Modules 6 and 7 - Chapter 3: The

Procurement Process
Module 6 – The Procurement Process
Module 7 – The Procurement Process, ES, and
SSB

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 Outline
A Basic Procurement Process (manual process)
Role of Enterprise Systems in the Procurement Process
Exercise Using Simulated SAP

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 A Basic Procurement Process
Also called the requisition-to-pay process
All the steps needed to acquire/procure material
 Manufacturers purchase raw materials
Example: Apple purchases components from various
manufacturers. The components are delivered to their
factories where they are assembled into a finished iPhone.
 Distributors / resellers, purchase materials that are called
trading goods. Trading goods are already manufactured.
Example: Amazon purchases trade goods that are delivered
to warehouse hubs and then sent to individual consumers’
homes and businesses. Amazon also has a reseller option for
businesses to sell through Amazon.

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 A Basic Procurement Process
Key Concepts and Assumptions
Business to consumer (B2C) vs. business to business (B2)
commerce
B2C – multiple sellers with many
options that will satisfy the consumer’s
need. A special relationship is not necessary.

 B2B – critical reliance on the availability

and receipt of materials. Must have a special
relationship with the supplier to minimize risk
of shortages, overages, or poor quality. Must
have standardized procurement processes in
B2B
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 A Basic Procurement Process
Conceptual Framework
Physical Flow
Actual physical activities and physical movement of materials
Ex. The warehouse manager must physically create the requisition
for materials. The materials must physically be shipped.
Document and Data Flow
Forms must capture the physical flow to create records
Information Flow
Instance and process level information used to monitor the
process and outcomes
Financial Impact
The value of inventory and the amount paid are captured in
financial reports

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 Physical Flow
What is the trigger?
How does the warehouse know materials are required?
What are the steps?
Recall the steps from Chapter 1
What is the purpose of each step?
Each step fulfills a required role in the procured process
Who is involved in each step?
Human resources ensures the right person with the right skills
fills each role
How is communication and coordination accomplished
What system is used to facilitate communication and
coordination?
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 Physical Flow

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 Document flow
Purchase Requisition
Purchase Order
Packing List
Goods Receipt Document
Vender Invoice and Payment
Key questions regarding documents
What is the purpose?
What are the key data?
 General: Who, when, what, where
 Process / step specific: varies
How does data change across the process?
Who is responsible for the data?

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 Purchase Requisition (See text for numerical reference)

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 Purchase Order (See text for numerical reference)

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 Packing List (See text for numerical reference)

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 A Goods Receipt Doc. (See text for numerical reference)

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 A Vender Invoice (See text for numerical reference)

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 Information Flow
Instance-Level Information
Status of a purchase requisition / order
Has a requisition been acted on? Has a PO been created and sent
Have goods been received for the requisition / order? When?
Where are the goods?
If received, has an invoice been received? Paid?
If not received, when can we expect the goods?
Aggregate- and Process-Level Information
How well is the process doing?
How much time does it take on average? Per material? Per
vendor?
Which vendors are prompt? Who habitually delivers late?
What do we buy most often? From with vendor(s)?

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 Financial Impact
Impact on balance sheet and income statement
accounts
Example: Procure $500 in materials.
The transaction occurs when the goods are received if
FOB is destination.
 Once the transaction occurs then an accounting entry
is made.
 Inventory is increased by $500; Accounts payable is
increased by $500.
 Assuming the quantity and quality are fine and the
invoice is paid in full: Decrease cash by $500 and
decreases accounts payable by $500
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 Financial Impact
Impact on balance sheet and income statement
accounts
Continuing example: Procure $500 in materials.
 Assume the company is a reseller and materials
purchased re-sell for $1,000.
Assume the sale is made and cash is received:
Increase cash by $1,000. Increase revenue by $1,000.
Decrease materials by $500. Increase cost of good sold
by $500.
Income statements records Revenue and Cost of
Goods Sold
 Balance
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payable
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 Impact on Income Statement
Revenue $1,000
Cost of Goods Sold $ 500
Gross Profit $ 500
You can see how this one transaction adds gross profit for the company.
Gross profit is the profit after direct costs of labour and parts. We are
accounting for parts only in this example.

