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Fundamental guide to SAP

Procurement processes
SAP Materials Management

INDEX

FUNDAMENTAL PROCUREMENT PROCESSES..................................................................................3


MATERIAL MASTER..................................................................................................................................5
VENDOR MASTER.......................................................................................................................................5
PURCHASING MASTER.............................................................................................................................6
PURCHASING DOCUMENTS....................................................................................................................7
NOTES ON PURCHASING DOCUMENTS...............................................................................................9
PURCHASING PROCESSING..................................................................................................................10
GOODS RECEIPT.......................................................................................................................................11
INVOICE PROCESSING............................................................................................................................12
VENDOR PAYMENT..................................................................................................................................13
PURCHASING INTERGRATION.............................................................................................................15
MATERIALS PLANNING AND CONTROL...........................................................................................16
QUOTATIONS.............................................................................................................................................19
PURCHASE ORDER...................................................................................................................................20
OUTLINE AGREEMENT...........................................................................................................................23
CONTRACT ................................................................................................................................................24
SCHEDULING AGREEMENT..................................................................................................................24
PURCHASING INFO RECORDS..............................................................................................................25
SOURCES OF SUPPLY..............................................................................................................................27
MASTER CONDITIONS............................................................................................................................28
EXTERNAL SERVICES MANAGEMENT..............................................................................................31
VENDOR EVALUATION...........................................................................................................................35

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INTRODUCTION

Materials Management covers all tasks within the supply chain, including consumption-
based planning, purchasing, vendor evaluation, and invoice verification. It also includes
inventory and warehouse management to manage stock until usage dictates the cycle
should begin again.

The purpose of the MM-Materials Management module is to provide detailed support for
the day-to-day activities of every type of business that entails the consumption of
material.

The Materials Management module of SAP R/3 consists of the following components:

• Purchasing.
• External Services Management.
• Vendor Evaluation.
• Inventory Management.
• Invoice Verification.
• Warehouse Management.
• Consumption Based Planning.
• Material Ledger

FUNDAMENTAL PROCUREMENT PROCESSES

Requirements Determination -- Basically, how do we know we need something? The


request for goods or services usually comes in the form of a purchase requisition.
Purchase requisitions can be created manually or automatically by MRP (Material
Requirements Planning). MRP is part of the Manufacturing Planning and Execution
process introduced above. Simply put MRP determines the material needs based on
current and future sales figures and automatically triggers the requirements when
necessary.

Source Determination -- The source of supply is determined for the needed item by the
purchasing department or the system

Vendor selection -- The requisition is assigned to a vendor

Order processing -- A purchase order is requested with reference to the requisition

Order follow-ups -- The system provides automated expediting and follows up


reminders to ensure prompt delivery of the order

Goods receipt and inventory management -- The goods are received into the
warehouse via purchase order goods receipt

Invoice verification -- The invoice is validated by comparing it to the original purchase


order price and quantity received

Payment -- Payment will be made based on payment terms and conditions defined

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Four Main Documents and Transactions in the Procurement Processes

Purchase Requisitions -- Includes the first three steps of the procurement process, i.e.
Requirements Determination, Source Determination and Vendor Selection.

Purchase Orders -- Includes the steps four and five of the procurement process, i.e.
Order processing, and Order Follow-Up

Goods Receipt Posting -- Includes step six of the inventory process, i.e. Goods
Receipt and Inventory Management

Invoice Processing -- Steps seven and eight of the procurement process, i.e. Invoice
Verification and Payment.

Organizational Elements

Client
The client represents the highest level of the organizational hierarchy. It represents the
corporate group level of an organization.

Company code
The company code represents an independent accounting unit within a client, i.e. a
business unit for which balance sheets and profit and loss statements, required by law,
are compiled.

Plant
A plant is an organizational unit within a company. A plant produces goods, renders
services, or makes goods available for distribution. Note that a plant can be a
manufacturing facility or a warehouse distribution center.

Storage location
A storage location is the actual physical location, within a plant, where the material
stocks are located.

Purchasing organization
A purchasing organization is an organizational unit responsible for procuring materials
and services for one or more plants and for negotiating prices and terms of delivery with
the vendor.

Purchasing group
The purchasing group is a special subdivision within a purchasing organization that
handles certain specific purchasing activities, namely the day-to-day buying. Please note
that a purchasing group can perform this function for several purchasing organizations.

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MATERIAL MASTER

Organizational levels for inventory management

General data
Plant data
Storage location data
Valuation data

Material master views – primary views for procurement

Purchasing view
Engineering view
Accounting view

Steps to create a material master

• The material type and industry sector


• The units of measure, such as the base unit (stock keeping unit), and the order
unit
• The purchasing group (buyer group) responsible for the material
• Accounting data, such as the valuation class, price control, and standard or
moving average price

VENDOR MASTER

Vendor Master Records include general information such as name and address,
currency used for the vendor, terms of payment, contact information, etc. Vendor master
records comprise information for both the accounting and purchasing function as well as
general vendor data. General data is data that applies to all company codes within the
client. It includes such information as address, phone number, and the language spoken
by the vendor. Accounting data includes accounting specific information such as
payment transactions and reconciliation control account information. Purchasing data
includes items such as contact persons, terms of delivery, etc. Because Accounting and
Purchasing have different information needs, each is presented with a different view of
the vendor master file. In the Accounting view, the accountant has access to the general
and accounting data, and in the Purchasing view the purchasing agent has access to the
general data and the purchasing data.

General functions

• Terms of payment
• One time vendor
• Blocking vendors
• Maintaining business partners – vendor, order recipient, goods supplier, invoicing
party, payee

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PURCHASING MASTER

In addition to vendor and material master data, Purchasing is supported in its everyday
work by the following additional types of master data:

• Purchasing info record


• Source list
• Quota arrangement
• Conditions
• Vendor evaluation

Purchasing info record

Info record is short for Information record. The info record contains concise information
about a vendor and a material that you already procure from that vendor. An info record
thus represents a material-vendor relationship. For example, the info record indicates
the units of measure in which materials are ordered from the vendor, and the applicable
reminder levels. It also shows price changes made by the vendor for the material. This
information can be useful in the process of evaluating quotations to determine the
successful bidder. Info records are created automatically when you order a material. You
can also create, change, and delete info records.

The purchasing info record (also referred to in abbreviated form as the "info record") is a
source of information for purchasing. It contains information on a specific material and a
vendor supplying the material. For example, the vendor's current pricing is stored in the
info record. The info record also allows buyers to quickly determine:

• Which materials have been previously offered or supplied by a specific vendor


• Which vendors have offered or supplied a specific material

The info record contains data such as:

• Current prices and pricing conditions


• The number of the last purchase order
• Tolerance limits for over deliveries and under deliveries
• The planned delivery time (lead time required by the vendor to deliver the
material)
• Vendor evaluation data
• An indicator as to whether the vendor counts as the regular vendor for the
material
• The vendor sub-range to which the material belongs
• The availability period during which the vendor can supply the material

There are two types of info record:

• Info records with a material master record (e.g. for stock material). This type of
info record represents the relationship between a material or service (for which a
master record exists) and a vendor.

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• Info records without a material master record (e.g. for consumable materials).
This type of info record represents the relationship between a material or service
for which no master record exists and a vendor.

