
Typical organizations are as follows:
- Business Group
- Legal Entity
- Sales Organization
- Purchasing Organization
- Plant and Warehouse
The following figure depicts a typical organization model.
A business group is typically the highest level in the organization hierarchy. It has no accounting impact. It consists of one or more companies.
A company typically represents a global brand name and is the organizational unit for which individual financial statements are created according to the relevant legal requirements. A company can have one or more legal entities.
A legal entity represents an organization unit identified by local governments as operating units and are typically instituted for every country or region that a business operates in. This organizational unit is typically self-contained and a set of accounts can be drawn up for external reporting. This involves recording all relevant transactions and generating all supporting documents for financial statements, such as balance sheets and profit and loss statements.
A sales organization is responsible for sales and distribution of products and services. Sales organizations can be defined based on the following characteristics:
- Sales channel - for example, wholesale, retail or direct sale
- Product Line - for example, electronics, entertainment, and service
- Geography - the geography of the ship-to location of orders. For example, east-coast or west-coast
- Customer - (major customers)
- A combination of one or more of the above
A purchasing organization (also known as a Buyer organization) is responsible for placing purchase orders to vendors to replenish raw materials and products in a company's locations. Purchasing organizations could be created centrally or can be associated with each legal entity or sales organization. Purchasing organizations can also be modeled based on product lines, geography, or vendors.
Plant and warehouse
Plants and warehouses are physical locations where goods are manufactured or stored for distribution. Typically, a plant or a warehouse is owned by a legal entity. A business can have many plants or warehouses associated in almost all combinations to its sales and purchasing organizations.
A warehouse could be designated to store products for a single sales organization or could service multiple sales organizations based on the sales organization structures (product-based, geography-based, customer-based). A single purchasing organization may be responsible for buying raw materials for a plant or stocking product into a warehouse or multiple purchasing organizations could be involved with a single plant or warehouse (purchasing based on geography or product).
In a third-partly logistics (3PL) company or in some rare cases with a business, a specific location can store inventory for multiple legal entities or companies. In this case, typically, the 3PL company is the owner of the inventory stocking location.