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CHAPTER 2: Procurement Logistics (MM)
Procurement logistics, defined as Materials Management (MM) in S/4HANA, involves
purchasing, inventory management, and warehouse operations. Materials must be ordered
from vendors, received into the warehouse, issued from the warehouse for sale or for use in
manufacturing, and the vendor must be paid. In all of these processes the quantities ordered
and on hand, the prices to be paid, and the costs to be charged to sales or manufacturing
must be tracked. The high level of integration in S/4HANA simplifies many of the tasks
associated with these activities such as determination of the optimum source of supply,
analyzing and comparing vendor pricing, issuing purchase orders, managing authorizations
for purchase requisitions, and processing invoices for payment. In addition, for manufacturing
firms, inventory management must be highly integrated with production planning to ensure
that raw materials and components are available when production is scheduled. The
integration of data improves the efficiency and effectiveness of the value chain within an
organization.
The graphic below identifies the process flows and master data requirements for procurement
logistics processing.
Vendor
Data
Purch
Purch
Goods
Invoic
Materia
l Data
Business Partners: Business partners are legal or natural persons with whom you have a
business relationship (e.g., Customers and vendors are business partners with whom you
have a relationship involving the transfer of goods and services.) Business partners have
several different functions, described as partner functions, in connection with your company.
You use partner functions to define the rights and responsibilities of each partner type in a
business transaction. Different business partners may carry out one or more partner
functions. For this reason, you can assign individual business partners several partner
functions. You manage data on business partners in master records. Data on partner
functions is stored in these master records and used in Financial Accounting and Logistics. A
business partner can be a customer and a vendor at the same time if, for example, your
customer also supplies goods to you or if a vendor is also one of your customers. In this
case, you must create a customer master record and a vendor master record for the business
partner. You can create a link between the two master records by entering the vendor
number in the customer master record and the customer number in the vendor master
record.
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Vendor Data: Vendors are business partners that are suppliers of materials or services to
the firm. Vendors can be internal (components of the same company), or external – parties
that are independent entities that are not affiliated with or a part of the company. In order to
facilitate purchases from these external vendors, a business partner master record with the
vendor role is set up within the SAP system. The attributes that are needed within the vendor
master record include items such as the vendor name, address, tax jurisdiction code,
language, payment terms, currency to be used, etc. These are the data items that will be of
use each time a purchase is initiated with the particular vendor and do not change frequently.
When a vendor master record is created in SAP, the choice can be made to let the system
assign a vendor number or the user can assign the vendor number. It is generally better to
allow the system to assign the vendor number thereby letting the system track numbers and
thus prevent duplications. Once the vendor number is assigned that is, the primary key
value), that becomes the key value used to track business activities with the vendor. The
vendor number not only tracks the purchasing transactions with the vendor, it also serves as
that vendor’s account number in the accounts payable subsidiary ledger in the Financial
Accounting (FI) module of SAP. If the company wishes to purchase something from a given
vendor, inputting that vendor’s number in the purchase order will automatically reference and
access all vendor master data necessary to carry out that transaction and also facilitate the
entry required in the payables ledger for the amount owed when the materials are received.
This is because the vendor number is a foreign key in both the purchase order table and
payables table (vendor subsidiary records).
In many cases, a company may wish to enter a long-term purchasing arrangement with one
or more of its vendors. One means of doing this in the SAP system is a contract. This is a
type of "outline agreement", or longer-term buying arrangement rather than one or a series of
individual purchases. The contract is a binding commitment to procure a certain material or
service from a vendor over a certain period of time. A scheduling agreement is another type
of "outline agreement", or longer-term buying arrangement. Scheduling agreements provide
for the creation of delivery schedules specifying purchase quantities, delivery dates, and
possibly also precise times of delivery over a predefined period.
In many cases a company may wish to purchase a given material from one particular vendor.
This eliminates the need to search for possible vendors for the given material when a
purchase is required. The SAP system allows for the creation of a purchasing info record
that will accomplish this task. The info record establishes the link between a given material
and specific vendor. This info record contains data that facilitate the purchasing activities. For
example, the info record shows the unit of measure used for ordering from the vendor and
indicates vendor price changes affecting the material over a period of time. A business may
wish to purchase materials or services from several vendors and thus create and maintain
relationships with more than one vendor as a matter of company policy. This can be done by
creating a quota arrangement that allows the company to automatically apportion the total
requirement of a material over a period among several different sources of supply.
Material Data: All materials within the SAP system are tracked using a material master
record. While there is a wide variety of materials that can be purchased from outside vendors
(as opposed to being produced in manufacturing within the company), trade goods and raw
materials are the most prevalent. Trade goods are goods or materials that are purchased
with the intent of being resold. These goods are purchased for later sale. Raw materials,
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however, are goods that are purchased for use used in manufacturing to produce other
products which, in turn, will be sold. Raw materials are used in the manufacturing process to
produce finished goods which will be sold to customers. In all of these cases, a material
master record must be created in the SAP system in order to track transactions involving a
given material. Such activities as ordering, receiving the material, stocking the material into
the warehouse, issue of the material to manufacturing or for sale, shipping the material,
costing the material to determine profit on a sale, etc. will all use data contained within the
material master record. For this reason, the material master record may be described as the
“most integrated” data record within SAP and thus contains a large volume of individual data
attributes. Below are a number of areas that utilize data from the material master record and
examples of the data used by each.

