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Process in Procurement

Unit 2
Basic of Procurement
Unit Overview
This unit deals with the concept of organizational levels necessary to replicate an
enterprise structure in the SAP system. It also introduces a simple procurement
process with its elements purchase order, goods receipt, and invoice verification.
In addition you will become familiar with single-screen transactions for purchase
orders, goods receipts and invoice receipt.

In this lesson contains as follows:

 Introduction
 Organization Structure
 Procurement Process
 Purchase Requisition
 Request for Quotation
 Purchasing Info Record
 Vendor Evaluation
 Stock Type
 Exercises

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Process in Procurement

INTRODUCTION
SAP MM (Material Management) is one of the largest functional module in SAP. This
module mainly deals with Procurement Process, Master Data (Material and Vendor
Master), Inventory Management, Valuation of Material & Account, Determination, MRP
(Material Requirement Planning), Invoice Verification. This module is integration with the
other modules such as Inventory Management, Sales and Distribution, Finance &
Controlling, Plant Maintenance, Project System, Production Planning.

Material Management as a process ensures no shortage of materials or any gaps in the

supply chain process of the organization. SAP MM speeds up the procurement and
material management activities, making the business run smoothly with complete time
and cost efficiency.

ORGANIZATION STRUCTURE
The organization structure in MM can be shown as follows:

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Terminologies are used in Material Management as follows:

No Name Description
1 Client Client is a highest organizational unit in SAP, and its known
as a self -contained data area unit with separate master
records and a complete set of tables
2 Company Code Company code is the smallest organizational unit in SAP
that will represent the legal entity and can provide the
reports to the external parties either Balance Sheet or
Profit and Loss Report.
3 Plant Plant Is an operating unit for production and material
requirement planning process. Plant can be referred to as a
grouping of several storage locations with stock materials
that are geographically close to one and another
4 Storage Location Storage location is an organizational unit that allows the
differentiation of material stocks within a plan. The Physical
inventory is carried out at storage location level
5 Purchasing Organization A Purchasing Organization is an organizational level that
negotiates conditions of purchase with vendors for one or
more plants. It is legally responsible for completing
purchasing contract
6 Purchasing Group A Purchasing Group is the key for a buyer or group of buyer
that responsible for a certain purchasing activities
7 Plant  Plant is an operating unit for production and material
requirements planning process

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 Plant can be referred to as a grouping of several storage

locations with stock of materials that are geographically
close to one another
8 Storage Location  The storage location is an organization unit that allows
the differentiation of material stocks within a plant
 Inventory Management on a quantity basis is carried
out at storage location level in the plant
 Physical inventory is carried out at storage location level
9 Material Group  Material group is used to group together
several materials or services with the same attributes,
and to assign them to a particular material group
For Example:
1. Mechanic
2. Electric
3. Pumps
4. Metal Processing, etc
10 Material Type  Material types are the materials which are having the
similar attributes are categorized together and
assigned to a material type
For Example:
1. Raw Material
2. Semi Finish Good
3. Finish Good
4. Spare Parts
5. Trading Goods
6. Service , etc

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The example of Organization Element in Material Management

PROCUREMENT PROCESS
The following figures illustrates the flow of basic procurement activities:

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No Procurement Activities
1 Demand Determination
2 Source Determination
3 Source List
3 Vendor / Supplier Selection
4 Process Order Processing
5 Order Monitoring
6 Good Receipt
7 Invoice Verification
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Description
In this step, it is determined what material or service
are required and which supplier can fulfill the
requirement. The document that is created in this
step is Purchase Requisition (PR).
In this step, It is determined who the suppliers will
provide the material or service based on step
Demand Determination. The document is created in
this step is Request for Quotation (RFQ). This
quotation will be created by Supplier.
The source list is used in the administration
of sources of supply. It specifies the allowed (and
disallowed) sources of a material for a certain plant
within a predefined period.
Example:
Material M1 from Plant 1000, can be supplied by
Vendor A, B & C From 01.01.2020 – 30.04.2020 but
Vendor A. can supply 01.05.2020 – 31.12.2020
In this step, normally company will select the vendor
through several criteria such as Delivery, Quality,
Cost & Past Performance.
In this step, Purchase Order will be created based on
information from Purchase Requisition,
Started when a purchase order is created and it is
used to track dates and events throughout the
process chain, from the placing of a
purchase order with an external vendor to the
presentation of the goods in a store, or the receipt
of goods in a distribution center.
A goods receipt is the physical inbound movement
of goods or materials into the warehouse. It is
a goods movement that is used to
post goods received from external vendors or from
in-plant production. All goods receipts result in an
increase of stock in the warehouse.
The system supports the checking and matching of
invoices. The accounts payable clerk is notified of
quantity and price variances because the system
has access to PO and goods receipt data. This
speeds the process of auditing and clearing
invoices for payment.
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Process in Procurement

