Sensitivity: Internal

ME9F Tcode: ME9F is used to take the printout of the purchase

orders.

Procurement: Every organization acquires material or services to complete

its business needs. The process of buying materials and obtaining services
from vendors or dealers is called procurement. Procurement should be done
in such a way that materials are ordered in correct quantity, with a proper
value at the proper time. It is subdivided into following parts −

 Basic Procurement

 Special Procurement

Basic Procurement

Basic procurement is a process of acquiring goods or services in the right

quantity, at the right price, and at the right time. However it is critical to
maintain a right balance between quantity, price, and time. Consider the
following example −

 Organizations try and keep inventory levels at a minimum, due to the

prices associated with high levels of inventory; at the same time, it can
be detrimental to stop production due to shortage of raw materials.

 Getting the minimum price for a product or service is often necessary,

however it is equally important to maintain a balance between the
product availability, quality, and vendor (seller) relations.

Procurement Lifecycle

Procurement in most modern organizations follow some sequential steps

which are described below −

Requirement and Information Gathering

Procurement process starts with gathering information about a product and

its quantity. Then for the required products and services, it is necessary to
look for suppliers who can satisfy the requirements.

Supplier Contact

After gathering the requirements, one looks for the suppliers who can fulfill
those requirements. Based on that, quotation requests or information
requests are sent to the suppliers or they are contacted directly.
Sensitivity: Internal

Background Review

Once the supplier is known, the product/service quality is checked, and any
necessities for services such as installation, warranty, and maintenance
parameters are investigated. Some samples of the products can be obtained
for quality examination.

Negotiation

Some negotiations with suppliers is made regarding the price, availability,

and delivery schedule of the products/services. Thereafter, a contract is
signed that is a binding legal document between the supplier and the
ordering party. A contract will include all necessary information such as price
and quantity of material, delivery date, etc.

Order Fulfillment

Ordered material is shipped, delivered to the ordering party, and the supplier
is paid accordingly. Training and installation of product or services may also
be included.

Consumption, Maintenance and Disposal

As the products/services are consumed, the performance of the products or

services is evaluated and any follow-up service support, if required, is
analyzed.

Contract Renewal

Once the products or services are consumed or the contract expires and
needs to be renewed, or the product or service is to be re-ordered, the
experience with the vendors and service providers is reviewed. If the
products or services are to be re-ordered, the company decides whether to
order from the previous supplier or think about new suppliers.

Basic Procurement Activities

The following figure illustrates the flow of basic procurement activities −

Sensitivity: Internal

A brief introduction of the procurement activities is given below −

Sr.No. Procurement Activities & Description

Determination of requirement

1 It is the logical subdivision where it is determined what material or

services are required, and which supplier can fulfill the
requirements.

Creating Purchase Requisition

2 It is the phase in which the purchasing department is informed

about the requirement of items or services. A requisition is an
internal document.

3 Creating Purchase Order

Sensitivity: Internal

It is the phase when an order is created from requisition and it is

approved and assigned to a supplier.

Goods receipt/ Invoice Received

4 It is the phase in which the material is received by the company and

its condition and quality are being inspected. In this phase, an
invoice is received from the vendor (seller).

Invoice verification/ Vendor Payment

5 It is the phase in which the vendor (seller) is paid from the company
and reconciliation of the invoice and PO is accomplished.

Type of Basic Procurement

There are two types of basic procurement −

 Procurement for Stock vs Consumption

 External vs Internal Procurement

Procurement for Stock vs Consumption

The following points show the difference of Procurement for Stock vs.
Consumption −

 Procurement for Stock − A stock material is a material that is kept

in stock. These materials are kept in stock once received from the
vendor. The stock of this material keeps on increasing or decreasing
based on the amount of quantity received or issued. To order a
material for stock, the material must have a master record within the
system.

 Procurement for Direct Consumption − When the procurement is

for direct consumption, i.e., it will be consumed as soon as it is
received, the user should specify the consumption purpose. To order a
material for consumption, the material may have a master record
within the system.

External vs Internal Procurement

The following points show the difference of External vs Internal Procurement

−
Sensitivity: Internal

 External procurement − It is the process of procuring goods or

services from external vendors. There are three basic forms of external
procurement generally supported by the purchasing component of the
IT system.

o One-time orders are generally used for material and services

that are ordered irregularly.

o Longer-term contracts with the subsequent issue of

release orders − For materials that are being ordered regularly
and in large quantities, we can negotiate deal with the vendor
(seller) for pricing or conditions & record then in a contract. In a
contract you also specify the validity date.

o Longer-term scheduling agreements and delivery

schedules − If a material is ordered on an everyday basis and is
to be delivered according to an exact time schedule, then you set
up a scheduling agreement.

 Internal Procurement − Large corporate organizations may own

multiple separate businesses or companies. Internal Procurement is
process of getting material and services from among identical
company. So, each of these companies maintains a complete
bookkeeping system with separate Balance, Profit & Loss Statements
so that when trade occurs between them it will be recorded.

Explore our latest online courses and learn new skills at your own pace.
Enroll and become a certified expert to boost your career.

