1. Supporting the Procurement Process with SAP
Chapter 7
Supporting the Procurement Process with SAP
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2. What are the fundamentals of a procurement process?
Three activities: Order; Receive; Pay
Individuals in the purchasing unit within the organization, notably the purchasing manager, can perform this function.
The order for procurement is sent to the supplier who then delivers materials and/or services to the organization.
Materials and/or services must be received by the organization to take ownership
This step in the process is generally handled in the warehouse by the warehouse manager (usually only for materials, not services).
Ownership of the materials and/or services results in a liability or an obligation to compensate the supplier with payment.
The accounting department is responsible for settling this liability by sending payment to the supplier.
As a reminder, this diagram depicts the three most basic components of the procurement process as well as some general roles that partake in these steps. The process generally begins with the placement of an order for purchase. This function can be performed by individuals in the purchasing unit within the organization, notably the purchasing manager. The order for procurement would be sent to the supplier who then delivers materials and/or services to the organization. In turn, these materials and/or services must be received by the organization to take ownership of them. This step in the process is generally handled in the warehouse by the warehouse manager (usually only for materials, not services). Ownership of the materials and/or services results in a liability or an obligation to compensate the supplier with payment. The accounting department would then be responsible for settling this liability by sending payment to the supplier.
Figure 7-1 Main Procurement Process Activities and Roles
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3. What are the fundamentals of a procurement process?
Supporting the Inbound Logistics Process in the Value Chain
Procurement of raw materials needed for production
In this chapter we’ll focus on how procurement supports the Inbound Logistics process used at CBI. As you can see from this slide, procurement supports inbound logistics processes by ensuring availability of materials, such as raw materials used in production of a product.
Figure 7-2 Procurement Process within the Value Chain of CBI
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4. What are the fundamentals of a procurement process?
Linking the fundamentals of the procurement process with Inbound Logistics in the Value Chain
When we link the fundamentals of the procurement process with the Inbound Logistics in the Value Chain, we see how the process becomes more robust. In this example from CBI, we see the roles from the process (Order, Receive, and Pay), as well as the sub activities required in the processes to support the Inbound Logistics in the Value Chain. Here, Wally has qualified various suppliers as being able to supply the enterprise with goods (raw materials) needed by the Assembly Manager for production. The suppliers will provide him with quotes on these materials so he can make an informed decision as to which supplier will be selected to supply the needed goods (raw materials). Once this decision has been made, Wally then creates a Purchase Order and sends it to the selected supplier. When the supplier delivers the raw materials, Wally then begins inbound processing by receiving the goods (raw materials) into inventory where the quantity available is updated. Ann then assumes the next fundamental step in the procurement process by receiving the Bill (invoice) from the supplier. She then uses the Bill (invoice) as a basis for submitting payment to the supplier, completing the fundamental steps in this procurement process. As you can also see, the procurement of the goods (raw materials) is needed to provide an adequate supply of raw materials on inventory to support the Production process. The result of the Production process will thus lead to an increase in Finished Goods Inventory.
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4 Information Silos
2 People
Do I pay the supplier right away?
8/22/2011
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Three-Way Match done by accounting after goods received before the invoice is paid
8/22/2011
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7. What were the problems with the Procurement process before SAP?
Warehouse problems:
Growth in finished goods inventory
Limited space for raw materials
Lack of visibility into price discounts
Accounting problems:
Three-way match for payment was a challenge
Correcting discrepancies were labor intensive
Time delays in updating accounting data
Purchasing problems:
Purchasing wasn’t centralized
Inexperienced users
Errors in data entry
Pressure for greater financial controls
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

8. How does CBI implement SAP?
CBI had to reexamine and refocus their strategy
Involved three activities
Determine industry structure
Commit to a specific competitive strategy
Develop objectives and measures for processes
CBI decided to implement SAP to help overcome their problems. Because of this, they needed to reexamine and refocus their strategy. This reexamination was divided into three key activities: Determine the industry structure; Commit to a specific competitive strategy; and Develop objectives and measures for processes that support their competitive strategies. Doing this required a great deal of work which we’ll address next.
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9. Five Five Forces Model – Evaluating Business Segments
Decision support and business intelligence
product redesign
CAD
Product returns
Lower market share
Lost customers
Increased costs
Reduced quality
Reduce prices
Increase quality
Value added services
Competition in price, distribution and service
Porter’s Five Forces Model to determine the relative attractiveness of an industry
Is this a market I want to get into?
Can I create barriers which slow down my competition?
If you are in a market where ______ is high, how do you respond and how can IT help?
Electronic connections to more suppliers
ERP reduce costs
CRM
CAD/CAM improve quality
Reduced prices
Lost market share
Better web presence
Lower costs through ERP, supply chain, etc.

