Contracts in Purchasing

December 1, 2017 | Author: pga_pga | Category: Procurement, Logistics, Contractual Term, Copyright, Enterprise Resource Planning
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August/September 2009

On Logistics / Purchasing

Purchasing Contracts Overview: Creation and Use By Adam Tysman, SAP Value and Effectiveness Specialist Editor's Note: This is a great getting-started overview, and covers the various aspects of contract creation, usage, and statistical reporting. This article discusses how the use of a Procurement Contract lowers data management overheads without any attendant decrease in functionality. lt also discusses the ways in which Contracts can be used in conjunction with Source Lists to ensure that the precise source of supply at the exact price desired is referenced on any issued Release Order. Purchasing Contracts can be your next step toward streamlining your procurement organization.

Introduction The most fundamental elements of any purchase are, of course, what is being purchased and from whom. The particular materials purchased and the quantities requested are governed by the particular business needs necessitating the procurement request. The particular vendor selected is governed by various factors such as price, lead time, delivery reliability, etc. Determining which of the potential sources of supply is the optimal is the subject of the ERP Tips article entitled “Vendor Evaluation”. ®

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The Purchasing component of the SAP R/3 Materials Management module owes much of its flexibility and capacity for automation to the records that link Vendor and Material or Service master data. There are various data objects that can be used to manage the details of this relationship. These objects can be referenced, whether the initial impetus for the purchase is automatic (that is, a resource planning system such as MRP is employed to determine what your enterprise needs to procure) or the purchase is initiated manually. For simpler and/or smaller scale procurement environments, the Purchasing Information Record is often the repository of choice in which the specifics of this association are housed. This is a simple record of the various attributes associated with purchasing a single material from a single vendor. However, these become difficult to manage and impose a high maintenance overhead on operations once the sophistication and complexity of your purchasing requirements passes a basic level. If you have many multiple items sourced from a single vendor and/or prices differ (for the same material from the same vendor) from plant to plant, an Outline agreement is the SAP standard solution. An outline agreement is an SAP name for a term-based arrangement between a company and its vendor for particular materials or the provision of particular services based on predefined terms and conditions.

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Purchasing Contracts Overview: Creation and Use

In particular, this article will detail the circumstances and setup around situations where the use of a Procurement Contract lowers those data management overheads without any attendant decrease in functionality. This article will also discuss the ways in which usage of Contracts can be used in conjunction with Source Lists to ensure that the precise source of supply at the exact price desired is referenced on any issued Release Order, even when created and sourced automatically. A release order is essentially a Purchase Order, created with reference to the contract. In examining the versatility of the Contract record, this article will explain how Contracts are limited in terms of quantity, value, and time, as well as how a single Contract can be applied enterprise wide or be made to reference a single material purchase, specific to a single procurement site. Finally, this article will outline the superior statistical reporting functionality around Purchasing Contracts that forms part of the standard system as delivered by SAP.

Getting Started To create a Purchasing Contract, use transaction ME31K or follow the menu path: Logistics  Materials Management  Purchasing  Outline Agreement  Contract  Create These steps are identical when changing or displaying a contract. In these cases, the transaction code to change a contract is ME32K and ME33K to display. This opens the “Create Contract” initial screen. Some of the values that are required here are straightforward; for example, Vendor refers to the supplier with whom these purchasing arrangements have been negotiated.. However, the apparent simplicity of a couple of these fields belies a more complex actual usage. In particular, the fields “Agreement type” and “Purchasing Organization” require further explanation.

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Purchasing Contracts Overview: Creation and Use

The initial contract create screen is displayed in Figure 1..

Figure 1: Contract Creation Initial Screen

Purchasing Organization If the intent is to use the Contract to apply the pricing arrangements (and other terms and conditions) for material supplied by a Vendor to ONE Purchasing Organization, then that is all that need be entered here. That is, simply reference your single purchasing Organization in this field. Any orders created for the plant or company code linked to that Purchasing Organization will seek this contract as a potential source of supply. However, if the details of the contract are to relate to plants or company codes assigned to MORE THAN ONE Purchasing Organization, a “Reference Purchasing Organization” must be created, and then entered here.

Reference Purchasing Organization In cases where an entity wishes to avail itself of purchasing benefits of scale, a reference purchasing organization is often used. It allows pricing and other contract data to be applied enterprise wide. This has the dual benefit of greatly reducing data maintenance activities at all of the sites issuing release orders against that contract, as well as reducing any errors that may arise as a result of data duplication. As only a single record needs to be maintained rather than many multiple identical instances of that information, contracts created in this way are known as Central Contracts.

