C_TS410_2022 Source to Pay Processing

Source to Pay Processing Detailed Explanation

This process manages the procurement lifecycle, from identifying the need for goods or services to making payments to vendors.

4.1 Overview of Procurement

What is Procurement?

Procurement is the process of acquiring goods and services that a company needs to operate. This process ensures that the right materials or services are purchased in the correct quantities, at the right price, and delivered on time.

In SAP, the procurement process follows an end-to-end cycle, known as the Source to Pay process:

1. Source: Identify the need and choose the vendor.
2. Procure: Create purchase documents, such as requisitions and purchase orders.
3. Receive: Verify that goods or services are delivered.
4. Pay: Verify invoices and settle payments.

Key Processes in Source to Pay

1. Purchase Requisition (PR)

   • A Purchase Requisition is an internal request to procure goods or services. It identifies what is needed, the quantity, and the delivery date.
   • PRs are typically created by departments such as production, maintenance, or sales.
   • Example: The production team requires 100 units of raw material X for manufacturing.

   Transaction Code: ME51N (Create Purchase Requisition).

2. Purchase Order (PO)

   • A Purchase Order (PO) is a formal document sent to the vendor to confirm the purchase details.
   • The PO includes:
     • Vendor information
     • Material or service description
     • Quantity and price
     • Delivery dates and terms

   Key Points:

   • A PO serves as a legal agreement between the company and the vendor.
   • POs can be created directly or automatically from a Purchase Requisition.

   Transaction Code: ME21N (Create Purchase Order).

   Example:
   A PO for 100 units of raw material X is sent to Vendor ABC at $10/unit, with a delivery date of 7 days.

3. Goods Receipt (GR)

   • A Goods Receipt is created when the ordered goods are received from the vendor.
   • It verifies that the goods delivered match the Purchase Order in terms of quantity and quality.

   Key Activities in Goods Receipt:

   • Inspect the delivered goods.
   • Update inventory levels in the system.
   • Record any discrepancies (e.g., missing or damaged items).

   Transaction Code: MIGO (Post Goods Receipt).

   Example:

   • The warehouse team receives 100 units of raw material X and posts a Goods Receipt.
   • Inventory levels increase by 100 units in the system.

4. Invoice Verification

   • Invoice Verification ensures that the vendor’s invoice matches the Purchase Order and Goods Receipt.
   • This is known as the 3-way match:
     • Purchase Order: Confirms the price and quantity ordered.
     • Goods Receipt: Confirms the quantity received.
     • Invoice: Confirms the vendor's bill.

   Key Points:

   • SAP flags any mismatches between these three documents.
   • Invoices are approved for payment only if all details are correct.

   Transaction Code: MIRO (Enter Incoming Invoice).

   Example:

   • Vendor ABC sends an invoice for 100 units of raw material X at $10/unit = $1,000.
   • SAP verifies the invoice against the PO and GR. If everything matches, the invoice is approved for payment.

5. Payment Processing

   • Payment Processing is the final step, where the vendor is paid for the goods or services provided.
   • Payments can be made manually or automatically through SAP’s Automatic Payment Program (APP).

   Key Steps:

   • Verify the approved invoices.
   • Schedule payments based on agreed payment terms.
   • Execute payments via bank transfer, check, or other methods.

   Transaction Code: F110 (Automatic Payment Program).

   Example:

   • The vendor’s invoice of $1,000 is due in 30 days. SAP processes the payment automatically on the due date and updates the Accounts Payable ledger.

Summary of the Procurement Process

Here’s a simplified flow of the Source to Pay process:

1. Purchase Requisition: The department identifies the need and requests materials/services.
2. Purchase Order: The purchasing team creates a PO and sends it to the vendor.
3. Goods Receipt: The goods are received, inspected, and recorded in inventory.
4. Invoice Verification: The vendor’s invoice is verified against the PO and GR.
5. Payment Processing: The vendor is paid for their goods or services.

4.2 Master Data in Procurement

Master Data is the foundation of the procurement process in SAP. It ensures that procurement activities are accurate and consistent.

1. Material Master

• The Material Master is the central source of information about a material (e.g., raw materials, finished goods).
• It contains data required for procurement, inventory management, production, and sales.

Key Information in the Material Master:

• Material Number: Unique identifier for a material (e.g., RM100 for Raw Material X).
• Description: Name of the material.
• Unit of Measure: E.g., pieces, kilograms.
• Purchasing Data: Vendor-specific details, pricing, lead time.

Transaction Code: MM01 (Create Material Master).

