Introduction
In my previous article I was ideating on using Ariba for getting Supplier inputs for the calculation of the Greenhouse Gas emissions.
I have already explained the significance of the greenhouse gas emission measurements, as well as the impact of the % renewable energy and % recycled content on the carbon emission calculation. As these inputs would normally come from the Suppliers, I was also presenting various Solution Concepts how Ariba could be used to support data acquisition.
While thus acquired renewable energy volumes may be use directly and included in the calculation of the carbon emissions (actually, excluding volumes of the electricity produced form the renewable sources), for recycled content situation is, once again, a bit more complex.
In this article, I will address the next logical question – how do we manage, in the backend system, inputs we acquired through Ariba – focus is on % recycled content, or the recycled content info in general. While Ariba provides an enabling capability, through collaboration with our Suppliers; the way how we will manage this data in our backend system represents the second part of the foundation architecture for the overall ESG reporting.
Figure 1. Ariba, SAP S/4HANA and SAP Business Technology Platform
This article, as well as the previous one, is not about Solution itself, but about Architectural Thinking and ideating on possible Solution Concept(s).
Context: Where do we need % recycled content?
Overall, the usage and placement of the recycled content present a very significant information for both, Climate Action and Circular Economy. If we take simple example of the PET packaging, i.e. we purchase PET bottles as a raw material and use it for the primary packaging of the juice, we need to understand what is the carbon footprint of the purchased raw materials (in this example PET bottles), as well as (non-)recycled content sold-out with the (semi-)finish goods:
- For Scope 3 (greenhouse gas) emission calculation – we need to know the ratio of the “virgin” (newly produced) and “recycled” content in the raw material purchased. Why is this important? The recycled “part” of the material has a different (lower) emission factor than the virgin one – usually around four times less. So, this makes a significant impact on the overall calculation of the carbon emissions.
- In other cases, we would need to know how much recycled content in our (semi-)finish goods is placed on the market, or in general terms how much recycled content is exiting one plant and entering the other plant (i.e. in case intercompany selling, or through export-import).
- An overall input (purchases or imports) of the % (non-)recycled plastic is needed for the calculation of the so called “plastic tax”, i.e. UK Plastic Packaging Tax (PPT) came into force in the UK on 1 April 2022 [1]. Basically, it applies to plastic packaging with less than 30% recycled plastic, manufactured or imported into the UK as a raw material, but it also includes packaging on finished goods which are imported into the UK [2]. This implies, any company purchasing, importing or manufacturing either raw materials and/or (semi-)finish goods may need to keep track of overall % recycled plastic. Similar requirements were or will be placed in Italy, and some other countries.
Beside above requirements, additional (in)directly related requirements may also be applicable, like EU taxonomy [3], or in-general financial aspects of the (non-)financial company, reporting specific CAPEX and OPEX activities (detailed overview in this article by denise.iwersen). Companies working with plastic packaging can be in particular affected by these regulations [4], where understanding of the proportion of the recycled plastic used is of immense importance [5]. Of course, every manufacturer would also be interested to see the costing effect – i.e. when purchasing mixed recycled and virgin plastic – obviously the cost of the recycled plastic “part” is higher than the cost of the virgin plastic “part”.
And that’s not the end… The area around Environment and Circular Economy will become more and more regulated, i.e.in EU there is a clear action plan – European Green Deal [6]
Also, in the above example I have used a simplistic approach, where the manufacturer ia buying PET bottle as a raw material, fills-in e.g. juice, and sells it as a finish goods. However, this “simple example” is not really the most common one. Often, the process is much more complex. Ordinarily, the manufacturers would purchase PET resin in the different forms, like PET chips, or PET preforms, from the different Suppliers, mix resins/chips, or “enrich” preforms during blowing etc. during the production of the actual PET bottles. And then, PET bottles are only part of the primary packaging, there are also closures and labels, coming from the different types of plastics. Finally, products or finish goods would be placed to the market, either in secondary, or more often in tertiary packaging, i.e.:
- wrapping six pack bottles with plastic shrink film/folia would be secondary packaging,
- placing several six-packs on the pallet and wrapping with plastic stretch film/folia would be tertiary packaging.
So, calculating everything for recycled plastic is really a challenge…
And, of course, various plastics are not the only type of the materials which can be recycled.