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Purchasing Contracts Overview: Creation and Use

Follow these steps to set up a Purchasing Organization: Create the new reference purchasing organization by following the configuration path: Enterprise Definition Materials Management Maintain Purchasing Organization. The reference purchasing organization can be linked to a company code and to plants if desired. In my experience, it is not usually linked to either. This is because the applicable plants and company codes are usually derived from the “standard” Purchasing Organizations to which this is going to be linked. This linkage of reference Purchasing Orgs to standard Purchasing Orgs is achieved by following the path Enterprise Structure Assignment Materials Management Assign Purchasing Organization to Reference Purchasing Organization. Now that this creation and linkage is complete, the contract can be created for the reference Purchasing org. Any plant or company code linked to any of the standard purchasing orgs that were linked to that newly created reference purchasing organization can avail themselves of the terms and conditions of the contract. Again, this has a wonderful effect on data maintenance because a single data object can now contain information that is used by the entire enterprise! NOTE: Vendor - Prior to setting up contracts for a Reference Purchasing org, any vendor for which you plan to set up a contract of this nature must be extended to that new central reference Organization. Although a simple enough task in itself, omitting this renders usage of the Central Contract impossible in SAP for that Vendor. Plant - If the contract is to be used for a single plant then simply enter the relevant value in this field and be sure to have entered the standard Purchasing Organization. If this contract is to be used as a Central Contract it is essential that NO plant is entered on this screen. Agreement type In the standard system, the options delivered for this field contains two values: MK- Quantity Contract and WK- Value Contract. Which of these is selected will control whether you reach the contract expiration/limit based on the cumulative monetary value of all of the orders referencing that contract (known as release orders) or whether it will be based on the cumulative quantity of goods ordered in reference to that contract. Each release order depletes the target value or quantity of the contract. It is important to note that in both cases the Contract usage itself is limited by an expiration date. After this date, the contract cannot be referenced regardless of the extent to which it has been depleted. Each contract line item price record can also be limited to a certain validity period. Although doing so uses standard pricing condition maintenance methods not described in this article, it is worthwhile mentioning here as it does provide a mechanism to expire an individual line item during the lifetime of the contract. Copyright © 2009 by Klee Associates, Inc.

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Purchasing Contracts Overview: Creation and Use

The Contract Now that we understand the less intuitive fields on the ME31K initial screen of Contract creation, we can move to compiling the details of the contract itself. The first screen displayed, the Contract Header screen, is shown in Figure 2.

Figure 2: Create Contract Header Screen NOTE: The Validity start and end fields are mandatory. The validity start field represents the first date on which this contract can be referenced regardless of any other factors. It will default to today's date unless you enter a specific future date at which the contract is to become operational.. The Validity End represents the final date on which this contract can be referenced regardless of any other factors. Please also notice that the terms of payment are changeable in this screen. This provides an opportunity to procure goods at terms of payment that differ from those established in the Vendor master records for the vendor as a whole. It is quite feasible, indeed common, to establish multiple contracts for the same vendor simply to group products according to the terms negotiated. Creating contracts in this manner ensures that when orders are placed, the terms on those orders are the correct ones negotiated specifically for the materials requested.

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Purchasing Contracts Overview: Creation and Use

Item Overview Screen On this screen, details of the contracted materials are entered as illustrated in Figure 3, Contract Item Entry. You will notice that a Target quantity is entered for each item. This represents the maximum quantity, agreed with the vendor, that can be ordered against this contract line item. This value is applied because the contract in the screen-print is a quantity (MK in the standard settings) contract. A value contract (WK in the standard settings) operated identically but a maximum value rather than a maximum quantity is the limiting factor for each line item. NOTE: Figure 3 shows a contract item for a service. The important points here are that we are detailing our intention to procure up to 1000 hours (Target Quantity) of the service TIPS at a price of $100 per hour. No plant is specified because this contract has been created for our reference purchasing organization. When a Purchase (or release) Order is created referencing this contract line item, the plant in that Purchase Order will be how the correct account postings are derived. It must NOT be entered here, because doing so will mean that only that specified plant will be eligible to create orders referencing this negotiated rate, etc. Similarly, because this is a service contract, an Account Assignment Category of “U- Unknown” has been specified. This allows the account assignment to take place at the time the Purchase/Release order referencing this line item is created.

