Organizational levels in the SAP procurement process

The organizational level that you see above is the one related to Materials Management. No matter where you go under the MM Processes, you would have to go through at least 1 of the above.

Client
The Client is the highest hierarchical level unit within a SAP system. We can say that it represents an Enterprise. We can also say that within this Enterprise, there might be more than 1 companies, which leads us to the next level, Company Code. It is represented in the system by a 3-digit numeric key.

Company Code

A Company Code is the organizational unit that allows you to structure your enterprise from a financial accounting perspective. It represents an independent unit producing its very own balance sheet, e.g a company within an Enterprise (Client). It is represented in the system by a 4-character alphanumeric key. This includes the entry of all events that require posting to the accounts and the creation of a complete audit trail for balance sheets and profit and loss statements. A company code represents an independent unit producing its own balance sheet, for example, a company within a corporate group (client).

Plant
The plant is an organizational unit where Operations are concerned. When I say operations, I mean Production, Procurement, Materials Planning and Maintenance locations. It is represented in the system by a 4-character alphanumeric key.

Storage location

The storage location is an organizational unit where we differentiate stocks of materials within a warehouse/plant. If further breakdown is required, we can use Storage Bins. It is represented in the system by a 4-character alphanumeric key.

Purchasing Group
Purchasing Group is a key to identify a buyer or a group of buyers responsible for a particular type of purchase. It is however not related to other units in the company structure.

Purchasing Organization

A Purchasing Organization is a unit which is responsible for the procurement of services/materials, and condition negotiations with vendors.

Special Procurement Processes

Vendor Consignment

Consignment basically something that vendor provides you and you store in your warehouse but you do not have to pay for it, until you use it. In this case, the vendor still remains as the owner of the stocks. Only when we consume these materials, then we will be charged/liable for it. Therefore, to settle this liabilities, it is according to agreed periods with the vendor, for example monthly.

In order to start this consignment process, you will have to first have an agreement on the price per quantity for the consigned materials. In SAP, we call this Consignment Info Record.

Remember earlier, I have mentioned that we will only be charged when we "Use/consume" the consigned materials? So, when referring to this, the procurement cycle for Consignment is a little bit different. The procurement cycle starts with a Purchase Order for Consignment Items, and it ends after Receiving the goods. This is because payment is required not after supply but after withdrawal.

Subcontracting
This procurement process is actually similar to the standard Procurement cycle. However, we would provide some or all of the components required to produce the material.

The Process starts of with a Subcontract Order where you indicate the material which is to be delivered, plus the components that you would provide to the Subcontractor.

So, when the vendor has received the Subcontract Order, he cannot start production until you have provided him with the necessary components. You perform this transfer of components by means of transfer posting where the materials are no longer physically in your location. It is now with the vendor for him to consume in order to produce the end-product.

As soon as the subcontractor completes the production for the end/refined material, he would then deliver it to you. This is now the Goods Receipt process. Unlike the standard Goods Receipt, here for Subcontracting process we Receipt the end-material as well as Issue out the components that was used by Subcontractor. These components are considered as subcontract consumption. In the end, the subcontractor will send us an invoice for the service given.

Stock transfer with Stock transfer Orders
This is a unique type of procurement because it does not involve an external vendor. It is a procurement method that is done within a company. The plant that needs the material will come up with an internal order called Stock Transport Order directed to the other plant which will be providing the material.

The issuing plant who receives the Stock Transport Order, will then provide the materials by performing Goods Issue with reference to the Stock Transport Order in SAP. After this is done, the receiving plant performs Goods Receipt against this Stock Transport Order to receive the materials.

This process can also be simplified by means of Transfer Postings only. In this case, we do not have to create a Stock Transport Order, but instead, perform Transfer Posting between receiving and issuing plant straight away.

Basics of External Procurement Process

The MM Module will be revolving around this business process. It is just whether we will be using each of it to its full extent or not. Let's begin :)

Requirement Determination

Before we can start with an external procurement process, we would need to have a requirement for it. A requirement can come from a few sources. Example, when there is a need for a new Printer in the Finance Department, therefore a user over there would raise a Purchase Requisition manually. Another example, when we have a MRP Procedure for a particular material (MRP Planning/Reorder Point/etc), SAP is able to generate Purchase Requisitions automatically or create a Planned Order first, which would be converted to Purchase Requisitions later on individually.

Source of Supply Determination
In SAP, we can also classify Vendors where we are allowed to procure from. There are also various methods in SAP to help you identify the possible sources to procure the goods. By doing so, you will be able to send Request for Quotations to the respective sources. This step is however optional, you can actually proceed to create a Purchase Order immediately.

Vendor Selection

If you chose to send Request for Quotations to a few sources, SAP automatically performs price comparisons based on the Quotations that they have provided. SAP is also able to send rejection letters to the vendors that did not qualify for the purchase.

Order Processing

This is where you create the official Purchasing Document called Purchase Order. You can create them manually in SAP or Automatically by the system. In SAP, you do not have to re-enter the Data in Purchase Order, but instead, you can copy the data from Purchase Requisition, RFQ, or Outline Agreements.

Purchase Order Monitoring

After creating a Purchase Order, it is necessary to check from time to time, the statuses of the Purchase Orders. In the Purchase Order report, it is possible to check for each PO, how much has been delivered, invoiced, etc.  It is also possible at this stage to remind vendors of outstanding deliveries.

Goods Receipt

When you enter incoming deliveries (by looking at the delivery order provided by vendor), you will be referring to the Purchase Order, therefore, entry work is minimized. SAP is also able to check how much quantity is still open for receiving, and it is also possible to set tolerance levels. For example, If your Purchase Order quantity is 100, you can set a over delivery and/or under delivery tolerance. Therefore, system will check against the tolerance % that you have set, and if you enter a quantity that exceeds this, SAP will throw you an error message.

Invoice Verification
When performing Invoice Verification in SAP, you will be referring to either the Purchase Order or Goods Receipt document. SAP will perform the necessary checks to ensure that you do not over or under pay the Vendor. Once this is completed, the MM Cycle is over. The next step "Payment Processing" is under the FI Module.

Payment Processing
This is the final step where the payment program authorizes payment to the creditor liabilities.

This covers the Standard External Procurement Cycle. Apart from the above, there are other special procurement processes such as Vendor Consignment, Subcontracting, Stock Transfer, etc. They will be explained later. For now, we should all be clear of the Standard cycle because the whole of MM evolves around it.