Chapter

The Procurement Process

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 ORGANIZATIONAL DATA

- Organizational levels: client, company code, and plant

- Most activities in the procurement process occur
within a company code
- A plant is the location where the materials are
received: receiving plant (<>manufacturing plant)

-Three additional organizational data:

storage locations,
purchasing organization,
purchasing group
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 ORGANIZATIONAL DATA
STORAGE LOCATION

- places within a plant where materials are kept

until they are needed
- A plant can have multiple storage locations,
each of which is designated for different
purposes (staging area, inspection area) or
stores specific types of materials (semifinished
goods)
- More specific storage locations include shelves,
bins, cabinets, and trays 4
 ORGANIZATIONAL DATA
STORAGE LOCATION

A plant must have at least one storage location if

it needs to track the quantity and value of
materials in its inventory

Ex: a plant that serves as a production or storage

facility must maintain accurate records of the
quantity and value of raw materials,
semifinished goods, and finished goods
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 ORGANIZATIONAL DATA
STORAGE LOCATION

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION

- Performs strategic activities related to

purchasing for one or more plants
- Evaluates and identifies vendors, and it
negotiates contracts and agreements, pricing,
and other terms
- Three models of purchasing organizations:
enterprise level, company level, and plant level
(from highly centralized to highly decentralized)

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Enterprise-Level Purchasing Organization

- Also known as the crosscompany code

purchasing organization, is the most centralized
model.
- There is only one purchasing organization for
the overall enterprise and all of the plants within
the enterprise

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Enterprise-Level Purchasing Organization

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Company-Level Purchasing Organization

- also known as the crossplant model, a single

purchasing organization is responsible for multiple
plants in one company code

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Company-Level Purchasing Organization

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Plant-Level Purchasing Organization

- The most decentralized model

- also known as a plant-specific purchasing
organization, in which each plant has its own
purchasing organization

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Plant-Level Purchasing Organization

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Reference Purchasing Organization
- A highly centralized model enables an enterprise to
negotiate favorable agreements because it purchases
materials in large volumes

- The enterprise may not be able to take advantage

of local practices and relationships with which it is
not familiar. It may not be able to react quickly to
changes in local conditions

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Reference Purchasing Organization

- A highly decentralized model is preferred when

vendors primarily serve a local geographic area and
knowledge of local practices and conditions enables
the enterprise to make favorable agreements

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Reference Purchasing Organization

=> enterprises frequently adopt a hybrid model that

consists of one centralized purchasing organization
that can evaluate needs and opportunities for the
entire enterprise and negotiate global contracts,
which purchasing organizations then use across the
enterprise: reference purchasing organization

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 ORGANIZATIONAL DATA
PURCHASING ORGANIZATION
Reference Purchasing Organization

Ex: GBI has adopted a hybrid model to include a

single global reference purchasing organization
(GL00), plus multiple company-code-specific
purchasing organizations.
- In the United States, the purchasing organization
(US00) is physically located in the Miami facilities
- In Germany the purchasing organization (DE00) is
physically located in the Heidelberg facilities 17
 ORGANIZATIONAL DATA
PURCHASING GROUP

- Whereas purchasing organizations are responsible

for the strategic aspects of purchasing, such as
negotiating contracts with vendors, purchasing
groups carry out the day-to-day purchasing activities.

- Is an individual or a group of individuals who are

responsible for purchasing activities for a material or
a group of materials

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 ORGANIZATIONAL DATA
PURCHASING GROUP

These activities include planning, creating purchase

requisitions, requesting quotations from vendors,
and creating and monitoring purchase orders

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 ORGANIZATIONAL DATA
PURCHASING GROUP

- Purchase order (PO) is a formal communication to a

vendor that represents a commitment to purchase
the indicated materials under the stated terms

- The purchasing group also serves as the main

point of contact with vendors

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 ORGANIZATIONAL DATA
PURCHASING GROUP
- A purchasing group is not always an entity within
the company. Some businesses outsource the
group’s activities

Ex: a company needs to acquire land or a building.

The company will retain a realtor to find the property
that best suits their needs => the realtor serves as
the purchasing group

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 ORGANIZATIONAL DATA
PURCHASING GROUP

- Many companies use the services of buyer agents

to find suitable vendors and buy materials from them
because these agents are more familiar with the
vendors

- GBI has one purchasing group for North America

(N00) and one for Europe (E00)

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 MASTER DATA

Material master,
Vendor master,
Purchasing info records,
Conditions.

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 MASTER DATA
MATERIAL MASTER

- Material master are grouped into different views

that are relevant to different processes
- Basic data: applicable to many processes, include
material number, description, and weight …
- The views relevant to purchasing are:
financial accounting data,
purchasing data,
plant data / storage
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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data

Valuation currency,
The valuation class,
The price control

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Valuation currency

Valuation currency is the currency that the materials

will be priced in, such as U.S. dollars or euros

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Valuation class

- Valuation class identifies the general ledger

accounts associated with the material

- The general ledger accounts are used to maintain

the value of the inventory in stock and are updated
as materials are purchased, sold, or used in
production
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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Valuation class

- Valuation class provides an important integration

point between purchasing and financial accounting
because it allows the system to automatically make
postings to appropriate stock or inventory accounts
in the general ledge

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Price control

- Price control identifies the method that is used to

value the materials.
The two options for price control:
moving average price
standard price

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Price control
moving average price

- In the moving average price option, the total value

of the materials is divided by the quantity in stock to
determine the average price per unit

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Price control
moving average price
Ex: if a firm has 1000 helmets in stock and they cost
$34,000 to purchase, then the moving price is $34
(34,000/1,000)
If the enterprise purchases an additional 100 helmets
for $3,500, then the new moving price increases
slightly to $34.09 (($34,000 + $3,500)/(1,000 + 100)).

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 MASTER DATA
MATERIAL MASTER
Financial Accounting Data
Price control
standard price
- Standard price is constant for a specified period of
time and does not fluctuate, even when an event
occurs that causes the value of the materials to
change
- The standard price is updated periodically - monthly
or quarterly - to account for changes in the value of
materials.
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 MASTER DATA
MATERIAL MASTER
Purchasing Data

- Purchasing view:
purchasing group,
the goods receipt processing time,
the delivery tolerances

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 MASTER DATA
MATERIAL MASTER
Purchasing Data
purchasing group

responsible for purchasing the materials

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 MASTER DATA
MATERIAL MASTER
Purchasing Data
goods receipt processing time

When a company receives materials from a vendor, it

requires a certain amount of time to receive them
and place them into storage responsible for
purchasing the materials
Ex: it must unpack the boxes, count the materials,
inspect their quality, and physically move them to
the appropriate storage location
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 MASTER DATA
MATERIAL MASTER
Purchasing Data
goods receipt processing time

An estimate of this time is included in the material

master.

The ERP system utilizes this estimate in planning

activities, for instance, to determine when an order
should be placed so that the materials are available
when they are needed. 36
 MASTER DATA
MATERIAL MASTER
Purchasing Data
delivery tolerances
- specify how much over delivery and under delivery
the ordering party will accept

- If the quantity delivered is within these tolerances,

then the ordering party accepts delivery

- If the quantity exceeds the tolerances, then it

refuses the shipment and returns it to the vendor 37
 MASTER DATA
MATERIAL MASTER
Plant Data / Storage

- Most materials that are purchased from a vendor or

produced in-house ultimately are received into
inventory

- The plant data/ storage view includes data that are

needed to properly store materials

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 MASTER DATA
MATERIAL MASTER
Plant Data / Storage

- Environmental requirements such as temperature

and humidity
- Special containers that are required for storage
- Shelf life; that is, how long a material can be stored
before it becomes obsolete or unusable (common in
pharmaceutical and food services industries)
- Instructions for special handling, for instance, if the
material is fragile or hazardous.
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 MASTER DATA
VENDOR MASTER

Vendor master data include the data needed to

conduct business with a vendor and to execute
transactions related to the purchasing process:
general data,
accounting data,
purchasing data

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 MASTER DATA
VENDOR MASTER

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 MASTER DATA
VENDOR MASTER
General data