Accounting
Valuation and costing/price calculation information. Examples: Standard price, past
and future price, and current valuation.

Materials planning and control
Information for material requirements planning (MRP) and consumption-based
planning/inventory control. Examples: Safety stock level, planned delivery time, and
reorder level for a material.

Purchasing
Data provided by Purchasing for a material. Examples: Purchasing group (group of
buyers) responsible for a material, over- and under-delivery tolerances, and the order
unit.

Engineering
Engineering and design data on a material. Examples: CAD drawings, basic
dimensions, and design specifications.

Storage
Information relating to the storage/warehousing of a material. Examples: unit of issue,
storage conditions, and packaging dimensions.

Forecasting
Information for predicting material requirements. Examples: How the material is
procured, forecasting period, and past consumption/usage.

Sales and distribution
Information for sales orders and pricing. Examples: Sales price, minimum order
quantity, and the name of the sales department responsible for a certain material
For each of these and for all areas that access material master records for transaction
processing, only the data pertinent for that area are presented in a view for the area. The
view for each area must be created. For example, the sales view for a material must be
created that includes items such as the transportation group for route determination and the
loading group for determination of the type of equipment required in order to move the
material into the shipping area from the warehouse.
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A unique number (capture in the primary key field) is assigned to each material master
record. This number identifies a specific material. Material numbers can be assigned
internally or externally. Internal number assignment means that the system assigns material
numbers, whereas external number assignment means that the person creating the material
master record does so. Once this number is assigned, it is used to track the material
throughout the SAP system.
The material master record contains attributes of the given material such as the description of
the material, the units of measure (e.g., base or stock-keeping unit, order unit, sales unit, unit
of issue), material type (e.g. trading, finished, raw material), gross and net weight (with and
without packaging, respectively) and weight units (e.g., lbs., ounces, kilos, etc.), price (e.g.,
standard, moving average), packaging material required for sale, loading group (e.g., forklift,
crane, handcart), country of origin, shelf life, and transportation group (e.g., on pallets, in
liquid form, etc.).
Procurement logistics transaction process flows: From an overall perspective, the
logistics value chain processes involve obtaining purchased materials from suppliers,
monitoring the status of those purchases, and receiving the items into inventory. The process
involves the creation of a purchase requisition followed by the creation of a purchase order,
the receipt of goods into inventory, the receipt of an invoice for the acquisition, and the
payment of that invoice.
Purchase Requisition
A purchase requisition is an internal document (one that is used within the company only)
that instructs the purchasing department to initiate steps to buy a material or procure a
service by a certain date. This request may come from an individual who is authorized to
request such a purchase, or it may come from the MRP (materials requirement planning)
system. Documentation of the request helps enhance the transaction-related control objective
that a particular transaction is properly authorized because it helps support that the eventual
purchase order placed should have occurred.
The MRP system uses a number of statistical methods to anticipate future demand for a
given stock item. That demand is balanced with the current quantity and other demand needs
of the item to determine the need to acquire a given additional quantity of the item at some
date in the future. If the company has not yet determined the vendor for the item and created
a vendor master record in the SAP system, the purchasing department must identify the
appropriate vendor and create that master record. If the vendor has been previously identified
and the appropriate record created in the system, purchasing can then proceed to the
processing of a purchase order to acquire the material from the vendor. The integration within
the SAP system allows the data from the requisition such as the material number, quantity
