The Enterprise Central Component
SAP, in German language, stands for Systeme, Anwendungen und Produkte in Der Datenverarbeitung. Sounds like a real tongue twister for the English speaking mortals like me. Well, translated into English it would suffice to call it Systems, Applications and Products in Data Processing.
And SAP ERP is by far the most famous and widely known packaged application from this Germany based company which has various products enabling organizations across industries implement their day to day operations, manage partners and their relationships. It comes with individual components meant to handle different processes in running the business. SAP ERP helps manage business processes including Operations, Financials, Human Capital Management, and Corporate services.
Systematically, SAP ERP comprises of a number of modules which include the following:
- Financial Accounting and Controlling (FICO)
- Asset Accounting (AA)
- Sales & Distribution (SD)
- Material Management (MM)
- Production Planning (PP)
- Quality Management (QM)
- Project Systems (PS)
- Plant Maintenance (PM)
- Human Capital Management (HCM).
SAP ERP integrates data across the modules in order to enable the organization with enterprise-wide resource planning.
This blog will talk about the very niche and important aspect called “Purchasing Flow” under Material Management Module, which is one of the crucial processes for any business to thrive. Purchasing, simply refers to the process of buying raw materials/services required to operate business on a day to day basis from prospective suppliers. We will briefly go over all the major elements that make up this robust process in SAP ERP – MM.
As mentioned earlier, Purchasing is the process of buying materials/services from suppliers to meet day to day business requirements.
This process runs as a closed loop as illustrated in the below diagram:
Various steps involved in this process cycle can be elaborated as below:
- Materials Requirement Planning (MRP): Determine requirements raised for a material from planning or manually by buyer.
- Source Determination: Determine list of suppliers based on previous transaction history or long term agreements available in system and request quotes from them.
- Vendor Selection: Compare quotes from all suppliers and select most suitable one for the requirement.
- Procurement of Goods/Services: Create contracts with the selected supplier and raise Purchase Order (PO) and send to supplier. Monitor PO at regular intervals and check with supplier on delivery.
- Goods Receipt and Inventory Management: Receive goods/services in your premises and create Goods Receipt transaction against PO in book of records for the received qty. Check if the received quantity is within the tolerance limits agreed upon with supplier in contracts.
- Invoice verification and Payments to Supplier: Receive invoice from supplier for the goods supplied, process the Invoice and make payments to the supplier.
Let’s now discuss the procurement types. There can be multiple ways based on which procurement types can be categorized. Here is the representation of basis-wise types.
Let’s now take a deeper look at all the types.
Material Being Procured
Based on the material being procured, there can be two Procurement Types involved in the Purchasing Process. These are described below.
Procurement of Stock Material: Stock materials are the materials that are inventoried/stored in warehouse and used when needed. Stock when received in warehouse adds to the stored quantity and when consumed reduces the overall stock quantity. Stock and consumption accounts are maintained and updated with values after every transaction based on stock value moving in or out of the warehouse respectively. Inventory is valuated at regular intervals to evaluate and assess material movements. Every stock material must have a master record created with parameters required to execute its life cycle and shows its current stored quantity/value.
Procurement for direct consumption: This refers to the Materials procured for direct consumption and not for storage. These may or may not have a master record created and will need account assignment when an order is created to specify where it is going to be consumed. Consumption account gets updated with value when goods are received against PO in such scenarios. This also covers any services we get from third party sources/suppliers.
Need to Procure
Based on the need to procure and process of implementation, there can be three Procurement Types involved in the Purchasing Process. These are as below.
One-time Purchase Order: Purchase order is created directly without reference to any existing contracts/agreements. This is used mostly for materials/services needed on irregular basis.
Supplier Contracts: Contracts/Outline agreements are created with suppliers specifying terms and conditions of procuring a material including Pricing conditions, total quantity, total value and validity date. This is used for materials needed on regular basis and in estimated quantities. These contracts are released into individual orders as and when required and sent to suppliers for fulfilment. Purchase orders when created derive all the information from contracts.
Scheduling Agreements: A Scheduling Agreement is similar to contract in terms of the information it holds i.e., it specifies terms and conditions of procuring a material from supplier but it is used for those that are needed at regular schedules/time intervals. Delivery schedule lines are created against these scheduling agreements specifying what is the quantity needed and by when. These are then sent to supplier who will review and confirm on the delivery schedules.
Special Procurement Types
Consignment: Consignment is a process where stock is procured from the supplier but stored in one of the supplier managed locations within buyer’s organizational premise until goods are withdrawn for use. Buyer in this scenario is not liable to pay to supplier as long as the stock is sitting in supplier location but will become liable as soon as it is taken out to warehouse.
Subcontracting: Subcontracting is a process in which a supplier is contracted with manufacturing goods for buyer. In such scenarios, component materials required to manufacture the product are supplied by buyer himself or bought by supplier, cost of which will then be transferred to the buyer.
Stock transfer using Stock Transport Order: This is the Process in which a plant orders goods from another plant within the organization to meet the requirements using STO (Stock Transport Order). Stock gets transferred from one plant to another by processing this STO creating deliveries.
Direct Shipments/Drop Shipments: This is also known as Third party processing. Sales order when received from customer is forwarded to a supplier/manufacturer who can supply the goods directly to the customer. This eliminates the intermediate process of buying from supplier, stocking and supplying to customer reducing overall costs.
Today, we live in the age of online purchasing and home-delivery. However the concepts of Purchasing remain equally relevant even today and for the time to come.
I hope you enjoyed reading this blog and found the information helpful.