An info record contains general data and organizational data:

• General data that is valid for each purchasing organization or each plant (for
example, origin data, reminder levels, and the order unit).
• Organizational data such as prices and pricing conditions that you can store for
the relevant purchasing organization or plant.

Source list

A source list specifies the possible sources of supply for a material over a given period
of time. It shows the time period in which a material may be ordered from a given vendor
or under a long-term agreement. The source list helps you determine which vendors or
internal suppliers supply a material at a given point in time. It is also used in the
automatic selection of vendors for a material.

Quota arrangement

A quota arrangement is a mechanism for determining the source of supply to which to


assign a material requirement on the basis of quotas. It enables you to determine the
valid source for the procurement of the material listed in a purchase requisition at any
given time. Setting quotas allows you to automatically apportion the total requirement of
a material over a period among a number of different sources of supply.

Master conditions

Master conditions are conditions that are defined centrally and which determine the
value of purchase orders. They are used as the basis for calculating the effective price.

Vendor evaluation

Vendor evaluation is the process of analyzing and assessing the performance of your
suppliers. It also constitutes a basis for vendor selection. Vendors are awarded scores
for a number of different criteria. Vendors' overall scores can be used to determine
whether they are retained in or eliminated from your vendor base.

PURCHASING DOCUMENTS

The main documents and transactions in the procurement process are:

• Purchase Requisitions
• Purchase Orders
• Goods Receipt posting - updates both stock and financial records
• Vendor Invoice posting

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Purchase Requisitions

A purchase requisition defines a need for a material or service. It has the following
characteristics:

• It is the primary instrument for identifying materials or services that must be


procured outside the company.
• It authorizes the purchasing department to purchase materials in specified
quantities within a specified time.
• It is an internal document: it is not used outside the company.

RFQ (request for quotation)

A request for quotation (RFQ) is an invitation to a vendor to indicate his terms and
conditions (in particular, his price) for the supply of a material or the provision of a
service by submitting a quotation. As in the case of the purchase requisition, the RFQ
identifies the material, quantity, and delivery date. In addition, the RFQ contains
information about the vendor to whom the RFQ is sent (for example, the vendor's name
and address) and important dates for the RFQ (such as the closing date for applications,
or pre-qualification date, and bid submission deadlines).

Quotation

A quotation contains the vendor's pricing and conditions for providing the material or
service stated in the RFQ. In MM Purchasing, the RFQ and quotation are the same
document. You enter the vendor's pricing and conditions in the original RFQ. Then you
can:

• Use the price comparison list to help you determine the best quotation
• Send rejection letters to the appropriate vendors
• Store the pricing and terms of delivery for certain quotations in the info record for
future reference.

Purchase Order (P.O)

The purchase order represents the formal and final approval of a purchasing transaction
with the vendor. It identifies:

• The vendor
• The material or service to be ordered
• The quantity
• The price
• The delivery date and terms of delivery
• The terms of payment

In addition, the purchase order determines whether the ordered material is placed in
stock or consumed directly upon goods receipt.

Additional items can include:

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• Quantity and/or Value Contracts


• Quota Arrangements
• Scheduling Agreements

Contract

A contract is a longer-term agreement with a vendor (one of the two forms of "outline
agreement" in the SAP system) to supply a material or provide a service for a certain
period of time. A number of different terms may be used for this concept in purchasing
literature, including "blanket order", "blanket contract", "systems contract" and "period
contract". The contract does not contain specific delivery dates or the individual delivery
quantities. These are specified subsequently in release orders issued against the
contract.

Scheduling agreement

The scheduling agreement has similarities with a quantity contract: it states the target
quantity of a material to be ordered from a vendor over a period of time, and the price.
For each material to be procured, you create a scheduling agreement item. For each
scheduling agreement item, you subsequently set up a rolling delivery schedule by
creating a number of individual schedule lines. In vendor scheduling, vendors receive a
scheduling agreement release (comprising a header and a rolling delivery schedule
made up of individual schedule lines) rather than discrete purchase or release orders.
(Note that in addition to standing for a method of ordering materials or services - as
here, in the SAP System, the terms "release" and "releasing" may also be applied to an
internal purchasing document approval or clearance process.) The delivery schedule
specifies the quantities to be delivered, the delivery dates, and possibly also delivery
time-spots, and may contain data on previous goods receipts. A delivery schedule may
contain firm, semi-firm, or planned (forecast) delivery dates.

NOTES ON PURCHASING DOCUMENTS

Purchasing documents are differentiated in the SAP system via the document type. This
determines, for example, which the relevant number range is and which fields are
offered for maintenance purposes. The relevant document type appears as a default
value when you create a purchasing document. Document types are defined for RFQs,
purchase orders, and contracts, for example. The standard SAP system includes certain
document types. However, your enterprise can also define its own.

Each document is assigned a unique number. (Note that the "number" may also be an
alphanumeric code: see below). This number can be assigned internally or externally,
depending on the policy of your enterprise. Internal number assignment means that the
system assigns the number. External number assignment means that the person
creating the document must supply it. Alphanumeric assignment is only possible in the
latter case.

Each purchasing document is subdivided into two main areas: the header and individual
items. Each document will contain a header and can contain several items. The header
contains information relevant to the whole document. The items specify the materials or
services to be procured. For example, information about the vendor is contained in the

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document header, and the material description and quantity to order is specified in each
item. The additional data includes additional information about the item, and has no
direct connection with the procurement data of the item. Additional data includes, for
example, account assignment data (such as cost center and G/L account) and the PO
history for an item, which contains information on already recorded goods and invoice
receipts relating to the item. Each item in a purchasing document represents a specific
planned procurement. Purchasing transactions (involving requisitioning, ordering and
monitoring) occur on an item-specific basis.

PURCHASING PROCESSING

Requisitions may be entered directly or as a result of Materials Requirement Planning


(MRP). Before a requisition is created, the source of supply must be determined. This
may be via a number of different strategies depending on the type of product and
industry concerned.
For example: Your packing materials are purchased in large quantities on a regular
basis from a single supplier. In this case a long-term contract may have been agreed
with this supplier, and the purchase requisitions may call off quantity releases against
the contract. If you wish to spread your purchasing across a number of suppliers, a
quota arrangement may be drawn up that splits the purchase orders into predefined
ratios.

How are requisitions created?

In the SAP System, requisitions can be created in the following ways:

Indirectly:

• Via materials planning and control - the SAP component Consumption-Based


Planning suggests materials that need to be ordered on the basis of past
consumption or usage figures and existing stock levels. The component also
automatically determines the order quantity and the delivery date.
• Via networks from the SAP component PS
• Via plant maintenance orders from the SAP component PM

Directly:

Someone from the requesting department enters a purchase requisition manually. The
person creating the requisition determines what and how much to order, and the delivery
date. The creation indicator in the requisition shows whether the requisition was created
manually or through Materials Planning. It is displayed in analyses of requisitions and in
the statistics data of a requisition item. Materials Planning can stipulate that a requisition
be resubmitted to Purchasing if it is not processed within a predetermined period. Once
the source of supply is determined, the requisition may have a release strategy assigned
to it. This strategy requires specific authorization before a purchase order can be
created. When the requisition is released, the data from the requisition is copied into a
purchase order with the details from the purchase information record.