Special Procurement

Special stocks are the stocks that are managed differently, as these stocks
do not belong to the company. Special stocks are kept at some particular
location. Special procurement and special stock types are divided into the
following categories −

Consignment Stocks

Consignment stocks are those material that is available at our store

premises, however it still belongs to the vendor (seller) of the material. If you
Sensitivity: Internal

utilize the material from consignment stocks, then you have to pay to the
vendor.

Third-party Processing

In third-party processing, a company passes on a sales order to the associate

external vendor (seller) who sends the goods directly to the customer. The
sales order is not processed by the company, but by the vendor (seller).
Third-party items can be entered in purchase requisitions, purchase orders,
and sales orders.

Pipeline Handling

In pipeline handling, the company need not order or store the material
involved. It is obtainable as and when required via a pipeline (for example, oil
or water), or another style of cable (such as electricity). The material that is
consumed is settled with the vendor (seller) on a regular basis.

Returnable Transport Stock

The company orders goods from a vendor (seller). The goods are delivered
with returnable transport packaging (pallets, containers) that belongs to the
vendor (seller) and is stored at the customer premises until they return it to
the company.

Subcontracting

The vendor (the subcontractor) receives components from the ordering party
with the help of which it produces a product. The product is ordered by your
company through a purchase order. The components required by the vendor
(seller) to manufacture the ordered product are listed in the purchase order
and provided to the subcontractor.

Stock Transfer Using Stock Transport Order

Goods are procured and supplied within a company. One plant orders the
goods internally from another plant (receiving plant/issuing plant). The goods
are procured with a special type of purchase order – the stock transport
order. You'll be able to request and monitor the transfer of goods with a stock
transport order.

Enterprise structure:

An enterprise structure defines various levels in an organization. These levels

are placed according to some hierarchy. Each level has some specific
functionality associated with it, which in a combined way describes the
Sensitivity: Internal

working of an organization. In addition, an enterprise structure defines

various organizational units that are present in an enterprise. The
organizational structure in MM consists of the following organizational levels
−

 Client

 Company Code

 Plant

 Storage Location

 Purchasing Organization

 Purchasing Group

The following diagram depicts one such organizational structure that

describes the levels incorporated in an organization. It puts the client at the
topmost, followed by multiple company code, followed by multiple plants,
plants having multiple storage location with their own or centralized
purchasing organizations.

In the following sections, we will look into each of the units that constitute an
enterprise structure.

Client

A client has the following attributes −

Sensitivity: Internal

 Client is a commercial organizational unit in R/3 system.

 It has its own set of master data with independent table sets.

 According to hierarchy, a client occupies the highest level in a SAP

system.

 Data that is maintained at the client level is valid for all organizational
levels.

Company Code

A company code has the following attributes −

 Within client, a company code is an independent accounting unit.

 It is a legal entity that has its own profit, loss and balance statement.

 It is the smallest unit in an organization for which a complete

independent account set can be replicated.

Explore our latest online courses and learn new skills at your own pace.
Enroll and become a certified expert to boost your career.

Plant

The basic points to be noted about a plant are as follows −

 Plant is an organizational unit within a company where activities take

place. A plant will produce goods and make goods available for the
company.

 It is a unit having manufacturing facility, warehouse distribution center,

or a regional sales office within logistic. It subdivides an enterprise in
different aspects.

Storage Location

A storage location has the following attributes −

 Storage location is an organizational unit, which actually differentiates

between different material stocks in a plant.

 Storage location is a place where stock is kept physically.

Sensitivity: Internal

 A plant can consist of multiple storage locations. All data is stored at

storage location level for a particular storage location.

Purchasing Organization

The points to be noted about a Purchasing Organization are as follows −

 A purchasing organization is an organizational unit under a company or

a plant that is responsible for the procurement activities according to
requirements. It is responsible for external procurement.

 A purchasing organization can be at the client level, which is known as

a centralized purchasing organization.

 A purchasing organization can also be at the company or plant level,

which is known as company-specific or plant-specific purchasing
organization.

Different forms of purchasing can be described as follows −

Centralized Purchasing

Purchasing organization is not assigned to any company code. It procures for

all company codes belonging to different client.

Company Specific Purchasing

Purchasing organization is assigned to a company code only. The plant

belonging to the company code can purchase through this purchasing
organization.

Plant Specific Purchasing

Purchasing organization is assigned to a plant. Only this specific plant can

purchase through this purchasing organization.

Purchasing Group

The attributes of a purchasing group are as follows −

 Purchasing group is an organizational unit responsible for the everyday

procurement activities within an organization.

 It is a buyer or a group of buyers responsible for the procurement

activities in a purchasing organization.
Sensitivity: Internal

An organization structure can be defined as the framework of a company

that describes the entire structure and functioning of the company.
Organization structures are split into different levels and each level is placed
according to a hierarchy. These levels have direct or indirect relationship with
one another. The various levels in a standard organization are as follows −

 Company

 Company code

 Plant

 Storage location

 Purchasing organization

 Purchasing group

All the Definitions in SAP are given through the Display IMG screen as shown
below −

Path to reach Definition

IMG ⇒ Enterprise Structure ⇒ Definition

Sensitivity: Internal

Create Company

Company is the topmost organizational unit after client, which incorporates

individual financial accounting statements of several company codes. A
company can have many company codes. In SAP, it is optional to create a
company. The following steps will take you through the procedure of creating
company.

