What is Central Procurement
There is a lot of hype lately on central procurement. With SAP’s strategic direction towards cloud-based enablement and planned decommissioning of SRM by 2025, central procurement is poised to play a major role in the future of procurement processes. One major advantage of SRM was its ability to be used as a procurement hub and connect multiple disjointed back-end systems. With SRM no longer in the future road map and with the advent of Ariba as the choice for collaboration with external stakeholders, central procurement will not only fill up the void left by SRM but also provide numerous advantages.
SAP central procurement is a relatively new product from SAP. It sits within the SAP S/4 HANA system for both cloud and on-premise version. central procurement is one of the most awaited release from SAP within the sourcing and procurement landscape. There is no additional hardware required to install central procurement, but additional license is required.
Why Central Procurement
Majority of the fortune 500 companies have varied and complex IT landscape with multiple systems and business processes. As companies grow and evolve, they add more systems through mergers and acquisitions and slowly it becomes a very difficult challenge to maintain all the systems and processes in order. Since procurement benefits from scale, it is imperative to aggregate spend at all levels, however it is equally difficult to consolidate spend through harmonization and standardization due to the complex landscape and continuous evolving nature of business. It has been observed that before a 3-5-year large scale transformation project is completed, the company is already in the process of a merger, acquisition or a divestiture, thus the benefits are sometimes short lived.
SAP is trying to solve this problem through centralization rather than consolidation. The central procurement system allows to connect multiple back-end systems, thus creating a hub, where the data can be centralized but it allows to maintain the local design in respective back-end systems. Such an architecture not only allows the customer to realize benefits through scale but also allows easy scalability and lower cost of operation. Central procurement also allows to connect with Ariba cloud solutions. Users can experience consumer grade buying through the guided buying feature of Ariba integrated to central procurement.
Key Components of Central Procurement
Central procurement can be broadly divided into the following areas
Central requisitioning: This area consists of the following major functions
- Create Purchase Requisition – Users can create purchase requisition directly through this app. Majority of indirect procurement is initiated through purchase requisition. This app has been designed by keeping an average non-IT savvy company user in mind. Even for better experience, this app can be connected to guided buying component of SAP Ariba. Purchase requisitions and corresponding approvals can happen either in guided buying or central procurement hub with purchase orders getting created in the actual back-end ERP system. To speed up the process, default values for users can be saved in Ariba, central procurement hub or back end systems. With multiple, connected ERP systems, the system can determine the actual back-end system based on certain values i.e. company code, plant etc.
- My Purchase Requisition – One of the biggest advantages of central procurement is the ability to centralize all procurement approvals irrespective of the systems i.e. from guided buying to individual ECC or S/4 back-end systems. This app allows to display approval status of purchase requisitions, it also allows the user to perform goods receipt or return the items as need be.
Central purchasing: Central purchasing is designed with the buying department in mind. A professional buyer can access all the purchase requisitions from multiple different connected systems and can process them as need be. All the purchasing documents are actual documents that reside in the back-end systems. Central procurement uses HANA in memory database to create separate proxy tables for faster access of the data. Central purchasing consists of the following major functions:
- Manage purchase requisitions centrally – The buyer can use this app to display purchase requisition, assign sources of supply, convert PR to PO etc.
- Manage purchase orders centrally – The buyer can use this app to display or change a PO created in back-end system.
- Approve Purchase orders centrally – Similar to purchase requisition, all purchase order approvals can be centralized in central procurement irrespective of the back-end system used.
- Responsibility Management – Central procurement provides a very flexible and user-friendly team and responsibility management feature. An administrator can define an organization structure and assign teams and responsibilities to individuals in the UI itself without doing any complex configuration or workflow activation. This feature is very useful to determine approval processes.
Central purchasing contracts: SAP central procurement allows contracts to be written at central level. This is another huge advantage of central procurement, which allows to prevent rouge spend by centralizing contracts and managing it. Once a contract is created, it can be distributed to different back-end systems. It allows the central contract to be distributed to back-end systems at quantity or percentage level.
- Create central contract – The contract department can use this tool to create central contracts, obtain approvals and update sources of supply across different ERP back-end systems
- Manage central contract – Once created, the central contract can be distributed to different ERP systems. The allocation of contracts can be done either at percentage or quantity level. The distribution can also be controlled at header or item level
Central analytics: SAP central procurement can used to generate aggregated reports from satellite ERP systems.
- Central purchase contract consumption – It can be used to generate contract released amount vs. consumed amount by multiple dimensions such as suppliers, purchasing groups etc.
- Monitor central purchase contract items – It also provides purchaser persona-based application reporting at various dimensions such as filter, chart and table section.
When to deploy Central Procurement
As discussed in the beginning of the blog post, the biggest use case for central procurement is its ability to be used as a procurement hub and centralize applicable spend thereby leveraging on scale and compliance. Central procurement is advantageous for companies using multiple ERP systems as back-ends. In such cases, the strategy is to implement central procurement first in the S/4 HANA or compatible ECC system without changing any localized processes or systems. The next step is to harmonize the local systems and the third and final step is to simplify by decommissioning some of the back-end ERP systems as applicable.
Disclaimer: Some of the features mentioned could be part of future backlog, hence may not be available in the latest release.