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.