Oracle EBS 11i: Define Organization structure / Oraganization Hierarchy

Defining Organization structure is the first step in any ERP implementation and is the most critical part of any implementation. You have to carefully study and understand the companys' reporting requirements, management hierarchy, business geographies, legal requirements, data security etc while finalizing it's organization structure.

First let me define the key components of Organization structure in Oracle ERP perspective. To better explain these, lets assume assume Amazon.com is implementing Oracle financials for it's US business.

1. Set of Books
Set of book is the top level of Organization hierarchy. This defines 3 key components of a ledger. So any transaction in a ledger automatically inherits followings from set of books,

a. Chart of Accounts
b. Currency
c. Calender

To set this up for Amazon.com US business in Oracle ERP, the values for above would be,

a. Chart of Accounts: To determine how many segments would be used in Chart of Accounts depends on several factors like financial reporting requirement, financial reporting to management, what level of reporting is required etc.
Typical Oracle ERP implementation varies from 5-8 segments. Following minimum level of segments should be there in any implementation,

Company (Balancing segment)
Cost center / Department
Natural Account

Generally every Organization require above segments as part of their Chart of accounts to track financial transactions, for financical reporting purpose etc.

Other segments like followings vary upon type of businesses,

Project
Product

For Amazon.com US business lets assume we have 7 segment chart of accounts with 2 segments for future usages.

b. Currency: This is the functional currency of the country in which you are doing business. For Amazon.com US business, this would be USD.

c. Calender: This is the financial calender that company wants to follow. Most of the US companies have financial calender as JAN to DEC but it is not mendatory to have JAN to DEC. Some companies like CISCO has financial period from AUG to JUL. So, based on company's requirement and business practice setup Calender.

Basically these three components make up a Set of book in Oracle. If anyone changes then you have to create a new Set of book. For our e.g., if Amazon.com starts business in UK then a new set of book needs to be created for UK currency (Generally Chart of accounts and calender remains same for any company across different countries).

Set of books is not for outside reporting. This is the Oracle way of handling financial transactions (GL Journal entries) and securing data within Oracle ERP. Set of books is defined in Oracle General Ledger module. A set of book can have multiple Legal entities / Operating units.

2. Legal Entity

Legal entity is the next level in Oraganization hierarchy and this is what is visible to outside world. For our e.g., if Amazon.com US business has been registered with AMAZON.COM LLC then the legal entity name for Amazon.com's US business would be "AMAZON.COM LLC". Note that the name is case sensitive and must match with the company registered name. All legal / financial reporting for a company happens by Legal entity name. Any financial deals (like Purchase orders, Sales Orders, Employement etc) in a company happens by Legal entity name.

Oracle classifies an Organization as Legal entity by "GRE/Legal entity". Organization is defined in Oracle Purchasing Module. A legal entity can have 1 and only 1 set of books but can have 1 or many operating units.

3. Operating Unit

Next level after Legal Entity is Operating unit. This is Oracle way of securing financial data and is nothing to do with Outside world. All subledger transactions (POs, Payable Invoices, Receivable Invoices etc.) are secured by Operating units in Oracle EBS 11i. Oracle classifies an Organization as Operating unit by "Operating Unit" type. Organization is defined in Oracle Purchasing Module. An Operating unit can have 1 and only 1 Legal entity and Set of book. Until Oracle EBS 11i, subledger data is secured by assigning Operating unit to each subledger responsibilities via profile option "MO:Operating Unit".

So, these are the key components an Organization structure in Oracle perpective.

Let's see how we can define Organzation structure for our e.g. AMAZON.COM which recently acquired ZAPPOS.COM.

A> Set Of Books
To decide how many SOBs are required for AMAZON.COM's US business, lets answer following questions which would help in determing if we need multiple SOBs,

Does AMAZON.COM and ZAPPOS.COM share the same 3Cs of SOB (Calender, Currency, COA)?
I think yes. It is because we are implmenting for US where functional currency is USD. Calender would be same as AMAZON.COM acquired ZAPPOS.COM so they would share the same AMAZON.COM calender. We can keep same COA as of AMAZON.COM
So, from above analysis we do not need a new SOB for our implementation / merger.

B> Legal Entity
To decide on number of Legal entities, we need to find out how many companies are registered under AMAZON.COM
In this case as AMAZON.COM aquired ZAPPOS.COM, we definitely would have to define two legal entities if AMAZON.COM wants to continue with ZAPPOS.COM as a registered company. If AMAZON.COM decides that both would be only 1 company going forward and there would be no ZAPPOS.COM then only 1 legal entity would be enough. But generally with any acuiqisition company do not close the aquired company immediately for several reasons like brand, reporting requirements, legal reasons etc.

So, here in our e.g., we will have minimum two legal entities. If AMAZON.COM has another registered company under it's parent company then that also needs to be defined. So, the logic behind this is how many companies are registered legally for which you are obliged for financial reporting.

Both the legal entities can have the same SOB that we define in the previous step.

In real life there can be more complex hierarchy depending upon legal requirement, the way companies are registered etc.

C> Operating unit:

For our e.g. we would definitely need minimum of two operating units because we have two legal entities for which we have to do financial reporting. 1 for AMAZON.COM and 1 for ZAPPOS.COM
However we can have more than 2 operating units as well. Think about a scenario where if you want to logically divide AMAZON.COM/ZAPPOS.COM business into east coast and west coast (region wise) and want to secure data by region. Although all are part of same legal entities and share the same SOB but you want to divide by region. In that case you can achieve that by having two operating units each for AMAZON.COM and ZAPPOS.COM
I just mentioned an example. In real world however company does that at country level not on region level within a country.

So, here we saw what is an Organization structure and how we define Organization hierarchy.