needed, desired delivery date, etc. to automatically populate the purchase order. This
integration helps enhance the transaction-related control objective that a particular
transaction is recorded accurately.
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Purchasing (Purchase Order)
A purchase order is a legally binding instruction from a purchasing organization to a vendor
to deliver a quantity of material or to perform a service at a given time at an agreed upon
price. The purchase order contains data such as the required material, the quantity to be
delivered, the price, terms of delivery, etc. The purchase order can also include a storage
location in the warehouse where the material will be stored when received. This storage
location is, of course, for internal use only and is of no use to the vendor. If the vendor
accepts the purchase order, the material will be delivered as per the requirements
established in the purchase order.
Like the purchase requisition, the purchase order helps enhance the transaction-related
control objective that a particular transaction is properly authorized because it helps support
that the eventual receipt, invoicing and payment from vendor should have occurred.
Goods Receipt
When ordered materials arrive from the vendor, a goods receipt must be processed in order
to receive the material into inventory and update the quantity records for the material. As
soon as the ordered goods arrive, the goods receipt is posted. The material is thus recorded
in the inventory management system. The goods receipt triggers quality inspection and
placement of the material into storage (stock put-away), and settlement with regard to the
goods received.
If a material is delivered for a purchase order, it is important for all the departments involved
that the goods receipt entry in the system references this purchase order (thereby
maintaining an audit trail), for the following reasons:

Goods receiving can check whether the delivery is from an actual purchase order
(typically through reference of the purchase order number on the vendor’s receiving
report that accompanies the goods). This checking helps enhance the transactionrelated control objective that a particular transaction is properly authorized.

The system can propose data from the purchase order during entry of the goods
receipt (for example, the material ordered, its quantity, and so on). This integration of
data in SAP therefore simplifies both data entry and checking (over- and underdeliveries). This integrating data feature in SAP helps enhance the transaction-related
control objective that a particular transaction is recorded accurately. This integrating
data feature is not only present here, but in other instances such as when creating the
invoice receipt (see later discussion in this chapter).

The delivery is marked in the purchase order history. This allows the Purchasing
department to monitor the purchase order history and initiate reminder procedures in
the event of a late delivery. This feature helps enhance the transaction-related control
objective that a transaction is recorded, as well as recorded accurately because the
integration of data reduces data entry errors.

The vendor invoice is checked against the ordered quantity and the delivered quantity.
This feature helps enhance the transaction-related control objective that a particular
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transaction is properly authorized, as well as being valid (the invoice is valid because
an authorized receipt took place).

The goods receipt is valuated based on the purchase order price or the invoice price.
This feature helps enhance the transaction-related control objective that a particular
transaction is recorded accurately.
If material is intended for stocking into the warehouse, the purchase order data can define a
storage location for it. This storage location is then automatically proposed by the system
during entry of the goods receipt (thereby enhancing the transaction-related control objective
that a particular transaction is recorded accurately) and can be accepted or changed. If no
storage location is entered in the purchase order, the storage location must be specified
when the goods receipt is entered. This requirement helps enhance the transaction-related
control objective that a particular transaction is recorded accurately.
Goods receipts for the warehouse can be posted to three different stock types:

To unrestricted-use stock: stock located in the warehouse that is not subject to any
kind of usage restrictions.

