Being useful for evaluation, pricing and reporting purposes, a ‘Product Hierarchy’ is an alphanumeric character string consisting of a maximum of 18 characters. It thus defines the product and its composition.
We maintain product hierarchy in the material master through following;
SPRO-> IMG-> Logistics – General-> Material Master-> Settings for Key Fields-> Data Relevant to Sales and Distribution-> Define Product Hierarchies
In the standard SAP R/3 System, the product hierarchy can have up to 3 levels, each with a specific number of characters and in total at a maximum number of 18 digit. The first and second levels have 5 digits and third level can have 8 digits.
A product hierarchy represented by ‘00050002000300040005.’ The first four characters ‘0005’ could indicate that the product is a car. The next four characters ‘0002’ could indicate the plant in which the car is manufactured. The third set of characters could indicate the color of the car. The next set may determine its engine capacity and so on. Thus, the product hierarchy helps in
defining the product composition.
For more with examples you can refer to SAP Help page