Exploring the Procurement Process in the MM Module The process of purchasing the required quantity of goods or materials by a company
from another company at the optimum cost is known as procurement. The procurement process also monitors the activities related to quality inspection of the received material, invoice verification, and release of the invoice for payment. Procurement in a company can be both internal and external. Internal procurement refers to the process of purchasing material or services from internal sources, such as a plant or storage location of the company. On the other hand, external procurement refers to the process of purchasing material or services from an external supplier or vendor. The following steps define the procurement process in the MM module: Determining materials requirements either manually or through the MRP process Checking whether or not the stock is available Maintaining the master data, in case of a new product Identifying the sources for supplying material, if the stock is not available Maintaining vendor details in the mySAP ERP system Negotiating the terms and conditions of an order with the vendor Placing a purchase order Discussing the delivery status with the vendor Receiving the goods in the warehouse Issuing the goods to the distribution department Paying the vendor for the delivery of goods With this, we come to the end of the procurement process in the MM module of the SAP ERP system. The implementation of the preceding steps is discussed in the following chapters of the book
Purchasing Organization
A purchasing organization is responsible for performing all the purchase activities centrally in an organization. It helps to perform the tasks required to complete the purchase process, such as studying the requirements of the purchase, preparing the purchase requisition and request of quotation documents, analyzing the documents, and preparing purchase orders. In a large organization, purchasing can be done at different levels, starting from the enterprise level. Therefore, the purchasing organizations can be established at the following levels:
Purchasing organization at enterprise level Refers to the purchasing organization that is set up at the highest level in an enterprise. At this level, the purchasing organization executes the purchasing activities for all the units of an enterprise, such as companies, plants, storage locations, and warehouses. One of the most common advantages of this level is the facility to closely monitor the purchasing process. On the other hand, the major concern of establishing the purchasing
organization at the enterprise level is the delay in finalizing the purchasing process for the units of the enterprise. Purchasing organization at company level Refers to the purchasing organization that is set up for each company in an organization. At this level, the purchasing organization executes the purchasing activities of the company under which it is created. Purchasing organization at plant level Refers to the purchasing organizations that are set up at the plant level. It is advisable to set up purchasing organizations at the plant level for large organizations, such as petroleum refineries, crude oil production companies, and highly customized manufacturing firms. In all these organizations, a purchasing organization is established on the basis of various important factors, such as availability of the raw materials, distance between the raw material producing organization as well as the plant, and timely availability of the raw materials. Reference purchasing organization Refers to the strategic purchasing organization that monitors the purchasing processes followed in an organization. It helps the management and purchasing organizations decide whether to continue or halt the purchasing process. The reference purchasing organization can also help analyze the purchasing process cleared by other purchasing organizations and negotiate with the vendor to get the best deal. In addition, the decision made by the reference purchasing organization regarding discounts and special conditions is accepted by all the purchasing organizations throughout the organization. Therefore, the reference purchasing organization can be critically important from the strategic view. This implies that the reference purchasing organization has more decisive powers than the other purchasing organizations.
You need to perform the following tasks to implement a purchasing organization in the mySAP ERP system:
Create a purchasing organization Assign the purchasing organization to a plant Create the purchasing group
Analyzing the Organizational Structure Under Various Business Scenarios
In a real business scenario, the organizational structure may depend on various factors, such as requirements, planning, purchasing, and resource availability. These factors have a significant role in deciding the resulting organizational structure and its business process implementation. In addition to the preceding factors, the organizational structure also depends on the purchasing organization, due to massive investments in its establishment. The major decisions regarding the establishment of purchasing organizations is whether to establish them at the plant or company code level and whether to create a reference purchasing organization. In this section, we discuss the business scenarios involving the purchasing organizations established at the following levels:
Individual purchasing organization at plant level Single purchasing organization for multiple plants Cross company code purchasing organization at plant level Reference purchasing organization
Now, let's discuss these one by one.
Individual Purchasing Organization at Plant Level
As discussed, the purchasing organization is an important factor that greatly influences an organizational structure. Let's consider a situation where each plant of a company code has a separate purchasing organization. This type of organizational structure is followed in organizations where the business processes are highly customized. Each plant is allocated a distinct set of tasks independent of the other plants in the company code. It helps to maintain the operational efficiency and uninterrupted supply of materials to the individual plants. The organizational structure that includes an individual purchasing organization for each plant is shown in Figure 2.77:
Let's now discuss a situation in which multiple plants can use the service of a single purchasing organization.
Single Purchasing Organization for Multiple Plants
Let's consider an organizational structure based on the situation where the single purchasing organization is assigned to more than one plant. The decision to set up this type of organizational structure is based on various factors, such as a common vendor supplying materials to all the plants. In this organizational structure, the purchasing processes of the underlying plants become faster due to their centralized processing. In contrast, the plants may have to wait until their purchasing process is approved, which may affect the production process. Figure 2.78 displays the organizational structure in which a single purchasing organization is assigned to multiple plants: Figure 2.78 represents an organizational structure with a single purchasing organization named A, which is assigned to the A and B plants. In this situation, the purchasing organization, A, is entitled to execute the purchasing processes for the A and B plants.
Figure 2.78: Displaying single purchasing organization assigned to multiple plants Let's now consider a situation in which the purchasing organization may be assigned to the plants of different company codes.