To stock in quality inspection: stock that has been received but is in the process of
incoming quality inspection and which has not yet been released for unrestricted use.

To blocked stock: stock that is present in the company but, for various reasons, is not
to be used and cannot be classified as unrestricted.
The purchase order data can define whether or not the material is to be posted to stock in
quality inspection (thereby enhancing the transaction-related control objective that a
particular transaction is recorded accurately). However, at the time of goods receipt the
decision as to which stock type the material is posted can be revised.
When a goods receipt is entered into the system a number of other activities occur and
updates take place.
Creation of a Material Document: When the goods receipt is posted, the system
automatically creates a material document which serves as proof of the goods
movement from receiving to the warehouse.
Creation of an Accounting Document: Parallel to the material document, the
system creates an accounting document. The accounting document contains the
posting lines (for the corresponding accounts) that are necessary for the movement.
Creation of a Goods Receipt/Issue Slip: When the goods receipt is entered, a
goods receipt/issue slip can be printed at the same time.
The automatic creation of these records helps enhance the transaction-related control
objective that a particular transaction is recorded. Further, by using the same data
which reduces data entry errors, the automatic creation of these records also helps
enhance the transaction-related control objective that a particular transaction is
recorded accurately.
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Sending a Mail Message to Purchasing: If the goods receipt message indicator has
been set in the purchase order, the buyer automatically receives a message informing
him/her of the delivery.
Stock Update: Which stocks are updated in the material master record depends on
the destination of the goods:

Goods receipt into the warehouse: If the goods are destined for the warehouse,
the system increases total valuated stock and the stock type (for example, the
unrestricted-use stock) by the delivered quantity. The stock value is updated at
the same time.

Goods receipt into consumption: If the goods are destined for consumption,
only the consumption statistics are updated in the material master record.

Goods receipt into goods receipt blocked stock: If the goods receipt is posted
into goods receipt blocked stock, the stock level remains the same. The goods
are recorded only in goods receipt blocked stock of the purchase order history.

Goods receipt into a new storage location: If goods are posted into a storage
location that does not yet exist for this material, the storage location is
automatically created in the material master record when the goods receipt is
posted (if automatic creation of storage location is allowed for the plant). If
automatic creation is not allowed, the user must add the new storage location to
the material master record before a goods receipt to it can be posted.
Update of General Ledger Accounts: When the goods receipt is posted, the system
automatically updates the G/L accounts by the value of the goods receipt. This feature
helps enhance the transaction-related control objective that a particular transaction is
recorded. Further, by using the same data which reduces data entry errors, this
feature also helps enhance the transaction-related control objective that a particular
transaction is recorded accurately. Updates can also occur in other related
applications. In the case of a goods receipt to consumption, for example, the account
assignment object (such as a cost center, order, asset, etc.) is debited.
Updates in the Purchase Order: When a goods receipt is posted, the following
purchasing data are updated:

Purchase order history: During goods receipt posting, a purchase order history
record is automatically created. This record contains data essential for
Purchasing, such as: the delivered quantity, the material document number and
item, the movement type, the posting date of the goods receipt, and which
user(s) recorded/updated the purchase order.

Purchase order item: If the "delivery completed" indicator is set in the material
document, the order item is considered closed, and the open purchase order
quantity is set to zero.
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Other Updates: Depending on the characteristics of the material, movement, and
components used, additional updates are carried out in other components. For
example, a goods receipt is relevant for:

Entries to be made in the planning file or independent requirements reduction in
materials planning

