Microsoft Dynamics AX 2012 Intercompany – Principal Company Model (Part1)

Microsoft Dynamics AX 2012 Intercompany – Principal Company Model

 

Purpose: The purpose of this document is to illustrate how to implement Principal Company Model in Microsoft Dynamics AX 2012.

 

Challenge: According to KPMG Global Manufacturing Outlook 2013 ("A taxing environment for manufacturers") the topic of tax planning becomes increasingly important for manufacturers in order to optimize costs and stay profitable.

 

… It may be time for manufacturers to put their tax department on speed-dial. Indeed, as I look across the findings in this report, one thing becomes clear: the issue of tax is even more important for manufacturers than even before. And rightfully so. These organizations that are able to enhance their competitive position and reduce their risk using smart and transparent tax planning will almost certainly gain an advantage over their peers …

 

I'll also refer to KPMG Global Manufacturing Outlook 2012 ("Near-shoring financial benefits – think tax early") to highlight the fact that ERP implementations nowadays often have requirements to implement complex intercompany scenarios driven by number of factors, for example, tax

 

… One of the critical components to this reassessment - which is often overshadowed by other operational agility elements - should be the financial considerations, e.g. the contractual, currency, and tax advantages that moving to a regional sourcing model may offer … If they are located in low-tax countries, such as Switzerland or Luxembourg, both preferred sourcing locations within Europe, or Singapore and Hong Kong in Eastern Asia, or Costa Rica or Panama in the Americas, they may see additional benefit to their strategies via those jurisdictions' competitive tax policies …

 

These complex intercompany scenarios include Holding company, Mixed company, Principal company, etc. This poses a challenge for ERP packages from the perspective of Supply Chain automation and transparency.

 

Solution: Intercompany feature allows for the exchange of documents between internal trade partners. Sales and purchase order documents are transferred automatically between the intercompany trade partners using the document transfer methods from the Microsoft Dynamics AX Integration Framework feature

 

When you create an intercompany sales order, Microsoft Dynamics AX creates a corresponding purchase order automatically. Similarly, creating an intercompany purchase order prompts the automatic creation of a corresponding intercompany sales order

This is true for two-legged orders (transactions between two related companies) and for most three-legged companies when an intercompany transaction originates with a sales order for an external customer.

 

The main idea behind Principal Company Model is to provide a "tax shelter" in one of the low-tax countries so the most part of the revenue will land there. This will be implemented using Intercompany feature in Microsoft Dynamics AX 2012 with creation of 5 Intercompany orders: SO (Sales company) -> PO (Sales company) -> SO (Principal company) -> PO (Principal company) -> SO (Manufacturing company)

 

Scenario

 

In this walkthrough I'll implement Principal Company Model in Microsoft Dynamics AX 2012 using Intercompany feature primarily focusing on Supply Chain automation and transparency. Please note that other critical considerations may include tax, proper costing (transfer of cost), drop ship, security and more. I'll also highlight how abovementioned requirements can be implemented in Microsoft Dynamics AX 2012 as a part of Principal Company Model implementation using a standard functionality. 

 

Schematically Principal Company Model can be represented as shown below

 

 

We have 3 companies involved and the goal is to automate Supply Chain operations and provide required level of operational transparency. That's why we expect that when we create the original Sales order in Sales company the system will help us to automatically generate all necessary documents in Intercompany chain. Also we expect that once we post Sales order in Manufacturing company physically (Packing slip) or financially (Invoice) upon completion of Production process the system will post all documents in Intercompany chain automatically for us.

 

 

Please note that in order to cover Sales order demand in Manufacturing company we have to execute MRP for Production order generation. We have number of options to do so, for example, you may choose to do local MRP in Manufacturing company if all materials are being procured into Manufacturing company or do Intercompany MRP across all companies involved which is in particular useful if some of materials are procured in different companies (other than Manufacturing company)

 

From costing perspective we want to make sure that we book the most of the revenue in Principal company to take advantage of low tax rates. In this example I assume that Sales company and Manufacturing company are located in the United States, and Principal company is located in Panama or Costa Rica. Please see the simplified diagram below which show how we transfer the price between companies in the Intercompany chain to ensure that the biggest margin is in Principal company and in other companies we just have a nominal margin of 1$   

 

 

We will also implement drop ship requirement using standard Microsoft Dynamics AX 2012 direct delivery functionality. Finally security considerations will be taken into account and will be implemented using Microsoft Dynamics AX 2012 Security model. Thus, for example, the user in Manufacturing company should logically not have access to confidential info about margins in Principal company or Sales company.

 

Setup

 

Companies

 

 

Here's the list of companies we'll need to implement Principal Company Model in Microsoft Dynamics AX 2012

 

Users

 

 

I'll also create 3 users, one for each company and assign appropriate security permissions for them using Access by organization capability 

 

Manufacturing user

 

 

Access by organization (Manufacturing company)

 

 

Please note that Manufacturing user will only have access to the data in Manufacturing company

 

Principal user

 

 

Access by organization (Principal company)

 

 

Please note that Principal user will have access to the data in all companies and will be able to navigate through the entire Intercompany chain

 

Sales user

 

 

Access by organization (Sales company)

 

 

Please note that Sales user will only have access to the data in Sales company

 

I'm going to use the same Mode of delivery, Delivery terms in all companies and assume that we have them set up this way

 

Sales company

 

In Sales company we will first set up an external customer who will be placing original Sales order