Cross Company Code Purchasing Organization at Plant Level
There may be a situation when a common purchasing organization is established across different company codes. As a result, plants of different company codes use the services of the common purchasing organization to complete their purchasing process. The decision to set up such an organizational structure is based on various factors, such as market fluctuation and increased demand of a product. Moreover, if the entire organization is overhauled or a common security, manufacturing, or software system is installed in the organization, a cross company code purchasing organization may be set up. Setting up a common purchasing organization across company codes is an administrative decision. Figure 2.79 represents an organizational structure based on the cross company code purchasing organization: Figure 2.79 displays an organizational structure that uses a common purchasing organization for plants of separate company codes. Company code A contains plants A and B as well as purchasing organization A; whereas, company code B contains plant C and purchasing organization B. Plant B is assigned to the purchasing organization B of company code B. Therefore, the purchasing process of plant B is executed by purchasing organization B, which belongs to company code B.
Figure 2.79: Displaying an organizational structure with cross company code purchasing organization Now, let's consider a different business scenario with a reference purchasing organization next.
Reference Purchasing Organization
The centralized purchasing organizations that are set up to monitor the purchasing processes across the organization are called reference purchasing organizations. A reference purchasing organization is more powerful than the individual purchasing organizations, since it is set up at the corporate level. Moreover, it can negotiate with a vendor and create a purchasing plan or formulate a global agreement that is applicable for all the purchasing organizations. An organizational structure based on the reference purchasing organization is shown in Figure 2.80:
Figure 2.80: Displaying the organizational structure based on the reference purchasing organization
In Figure 2.80, the purchasing organizations A, B, and C are assigned to the plants of company codes A and B. Purchasing organization D is a reference purchasing organization assigned to all the other purchasing organizations. Any change or decision made by purchasing organization D is applicable to the rest of the purchasing organizations
Exploring the Purchasing Process
The purchasing process, also known as the procurement cycle or procure to pay (P2P) cycle, starts with the determination of the requirements for materials or services in an organization, and ends when the payment is made to the supplier. The various stages involved in the procurement cycle are shown in Figure 5.1:
Figure 5.1: Displaying the procurement cycle Let's now discuss each of these stages in detail.
Determining the Material Requirements
The procurement cycle in the mySAP ERP system starts by determining the materials or services that need to be procured from an external source. The material requirements are then recorded in the purchase requisition document, which is forwarded to the purchasing department of the organization. A purchase requisition document is used to notify the purchasing department about the details of the required materials or services, such as their type, the amount or quantity in which the materials are required, and the date by which they must be made available to the organization. Note that in the mySAP ERP system, a purchase requisition document must be approved or released before being passed to the next stage or phase in the purchasing process.
Determining the Source of Supplying the Materials
After determining the requirements of an organization, the next step is to identify the source of supply to fulfill these requirements. This source can be determined by referring to past orders and the existing agreements of the organization with external suppliers and vendors. You can use the ME57 transaction code in the mySAP ERP system to check whether the required material or service can be obtained from an
existing contract and agreement. If you do not find a valid contract or agreement, you can create new RFQ documents to be sent to vendors. A RFQ is an external purchasing document that contains all the details of a material, such as price, delivery conditions, and terms of payment that a vendor agrees to while providing the material or service. The RFQ document is sent by a company to a vendor to request for the quotation of the material.
Selecting a Vendor
When the vendors submit their quotations of materials, these quotations are entered in the mySAP ERP system by using the ME47 transaction code. These quotations are then compared for their financial and other feasibilities by using the ME49 transaction code, after which the organization selects a particular vendor to supply the required materials or services. The organization can also send rejection letters to the vendors whose quotations are not selected.
Processing and Monitoring a PO
After selecting a vendor, the organization creates a purchase order (PO) document for the selected vendor. A PO is a legal document that is issued by an organization to a vendor. We learned earlier that a PO contains all the details of the required material or service, such as the description, quantity, delivery date, agreed prices, terms of delivery, and terms of payment. The information to be entered in a PO is retrieved from the purchase requisition or quotation document. You can use the ME21N transaction code to create a PO document. After issuing a PO document to the vendor, the organization monitors whether or not the vendor is delivering the material or service as per the terms and conditions agreed between them. It also checks whether the material or service is received by the concerned person, for instance a warehouse man, who then creates a goods receipt for the received materials.
Generating Goods Receipts
When the concerned person in the organization receives the material or service, he has to post a goods receipt or service acceptance document and update the PO history in the mySAP ERP system. In addition, the mySAP ERP system also generates a reminder in case the goods receipt document is not created corresponding to the item(s) mentioned in the PO document at the specified date.
Verifying the Invoices
After the goods receipt is sent to the vendor, the vendor matches the details with the PO document and generates an invoice. An invoice is a formal document issued by a vendor to an organization for the payment of the material or service that has been provided to the organization. In general, an invoice is attached with a goods receipt or delivery note document and sent to the organization. On receiving an invoice from the vendor, the organization verifies it by performing the following tasks: 1. 2. 3. Comparing the information present in the invoice with that of the original PO document. Checking whether or not the materials or services mentioned in the PO have been received from the vendor. Checking whether or not the goods receipt or service acceptance document has been issued to the vendor. If the goods receipt or service acceptance document has been issued, the invoice receipt document can be posted in the mySAP ERP system.
Processing of Payments
After posting an invoice receipt document, the organization has to pay the vendor as per the terms of payment mentioned in the PO document. The task of payment processing is performed in the Financial
Accounting (FI) module. When payment processing is completed, the vendor's account is debited and the organization's account is credited. Since the purchasing process or procurement cycle starts with the purchase requisition phase, let's now discuss this phase in detail.