Chapter 4- The procurement

process
 ORGANIZATIONAL DATA
•In the context of procurement, a plant is the location where the materials are
received. Therefore we refer to it as a receiving plant, as opposed to, say, a
manufacturing plant, where goods are actually produced.
•Three additional organizational data are relevant to purchasing:
•storage locations
•purchasing organization
•purchasing group
•Storage location: Storage locations are 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 (e.g., staging area, inspection area) or
stores different materials.
More specific storage locations include shelves, bins, cabinets, and trays.
Locations range from small bins to entire buildings, depending on the size of the
materials being stored. For example, the storage location for nuts and bolts will
be a small container, whereas the storage location for an aircraft will be a hanger.
 ORGANIZATIONAL DATA
•Storage location: Regardless of the nature of the enterprise, however, a plant
must have at least one storage location if it needs to track the quantity and value
of materials in its inventory. For example, a plant that serves as a production or
storage facility must maintain accurate records of the quantity and value of raw
materials, semi-finished goods, and finished goods.
 ORGANIZATIONAL DATA
•Purchasing Organization: A purchasing organization is the unit within an
enterprise that performs strategic activities related to purchasing for one or more
plants. It evaluates and identifies vendors, and it negotiates contracts and
agreements, pricing, and other terms.
•Typically, there are three models of purchasing organizations: enterprise level,
company level, and plant level. These models range from highly centralized to
highly decentralized.
•Enterprise-level Purchasing Organization: The enterprise-level purchasing
organization, also known as the cross-company 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.
ORGANIZATIONAL DATA
 ORGANIZATIONAL DATA
Company-level Purchasing Organization: With the company-level purchasing
organization, also known as the cross-plant model, a single purchasing
organization is responsible for multiple plants in one company code. This
approach is less centralized than the enterprise-level model. In this model the
purchasing organization is assigned to both the plant and the company code.
 ORGANIZATIONAL DATA
Plant-level Purchasing Organization: The most decentralized model is the plant
level purchasing organization, also known as a plant-specific purchasing
organization, in which each plant has its own purchasing organization.
 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.

•A purchasing group is an individual or a group of individuals who are

responsible for purchasing activities for a material or a group of materials. These
activities include planning, creating purchase requisitions, requesting quotations
from vendors, and creating and monitoring purchase orders.

•A 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.
 Material MASTER DATA
•Material Master: the material master are grouped into different views that are
relevant to different processes. the views relevant to purchasing are financial
accounting, purchasing, and plant data / storage.

•Financial accounting data: Financial accounting data include the valuation

currency, the valuation class, and the price control. Valuation currency is the
currency that the materials will be priced in, such as U.S. dollars or euro.

•The 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. You may wish to review the appendix in Chapter 3 to familiarize
yourself with the material accounts that GBI uses.

•Price control identifies the method that is used to value the materials. The two
options for price control are moving average price and standard price. Both
options define the price per unit of materials in stock, such as helmets.
 Material MASTER DATA
•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. For example, 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). This price is called “moving” because it is
updated each time a process step affects the price; it represents an average price
of the materials in stock. Thus, 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)).

•In contrast, 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 — for example, monthly or
quarterly — to account for changes in the value of materials. Thus, in our
example above, if the firm’s policy is to update the standard price at the end of
each month, then it does not make any price changes when it purchases the
additional helmets. Instead, it updates the standard price at the end of the
month.
 Material MASTER DATA
•Another key component of the material master is the purchasing data or view.
The key data in the purchasing view are:
•purchasing group: responsible for purchasing the materials (refer to the
purchasing group)
•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. For instance, it must unpack the boxes, count the materials, inspect their
quality, and physically move them to the appropriate storage location. This is the
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.
•delivery tolerances: It is not uncommon for the shipment from a vendor to
include either more or less material than the actual quantity ordered. When this
occurs, the receiving organization may or may not accept receipt, depending on
its policies and its agreements with its vendors. The delivery tolerances in the
material master 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.
 Material MASTER DATA
Most materials that are purchased from a vendor or produced in-house
ultimately are received into inventory. For this step to occur, the plant data /
storage view must be included in the material master. The plant data/ storage
view includes data that are needed to properly store materials. Examples of these
data are:
• 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
 Vendor MASTER DATA
Vendor master data include the data needed to conduct business with a vendor
and to execute transactions related to the purchasing process. Data in the vendor
master are grouped into three segments: general data, accounting data, and
purchasing data.
 Vendor MASTER DATA
•General data include the vendor’s name, address, and communication
information such as phone and fax numbers. These data are defined at the client
level and are consistent across all company codes and purchasing organizations in
the enterprise (client).

•Accounting data include tax-related data, bank data, and payment terms and
methods. These data are defined at the company code level (recall from Chapter
2 that financial accounting is maintained at the company code level) and are
relevant to all purchasing transactions in the company code. The accounting
department will typically complete this segment of the vendor master.

•Accounting data must also specify the reconciliation account in the general
ledger. Recall from Chapter 3 that a vendor account is a sub-ledger account and
that the reconciliation account identifies the accounts payable account in the
general ledger associated with the vendor.
 Vendor MASTER DATA
•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. 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. For example, delivery and
payment terms may vary for different purchasing organizations.
 PURCHASING INFO RECORDS
•A purchasing info record is an intersection or a combination of material and
vendor data, as illustrated in Figure 4-8.