 

External Customer

 

 

External customer – Invoice and delivery

 

 

Please note that in order to automate Intercompany chain of documents creation we have to mark "Create intercompany orders" [V] checkmark. We also want to implement drop ship scenario and ultimately deliver goods to the customer directly from Manufacturing company, that's why I also mark "Direct delivery" [V] checkmark

 

Address 

 

 

Please note that the address I provide for the customer in Sales company will be transferred all the way through the Intercompany chain to Manufacturing company for direct delivery

The next step is to define Intercompany Vendor in Sales company referencing Principal Company

 

IC Vendor (Principal Company)

 

 

Please review detailed Intercompany setup for Intercompany Vendor below

 

Intercompany setup – Trading relationship

 

 

Intercompany setup – Purchase order policies

 

 

Intercompany setup – Purchase value mapping

 

 

Intercompany setup – Purchase agreement policies

 

 

Intercompany setup – Sales order policies

 

 

Intercompany setup – Sales value mapping

 

 

Intercompany setup – Sales agreement policies

 

 

Now it's time to define a product we sell in Sales company

 

IC Product

 

 

Purchase – Default Vendor

 

 

Please note that in order to automatically generate Intercompany orders we have to define default vendor for the product who has Intercompany relationship set up

 

Trade agreements

 

 

Now we'll use trade agreements to make sure that we properly transfer price throughout Intercompany chain (based on costing diagram presented earlier)

 

Principal Company

 

In Principal company we start with creation of Intercompany Customer who will have Intercompany relationship with Intercompany Vendor in Sales company

 

IC Customer (Sales Company)

 

 

IC Customer - Invoice and delivery

 

 

Please note that it's important to mark "Create intercompany orders" [V] checkmark to let the system create all legs in Intercompany chain automatically

 

Please review detailed Intercompany setup for Intercompany Customer below

 

Intercompany setup – Trading relationship

 

 

Intercompany setup – Purchase order policies

 

 

Intercompany setup – Purchase value mapping

 

 

Intercompany setup – Purchase agreement policies

 

 

Intercompany setup – Sales order policies

 

 

Intercompany setup – Sales value mapping

 

 

Intercompany setup – Sales agreement policies

 

 

Next step is to create Intercompany Vendor linked to Intercompany Customer in Manufacturing company in order to continue Intercompany chain

 

IC Vendor (Manufacturing Company)

 

 

Please review detailed Intercompany setup for Intercompany Vendor below

 

Intercompany setup – Trading relationship

 

 

Intercompany setup – Purchase order policies

 

 

Intercompany setup – Purchase value mapping

 

 

Intercompany setup – Purchase agreement policies

 

 

Intercompany setup – Sales order policies

 

 

Intercompany setup – Sales value mapping

 

 

Intercompany setup – Sales agreement policies

 

 

Now it's time to define a product in Principal company. Please note that you can define the product once using Centralized Product information management approach and then release the product to all 3 companies at once 

 

IC Product

 

 

IC Product - Purchase

 

 

Similarly we'll specify default Vendor who is Intercompany Vendor for the product to keep the ball rolling and let the system create all necessary legs of Intercompany chain

 

Trade agreements

 

 

We intend to book the most of the revenue in Principal company, that's why the sales price we specify here is significantly higher (50$ versus 15$) than the sales price we specified in Manufacturing company, and it's almost the same comparing to Sales company (the difference will be 1$ for nominal margin) 

 

Manufacturing Company

 

Now in Manufacturing company we'll create Intercompany Customer linked to Intercompany Vendor in Principal company to complete the exercise

 

IC Customer (Principal Company)

 

 

Please review detailed Intercompany setup for Intercompany Customer below

 

Intercompany setup – Trading relationship

 

 

Intercompany setup – Purchase order policies

 

 

Intercompany setup – Purchase value mapping

 

 

Intercompany setup – Purchase agreement policies

 

 

Intercompany setup – Sales order policies

 

 

Intercompany setup – Sales value mapping

 

 

Intercompany setup – Sales agreement policies

 

 

Finally we'll create Vendor in Manufacturing company to supply the materials for Production process

 

IC Vendor (External Vendor)

 

 

In Manufacturing company we'll create 2 products, one will be the product we produce and another one will be material used in production process

 

Released products

 

 

IC Product

 

 

Trade agreements

 

 

Please note that we want to minimize margin in Manufacturing company, that's why the sales price for the product to Principal company will be 15$ and the cost of production will be 14$ (which will include the cost of material 10$ and the cost of labor 4$)

 

Now we'll create material product as well

 

Material

 

 

Trade agreements

 

 

For material product we'll define purchase price as 10$

 

For the sake of time I'll omit the definition of Product Bill of materials, Route, Resource and Operation

 

But the interesting thing about the Route is that we will set up Operation Cost Category with Hour price of 4$ (and we will consume 1 hour when producing the product) which will allow us to get the Cost of production as 14$ (10$+4$). This in its turn allows us to get a nominal margin of 1$ in Manufacturing company (15$ - 14$)

Please find the continuation of the scenario by going with links below
Part2 - Creation and Execution: http://ax2012manufacturing.blogspot.com/2013/09/microsoft-dynamics-ax-2012-intercompany_2087.html
Part3 - Security and Development: http://ax2012manufacturing.blogspot.com/2013/09/microsoft-dynamics-ax-2012-intercompany_12.html