Path to Create Company

Sensitivity: Internal

IMG ⇒ Enterprise Structure ⇒ Definition ⇒ Financial Accounting ⇒ Define

Company

TCode: OX15

Step 1 − On the Display IMG screen, select Define Company execute icon by
following the above path.

Step 2 − Click the New Entries icon.

Sensitivity: Internal

Step 3 − Fill in all the necessary details such as name of the company,
address of the company with street number, city, country, and postal code.
Sensitivity: Internal

Step 4 − Click the Save icon after filling the required information. A new
company will be created.

Create Company Code

A Company Code is the smallest organizational unit after company, for which
the standalone financial accounting's profit and loss statements can be
withdrawn. Many company codes can be assigned to one company. The
following steps depict how to create a company code.

Path to create Company Code

IMG ⇒ Enterprise Structure ⇒ Definition ⇒ Financial Accounting ⇒ Edit,

Copy, Delete, Check Company Code

TCode: OX02

Step 1 − On the Display IMG screen, select Edit, Copy, Delete, Check
Company Code execute icon, by following the above path.
Sensitivity: Internal

Step 2 − Click the New Entries button.

Sensitivity: Internal

Step 3 − Fill in all the necessary details like Company code, company name
along with city, country, currency, language.
Sensitivity: Internal

Step 4 − Click the Save icon after filling the required information. A new
company code will be created.

Explore our latest online courses and learn new skills at your own pace.
Enroll and become a certified expert to boost your career.

Create Plant

A Plant is an organizational unit within a company where activities take

place. A plant will produce goods and make goods available for the company.
The following steps will take you through the procedure of creating a plant −

Path to create Plant

IMG ⇒ Enterprise Structure ⇒ Definition ⇒ Logistic General ⇒ Define, Copy,

Delete check plant

TCode: OX10

Step 1 − On the Display IMG screen, select Define, Copy, Delete check plant
execute icon, by following the above path.

Select Define Plant icon to create a new plant.

Sensitivity: Internal

Step 2 − Click the New Entries icon.

Sensitivity: Internal

Step 3 − Fill in all necessary details like plant name along with detailed
information like Language, House no., city, country, region, postal code.
Sensitivity: Internal

Step 4 − Click the Save icon after filling the required information. A new
plant will be created.

Create Storage Location

A Storage Location is an organizational unit, which actually differentiates

between the different material stocks in a Plant. Storage location is a place
where stock is kept physically. A plant can consist of multiple storage
locations. All data is stored at a storage location level for a particular storage
location. Follow the steps given below to create a Storage Location −
Sensitivity: Internal

Path to Create Storage Location

IMG ⇒ Enterprise Structure ⇒ Definition ⇒ Materials Management ⇒

Maintain Storage Location

TCode: OX09

Step 1 − On the Display IMG screen, select Maintain Storage Location

execute icon, by following the above path.

Step 2 − Enter the name of the plant for which you want to create the
storage location.
Sensitivity: Internal

Step 3 − Click the New Entries icon.

Sensitivity: Internal

Step 4 − Enter the name of the storage location along with its description.
Click the Save icon after filling the required information. A new Storage
Location will be created.

Create Purchasing Organization

A Purchasing Organization is an organizational unit under Company or Plant

that is responsible for procurement activities according to requirements. It is
responsible for external procurement. A purchasing organization can be
Sensitivity: Internal

specific to a plant or a company. Following the steps given below to create a

Purchasing Organization −

Path to Create Purchasing Organization

IMG ⇒ Enterprise Structure ⇒ Definition ⇒ Materials Management ⇒

Maintain Purchasing Organization

TCode: OX08

Step 1 − On the Display IMG screen, select Maintain Purchasing

Organization execute icon, by following the above path.

Step 2 − Click the New Entries icon.

Sensitivity: Internal

Step 3 − Enter the name of the purchasing organization along with its
description.
Sensitivity: Internal

Step 4 − Click the Save icon after filling the required information. A new
Purchasing Organization will be created.

Create Purchasing Group

A Purchasing Group is an organizational unit that is responsible for the

everyday procurement activities within an organization. The steps given
below depict how to create a Purchasing Group −

Path to Create Purchasing Group

IMG ⇒ Materials Management ⇒ Purchasing ⇒ Create Purchasing Group

Sensitivity: Internal

TCode: OME4

Step 1 − On the Display IMG screen, select Maintain Purchasing Group

execute icon, by following the above path.

Step 2 − Click the New Entries icon.

Sensitivity: Internal

Step 3 − Enter the name of the purchasing group along with its description.
Sensitivity: Internal

Step 4 − Click the Save icon after filling the required information. A new
Purchasing Group will be created.