2. Vendor Master

• The Vendor Master contains all information related to suppliers (vendors).
• It is shared across multiple SAP modules, including FI (Accounts Payable) and MM (Procurement).

Key Information in the Vendor Master:

• Vendor Number: Unique ID for the vendor (e.g., 5000001).
• General Data: Name, address, and contact details.
• Company Code Data: Payment terms, bank details, currency.
• Purchasing Organization Data: Default purchasing organization, order currency.

Transaction Code: XK01 (Create Vendor Master).

3. Purchasing Info Record

• The Purchasing Info Record (PIR) links a material with a specific vendor. It stores pricing conditions and procurement-related details.

Key Data in Purchasing Info Record:

• Vendor-specific pricing for materials.
• Discounts, freight costs, and delivery lead time.
• Purchase Order history for the material and vendor.

Transaction Code: ME11 (Create Purchasing Info Record).

Example:

• Material RM100 (Raw Material X) → Vendor ABC → Price: $10/unit → Lead Time: 7 days.

4.3 Procurement Types

In the Source to Pay Process, there are different types of procurement based on the purpose and requirement. These procurement types ensure that goods or services are acquired efficiently to meet operational and production needs.

1. Stock Procurement

Definition: Stock procurement is the process of purchasing goods that are stored in inventory before being used.

• These materials are typically raw materials, components, or spare parts that will be used later in production or maintenance.

Key Characteristics:

• Materials are purchased and recorded in inventory accounts.
• Inventory levels are updated automatically in SAP.

Process Flow:

1. Purchase Requisition: A department identifies the need for stock materials.
2. Purchase Order: The purchasing team creates a Purchase Order (PO).
3. Goods Receipt: The materials are received and stored in the warehouse.
4. Invoice Verification: The vendor's invoice is matched with the PO and Goods Receipt.
5. Payment: The vendor is paid.

Example:

• A manufacturing company requires 500 units of steel for future production. The steel is procured, stored in the warehouse, and consumed when needed.

2. Direct Procurement

Definition: Direct procurement involves purchasing materials that are used immediately in production or manufacturing.

• These materials are directly linked to production orders.
• Common for manufacturing or project-specific requirements.

Key Characteristics:

• Materials are not stored in inventory.
• Costs are immediately assigned to production or projects.

Process Flow:

1. Material Requirements Planning (MRP): Determines the need for materials based on production orders.
2. Purchase Requisition: Automatically generated by MRP.
3. Purchase Order: A PO is sent to the vendor.
4. Goods Receipt: Materials are delivered directly to the production line.
5. Invoice Verification: Vendor’s invoice is verified.

Example:

• A furniture company requires wood planks to produce tables. The wood is procured and delivered directly to the production area.

3. Indirect Procurement

Definition: Indirect procurement involves acquiring goods and services that are not directly used in production but support business operations.

• Examples: Office supplies, maintenance services, IT equipment, and MRO (Maintenance, Repair, and Operations) items.

Key Characteristics:

• These materials are consumed by administrative or operational departments.
• Costs are charged to overhead accounts or specific cost centers.

Process Flow:

1. Purchase Requisition: The requesting department creates a requisition.
2. Purchase Order: A PO is sent to the vendor for goods or services.
3. Goods Receipt/Service Confirmation: Goods are received or services are confirmed.
4. Invoice Verification: Vendor’s invoice is matched with the PO.
5. Payment: The vendor is paid.

Example:

• A company procures 100 boxes of printer paper and hires a cleaning service for office maintenance. These items are categorized as indirect procurement.

Comparison of Procurement Types

Feature	Stock Procurement	Direct Procurement	Indirect Procurement
Purpose	Inventory replenishment	Production requirements	Business operations
Stored in Inventory?	Yes	No	No
Consumption	At a later time	Immediately	Over time (services/items)
Examples	Raw materials, spare parts	Production materials	Office supplies, services

4.4 Tools and Integration

To streamline procurement processes, SAP integrates with other modules and tools to ensure automation, accuracy, and efficiency.

1. MRP Integration (Material Requirements Planning)

Definition: MRP automatically generates procurement proposals (Purchase Requisitions or Purchase Orders) based on demand for materials.

• MRP considers existing stock, production schedules, and sales orders to determine material requirements.

Key Features:

1. Automatic Procurement: When stock levels fall below the defined threshold, MRP creates a requisition automatically.
2. Integration with Production Planning: Ensures raw materials are available for production orders.
3. Optimized Inventory: Prevents overstocking or stock shortages.