10. How does CBI implement SAP?
Strong rivalry with low switching costs – Porter’s 5 Forces
Adopt differentiation strategy
To help determine the industry structure, CBI turned to Porter’s Five Forces Model. Using this model, CBI discovered the wholesale bike industry has strong rivalry with low switching costs. For CBI, this means a retailer could easily switch from one bike maker to another.
Create objectives and measures for their processes
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11. How does the Procurement process work at CBI after SAP?
Maintained same three major activities
Order; Receive; and Pay
Single shared database
Solutions to prior problems
Purchasing
Warehouse
Accounting
After CBI implemented SAP, the three fundamental activities in the procurement process remained (Order; Receive; Pay). However, SAP now provides CBI with a single database system where all data and information is stored together, not separately as in the past. Prior problems that existed before the SAP implementation were resolved. If you recall, CBI had experienced several problems specific to purchasing, the warehouse, and accounting.
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How many accountants does it take to …
How many errors are eliminated?
Where’s Wally when the system orders stuff?
Purchase Requesition created automatically when inventory levels dip below threshold.
Purchasing manager approves the purchase requisition which creates the PO.
The Warehouse Manager posts the goods reciept.
Accounting can then pay the bills.
SAP can do the 3-way match and can automatically pay the vendor if that’s what you want.
8/22/2011
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How does the Procurement process work at CBI after SAP? PO Screen in SAP for 20 Water Bottles and 30 Water Bottle Cages from Space Bike Composites
New Purchasing Department centralized purchasing activities
Data entered into a single, shared database
Automated internal document: Purchase Requisition (PR)
Easy conversion of PRs to Purchase Orders which reduce errors
Purchasing
New purchasing department centralized purchasing activities
Data entered in a single, shared database
Automated internal company document
Purchase Requisition (PR)
Easy conversion of PR’s to Purchase Orders
Reduces errors
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How does the Procurement process work at CBI after SAP? Goods Receipt Screen in SAP
Warehouse
Goods receipts entered into same database as PO’s
SAP verifies the goods received against the PO
Immediate update to inventory
Accounting impacts automatically updated in the same database
SAP documents this in the database
Warehouse
Goods receipts entered into same database as PO’s
SAP verifies the goods received against the PO
Immediate update to inventory
Accounting impacts automatically updated in the same database
SAP documents this in the database
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

15. How does the Procurement process work at CBI after SAP?
Invoice Three-Way Match: Enter Incoming Invoice Screen in SAP
Accounting
Three-way match completed by SAP
Less labor intensive
Incoming invoices are compared to PO and Goods Receipt for verification
Payment simplified
Accounting updated automatically in SAP
SAP documents these steps in the database
Accounting
Three-way match completed by SAP
Less labor intensive
Incoming invoices are compared to PO and Goods Receipt for verification
Payment simplified
Accounting updated automatically in SAP
SAP documents these steps in the database
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

16. How does the Procurement process work at CBI after SAP?
FIGURE 7-16 Post Outgoing Payments Screen in SAP
This slide shows an example of how SAP manages the payment to a vendor. When the invoice was entered into SAP, it created an open item in the vendor’s account. When it’s time to pay the vendor, an employee in accounting simply enters information regarding which bank account will be used to make the payment as well as entering the vendor’s account in the open item selection area.
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17. How does the Procurement process work at CBI after SAP?
Benefits of SAP for CBI’s procurement process
Single database
Shared information in real time
Reduction of errors
Improved financial controls
Increased responsiveness
As a result of the SAP implementation, CBI has been able to perform the procurement process and stay true to its competitive strategy. SAP provides an added benefit of having all data and information in a single database that allows for real time sharing of this information. Because of the single database, CBI has also realized a reduction of data entry errors. The real time sharing of information has also led to improved financial controls within CBI and increased responsiveness to its customers.
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18. How can SAP Improve the Integration of Supply Chain Processes at CBI?
Supply Chain Process Integration
Improving Supply Chain Process Integration by Sharing Data
Improving Supply Chain Process Integration by Increasing Process Synergy
Other IS That Improve Supply Chain Processes
We’ll begin this discussion by addressing some of the processes involved in the supply chain and then move on to a discussion about integration across these processes. Finally, we’ll address other IS technologies that improve the supply chain processes.
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19. How SAP Improves Integration of Supply Chain Processes at CBI?
Other IS That Improve Supply Chain Processes
Augmented reality
Uses computer graphics that are overlaid on a physical location to provide imagery of status as well as locations of products
RFID
Radio frequency identification (RFID) are chips that are attached to materials and pass through scanners to provide visibility into movements of materials in an operation
Sensors
Can also be used by applying them to vehicles to track shipping and transportation activities
Robotics
Used to automate various activities, particularly in the warehouse to more efficiently pick and store materials
3D printing
“Print” some raw materials in house instead of relying on suppliers
Other technologies also exist that improve supply chain processes. Augmented reality uses computer graphics that are overlaid on a physical location to provide imagery of status as well as locations of products. Radio frequency identification (RFID) are chips that are attached to materials and pass through scanners to provide visibility into movements of materials in an operation. Sensors can also be used by applying them to vehicles to track shipping and transportation activities. Robotics can also be used to automate various activities, particularly in the warehouse to more efficiently pick and put away materials. And finally 3D printing, also referred to as additive manufacturing could allow companies like CBI to “print” some raw materials in house instead of relying on suppliers.
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20. How does the Use of SAP Change CBI?
New skills are needed
Abstract reasoning
Analytical skills to look for patterns in the data which leads to more ways to improve process
Process focus
Examine inputs and outputs to connect with partner firms
More data sharing
On demand from suppliers and buyers
Outsourcing
Take advantage of firms who can do subassembly faster and cheaper
Bottom line: Change is inevitable
Jack Welch, former CEO of GE: IF change is happening faster outside the company than inside then the end of that company is in sight
The implementation of SAP resulted in changes for CBI. Some of these changes could be anticipated, like the need to train employees because the skill sets would be somewhat different. It also forced CBI to be more focused on processes and less on individual activities. The systems also provided real time data to various users and integrated processes. Finally, as we saw in previous slides, various IS could be used to support processes, like robots. The use of robots had benefits from an efficiency standpoint, but new challenges arose. Workers like Wally became frustrated with the new system because they were more hands-on and now spent most of their time managing data, documents, and reports churned out by SAP. Change, such as was the case at CBI, introduces other challenges, like the human challenges we just mentioned. Those also have to be managed to stay competitive in business.
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall