Learn About Organizational Hierarchies with Microsoft Dynamics 365 Finance and Supply Chain Management

An organization is a group of people who are working together to carry out a business process or achieve a goal. Organizational hierarchies represent the relationships between the organizations that make up your business.

You can define the following types of internal organizations: legal entities, operating units, and teams.

All internal organizations are types of the Party entity. Therefore, these organizations use the address book to store address and contact information. A party, which can be either a person or an organization, can belong to one or more address books.

A legal entity is an organization that has a registered or legislated legal structure. Legal entities can enter into legal contracts and are required to prepare statements that report on their performance.

A company is a type of legal entity. Currently, companies are the only kind of legal entity that you can create, and every legal entity is associated with a company ID. This association exists because some functional areas in the program use a company ID, or DataAreaId, in their data models. In these functional areas, companies are used as a boundary for data security. Users can access data only for the company that they are currently logged on to.

An operating unit is an organization that is used to divide the control of economic resources and operational processes in a business. People in an operating unit have a duty to maximize the use of scarce resources, improve processes, and account for their performance.

The types of operating units include cost centers, business units, value streams, departments, and commerce channels. The following provides more information about each type of operating unit:

A team is an organization in which the members share a common responsibility, interest, or objective. Teams cannot be used in organizational hierarchies.

Set up organizational hierarchies in D365 to view and report on your business from different perspectives. For example, you can set up a hierarchy of legal entities for tax, legal, or statutory reporting. Set up a hierarchy that is based on operating units to report financial information that is not legally required, but that is used for internal control. For example, you can create a purchasing hierarchy to control purchasing policies, rules, and business processes.

Each hierarchy is assigned a purpose. The purpose of a hierarchy determines the types of organizations that can be included in the hierarchy. The purpose also determines which application scenarios a hierarchy can be used in.

Organizations in a hierarchy can share parameters, policies, and transactions. An organization can inherit or override the parameters of its parent organization. However, shared master data, such as products and address books, applies to the whole organization and cannot be overridden for individual organizations. Creating organizations and hierarchies requires careful planning.

Organizational Hierarchies can be selected as a Tree type option in Financial Reporting. Financial reporting will select the current effective hierarch as noted by hierarchy.