Fine-tune SAP procurement processes with materials management tools

Mastering procurement elements within the SAP materials management module can help companies wring more value out of their purchasing processes.

It is important to gain an understanding of the various procurement elements available in the SAP Materials Management

(MM) module. Such an understanding helps ensure that organizations make use of the right SAP procurement element at the right time. It will also go a long way toward helping organizations plan procurement strategies as well as the future of the business itself.

Businesses can conceivably have many types of procurement relationships. They might include long-term quantity or value agreements with suppliers, outsourcing agreements with manufacturers, inter-plant stock transfers within the company itself, and relationships with service providers. The ability to choose the right procurement element within SAP Materials Management, as well as the flexibility to switch from one procurement element to the other when needed, promises to bring about optimization in business processes.

Quantity contract

A company creates a quantity contract with a vendor in SAP when it wants specific quantities of specific materials delivered during a defined validity period. As a second step, it then creates a Contract release order (CRO) that references the quantity contract each time it places a firm purchase order with the vendor that is supplying the goods. With each new CRO, the system automatically goes into the quantity contract and reduces the quantity of material to be supplied. Each time the company creates a CRO with reference to a quantity contract, the system checks to see if it is still within the defined validity period before allowing the user to proceed further. Although not mandatory, the user can also enter the total value of the quantity contract, and it acts as an additional check and ensures that the overall value of the quantity does not exceed what the two parties previously agreed upon.

Value contract

Similar to quantity contract, a company can also create a value contract with the vendor in SAP. A value contract is drawn up when the purchasing company wants to enter into a value-based agreement with the vendor to supply goods during a defined validity period. As a second step, it then creates a CRO that references the value contract each time the company places a firm purchase order with the vendor that is supplying the goods. Each new CRO reduces the appropriate value from the value contract. The system also checks to make sure that the order is being carried out during the defined validity period before allowing the user to proceed.

Scheduling agreement

A company enters into a scheduling agreement with a vendor when it wants materials to be delivered on specific dates or some other defined period of time. A scheduling agreement makes sure that both parties are absolutely clear on the schedule and the specific quantities of materials to be delivered.

Stock transport order

Creating a stock transport order (STO) in SAP enables a company to place an inter-plant procurement element in SAP. The receiving plant creates the STO. The supplying plant issues the goods with reference to the STO. The goods are reflected in Stock-in-Transit reports until it reaches the receiving plant.

Subcontracting order

A company creates a subcontracting order when it wants some of its in-house material processed by a vendor as part of an effort to add value. It creates the subcontracting order against the vendor for the assembly material. It then issues the components required by the vendor to convert the components into an assembly.

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During this time, the system shows the components' stock on the vendor's premises. The vendor delivers the assembly in accordance with the subcontracting order and invoices the company for the services provided. It helps to have a bill of materials (BoM) for the assembly already in the system because the BoM allows the system to automatically determine the components required to process the assembly. If the BoM is unavailable, the user can enter the components' details manually.

Framework order

Procurement relationships that entail the provision of services from a vendor can be handled by creating a framework order in SAP. The entire trail of services is maintained by creating a Service Entry Sheet in SAP, which must be approved before payment to vendor is made.

More procurement elements

A large number of other procurement elements are also available in the SAP MM module. For example, users can create a purchase order that is specific to an asset only; a purchase order with reference to the cost center; a purchase order for project-based procurement; or a purchase order with references to a production order or sales order. They are all controlled by the relevant item category available in SAP MM.

Materials requirements planning and procurement elements

Several business processes can either be completely automated or optimized when a company integrates the aforementioned procurement elements into materials planning functions like materials requirements planning (MRP). With the right settings made and prerequisites attended to, the MRP can automatically create a CRO for either a quantity or value contract and perform these other reports automatically: delivery scheduling against a scheduling agreement; create proposals for stock transport orders for an inter-plant material transfer; and more.

Interested companies need to engage an SAP MM consultant to bring about improvements in business processes related to the core SAP SCM modules.

ABOUT THE AUTHOR
Jawad Akhtar is an assistant vice president and SAP project manager for AbacusConsulting, where he focuses on SCM issues. AbacusConsulting is based in Pakistan.

This was first published in January 2013

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