•Purchasing info records 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.

•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 INFO RECORDS
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. Companies use pricing conditions to determine
the cost of purchasing the material from that vendor.
 Process
The steps used to procure items are diagrammed in the following figure.
 Process: REQUIREMENTS DETERMINATION

•The data needed to create a purchase requisition are the item category,
quantity, desired delivery date, and desired delivery location or receiving plant
(see Figure 4-14). In addition, a material number is needed for stock items. The
ERP system uses the material number to obtain additional data from the material
master such as description, material group, purchasing group, unit of measure,
and valuation price. The delivery date and location are typically provided by the
requisitioner, but they can also be obtained from the material master.
•The organizational data needed to create a purchase requisition are the
purchasing group and the receiving plant. These data are typically obtained from
the material master. User input can provide or override these data as needed.
 Process: REQUIREMENTS DETERMINATION

Vendor data are optional. When they are included, they indicate a preference for
the source of supply. Vendor data include the vendor number and name.
 Process: REQUIREMENTS DETERMINATION
Tasks
The only task in this step is to create the purchase requisition using the specified
data.
Outcomes
The process document that results from this step is the purchase requisition. The
system will assign a unique requisition number to this document, which the
concerned parties can use to track its progress through the various steps in the
process. Significantly, this step does not generate any financial or management
accounting documents because creating a requisition has no financial impact.
Moreover, because there is no goods movement (that is, no materials are
received), no material document is created either.
Process: SOURCE OF SUPPLY DETERMINATION
 Process: ORDER PROCESSING
•A purchase order is a communication sent to a vendor in which a company
commits to purchasing the specified materials under the stated terms. Figure 4-
16 summarizes the elements of a purchase order.
•A purchase order is typically created with reference to a requisition, an RFQ, a
quotation, or a previously created purchase order.
 Process: ORDER PROCESSING
Data
•A purchase order includes data from a variety of sources, as shown in Figure 4-
17. Besides the source documents, data from several master records, such as
material master, vendor master, info records, and conditions, are also included. In
addition, data from specific agreements and contracts with the selected vendor
can be incorporated.
•Most of the data in a purchase requisition (Figure 4-14) are included in the
purchase order.
 Process: ORDER PROCESSING
Tasks
The primary task in this step is to create and send the purchase order to the
vendor. In addition, other steps might be necessary, depending on how the order
is created. The most common additional steps involve selecting a vendor and
then communicating with the vendor to confirm logistics and delivery details.
Outcomes
•The main document created in this step is the purchase order. If the purchase
order includes data from purchase requisitions , then multiple requisitions can be
used to generate one order.
•Purchase requisitions are updated to reflect the purchase order number(s)
assigned to them. This process enables the requisitioner to easily determine the
status of each requisition. He or she can also click on the PO document number
now referenced on the purchase requisition to view the purchase order and its
status.
 Process: GOODS RECEIPT

Data
Most of the data needed to complete the goods receipt task are contained in the
delivery document and the purchase order. These data are shown in Figure 4-23.
The purchase order provides data about the materials that the company ordered,
and the delivery document contains data about the materials that it actually
received. Additional data regarding where the materials are to be stored (plant
and storage location) and the specific movement type are also necessary.
 Process: GOODS RECEIPT

Tasks
The essential task in the goods receipt step is to verify and record the materials
included in the shipment in the goods receipt document.
•The user will log into the system and create a goods receipt document by
providing the purchase order number.
•The system will retrieve the purchase order and automatically add the relevant
data to the goods receipt document.
•The user will then verify that the data are correct. That is, the materials and
quantities delivered match what the company ordered. one purchase order can
generate multiple deliveries. In such cases, the user will modify the data to reflect
the materials and quantities that the company actually received.
 Process: GOODS RECEIPT
Outcomes
In addition to creating the goods receipt document, the goods receipt step has
numerous consequences for multiple areas of the organization. Significantly, it is the
first step in the procurement process that has an impact on financials, specifically,
on general ledger accounts. Figure 4-24 illustrates the financial impact of receiving
the 500 t-shirts in our example. The trading goods inventory account is debited by
the value of the goods received, that is, $7,500. A corresponding credit is posted to
the goods receipt/invoice receipt (GR/IR) account.
 Process: INVOICE VERIFICATION
As you can see in Figure 4-28, invoice verification has an impact on the general
ledger. The figure illustrates the data for our example. Specifically, a debit of $7,500
is posted to the GR/IR account, and the vendor account is credited by the same
amount. Because the vendor account is a sub-ledger account, an automatic credit
posting is also made to the corresponding reconciliation account in the general
ledger—the accounts payable reconciliation account. A corresponding financial
accounting document is created. In addition, an invoice document is created.
 Process: PAYMENT PROCESSING
Appropriate general ledger accounts are also updated, as shown in Figure 4-31, and
a corresponding financial accounting document is created. As the figure indicates,
the bank account is credited by the amount of the payment, and the vendor
account is debited, as is the associated accounts payable reconciliation account.