MRP Process Flow:

1. Demand Calculation: MRP calculates material requirements based on:
   • Production Orders
   • Sales Orders
   • Safety Stock Levels
2. Procurement Proposal: MRP generates:
   • Purchase Requisitions (for external procurement).
   • Planned Orders (for internal production).
3. Purchase Order Creation: The purchasing team converts Purchase Requisitions into Purchase Orders.
4. Goods Receipt: Materials are delivered and received in the warehouse.

Example:

• A factory plans to produce 1,000 chairs next month. MRP calculates the need for 1,000 wooden planks and generates a Purchase Requisition for these materials automatically.

2. Invoice Management

Definition: Invoice Management automates the verification and approval of vendor invoices. It ensures that invoices are accurate and payments are made promptly.

Key Features:

1. 3-Way Matching: Verifies the invoice against the Purchase Order and Goods Receipt to ensure accuracy.
2. Automated Approval Workflow: Invoices are routed to the right person for approval based on company rules.
3. Exception Handling: Any discrepancies (e.g., incorrect prices, missing goods) are flagged for resolution.

Process Flow:

1. Invoice Entry: The vendor submits an invoice.
2. Matching: The system performs a 3-way match between:
   • Purchase Order
   • Goods Receipt
   • Invoice
3. Approval: Invoices that match are approved for payment.
4. Payment Processing: Payments are scheduled and processed.

Example:

• A vendor sends an invoice for $1,000. SAP matches it with:
  • Purchase Order: $1,000 for 100 units.
  • Goods Receipt: 100 units received.
• The invoice is approved, and the payment is scheduled automatically.

Source to Pay Processing (Additional Content)

1. Release Strategy in Procurement

In real-world procurement processes, Purchase Requisitions (PRs) and Purchase Orders (POs) are often subject to approval workflows before being processed. SAP enables this through a Release Strategy.

What is a Release Strategy?

A Release Strategy is a predefined approval procedure that controls whether a PR or PO needs authorization before it becomes valid for further processing.

Key Features of Release Strategy:

• Configurable Conditions: The strategy can be defined based on various criteria, including:
  • Document Type
  • Purchase Organization
  • Material Group
  • Total Value of the Document
  • Plant
• Multi-Level Approval: Multiple levels of authorization can be set, e.g., Supervisor → Manager → Director.

Types of Documents Requiring Release:

• Purchase Requisitions (PRs)
• Purchase Orders (POs)
• Outline Agreements (e.g., Contracts, Scheduling Agreements)

How it Works (PO Example):

1. A PO is created with a total value exceeding $10,000.
2. SAP automatically triggers the release workflow.
3. Approvers are notified and must release (approve) the PO.
4. Once all required approvals are completed, the PO can be transmitted to the vendor.

Transaction Code for PO Release:

• ME28 – Release Purchase Orders in Mass

Example Scenario:

PO Value	Approver Level
$0–5,000	Supervisor
$5,001–20,000	Department Manager
>$20,000	Procurement Director

2. Outline Agreements in SAP

To support long-term procurement relationships, SAP provides Outline Agreements, which define overarching terms between a buyer and vendor over a time period.

Definition:

An Outline Agreement is a long-term purchasing arrangement with a vendor, covering pricing, delivery schedules, and quantities. It eliminates the need to create frequent individual POs.

Types of Outline Agreements:

1. Contracts:

• A general agreement to procure a certain quantity or value of goods/services from a vendor over a specified period.
• Two types:
  • Quantity Contract: Specifies the total quantity (e.g., 10,000 units of screws).
  • Value Contract: Specifies the total monetary value (e.g., $100,000 of spare parts).

2. Scheduling Agreements:

• A time-based agreement with a vendor that includes specific delivery dates and quantities (called scheduling lines).
• Common in manufacturing and automotive industries where materials are required on a recurring basis.

Key Benefits:

• Reduces administrative overhead.
• Ensures better vendor negotiation and cost savings.
• Guarantees material availability with predictable deliveries.

Transaction Codes:

• ME31K: Create Contract
• ME32K: Change Contract
• ME33K: Display Contract
• ME31L: Create Scheduling Agreement
• ME38: Maintain Scheduling Lines

Example: Contract vs. Scheduling Agreement

Feature	Contract	Scheduling Agreement
Delivery Details	Not specified in advance	Detailed delivery schedules
Use Case	Ad hoc or less frequent procurement	Recurring or planned deliveries
Follow-On Documents	Purchase Order	Delivery based on scheduling lines