Statistical data in Inventory Controlling

Vendor evaluation data in Purchasing

Transfer requirements and quantities in the Warehouse Management System

Inspection lots in Quality Management
As noted a number of times in this section, there are many instances of automatic
posting/updating of records in SAP. As a point worth emphasizing, such automatic
posting/updating helps enhance the transaction-related control objective is that a particular
transaction is recorded, as well as recorded accurately because of the integration of data
when posting/updating.
Invoice Verification
The invoice verification component of the Materials Management (MM) system provides the
link between the Materials Management and the Financial Accounting, Controlling, and Asset
Accounting components.
Invoice Verification in Materials Management serves the following purposes:

It completes the materials procurement process - which starts with the purchase
requisition, continues with purchasing and goods receipt, and ends with the invoice
receipt

It allows invoices that do not originate in materials procurement (for example, services,
expenses, course costs, etc.) to be processed

It allows credit memos, such as discounts, and invoice cancellations to be processed
Invoice Verification does not handle the payment or the analysis of invoices. The information
required for these processes is passed on to other departments. Invoice Verification tasks
include:

Entering invoices and credit memos that have been received

Checking the accuracy of invoices with respect to contents, prices, and arithmetic

Executing the account postings resulting from an invoice
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
Updating certain data in the SAP system such as open items and material prices

Checking invoices that were blocked for payment because they varied too greatly from
the purchase order
Each invoice contains various items of information. To post an invoice, this information is
entered into the system. If an invoice refers to an existing transaction, certain items of
information will already be available in the system. The system proposes this information as
default data so that the user only needs to compare it and, if necessary, correct any possible
variances. If an invoice refers to a purchase order, for example, the user only needs to enter
the number of the purchase order. The system selects the right transaction and proposes
data from the purchase order, including the vendor, material, quantity ordered, terms of
delivery, terms of payment. This default data can be overwritten if there are variances. The
system can display the purchase order history to show, for example, which quantities have
been delivered and how much has already been invoiced.
As can be seen by this discussion, the use of purchase order data at the time of invoice
receipt helps enhance the transaction-related control objective is that a particular transaction
is recorded accurately. The integration of data in SAP allows this capability, and is used at
other times, such as when creating the data for the purchase order based on data from the
purchase requisition, as well as when creating the data for the goods receipt based on data
from the purchase order.
If variances exist between the purchase order and goods receipt based on amounts or goods
receipt and the invoice based on price, the system will issue a warning on the screen. If the
variances are within the preset tolerance limits, the system will allow the invoice to be
posted but will automatically block it for payment. The invoice must then be released in a
separate step. If the variances are not within the tolerances, the system will not allow the
invoice to be posted.
The use of tolerance limits helps provide dual consideration of both accurately recording a
particular transaction (a transaction-related control objective) and promoting efficient and
effective operations (an internal control objective) by allowing some tolerance so that
activities do not get halted by some acceptable difference that can then be investigated.
When the invoice is entered, the system also finds the relevant account. Automatic postings
for sales tax, cash discount clearing, and price variances are also generated and the posting
records displayed. Like previous discussion about automatic posting, this feature helps
enhance the transaction-related control objective that a particular transaction is recorded, as
well as recorded accurately. If a balance is created, the user is required to make corrections,
as an invoice can only be posted if the balance equals zero.
As soon as the invoice is posted, certain data, such as the average price of the material
ordered and the purchase order history, are updated in the system.
The invoice posting completes invoice verification. The data necessary for the invoice to be
paid are now contained in the system. The accounting department can retrieve the data and
make the appropriate payments with the aid of the Financial Accounting component.
As a rule, an invoice refers to a transaction for which the issuing party requests payment.
Invoice Verification differs depending on the type of invoice involved.
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
Invoices based on purchase orders: With purchase-order-based Invoice Verification,
items that have been ordered and received can be settled together, regardless of
whether an item has been received in several partial deliveries. All the deliveries are
totaled and posted as one item.

Invoices based on goods receipt: With goods-receipt-based Invoice Verification, each
individual goods receipt is invoiced separately.

Invoices without an order reference: When there is no reference to a purchase order,
it is possible to post the transaction directly to a material account, a G/L account, or an
asset account.
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