Company process the payment to the vendor based

8 Payment Processing
on invoice received document

PURCHASE REQUISITION
A purchase requisition is a request or instruction to Purchasing to procure a certain
quantity of a material or a service so that it is available at a certain point in time. An item
of a requisition contains the quantity and delivery date of the material to be supplied or
the quantity of the service to be performed.

Note Description
The main function of MRP is to guarantee material availability
MRP (Material
on time. MRP is required to procure or produce the required
Requirement
quantities on time for in- house purpose or for fulfilling
Planning)
customer demand.
An outline agreement is a long-term purchasing agreement
Outline Agreement with a vendor containing terms and conditions regarding the
material that is to be supplied by the vendor.

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REQUEST FOR QUOTATION

Request for quotation is a form of invitation that is sent to the vendors to submit
a quotation indicating their pricing and terms and conditions. It contains details about
goods or services, quantity, date of delivery, and date of bid on which it is to be
submitted.

PURCHASING INFO RECORD

Purchasing info record is an important source of information related to a buyer. It is
used to record purchasing information with the vendor for certain materials. In this
master data, information about last purchasing price, planned delivery time, reminder
for invoice verification, vendor material number are stored. Purchasing info record can
be created manually as well automatically. Purchasing Info record is created Manually,
using transaction code ME11. But If it can be also created automatically, through turning
on Info Update Indicator checkbox when maintaining a quotation, purchase order,
contract or scheduling agreement documents.

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VENDOR EVALUATION
The Vendor Evaluation is a component supports to optimize the procurement processes
in the case of both materials and services. The Vendor Evaluation component helps you
select sources of supply and facilitates the continual monitoring of existing supply
relationships. It provides the accurate information on prices, and terms of payment and
delivery.

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STOCK TYPES
There are three overarching SAP stock types, and several additional sub-types. Discuss in
detail about stock will be done in the lesson of Inventory Management.

1. Valuated Stock
Valuated stocks are those which are stored on premises and which post values in the
company’s accounts. There are three types of valuated stock, amongst which
materials can be moved using particular movement types. We define each sub-type
of valuated stock below.

 Unrestricted Stock: Unrestricted stock refers to stock which can be used readily
and which is always available for use on premises.
 Quality Inspection Stock: Quality inspection stock is delivered material that is
retained for quality inspection. It is not regarded as unrestricted and cannot be
readily used.
 Blocked Stock: If a material is rejected due to bad quality then it is moved to
blocked stock in SAP. This can also happen during production when some
irregularities are found with the stock and thus blocked for further use.

2. Non Valuated Stock

With the procurement of non-valuated stocks, no accounting entry takes place.
These SAP stock types are not yet owned by the company even though they may be
on the premises. For example, if a vendor sends goods that are visibly damaged at
the time of receiving, they will be returned to the vendor and should not be
processed into inventory. In this case the goods are received into blocked stock with
no accounting entry. This is an example of a non-valuated stock type, as the
ownership is still not with the company.

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3. Special Stock
Special Stocks are stocks that are accounted for but are not owned by the client, or are not
stored at a regular facility. For the example stock for Subcontracting, Consignment.
 Subcontracting is a special procurement method wherein the company decides
to outsource its work to a vendor. In this process, a company sends raw
material to the vendor for specific manufacturing processes and receives the
finished material back.
 Consignment, the vendor provides goods and keeps them in a company’s
storage area. The owner of the goods is still the vendor and the company is the
owner only when it withdraws the goods from the consignment stores for its
own use. The company pays the vendor only when it consumes the goods kept
in the company’s storage area as needed.

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