- Include the vendor’s name, address, and

communication information such as phone and fax
numbers
- Are defined at the client level and are consistent
across all company codes and purchasing
organizations in the enterprise (client)
- Are common to the purchasing and accounting
departments and can be maintained by either
department 42
 MASTER DATA
VENDOR MASTER
Accounting data

- Include tax-related data, bank data, and payment

terms and methods

- Are defined at the company code level (financial

accounting is maintained at the company code level)
and are relevant to all purchasing transactions in the
company code
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 MASTER DATA
VENDOR MASTER
Accounting data

- Specify the reconciliation account in the general

ledger

- If the vendor supplies multiple companies

(company codes) within the enterprise, then the data
very likely will vary for each company

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 MASTER DATA
VENDOR MASTER
Accounting data

- The reconciliation account will be different if each

company uses a different chart of accounts and
general ledger accounts
- Bank data and payment terms may vary as well

=> Accounting data are maintained separately for each

company code with which the vendor had dealings
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 MASTER DATA
VENDOR MASTER
Purchasing data

- Include various terms related to determining prices,

creating and communicating purchase orders,
verifying invoices, and other steps involved in
executing purchases with the vendor

- The purchasing department will typically complete

this segment

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 MASTER DATA
VENDOR MASTER
Purchasing data

- Are defined at the purchasing organizational level

and are applicable only to that organization

- If an enterprise has multiple purchasing

organizations that deal with the vendor, then it must
maintain separate data for each one

- Delivery and payment terms may vary for different

purchasing organizations 47
 MASTER DATA
VENDOR MASTER

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 MASTER DATA
PURCHASING INFO RECORDS
an intersection or a combination of material and
vendor data

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 MASTER DATA
PURCHASING INFO RECORDS

- It contains data specific to one vendor and one

material or material group

- Include some data that are in the vendor master and

the material master, as well as data that are valid for
the specific combination of vendor and material.
These data are grouped into general data and
purchasing organization data

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 MASTER DATA
PURCHASING INFO RECORDS

- General data are applicable to all purchasing groups

and include vendor number, material number (or
group), and other data used for communication (e.g.,
contact information, telephone numbers, and
reminders)
- Purchasing data are specific to one purchasing
organization, and they are based on agreements with
the vendor regarding delivery times, delivery
tolerances, quantities, and pricing conditions
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 MASTER DATA
PURCHASING INFO RECORDS

- Companies use pricing conditions to determine the

cost of purchasing the material from that vendor

- The info record typically defines a number of

different condition types, including gross price,
discounts and surcharges, taxes, and freight

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 MASTER DATA
PURCHASING INFO RECORDS

- includes text data that are used for notes and

instructions to accompany purchase orders, and it
keeps track of the last purchase order for the specific
material-vendor combination

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 MASTER DATA
PURCHASING INFO RECORDS

=> the company uses data from the purchasing info

record as default values when it creates a purchase
order for a specific combination of material and
vendor

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 MASTER DATA
PURCHASING INFO RECORDS

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 MASTER DATA
CONDITIONS

- Used to determine the appropriate prices, discounts,

taxes, freight, and so on for the materials

- Unlike the conditions in the purchasing info records,

however, these conditions are not defined for a
specific combination of vendor and material

- They are based on the overall agreements and

contracts in place with vendors
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 MASTER DATA
CONDITIONS

The company uses these conditions to determine

pricing when it creates purchase orders

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 KEY CONCEPTS
ITEM CATEGORIES
Determine which process steps and data are needed
when acompany purchases materials or services
standard,
consignment,
subcontracting,
third-party,
stock transfer,
services

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 KEY CONCEPTS
ITEM CATEGORIES
standard items
The most common, and the process used to procure
them includes the steps portrayed in :

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 KEY CONCEPTS
ITEM CATEGORIES
consignment items

- It pays the vendor only when it uses or sells the

materials.
- For this category of materials, therefore, there is no
invoice receipt step

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 KEY CONCEPTS
ITEM CATEGORIES
Third-party order items

- Items that the vendor ships directly to a customer

- Companies employ third-party orders for trading
goods, such as helmets, that they purchase and then
resell to customers without performing any
operations themselves
- Because the customer receives the goods directly
from the vendor, there is no goods receipt for the
company itself
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 KEY CONCEPTS
ITEM CATEGORIES
subcontracting arrangement