Figure 3: Contract Item Entry for a Service

Plant Specific Conditions in a Central Contract Situations often arise where contractual stipulations and price are agreed enterprise wide but circumstances demand exceptions. An example of this might be a scenario in which the price for a certain material is agreed but owing to the fact that one plant is located at a great distance from the supplier's nearest distribution center, a fuel surcharge is to be applied to orders for that site. To incorporate this fact into a central, not plant specific, contract, the system provides us the opportunity to enter plant specific pricing conditions and other terms. By selecting the contract line item in question (achieved by clicking on the grey square adjacent to the line item number itself) and then following the path Edit  Plant Conditions  Overview, we are able to reach the plant specific pricing screen. Simply enter the plant for which the condition is to apply and click Enter.

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Purchasing Contracts Overview: Creation and Use

Figure 4, Plant Specific Data, shows a screen almost identical to that seen in Figure 3. The pivotal difference is the Conditions plant field under the Currency field. This is not present at all in Figure 3. In Figure 4, it defines which plant is being considered. Any entries made on this screen apply automatically, but only to orders created for that plant. This functionality ensures that a central contract can be created for an entire enterprise, but any aspects of the contract that are site-specific can easily be incorporated. Notice how the price in the plant “B” in Figure 4 is different from that for all of the other plants, as shown in Figure 3.

Figure 4 –Plant specific data

Source Lists and Contracts Another means by which the use of contracts allows a greater degree of specificity to be applied to Purchase Order creation involves source lists. Source lists are essentially approved supplier lists for a given single material in a given single plant. Of those suppliers, the one that is preferred over all others can be set as the default supplier. Using contracts (central or plant specific) increases the flexibility of this function. This is achieved because it is possible to specify a contract line item as the source of supply. Designating a contract line item in this manner results in the ability to have the same product procured from the same vendor for differing sites reference different contracts with different terms.

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Purchasing Contracts Overview: Creation and Use

In Figure 5, Contract Line Item Referenced in a Source List, please observe that the contract line item is flagged as “fixed” (denoting that is the default source of supply) and is also set with value “1” under MRP column. By using “1” in the MRP column, it is possible to set the whole automatic replenishment/order issue process to use the specific source with the specific terms and conditions you have designated for that plant or site during automatic replenishment order generation. NOTE: A source list is only a mandatory reference for order generation if BOTH the vendor and material are flagged as “Source List Mandatory”.

Figure 5: Contract Line Item Referenced in a Source List

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Purchasing Contracts Overview: Creation and Use

Statistics: A popular function of R/3 contracts is the ability to instantly display information relating to orders placed against a single contract line item. Order information such as Company code, plant, date of order placement, order quantity, and order value, as well as cumulative values collated from the individual orders, is available in real time directly from the Contract screen. By selecting any contract line item and following the path Item  Statistics  Release Documentation, a screen similar to that seen in Figure 6, Contract Release Order Documentation, is displayed. In Figure 6 we see the line item in question followed by detail of orders created with this contract as the source of supply. This data is of course invaluable during Contract Re-negotiation or Vendor Evaluation activities. Another useful feature of this statistical display screen is that simply by placing the cursor on the Order Number displayed and then selecting the magnifying glass icon, the actual order itself is shown.

Figure 6: Contract Release Order Documentation

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Purchasing Contracts Overview: Creation and Use

Conclusion In this article, we covered many aspects of contract creation, usage, and statistical reporting. Once a level of familiarity with this concept and its use in conjunction with Source Lists in automatic Source Determination is established, the benefits of using this record to manage the various elements of your relationship with your vendors are manifold. Details pertaining to an entire enterprise are managed in a single object. Any variations within that enterprise can be accounted for. All usage data for that material from that vendor is available instantly because all of the orders have the contract line item itself as the common unifying factor. This adaptable object can be used to record and manage many further facets of one's relationship with a vendor not detailed in this article. For example, the contract keeps very clear change records eradicating speculation as to the source of any changes made.

About the Author: Adam Tysman is a former long-term SAP America Senior MM Consultant. He has many years of experience improving, implementing, and supporting SAP systems across multiple countries in a variety of industries. This has included working for SAP in Germany and in the UK. Adam and his colleagues specialize in helping clients reap the benefits of untapped functionality lying latent within their existing SAP investments. You may contact the author at [email protected] Be sure to mention the author’s name and/or the article title. If you would like to arrange to speak with Adam or another ERPtips representative about implementing or optimizing purchasing contracts at your company, contact [email protected]

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