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Purchase Order Processing

• A purchase order is a formal request to a vendor to provide certain materials or


services under specific conditions (quantity, price, delivery date, etc.)
• Like purchase requisitions, purchase orders may be entered directly.
• There are different types of purchase orders designed to handle various business
situations. As a result of the order type, different account assignments can be
made for the items, charging the items to cost centers, assets, projects, etc.
• It is possible to apportion the costs across several cost centers or projects when
the order is created.

You can create a PO in three different ways:

1. Vendor known

Use this procedure if you know which vendor is to receive the order. This procedure is
described later in this section.

2. Vendor unknown

Use this procedure if you want the system to select possible vendors. These
suggestions are then made on the basis of sources of supply that have been predefined
in the system. (Note: the term "source" covers outline purchase agreements, info
records, and source lists).

3. Assigned requisitions

Use this procedure to list the requisitions for your purchasing group that have already
been assigned to a vendor (that is, those requisitions containing a vendor, outline
agreement, or info record as a procurement option). POs can be generated from these
requisitions automatically.

GOODS RECEIPT

When a company receives material from a vendor, a goods receipt is a recorded. A


goods receipt (GR) is a goods movement with which the receipt of goods from a vendor
or from production is posted. A goods receipt leads to an increase in warehouse stock.
Goods receiving personnel can confirm the receipt of goods simply by entering the PO
number. By specifying permissible tolerances, buyers can limit over- and underdeliveries
of ordered goods.

Accounting documents

If the movement is relevant for Financial Accounting (that is, if it leads to an update of
the G/L accounts), an accounting document is created parallel to the material document.
In some cases, several accounting documents are created for a single material
document. This might be the case, for example, if you have two material document items
with different plants that belong to different company codes. The G/L accounts involved
in a goods movement are updated through an automatic account assignment.

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G/L accounts: Stock, Consumption, GR/IR accounts.

At goods receipt, the integration with FI (Financial Accounting) updates the General
Ledger to reflect the increase in the stock value.

• Stock Update. Which stocks are updated in the material master record depends
on the destination of the goods:
• Goods receipt into the warehouse. If the goods are destined for the warehouse,
the system increases total valuated stock and the stock type (for example, the
unrestricted-use stock) by the delivered quantity. The stock value is updated at
the same time.
• Goods receipt into consumption. If the goods are destined for consumption, only
the consumption statistics are updated in the material master record.
• Goods receipt into goods receipt blocked stock. If the goods receipt is posted into
goods receipt blocked stock (see the section Goods Receipts Into Goods Receipt
Blocked Stock), the stock remains unchanged. The goods are recorded only in
goods receipt blocked stock of the purchase order history.
• Goods receipt into a new storage location. If you book goods into a storage
location, which does not yet exist for this material, the storage location data will
automatically be created in the material master record when the goods receipt is
posted.

Other Documents generated during Goods receipt posting

• A material document is generated that serves as proof of the movement and as a


source of information for any applications that follow. A material document
consists of a header and at least one item. The header contains general data
about the movement (for example, its date). Each item describes one movement.
• Purchase order history. During goods receipt posting, a purchase order history
record is automatically created. This record contains data essential for
Purchasing, such as: the delivered quantity, the material document number and
item, the movement type, and the posting date of the goods receipt. The vendor
evaluation is also updated which allows you to see if vendors are adhering to the
requested delivery dates, etc.
• Order item. If the "delivery completed" indicator is set in the material document,
the order item is considered closed, and the open purchase order quantity is set
to zero.
• Transfer Order document
• Point of Consumption Cost Center Order document
• Stock Quantity Consumption statistics

INVOICE PROCESSING

Invoice verification validates the invoice by matching the purchase order price and
purchase order receipt quantity to the invoice. This also updates the purchase order
history and creates a financial accounting document. 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. After a purchase order has

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been filed, a good receipt made, and a vendor invoice created, the invoice must be
verified before the invoice is posted to the following areas:

• G/L accounts
• Assets
• Cost Centers
• Projects
• Order

VENDOR PAYMENT

SAP's standard system contains the most common forms of payments. Each method
has been defined separately for each country. The payment program has been
developed for international transactions with vendors and customers, so you can carry
out both incoming and outgoing payments. The standard payment methods include:

Check

You can post the check payment manually or via the payment program.
Checks issued by hand need to be dealt with separately in order to create a link between
the check number and the payment document. It is advisable to reserve a separate
number range for manually created checks in order to keep the use and management of
such checks separate from that of automatically created checks.

Transfer

Immediately after receiving the closing invoice, you can carry out a transfer posting of
the clearable down payments. This transaction also supports the transfer posting of
partial amounts. After this transfer posting, the corresponding amount is no longer
displayed in the vendor account and in the General Ledger as a "down payment made",
but rather as a "payment made" in the payables account. This payment made is taken
into account when the invoice is paid, either manually or automatically.

You must carry out a transfer posting of down payments manually in the following cases:

1. You want to prepare your year-end closing. You have received the closing invoice for
a down payment and can no longer clear it with the payment program, since you will not
run the payment program until after you next prepare the balance sheet. In this case,
you clear the down payment with the closing invoice manually.

2. You want to allocate a down payment to a specific invoice, with which it is to be


cleared. The system notes the document number of the invoice in the line item of the
down payment. The payment program subtracts the down payment only when the
corresponding invoice is paid.

3. You want to clear a down payment partially. That is, a down payment is cleared with
several invoices, which are paid at different times. You must clear each down payment
amount manually.

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Bill of exchange

You can make payments to your vendor by bill of exchange using the payment program.
You can also post the bill of exchange payment manually.

To post a bill of exchange payment manually, proceed as follows:


1. Select Document entry -> Bill of exchange ->Payment. The system shows the screen
for entering header data and for selecting a clearing procedure.

2. Enter the header data and select the clearing procedure Outgoing payment. On the
bottom line, enter the posting key for posting a bill payable (39 in the standard system),
the number of the vendor account, and the special G/L indicator for the bill posting (B in
the standard system). Select ENTER. This accesses the screen for entering data on the
bill of exchange. The most important fields are:

• Drawer The address data of the vendor is suggested.


• Drawee The address data of the company code is suggested.
• Due date

Enter the due date of the bill of exchange. Your bank pays the bill of exchange on this
date.

3. If you want to post the bill liability to the bank sub-account and the corresponding
clearing account, you enter these two line items first. To do this, you must make the
corresponding G/L account posting on the bottom line of the screen. You can then
change to the screen for processing open items to clear the bill payable.

4. Select Process -> Choose open items. You reach the selection screen for open items.
The system suggests the required data, such as the vendor account number, the
account type, and the company code. You can further limit the items to be processed by
specifying selection criteria.

5. You then change to the screen for processing open items. All further steps for clearing
open items are described in Clearing Open Items.

6. Post the document: The system clears the open payables and posts a bill payable to
the vendor account and the special G/L account.

Once the invoices are posted, Accounts Payable reads and pays all invoices that are
due and are not blocked for payment. The payments are based on information (payment
terms) that is specified in either the purchase order or in the vendor master file. This
information can be changed manually on the invoice.

Terms of payment represent stipulations concerning the time of payment of amounts


due, including the specification of any discounts granted for prompt payment, together
with the discount-qualifying periods (for example, the clause "payable in 30 days net", or
"discount of 2% if payment is made within 10 days). In the latter example, the discount is
deducted from the invoice amount if payment is made within the specified period.