*) Another EU regulation will be coming in place soon – Carbon Border Adjustment Mechanism [7][8] – designated as “carbon border tax”. Currently it is not foreseen to directly affect plastic packaging, but will target (among others) Aluminum, Iron & Steel sectors (check out this post by thijs.elling).
Solution Concept
Okay, challenge is there, but it’s nothing new… How are we addressing this challenge?
One important thing to note – no matter how complex reporting in on the recycled content (or in general on Circular Economy) – it will become more and more complex…
ESG reporting is becoming more and more demanding – so if we want to comply with forthcoming requirements and regulations, we should build proper foundations – proper data model for the recycled content.
Two main options will be evaluated:
- % recycled content as a custom attribute of the Material Master
- % recycled content as a characteristic of the class within Batch Management
Manage % recycled content on the Material level
We can manage packaging element attributes for each Material which is designated as a (raw) material for packaging. Such Material can be extended for the additional attribute (or in general we can create new classification set for various ESG attributes or for Packaging) which will store/record % recycled content – this is pretty much standard process in SAP S/4HANA (i.e. extending MARA table with the append structure, which will have the custom fields).
In the Bill-Of-Material (BOM) we will maintain different packaging compositions for primary, secondary, or tertiary packaging of the (semi-)finish goods. In the overall production process, there may be several “layers” of BOM – BOM is usually multi-layer, i.e. we can have:
- BOM “A” for “intermediary” packaging of the (semi-)finish goods – subject to intercompany move, or export
- BOM “B” for a secondary packaging,
- BOM “C” for a tertiary packaging,
- BOM “D” for repackaging into “different” tertiary packaging – used for placing finish goods on the different market
- …etc.
Figure 2. Example of Material Master and BOM
Each BOM by itself is also a Material, just as raw materials, (semi-)finish goods and scrap materials (scrap from the production process during material “conversion”). Through material movements in the Material Document, we can track:
- Inbound delivery – i.e. from purchases, imports, or posting good-receipts of newly created goods (from the production, packaging etc.);
- Outbound delivery – i.e. releasing to the market, exports;
- Stocks transfers – i.e. between Plant and/or Storage Location;
- Production – i.e. issues for the production
- Write-offs and scrap
- … etc.
As BOM has a composition up to the level of the Material(s) in which we want to track the recycled content, we can fairly easily track and report on the recycled content in the various stages – this would provide the foundation for all required reporting.
Figure 3. Example of Material Documents and movement types
The best way to acquire % recycled content for the Material Master
What is the most suitable Ariba product we could use to acquire data for Material Master?
I will not go to details described in my previous article, but in general, two main ideas are:
- Goods-Receipts (Ariba Procurement) or
- Suppliers’ Certificates (Ariba SLP).
In this approach, we would not be linking % recycled content (or the recycled content in general) with the Material Document, but with the Material Master. Acquiring Suppliers’ inputs through Goods Receipts is possible, but for maintaining the attribute of the Material – it would make more sense to acquire recycled content values via Suppliers’ Certificates – using Ariba SLP.
Figure 4. Using Ariba SLP to acquire the recycled content
Limitation?
Recording % recycled content as the attribute of the Material, would be the most common and the most obvious approach today. This approach might do just fine for smaller Companies, working with a limited number of raw materials, BOMs; conducting a limited number of production & logistical operations. Larger Companies might be facing certain problems with this approach:
- Each time the Supplier changes % recycled content (which is stored/recorded as the attribute of the Material), we would need to create new Material, and re-create new BOMs for all subsequential layers containing this Material. This would be a very tedious task when working with many raw materials, many BOMs, and when operating in many countries. This could also lead to the “explosion” or the Material Master table.
- New raw materials and new BOMs would in reality have the same visual characteristics as the “old” ones – how can we tell which (semi-)finish goods have been transferred, released to the market, or exported?
- Costing split (in case we need costing part of the % recycled content) is not covered by this approach.
We may try to address this by updating existing Material and keep historical values in the reporting system – i.e. implementing in SAP BW time-dependent characteristics for the recycled content. But “update” Material is really not the correct way for many reasons. Among other reasons – we might have an “old” version of the Material in our stocks.
Nevertheless, problems could be partially addressed by implementing programs (either as extensions in SAP BTP or ABAP within SAP S/4HANA):
- Recognize when existing Material is being supplied with different % recycled content;
- Create “new” Material;
- Create “new” BOMs for all subsequential layers containing this Material;
- Optionally – disable “old” Material for inbound deliveries from purchases (in case we do not expect additional quantities of the “old” Material).
Thinking outside of the box…
What if we can mix resins to always get the same % recycled content of the Material, and only then use this Material for packaging BOMs? At least, we would not have to change BOMs frequently…
Managing recycled content through Batch Management
When working with heavy and demanding Supply-Chain and Production, SAP Batch Management might provide necessary solutions for tracking raw materials and (semi-)finish goods.
- This time, % recycled content is not the attribute on the Material level
- Material keeps all relevant characteristics – and it is not subject to change when different % recycled content is provided by the Supplier.
- BOMs for all subsequential layers containing this material are constant as well.
- Material Documents are tracking movements of the raw materials and (semi-)finish goods.
- % recycled content is a characteristic of the Batch – which is related with the Material Master, but also with the Material Documents.
Batch is unique, has characteristics measures, and it is assigned to the respective Material number. Batch contains only data that is unique from the perspective of that Batch. All characteristics which are common for the Material itself, are characteristics of the Material.
How does Batch Management works?
- Batch Management is activated under Material Master;
- Batch Management enables creation of the characteristics and classes – i.e. we can create characteristics which will hold % recycled content (or the recycled content in general)
- Characteristics define “allowed values” of the characteristic itself;
- Classes contain list of the characteristics assigned to them;
- For the Material(s) which will be managed through Batch Management – it is necessary to check “Batch Management” parameter and maintain (assign) classes;
- Batch (as a business object) “inherits” classes of the Material – however, within the Batch we can also assign to each characteristic “specific value” (from the ”allowed values” or create “new value” for % recycled content) – in this way, this value is now assigned to the Batch, not to the Material.
*) This is a simplified view of the Batch Management – I am not discussing Batch levels, Batch Short/Sort Rule, Batch Determinations etc.
Figure 5. SAP Batch Management for the recycled content
With Batch Management, we can capture % recycled content as the characteristic – this recycled content is unique for this Batch – of course, it may be the same as some previous Batch, but it may vary over time – and this is not affecting Material Master:
- Batch is created automatically during Goods Receipts;
- Batch may also contain purchasing cost – i.e. in case such “split” of costing is provided i during purchase (in the Material accounting view – set standard valuation category to Automatic/Batch);
- Batch is linked with Material Document (via Material Number, Plant, Storage Location, and Charge=Batch Number);
- We can split Batch, or create new Material (i.e. producing new material from one or more raw materials), and this new Material can also be Batch managed;
- However, Batch is not linked with BOM – we cannot “fix” BOM to the specific Batch – for understanding which Branch is used during production or packaging we must perform Batch Determination – either Manually (operator would manually select) or Automatically based on the Sort Rule and Strategy Type (e.g. FIFO per Storage Location);
Figure 6. Example of the Material Document link with Batch
As Batch is linked to the Material(s) in which we want to track recycled content, we can track and report on the recycled content in the various stages – this would provide baselines for all required reporting. Here, we would use reports based either on the Batch Information Cockpit (BMBC), or produce reports on Material Document (for purchases), or produce reports on Batch Stocks Table (MNHB) etc.
It should be noted, standard functionality Batch where-used list of the Batch Information Cockpit requires both, source and target, Materials are Batch managed. To keep a track of the Batch usage up to the finish goods BOM, custom program/reporting logic might be needed:
- Basically, we would have to track “Batch” and its usage in the newly produced Material which is the initial BOM layer;
- Production of the Material which is next subsequential BOM layer (i.e. secondary packaging) would be based on the initial BOM layer (i.e. primary packaging) – so it would “inherit” choice of the Batch used for the initial packaging;
- Custom off-stock movement type and postings can be created to follow raw material Batch usage throughout all produced Materials based on all BOM layers up to the Goods Issues.
Right approach for Suppliers’ inputs
Ariba Procurement?
Yes, of course – we can use Goods Receipts to collect Suppliers’ inputs on recycled content, and Batch can be created automatically.
This is the most logical and the most natural flow of data.
Figure 7. Using Ariba Procurement to acquire the recycled content
Any shortcomings?
Ariba Procurement collaboration with Suppliers, Goods Receipts and Batch Management – is this the “Solution”?
Yes, and no… This might be the “Solution” for large Companies, working with Batch Management. It should be noted, implementation of the Batch Management is much more than just configuration on the backend system – it requires labeling, scanning, tracking all batches in all production steps – which could increase load on the logistic and production workforce. Also, custom program logic to track Batch usage, when using BOMs, might be necessary as well. While, this approach does provide foundation architecture for both, Climate Action and Circular Economy, the investment and operational challenges might be too high for some Companies.
Can we address these challenges?
We have to see things beyond “now”. We have to think in line with the Industry 4.0 [9] – and if do so, some logical actions steps can be put in place:
- Automatic Batch Determination – can we even enhance it with ML (Machine Learning) capability(?) – i.e. “train” machine to choose right Batch, understanding all components up to the finish goods, so we are always “bellow” the Plastic Tax threshold;
- IoT – labeling and tracking Batch without need for a manual or automatic scanning of barcodes – i.e. using smart tags for labeling;
- Automation of industrial process – in logistic and production using M2M (Machine-2-Machine) communication;
- … and of course, overall Change Management;
Now, it’s not easy – but, we should understand that Batch Management with the process automation can bring many, many tangible benefits – especially for larger manufacturers.
Other ideas?
The above Solution Concepts were presented with some key assumptions:
- There is a need to provide fully accurate reporting on recycled content – no approximations, no averages etc. Or course, under “accurate” emphasis is on accurate as much as Suppliers’ inputs are accurate (i.e. on the recycled content);
- Standard and available products – Ariba & SAP S/4HANA (incl. SAP Batch Management);
- Solution Concept is only about foundation architecture – data acquisition & primary data management – we must build foundations, and only then, after we build foundations, things will get more exciting with other ESG products and services – SAP Environment, Health, and Safety Management, SAP Sustainability Control Tower; SAP Responsible Design and Production, SAP Product Footprint Management etc.;
- Only one use case is addressed – recycled content – but there are other potential use-cases, like carbon footprint per product etc.;
All above solutions might be a good “Solution Concept” for one or the other Company – depending on its size, complexity, industry etc.
Now, at this point of time, we cannot say how strict reporting requirements would be – we cannot say if some approximations (i.e. monthly average) would be acceptable for the regulators and legislators. As reporting requirements and still evolving – current requirements are either not so clear, or not so strict, or still not in place. After all, in the above Solution Concepts, reporting accuracy relay on the accurate inputs – as it is always the case. Can we currently ensure globally (or even regionally) all our Suppliers can provide absolutely accurate inputs up to the “decimals”? No, probably not – for time being providing fairly accurate and auditable monthly averages might be quite sufficient. And if we accept this assumption, a complete range of different Solution Concepts addressing above limitations and/or shortcomings can be “custom” developed. After all, SAP S/4HANA provides excellent extensibility options through SAP BTP…
Stay tuned…
Let me invite you again to keep following relevant blogs and community resources, post and answer questions, and read other posts on the sustainability topic.
And of course, share your thought and comments on my article, in the comments section.
About the author
I have been an IT professional for more than 20 years, with over 10 years of experience in Enterprise and Solution Architecture. My key focus is Enterprise Integration, of applications, systems, and processes.
Sustainability is more than just EA/SA topic – it is a topic of everybody’s interest...
Acknowledgment
This article uses SAP Business Technology Platform Solution Diagrams & Icons as perSAP Terms of Use governing the use of these SAP Materials (please note, newer version of the Solution Diagrams & Icons, as well as Terms of Use, might be in place after the publication of this article).
More guidelines on Solution Diagrams & Icons can be found in this article by bertram.ganz.
References
[1] https://www.gov.uk/guidance/check-if-you-need-to-register-for-plastic-packaging-tax
[2] https://www.pwc.co.uk/services/tax/plastic-packaging-tax.html#:~:text=Plastic%20Packaging%20Tax%20(P...).
[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32020R0852
[4] https://www.celsia.io/blogs/can-manufacture-of-plastics-be-sustainable-under-the-new-eu-taxonomy-req...
[5] https://www.nabu.de/imperia/md/content/nabude/sustainablefinance/210412_nabu_taxonomy_circular-econo...
[6] https://environment.ec.europa.eu/strategy/circular-economy-action-plan_en
[7] https://taxation-customs.ec.europa.eu/green-taxation-0/carbon-border-adjustment-mechanism_en
[8] https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661
[9] https://en.wikipedia.org/wiki/Fourth_Industrial_Revolution
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