Revenue $1,000
Cost of Goods Sold $ 500
Assembly Labour $ 200
Gross Profit $ 300
By adding in assembly labour we can see the gross profit after all of the
direct costs of manufacturing. For SBB, manufacturing is an assembly
process of components.
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 Income Statement Example

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 Importance of financial information
Break even analysis:
From the income statement we know the price and cost per
item sold.
From Chapter 3 the cost of an entry level skateboard is
$34.00
From Chapter 4, the sales price of this skateboard is $45.00
Let’s assume that for the month of March, the overhead costs
or fixed costs $5,000. Let’s also assume that the only item
sold is this skateboard. We can calculate how many
skateboards the company must sell to cover all costs.
Break even = Fixed costs / (Selling price – Cost)
Break even = $5,000 /$11 = 454.5
The company
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of Business skateboards
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 Importance of financial information
How is this information helpful?
Break even analysis from the previous slide:
Break even = Fixed costs / (Selling price – Cost)
Break even = $5,000 /$11 = 454.5
The company must sell 455 skateboards to break even.
***
Suppose the company is thinking about giving raises to the
managers.
This will increase monthly fixed costs by $1,000. Fixed costs
now equal $6,000.
The new break even = $6,000/$11 = 545.45 or 546
skateboards
20 The company must be able to sell 91 more skateboards for the
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month to break even.
 Balance Sheet Example

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 Importance of balance sheet information
From our sample balance sheet we can calculate the
ability of the company to pay its current liabilities.
Current assets (CA) = $175,00 (Easily convertible to
cash)
Current liabilities (CL) = $140,000
The current ratio = CA/CL = 1.25
This means for every $1 of amount owed to vendors the
company has $1.25 available. They can afford their
current payments.
But does this mean the company is financially healthy?
What about the trend or competition?
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 Importance of balance sheet information
What if the previous month the current ratio was 1.50
and it’s now 1.25?
You can see the problem here.
What if the industry standard for the current ratio was 2?
The industry represents the company and it’s
competition.
If the company’s competition has a current ratio of 2,
what does this mean?
Suppose this is SBB and across the street there is another
skateboard company, XYZ, that seems to be roughly the
same size.
(See next slide for the example to continue.)
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 Importance of balance sheet information
If XYZ has current liabilities equal to the current liabilities of
SBB how much current assets does XYZ have?
Recall current liabilities are $140,00 XYZ’s current ratio is 2.
XYZ’s current assets = $
Compared to SBB’s current assets of $175,000
What does this mean?
Suppose the company’s were entering the marketing season
for their industry. How much more advertising could XYZ
purchase?
Do you see the problem for SBB?
What should SBB do?

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 Cash Flow Statement Example

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 Importance of Cash Flow
Companies can be profitable on their income
statement but have negative cash flow.
With negative cash flow they will eventually run out
of cash.
If companies cannot pay their debt what will
happen?
Their creditors can legally force them into
bankruptcy so that assets can be sold off and the debt
paid.
So you see, cash is the physical asset the companies
must have and if they do not have it they can be
26 forced out of business.
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 Role of enterprise systems in the
procurement process
Execute the Process
Create Purchase Requisition
Create Purchase Order
Receive Shipment
Receive Invoice and Send Payment
Capture and Store Process Data
Monitor the Process
Instance-Level Information Flow
Process-Level Information Flow

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 Enterprise systems in Procurement

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 Purchase Requisition in SAP

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 Purchase Order in SAP

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 Goods Receipt in SAP

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 Invoice Receipt in SAP

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 Vender Payment in SAP – Initial Screen

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 Vender Payment in SAP – Processing

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 Process monitoring (Information flow)
Instance level – status information
Status of a purchase requisition / order (PO history)
Process level – aggregate information
How is the process doing?

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 Purchase Requisition History

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 Purchase Order History

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 Process-Level Information

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 Exercise Using Simulated SAP
The exercises will require you to complete the steps in
the procurement process that have been discussed in
this chapter. In particular you will:
Create a purchase requisition for a number of trading
goods
Convert the requisition to a purchase order
Enter a goods receipt into the system
Enter a vendor invoice into the system
Record a payment to the vendor

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