You specify the terms of payment in the vendor master record. When you place an order

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with the vendor, they automatically appear as default values; however, you can change
them as needed.

Terms of payment can also be entered in the vendor's invoice. These are then the ones
used by the payment program.

Blocking Invoices

When an invoice is blocked, Financial Accounting cannot pay the invoice. The invoice
must first be released in a separate step before it can be processed. An invoice can be
blocked for payment due to one of the following reasons:

• Variances in an Invoice Item


• Amount of an Invoice Item
• Stochastic Block
• Manual Block

Cash discount and blocked invoices: When an invoice is blocked, the period in which the
vendor grants a cash discount may end before the invoice is released. In this case,
blocking the invoice would be a disadvantage, since the payment program cannot
deduct the cash discount. To avoid this, you can update the baseline date for payment
when you release the invoice, so that the cash discount periods can be shifted forwards.

PURCHASING INTERGRATION

The R/3 System consists of various modules that are completely integrated with one
another. This integration allows various departments in a company to share and
maintain the same information. Purchasing is a component of the Materials Management
(MM) module. The MM module is fully integrated with other modules in the R/3 System.
It supports all phases of materials management: materials planning and control,
purchasing, goods receiving, inventory management, and invoice verification. Good
communication between all participants in the procurement process is necessary for
Purchasing to function smoothly. Purchasing communicates with other modules in the R/
3 System to ensure a constant flow of information. For example, it works side by side the
following modules:

Controlling (CO)

Orders for materials and services consumed directly illustrate the interface to the cost
accounting system (Controlling). This is because they can be assigned to a cost center
directly.

Financial Accounting (FI)

Purchasing and Accounting both maintain information on vendors. Information on each


vendor is stored in a vendor master record, which contains both accounting and
purchasing information. The vendor master record represents the vendor account in
financial accounting. Through PO account assignment, Purchasing can also specify
which G/L accounts are to be charged in the financial accounting system.

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Sales and Distribution (SD)

Within the framework of material requirements planning (MRP), customer requirements


from Sales can be passed on to Purchasing. In addition, when creating a requisition, you
can assign it to a sales order.

MATERIALS PLANNING AND CONTROL

This section provides an overview of materials planning and control and shows how the
latter affects purchasing activities in the SAP system.

The section discusses how the component Consumption-Based Planning:

• Identifies which materials to order


• Determines the quantity to order
• Sets the delivery date

What is materials planning and control?

Materials planning and control determines how much of which material, component,
goods etc. is needed and when. This activity is the responsibility of the materials planner
or controller.

Types of materials planning and control

There are two forms of materials planning and control:

Deterministic

Deterministic materials planning (material requirements planning, or MRP) determines


requirements on the basis of bills of material and outside demand. This procedure
involves the development of a production plan directly from bills of material. This form of
materials planning is a component of the SAP application Production Planning (PP).

Consumption-based

Consumption-based planning forms part of the SAP application Materials Management


(MM). It determines requirements on the basis of past consumption data.

Note that in the SAP system both of the above may collectively be referred to as "MRP".

Consumption-based planning
The SAP component Consumption-Based Planning helps the responsible materials
planner (or materials or inventory controller) to determine the following:

• Which materials to order


• The quantity required
• When materials must be delivered to meet current and future requirements

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It bases its decisions on what to order on past consumption. The system can generate
requisitions automatically. These can be assigned to a purchasing group (buyer group)
or a materials planner/controller. The materials planner/controller or buyer can then
convert the requisition into a standard purchase order or a release order issued against
a contract.

Identifying materials to order

The Consumption-Based Planning module identifies material shortages using one of the
following methods:

• By reference to the reorder level (reorder point)


• Using a forecasting model

Whether requirements for a given material are determined by reference to the reorder
level or using a forecasting model is defined in the material master record.

Reorder level

Consumption-Based Planning can suggest orders based by reference to the reorder


level of a material. The system compares the material's reorder level with the sum of the
available stock. If the available stock is less than the reorder level, the system flags the
material for MRP. An order proposal is then generated during the next MRP run. The
available stock is determined using the following formula:

Available stock = (stock in hand in the warehouse + current orders) - reserved stock

Releasing Requisitions

This section describes the release procedure for requisitions in Purchasing. (Note that in
this context, "release" means giving approval, or clearance, to go ahead with the
procurement of the materials or services set out in the requisition, and should not be
confused with the issuing of orders against longer-term purchase agreements, which
may also be referred to as "releasing" (US) or "calling off" (UK)).

It discusses how the release (approval) of purchase requisitions is controlled, how you
can determine who must release (approve) a purchase requisition, and how a purchase
requisition is actually released (approved).

Within Purchasing, there are two procedures for releasing purchase requisitions:

• Release procedure 1 (without classification)


• Release procedure 2 (with classification)

Release procedure 1

This procedure serves as a correction and approval procedure for purchase requisitions.
Its aim is to check the data on material, quantity, and dates for accuracy and ensure the
correctness of the specified account assignment and source of supply. Purchase
requisitions are released on an item by item basis.

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Release procedure 2

The aim of this procedure is to replace manual written authorization procedures using
signatures by an electronic one, while maintaining the dual control principle. The person
responsible processes the relevant document in the system, thereby marking it with an
"electronic signature" which can give the document legal force. A purchase order
contains an item relating to 1,000 pieces of Steel 1 for plant 2. The material belongs to
the material class Metal 05. The item has a value of 15,000 dollars. As soon as the item
has been entered, the system passes on the field contents from MM Purchasing to MM
Classification in a communication structure. Classification first selects the relevant
characteristics and then checks the characteristic values.

This procedure is available not only for purchase requisitions but for all other purchasing
documents as well.

Release on an item-by-item basis is only possible in the case of requisitions, not in the
case of the other purchasing documents. The reorder level can either be set manually by
the materials planner/controller or automatically by the system.

Manually

The planner/controller enters the reorder level in the material master record manually.

Automatically

The system regularly compares the reorder level with future requirements. If the reorder
level is too high or too low, it can be corrected using the formula:

Reorder Level

= safety stock + daily requirements * replenishment lead time


where the replenishment lead time is in days. The daily requirements are determined
using forecasting models.

Forecasting Model

Forecasting models identify a pattern of demand for a given material. Their purpose is to
identify how much of a material is required at a given future date based on this pattern.

Examples of forecasting models:

Constant
Demand values are scattered around an average value.

Trend
Demand either rises or falls steadily over a period of time.

Seasonal
Demand peaks at regular time intervals. These and other forecasting procedures are

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described in more detail in the MM Consumption-Based Planning Guide.

Determining the order quantity

The actual order quantity takes the following data in the material master record into
account:

• The lot-sizing procedure


• Tolerances, such as the minimum and maximum lot size

Lot sizing procedure

The lot sizing procedure is used to calculate the order quantity on the basis of the lot
size. The materials planner/controller defines the lot-sizing procedure used for a given
material in the material master record.

Tolerances

Certain tolerances in the material master record also affect the order quantity. The
minimum lot size and the maximum lot size, for example, limit the purchase order
quantity to a certain range. If the material has to be ordered in fixed packaging units, the
rounding value is used to round off the order quantity to the packaging unit size.

Determining the delivery date

For materials procured externally, the system suggests delivery dates based on:

• The release date of the requisition


• Certain tolerances in the material master record

Release date

The release date of a purchase requisition is the date on which it is activated by the
materials planner/controller.

Factors determining the delivery date

The following factors influence the determination of the delivery date:

· planned delivery time (in calendar days) - either from the material master record or
from the purchasing info record
· GR processing time (in workdays) defined in the material master record
· purchasing department processing time (in workdays), which is defined for a given
plant

QUOTATIONS

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This section provides general information on how requests for quotation and quotations
are used in MM Purchasing.

What is a request for quotation?

A request for quotation (RFQ) is an invitation to a vendor to indicate his terms and
conditions (in particular, his price) for the supply of a material or the provision of a
service by submitting a quotation. As in the case of the purchase requisition, the RFQ
identifies the material, quantity, and delivery date. In addition, the RFQ contains
information about the vendor to whom the RFQ is sent (for example, the vendor's name
and address) and important dates for the RFQ (such as the closing date for applications,
or pre-qualification date, and bid submission deadlines). RFQs can be subject to a
release procedure.

Structure of an RFQ

The RFQ is organized as other purchasing documents. The header contains general
information about the RFQ, such as the vendor address. Each item identifies the
individual materials for which a price is required from the vendor. One main difference
between RFQs and other purchasing document types is the fact that you cannot enter
account assignments for RFQ items.

What is a quotation?

A quotation contains the vendor's pricing and conditions for providing the material or
service stated in the RFQ. In MM Purchasing, the RFQ and quotation are the same
document. You enter the vendor's pricing and conditions in the original RFQ. Then you
can:

· use the price comparison list to help you determine the best quotation
· send rejection letters to the appropriate vendors
· store the pricing and terms of delivery for certain quotations in the info record for future
reference

Processing of RFQs and Quotations

You do the following when processing RFQs and quotations:

1. You create an RFQ manually or by referencing a requisition.


2. You specify which vendors will receive the RFQ. A separate document is created
for each addressee.
3. You enter the prices and conditions from the vendor's quotation into the RFQ.
4. You can monitor the status of the RFQ and quotation as it is further processed
(that is, following creation of a contract or purchase order).

PURCHASE ORDER

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This section provides general information about purchase orders and how they are
processed with MM Purchasing.

What is a purchase order?

The purchase order represents the formal and final approval of a purchasing transaction
with the vendor. It identifies

• The vendor
• The material or service to be ordered
• The quantity
• The price
• The delivery date and terms of delivery
• The terms of payment

In addition, the purchase order determines whether the ordered material is placed in
stock or consumed directly upon goods receipt. Purchase orders can be subject to a
release procedure.

Structure of a purchase order

As in the case of other purchasing documents, the PO consists of:

· Header
It contains information specific to the entire PO. For example, the terms of
payment and the delivery terms are in the header.
· Items
It contains information specific to the material or service. For example:
- Material number or short description ("short text")
- Quantity
- Price

For each item, you can enter additional information such as time-spot schedule lines and
item-specific texts. The PO history menu enables you to monitor deliveries and invoices
received with regard to the item.

Item category

The item category defines whether purchase order item:

• Requires a material number


• Requires an account assignment
• Will be placed in stock
• Requires a goods receipt (GR) and/or an invoice receipt (IR)

The following are the item categories defined in the standard system:

Standard items categories in POs

Standard

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Provides for normal goods and invoice receipt


Consignment
- Material number required- no account assignments
- Kept in stock
- GR necessary
- IR not necessary
Subcontracting
- GR allowed
- IR necessary
Stock transfer
- Material number required
- GR necessary
- No IR
Third-party
- Account assignment required
- GR and IR allowed

Standard

Items with the item category "Standard" are orders for goods that are to be procured
externally. In this case, goods and invoice receipt are possible.

Consignment

Items with the item category "Consignment" are items relating to goods procured on a
consignment basis. Account assignments cannot be made for material ordered on
consignment. Consignment stocks are managed separately and are not valuated.

Subcontracting

Order items with the item category Subcontracting are used to order finished assemblies
from a subcontractor, for example. Any components the subcontractor requires to
assemble the final product are entered as "material to be provided."

Stock transport order (inter-plant stock transfer order)

The stock transport order is a mechanism facilitating the transfer of stock from one plant
to another (that is, a transfer involving transport over a longer distance). The stock
transport order is one of the special order types in Purchasing.

Third-party order

Part of a triangular business deal. A third-party order is an order placed with a vendor
instructing the latter to supply goods to or perform a service for a third party (for
example, one of your customers). The third-party order is specified in the item category
field of a requisition or purchase order. The third-party order is one of the special order
types in Purchasing.

Item category and account assignment

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The item category requires an account assignment for materials that are consumed
directly (that is, materials that are not taken into stock). In the case of stock material, an
account assignment is possible, but not mandatory.

PO texts

You can enter text in a purchase order directly or change texts that are suggested by
system. There are two kinds of text:

• Header text - applies to the entire document


• Item text - applies to an individual item

You define which texts appear in which order on printouts in Customizing. You can enter
several header or item texts, which you can identify by your own codes.

OUTLINE AGREEMENT

What is an outline agreement?

This section provides general background information on the "outline agreements"


(Which, outside the SAP System, may also be referred to as blanket, master, framework
or umbrella agreements) that are used in the MM Purchasing component.

An outline agreement is a longer-term arrangement with a vendor regarding the supply


of materials or the performance of services according to predetermined terms and
conditions. In MM Purchasing, such agreements are subdivided into Contracts and
Scheduling agreements Outline agreements may be subject to a release (approval or
clearance) procedure.

Structure of an outline agreement

As in the case of other purchasing documents, an outline agreement consists of the


following elements:

Document header:

Contain the information specific to the entire agreement. For example:


- The vendor information and header conditions are in the document header.

Items:

Contain the information specific to the material or service. For example:


- Statistics on ordering activities for the item
- Quantity or price of the item
- Pricing conditions, such as quantity discounts and surcharges

Texts in outline agreements

You can create your own texts from scratch in an agreement or change a text that has

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been suggested by the system. There are two kinds of agreement text: header text and
item text. The texts are further subdivided into text types, for example, shipping and
delivery instructions. The text type determines the print sequence on the document
printout.

CONTRACT

A contract is a longer-term agreement with a vendor (one of the two forms of "outline
agreement" in the SAP system) to supply a material or provide a service for a certain
period of time. A number of different terms may be used for this concept in purchasing
literature, including "blanket order", "blanket contract", "systems contract" and "period
contract". The contract does not contain specific delivery dates or the individual delivery
quantities. These are specified subsequently in release orders issued against the
contract.

Contract types

When creating a contract, you can choose between the following contract types:

Value

The contract is regarded as fulfilled when release orders totaling a given value have
been issued. Use this contract type when the total value of all release orders should not
exceed a certain amount.

Quantity

The contract is regarded as fulfilled when release orders totaling a given quantity have
been issued. Use this contract type when the total quantity to order over the duration of
the contract is known.

Ways of creating contracts

You can create a contract in one of the following ways:

·Manually: You enter all the contract data manually.


·Using the referencing technique: You can create a contract by referencing
-Purchase requisitions
-RFQs/quotations
-Other contracts

·You can also mix the two methods: you can create a contract by referencing an existing
one and then change or enter some items manually.

SCHEDULING AGREEMENT

The scheduling agreement has similarities with a quantity contract: it states the target
quantity of a material to be ordered from a vendor over a period of time, and the price.
For each material to be procured, you create a scheduling agreement item. For each
scheduling agreement item, you subsequently set up a rolling delivery schedule by

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creating a number of individual schedule lines. In vendor scheduling, vendors receive a


scheduling agreement release (comprising a header and a rolling delivery schedule
made up of individual schedule lines) rather than discrete purchase or release orders.
(Note that in addition to standing for a method of ordering materials or services - as
here, in the SAP System, the terms "release" and "releasing" may also be applied to an
internal purchasing document approval or clearance process.) The delivery schedule
specifies the quantities to be delivered, the delivery dates, and possibly also delivery
time-spots, and may contain data on previous goods receipts. A delivery schedule may
contain firm, semi-firm, or planned (forecast) delivery dates.

If you are using scheduling agreements, you can work with or without release
documentation. Working with such documentation affords the advantage that you can
display the valid scheduling agreement releases transmitted to a vendor over a certain
period whenever necessary.

If you work with scheduling agreements without release documentation, the current
schedule is automatically outputted via the message (output) control program.

If you work with scheduling agreements with release documentation, internally you can
make as many changes to the individual schedule lines as you wish. As soon as the
schedule lines for a certain item have been finalized and the schedule is ready to be
transmitted to the vendor, you generate a scheduling agreement release. This triggers
the transmission of the relevant data to the vendor. The information is recorded in the
system, allowing you to verify at any time exactly when you sent which data to which
vendor.

Advantages of vendor scheduling

Procurement via scheduling agreements has several significant advantages:

· Streamlines paperwork, shortens processing times - one delivery schedule can replace
many purchase orders or contract release orders.

· Promotes low inventories - you can specify the exact time to deliver, allowing for
minimum stock levels and just-in-time (JIT) deliveries.

· Shorter vendor lead times - because the delivery schedule extends into the future, the
vendor has less need to backlog orders, thus reducing the lead time for a delivery.

· Automatic generation of delivery schedule lines via the MRP system (a precondition for
this is that Purchasing must assign a scheduling agreement as a unique source of
supply using the quota arrangement and source list mechanisms)

PURCHASING INFO RECORDS

What is a purchasing info record?

The purchasing info record (also referred to in abbreviated form as the "info record") is a
source of information for purchasing. It contains information on a specific material and a

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vendor supplying the material. For example, the vendor's current pricing is stored in the
info record.

The info record also allows buyers to quickly determine:

• which materials have been previously offered or supplied by a specific vendor


• which vendors have offered or supplied a specific material

Contents of an info record

The info record contains data such as:

• current prices and pricing conditions


• the number of the last purchase order
• tolerance limits for over-deliveries and under-deliveries
• the planned delivery time (lead time required by the vendor to deliver the
material)
• vendor evaluation data
• an indicator as to whether the vendor counts as the regular vendor for the
material
• the vendor sub-range to which the material belongs
• the availability period during which the vendor can supply the material

The info record contains quotation and ordering data. The data in the info record (for
example, prices) is also used as default data for purchase orders. For example, you
can store the current and future quotation conditions (discounts, fixed costs etc.) in
the info record, in order to be able to copy them into Pos. You can also maintain the
vendor's conditions directly in the info record.

Types of info record

There are two types of info record:

• Info records with a material master record (e.g. for stock material) this type of info
record represents the relationship between a material or service (for which a
master record exists) and a vendor.
• Info records without a material master record (e.g. for consumable materials) this
type of info record represents the relationship between a material or service for
which no master record exists and a vendor.

Subcontractor info record

A subcontractor info record contains ordering information for subcontract orders. For
example, if you subcontract the assembly of a component, the subcontractor info record
would include the vendor's (subcontractor's) price for assembling the component.

Pipeline info record

A pipeline info record contains information on a vendor's commodity that is supplied


through a pipeline (for example, oil or water) or via similar means (for example,

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electricity through the mains). The info record contains the vendor's price for the
consumption of such commodities by the buyer ("pipeline withdrawals"). You can store
withdrawal/usage prices for different validity periods.

Structure of an info record

An info record contains general data and organizational data:

• General data

Data that is valid for each purchasing organization or each plant (for example, origin
data, reminder levels, and the order unit).

• Organizational data

Data such as prices and pricing conditions that you can store for the relevant purchasing
organization or plant

Texts in the info record

The info record contains the following text types: Info record memo; an internal note that
is adopted in the PO item. The info record memo is not printed out

PO text in info record

This text serves to describe the order item and corresponds to the PO text in the
material master record. It is adopted in the PO item and included in the printout.

Short text

For material that has a material master record, the short text (short description) is copied
directly from the material master record into the PO or the outline purchase agreement.

For an info record linked to a material master record, you can specify for each
purchasing organization whether

• Only the info record PO text is to be displayed and printed in purchasing


documents. (To do so, set the indicator No m. text in the purchasing organization
data of the info record).

Or

• Both the info record PO text and the material master record PO text are to be
displayed and printed in purchasing documents. Both texts are displayed and
printed if the indicator No m. text is not set.

SOURCES OF SUPPLY

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In MM Purchasing, a source of supply may be a vendor or an outline agreement. You


can manage sources of supply using source lists and quota arrangements. The former
are used to define the preferred or allowed sources of a material. Quota arrangements
are used to determine which portion of the total requirement of a material to procure
from a given source.

Aims of sourcing administration

Source list records and quota arrangements are used in determining the effective source
of a material. Source determination is the process of assigning a particular source of
supply to a purchase requisition (or vice versa).

What is a source list?

A source list specifies the allowed (and disallowed) sources of supply for a material
within a plant. It also indicates the period for which the source is valid. Each source is
defined in the source list by means of a source list record. The source list offers you the
following options:

• Definition of a source of supply as "fixed". Such sources count as preferred


sources over a certain period of time.
• Determination of the effective sources (that is, those sources that represent the
preferred sources at a certain point in time).
• Definition of a source of supply as "blocked".

MASTER CONDITIONS

Master conditions are conditions that determine the effective price in the purchase order.
They serve as a central repository of pricing for purchase orders. They are automatically
included in the price calculation in the purchase order if the PO references a contract or
an info record, or if it meets certain criteria defined in the extended conditions.

There are three types of master condition:

1. Conditions in contracts - Conditions in a contract apply to all release orders


issued against the contract.
2. Conditions in info records - Conditions in the info record apply to orders that
specify the material and vendor contained in the info record.
3. Extended conditions - These are a flexible way of setting vendor pricing.
Extended conditions are master conditions that are included in the price
calculation in a purchase order only if the PO meets certain criteria. One way to
use extended conditions would be to define a 10% discount on all orders placed
with a specific vendor that are created by a certain purchasing organization. In
this case, the vendor number and purchasing organization are the two criteria a
PO must meet before the price in the PO can be calculated.

Extended conditions are more flexible than master conditions in info records or contracts
because you can define which criteria they must meet before they are applied to a
purchase order.

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The documentation on outline agreements and purchasing info records shows how the
conditions specified in outline agreements and purchasing info records, respectively,
influence the calculation of the effective price in the purchase order.

In this chapter, you will learn how to specify conditions that apply to the pricing of all
orders for any material with a vendor, not only for a specific material or material group as
is the case with outline agreements and info records.

Conditions technique

The conditions technique is used to define pricing across applications. For example, it is
used in the SD (Sales & Distribution) module as well as in the MM module. The goal of
the conditions technique is to calculate the effective price in a purchase order. Master
conditions are simply conditions defined with the conditions technique. While this section
is not essential to your understanding of master conditions in purchase orders, it does
provide useful background information on the mechanism for determining pricing in
Purchasing.

Basic elements of the conditions technique

The conditions technique consists of four main elements:

• Condition types
• Condition tables
• Access sequences
• Calculation schema (pricing procedure)

These concepts are important for understanding how the system determines pricing in
master conditions.

Condition type

A condition type is a representation of a pricing element. Condition types exist for


discounts, surcharges, and freight costs, for example. You use condition types to enter
pricing in purchasing documents. You learned how to specify condition types when
entering pricing in quotations and purchase orders, for example.

Condition table

A condition table defines the combination of fields (the key) that identifies an individual
condition record. The system stores the condition data you enter in the form of a
condition record. For example, when you enter a vendor's pricing in a purchasing info
record with reference to a material master record, the key of the condition table includes
the vendor number and the material number.

The actual pricing information - such as the gross price and any discounts - is stored in a
condition record under this key.

Access sequence

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An access sequence is a search strategy that the system uses to find condition records
for a particular condition type. The access sequence determines the sequence in which
the system searches condition records for a valid price.

Price calculation schema (pricing procedure)

A calculation schema (also known as a pricing procedure, but the same mechanism can
also be used to calculate tax amounts, period-end rebates, or costs, for example) is a
group of condition types, defined in a particular sequence. It enables the system to
determine that a particular set of condition types, in a specified sequence, apply in given
circumstances. For example, the calculation schema determines which condition types
apply to the gross price. The calculation schema also determines that the condition
types for discounts are calculated in the effective price automatically.

With MM Customizing, you can define price calculation schemas for specific vendors
and/or purchasing organizations. The system searches for pricing data in condition
records. The criteria it uses in the search depend on the keys in the condition table. The
sequence of the search depends on the access sequence specified for the condition
type. Which condition types are used in the search are defined in the calculation
schema.

For example, suppose that you have just created an info record that specifies a 10%
discount from the gross price. This condition is then stored in a condition record under
the vendor and material number. When the material is ordered from the vendor in a PO,
the system searches for the discount using the access sequence.

The calculation schema ensures that the 10% discount is deducted from the gross price
instead of the net price during the price calculation process.

You can maintain conditions in the following ways:

Prices

With this method, you can list or maintain the conditions that determine the net price in a
single info record or contract. You can enter the going market price for a material.

Discounts and surcharges

With this method, you can enter discounts or surcharges that apply to all info records or
contract meeting your purchasing criteria

Other condition types

If your company has defined its own condition types, access sequences, and condition
tables, you can define master conditions that use these pricing elements.

Price changes

You can change pricing by a fixed amount globally.

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EXTERNAL SERVICES MANAGEMENT

MM External Services Management (MM SRV) is a program within the Materials


Management (MM) module. It supports the complete cycle of bid invitation, award of
contract, and acceptance of services.

The MM External Services Management documentation

• affords a general introduction to the procurement of externally performed


services
• indicates the organizational levels, master data, and documents of the
application
• describes the available functionality and how it works
• explains the procedures for creating documents in the system

ESM Functionality

The program offers the following functionality:

• A service master database, in which the descriptions of all services that are to be
procured can be stored.
• A separate set of service specifications can be created for each concrete
procurement project or proposed procurement in the purchasing document.

Sets of service specifications may include both items with services and items with
materials.

• When creating such specifications, the user does not have to list individual
services manually. Instead, the data is simply copied from the master data. Use
of this referencing technique means that data only has to be entered once. The
manual entry effort is reduced to a minimum.
• There are two ways of entering services:
o as planned services
o as unplanned services

Planned Services

By "planned services", we mean services whose precise nature and intended scope is
already known at the beginning of a procurement project. At the time they are requested,
they are either entered with the aid of a service master record, or set out in service
specifications as short or long texts. Prices and quantities are stipulated in both cases.

Unplanned Services

A procurement project may constitute or include a number of individual services which


you initially cannot or do not wish to specify in detail (for example, the construction of an
office building). Such initially undefined services, which are termed "unplanned
services", thus have no descriptions. They are entered in the form of money value limits.

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Services may be performed up to a value not exceeding these limits. This allows you to
exercise a degree of cost control in such situations.

You can set a value limit at the uppermost level (for example, 5 million dollars for the
construction of the aforementioned office building). In addition, you can set limits for
individual contracts within the project (for example, 200,000 dollars for masonry works
and 250,000 dollars for electrical installations). The system checks adherence to both
these sub-limits and the overall limit. When the services have been performed, they are
recorded in entry sheets and then accepted. The accepted service entry sheet
constitutes the basis for subsequent invoice verification in the case of services.

Organizational Levels

The organizational level at which services are procured is the purchasing organization.
Depending on the size of the enterprise and the way Purchasing is set up, a purchasing
organization can assume responsibility for all procurement (central purchasing) or the
purchasing function can be split up among several purchasing organizations, each of
which procures the particular services that have been assigned to it. The individual
purchasing organizations can be subdivided into various purchasing groups (groups of
buyers), each with its own responsibilities.

Master Data

This section discusses the master data utilized by MM External Services Management:

• Service master data


• Vendor master data

Service master

The service master database (comprising all the individual service master records) is
used to store the descriptions of all services that have to be procured on an ongoing
basis. In addition to the description of the service, a service master record contains
information necessary for its procurement (for example, texts, units of measure, prices).
The service master serves as a source of default data provided by the system during the
subsequent creation of service specifications (in connection with a bid invitation
procedure, for example). Here you can also maintain services from general,
standardized sets of service specifications (known as standard service catalogs) such as
the one for the construction industry. The individual service master records can be
grouped according to different service types (for example, by sector or trade).

SAP supplies a user exit enabling you, for example, to check whether the service
number entered corresponds to the number in the standard service catalog.

Vendor master

The vendor master database (comprising all the individual vendor master records)
contains information on service providers. In addition to the name and address of the
service provider, an individual vendor master record contains data on

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• the currency for transactions with this vendor,


• terms of payment, and
• names of contact persons

As the vendor is also regarded as a creditor in Accounting, the vendor master record
also contains accounting data such as the control account. The vendor master record is
therefore maintained by both Purchasing and Accounting.

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Purchasing Documents

This section introduces the documents used in the procurement of services and
discusses the structure of these documents in the SAP System.

A purchasing document is an instrument used by Purchasing to procure


materials or services. You will find more information on the individual
purchasing documents in the MM Purchasing documentation.

In addition to the documents for the standard materials purchasing function,


there is a document for the entry of services actually performed by vendors or
subcontractors. Furthermore, the invoice verification document is also relevant
to services.

Purchase requisition

The purchase requisition defines the requirement of a material or a service.


Requisitions originate outside the Purchasing Department, that is to say, in the
user departments, within Plant Maintenance, and in the Project System. They
represent a request to Purchasing to procure the specified quantities of the
materials or services on or by the desired date. The purchase requisition is a
document that is designed for internal use only.

Request for quotation (RFQ)

The RFQ is an invitation to a vendor to stipulate, through the submission of a


quotation (bid), his prices and conditions (amongst other information) for
supplying a material or performing a service.

Quotation

The quotation (bid) contains a vendor's prices and conditions for the supply or
performance of the materials or services specified in the RFQ.

Purchase order (PO)

The PO is a binding request to a vendor to supply certain materials or perform certain


services in accordance with specified terms and conditions.

Contract

In the SAP MM System, the term "contract" denotes a form of longer-term,


volume purchasing agreement with a vendor covering the supply of a material
or the performance of services. Fulfillment is on the basis of individual release
orders issued by the buying entity according to need over the duration of the
contract.

Service specifications are entered in the contract (in exactly the same way as in
the PO) at document item or sub-item level.

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Service entry sheet

The service entry sheet is used to record services as they are actually
performed by the vendor or subcontractor. In the case of planned services, the
services actually performed are recorded in the entry sheet with reference to
the specifications already entered in the PO. In the case of unplanned services
(defined only in the form of money limits in the PO), the service entry sheet
constitutes the document in which precise specifications are entered into the
system for the first time.

Steps in procurement of services

The procurement of services may involve the following phases:

• Creation of purchase requisition


• Determination of possible sources
• Invitation to potential service providers to submit bids (creation of RFQ)
• Entry of quotations (bids)
• Analysis and evaluation of quotations
• Award of contract (order placement)
• Entry of services actually performed
• Acceptance of services performed
• Checking and approving invoices submitted by vendors for services performed

VENDOR EVALUATION

The Vendor Evaluation component has been completely integrated into MM Purchasing.
Information such as delivery dates, prices, and quantities can be taken from purchase
orders. Vendor Evaluation also uses data from Quality Management, such as the results
of incoming inspections or quality audits. It also accesses basic data in Materials
Management, such as goods receipt data from Inventory Management, and data from
the Logistics Information System (LIS).

What is Vendor Evaluation?

The Vendor Evaluation System supports you in the optimization of your procurement
processes in the case of both materials and services.

Procurement of Materials

The system helps you select sources of supply and facilitate the continual monitoring of
existing supply relationships. It provides you with accurate information on prices, and
terms of payment and delivery. By evaluating vendors, you can improve your
enterprise's competitiveness. You can quickly determine and resolve any procurement
problems that may arise on the basis of detailed information and in collaboration with the
relevant vendors.

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Procurement of Services

You can check the reliability of the vendors from which you procure services on a plant-
by-plant basis. You can determine whether the vendors perform the services within the
specified timeframes and appraise the quality of the work carried out.

Scores and Criteria

The SAP Standard System offers you a scoring range from 1 to 100 points, which is
used to measure the performance of your vendors on the basis of five main criteria. You
can determine and compare the performance of your vendors by reference to their
overall scores. The main criteria available in the standard system are:
·Price
·Quality
·Delivery
·General service/support

These four main criteria serve as a basis for the evaluation of vendors from whom you
procure materials.

You can also define other or further main criteria, as required. You can assign different
weights to the individual criteria. The vendor's overall score is computed taking into
account the weighted scores awarded for each of the main criteria. The Vendor
Evaluation System ensures that evaluation of vendors is objective, since all vendors are
assessed according to uniform criteria and the scores are computed automatically. In
this way, subjective impressions and judgments can be largely avoided. To create a
detailed evaluation, each main criterion can be divided into several sub criteria. The
standard system provides you with certain sub criteria, which suffice as a basis for
evaluation, but you can also define your own additional sub criteria.

The scores for the sub criteria are calculated in three different ways.

Automatic

Scores are calculated by the system on the basis of existing data.

Semi-automatic

You enter individual scores for important materials, or for the quality and
timeliness of a service performed yourself. The system then calculates the
higher-level score from these.
Manual

You enter a blanket score for a sub criterion per vendor.

Analyses
The results of vendor evaluation are displayed in the form of analyses. For example, you
can generate ranking lists of the best vendors according to overall score or ranking lists
for specific materials. Changes to evaluations are recorded in logs, and you have the
option of printing out evaluation sheets.

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Organizational Level for Vendor Evaluation

The organizational level for Vendor Evaluation is the purchasing organization: Each
purchasing organization evaluates the vendors that have been assigned to it. The
system does not support a comparison of Vendor Evaluations at the higher company
code level.

Vendor Evaluation uses the following master data:

• Vendor master record


• Material master record
• Purchasing info record

This section describes the most important elements of Vendor Evaluation:

Overall Score
Main Criteria
Sub criteria
Scoring Range
Weighting of Scores

Overall Score

The overall score represents the complete evaluation of a vendor. It is a combination of


the scores the vendor has achieved for all the main criteria. You can compare different
vendors on the basis of their overall scores without generating a detailed analysis of
their evaluations.

Main criteria

The main criteria form the basis for assessing the performance of a vendor. The system
calculates the overall score for a vendor from the main criteria scores. You can evaluate
vendors according to several main criteria, which you consider important. The scores for
the main criteria are a more accurate representation of the performance of a vendor than
the overall score.

Subcriteria

Subcriteria are the smallest units to which scores can be assigned in Vendor Evaluation.
The system calculates a score for the higher-level main criterion based on the scores a
vendor receives for the various subcriteria. There are three types of subcriteria:

• Manual
• Semi-automatic
• Automatic

They are named after the different methods of scoring. The individual scoring methods
fulfill different purposes and involve different kinds of maintenance.

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Scoring Range

To compare the performance of one vendor with another, it is necessary to establish a


range (or scale) of possible scores. You can define your own scoring range from the
worst- to the best-possible achievable score. The examples in this documentation are
based on a scoring range of 1 to 100 points. This scale provides you with a good
overview and also permits quite a finely differentiated rating of individual vendors.

The scoring range is defined when the system is configured.

Weighting of Scores

The scores a vendor is awarded for main criteria can be weighted differently to reflect
differences in the significance of the criteria.

Weighting Factor

By using weighting factors, you can increase or reduce the importance of certain criteria
when a score is calculated at the next highest level.

Suppose a vendor receives 80 points for the criterion Price and 80 points for the criterion
Service. Since the price of the material is more important to you than the service the
vendor provides, you assign the criterion Price a weighting factor of 3 and the criterion
Service a factor of 1. The 80 points for Price are then worth three times more than the 80
points for Service when the overall score is calculated.

Weighting Keys

A weighting key is an identifier under which the weighting factors for a number of main
criteria can be grouped together and saved. If you know that you will want to carry out an
evaluation repeatedly with certain main criteria and certain weighting factors, you can
save this combination under a weighting key. When you carry out the next vendor
evaluation, just enter the relevant weighting key instead of entering a weighting factor for
each individual criterion. The system then automatically sets all the weighting factors.

Evaluating Vendors

The evaluation of vendors is subject to certain preconditions. Before you begin, you
must consider the following:

• Have you maintained the system settings?


• Do you have the required authorizations?
• Which vendor do you want to evaluate? (vendor key)
• Which purchasing organization is to evaluate the vendor (purchasing
organization key)?
• Is this the first time the vendor has been evaluated?
• If not, when was the last evaluation?

Below are the steps you must carry out to evaluate a vendor:

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• Enter vendor information


• Enter weighting key
• Enter scores for manual sub criteria
• Evaluate all main criteria

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