- a company sends materials to a vendor, who uses

them to create semi-finished products
- The vendor then sends these products back to the
company that initiated the process
- The procurement process includes the additional
step of shipping materials to the vendor

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 KEY CONCEPTS
ITEM CATEGORIES
stock transfer

- the process whereby an organization uses the

procurement process to obtain materials from
another plant within the same organization

- Because the entire process takes place within a

single organization, there are no invoice and payment
steps

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 KEY CONCEPTS
ITEM CATEGORIES
services

- such as janitorial or landscaping services — generally

do not involve receiving materials.
- A mechanism to record services performed – a
service sheet

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 KEY CONCEPTS
STOCK TYPE OR STATUS

- Stock or inventory of materials is classified into

different stock types or statuses that determine the
usability of materials

- how the company can use the materials in its various

processes

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 KEY CONCEPTS
STOCK TYPE OR STATUS

unrestricted use,
in quality inspection,
blocked stock,
stock in transit

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 KEY CONCEPTS
STOCK TYPE OR STATUS
unrestricted use

- can be used in any manner that management feels

will benefit the enterprise

- can be consumed internally—for instance, to

produce other products—or externally, to meet
customer demand

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 KEY CONCEPTS
STOCK TYPE OR STATUS
in quality inspection

uses the in quality inspection status when the goods it

receives from a vendor must undergo inspection
before being released for consumption

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 KEY CONCEPTS
STOCK TYPE OR STATUS
blocked stock

used for materials that are damaged or unusable

for some reason, such as the when the vendor
delivers the wrong materials

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 KEY CONCEPTS
STOCK TYPE OR STATUS
stock in transit

when materials are being moved from one plant to

another

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 KEY CONCEPTS
GOODS MOVEMENT
A process step that results in a change in stock
results
goods receipt,
goods issue,
stock transfer,
transfer posting

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 KEY CONCEPTS
GOODS MOVEMENT
goods receipt

- Records the receipt of materials into storage,

which results in an increase in inventory quantity
- A company usually generates a goods receipt when it
receives materials either from a vendor or from the
production process

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 KEY CONCEPTS
GOODS MOVEMENT
goods issue
- when materials are removed from storage, in which
case inventory is reduced
- A company typically generates a goods issue when it
(a) ships materials to a customer,
(b) uses them for internal consumption (e.g., to
produce another material), or
(c) designates them for sampling or to scrap

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 KEY CONCEPTS
GOODS MOVEMENT
stock transfer
- is used to move goods from one location to another
within the organization
- Materials can be transferred between storage
locations, between plants within the same company
codes, and between plants across company codes
- the procurement process can be used to transfer
materials from one location to another

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 KEY CONCEPTS
GOODS MOVEMENT
transfer posting

- to change a material’s status or type

Ex: it would use a transfer posting to redefine a
material from in quality inspection status to
unrestricted use or to change a material type from
raw materials to finished goods

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 KEY CONCEPTS
GOODS MOVEMENT
transfer posting

- When the company receives materials from a

vendor, it stores them and designates them as in
quality inspection. After they pass inspection, it issues
a transfer posting to “move” them to unrestricted use
status.
- In this situation a material document is created, but
an accounting document is not

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 KEY CONCEPTS
GOODS MOVEMENT
transfer posting

A transfer posting may or may not involve the physical

movement of materials from one location to another

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 KEY CONCEPTS
GOODS MOVEMENT

material document records data related to a goods

movement

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 KEY CONCEPTS
GOODS MOVEMENT

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 KEY CONCEPTS
MOVEMENT TYPES

Every goods movement requires a movement

type

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 KEY CONCEPTS
MOVEMENT TYPES
The movement type determines:

- which category of movement is being executed

(goods receipt or goods issue)
- what information must be provided when executing
the movement (storage location)
- which general ledger accounts will be updated
(finished goods inventory)
- how the stock quantity will be affected (increase or
decrease)
- the screenlayout used to record the movement 81
 KEY CONCEPTS
MOVEMENT TYPES

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