Sourcing and Procurement with SAP S/4HANA

Justin Ashlock

• Publisher: SAP PRESS
• Year: 2020
• ISBN:
  9781493219124
• Edition: 2
• Topic: Computer Science
• Subtopic: Computer Science General
• Index: Computer Science

1 Introduction to Sourcing and Procurement

At its core, procurement is simply the purchase of a good or service by one organization or individual from another organization or individual. Companies and governments require both direct and indirect inputs of this nature to deliver the goods and services they in turn seek to deliver to the marketplace or directly to their customer base.

This chapter explains the software-agnostic procurement business process for today’s enterprises, the boundaries between operational procurement with an SAP ERP system and strategic sourcing with an SAP Cloud system such as SAP Ariba or SAP Fieldglass, and the key innovations and simplifications introduced with SAP S/4HANA.

1.1 Sourcing and Procurement Basics

Sourcing is a process of matching requirements and needs originating from an organization with a supplier to provide these goods and/or services, preferably under a negotiated price and set of conditions. Sourcing entails identifying and understanding the requirements, identifying the most viable set of suppliers, requesting information and bids from the suppliers, awarding the purchase to a supplier, and creating the follow-on documents via the procurement process.

Procurement often takes up where sourcing leaves off, issuing purchase requisitions and purchase orders for goods and/or services with the supplier identified during the sourcing process as the source of supply and then receiving and processing the receipts and invoices in the follow-on processes of a procure-to-pay process.

Sourcing and procurement are essential, core processes in enterprise resource planning (ERP). Without sourcing and procurement, production of a good or service isn’t possible, and without production no goods/services are produced. Without goods/services to provide, no spending justification can be made by a government entity, nor can sales/revenues be obtained by a firm. Following this logic to its conclusion, without input, a government or enterprise can’t deliver its goods and services, and without sourcing and procurement, you can’t obtain input. Without sourcing and procurement, therefore, you can’t run a firm or government.

1.1.1 Sourcing

Sourcing of goods and services is critical for an organization to meet its objectives and obligations in the marketplace and/or for its stakeholders. An example of a direct input driving strategic sourcing can be found in the airline industry. Airlines provide a service that is heavily dependent on fuel and its costs. The price of fuel can change daily, with airlines not always able to pass the costs (or, more recently, the savings) directly to their end customers. Fuel can comprise up to one-third of an airline’s operating costs. At this level, fuel easily qualifies as a strategic sourcing area for an airline.

Unlike one-off items ordered by employees in the office or on the shop floor, strategic sourcing items have more predictable and sizeable quantity requirements and anticipated costs. If an organization fails to adequately estimate its needs in the strategic sourcing area, the consequences can be severe. Securing too little fuel at an airline can mean having to buy fuel on the spot market at much higher costs or even grounding flights. Sourcing from untested or appropriately vetted suppliers for strategic input can undermine the brand image, as products are shipped with a built-in point of failure. In severe cases, some organizations may not get a second chance to “make it right” and may be immediately cast into the dustbin of history. Quality control begins at the supplier level for any organization, especially if your products and services are the sum of your suppliers’ inputs.

From a systems standpoint, strategic procurement requires three things from SAP ERP: First, you must have robust forecasting to accurately estimate supply needs. Some companies and organizations run forecasting for their business in Excel sheets and rely on historical experience. This is a 1.0 approach and doesn’t scale well for larger enterprises. Second, strategic sourcing requires an understanding of inventory and supply chains. If you have supply requirements from end customers forecasted at a certain level, what does this mean at all levels of your production? Do the suppliers have enough lead time to provide the input required? Do the areas of production have the adequate inventory and quality-management processes in place to fulfill these requirements within the timeline required? Third, do you have the right suppliers for this undertaking at the optimal price? This is perhaps the most challenging area for SAP ERP because it requires collaboration, a weak point for the system.

The supplier collaboration area is a weak point for SAP ERP because, by definition, SAP ERP can’t connect to the outside world unencumbered by security requirements and concerns. Yet SAP ERP forms the basis for forecasting and the interconnected production planning areas in the strategic procurement equation. SAP ERP is tightly integrated with inventory management and planning modules, which can be used to drive strategic purchasing automatically for purchases, issuing POs based on stock levels and forecast models. Collaboration with suppliers is best conducted in a demilitarized zone, in which the organization doesn’t have to risk its crown jewels regularly to trade simple and complex pieces of information at a system level. This is why SAP Ariba is the go-to solution for strategic sourcing execution, especially when it’s time to collaborate with suppliers. Basic supplier collaboration capabilities are also available in SAP S/4HANA.

In summary, strategic sourcing is central to an organization and spans many core areas, from finance to inventory and quality management to product development and production to sourcing. From a systems standpoint, both SAP ERP systems and supplier collaboration platforms/solutions are required to cover this area.

The supplier collaboration platform from an SAP solutions standpoint is SAP Ariba. To cover all strategic sourcing, using SAP Ariba alone isn’t feasible because it would only be able to cover parts of the process and would need to integrate with the SAP ERP backend for others. However, handing this process entirely in SAP ERP creates its own challenges: supplier collaboration areas, from request for quotation/purchase/information (RFX) scenarios to contract negotiation to network-enabled suppliers for document exchange, are not as robust as in SAP Ariba or aren’t available at all in SAP ERP, as in the case of network-enabled supplier collaboration.

1.1.2 Operational Procurement

Operational procurement keeps the lights on and the office supplies stocked for an organization. Much of this type of procurement can be driven directly at the employee level, rather than by a designated buyer aggregating demand and then placing larger orders. Depending on the industry and the process and system maturity of an organization, operational procurement is pushed all the way down to the requesting employee, centralized at a buyer level, often at the site, company division, or a centrali...

Table of contents

• Dear Reader
• Notes on Usage
• Table of Contents
•   Foreword
•   Preface
• 1   Introduction to Sourcing and Procurement
• 2   Implementation Options
• 3   Organizational Structure
• 4   Master Data
• 5   Operational Procurement
• 6   Automated and Direct Procurement
• 7   Inventory Management
• 8   Contracts Management
• 9   Enterprise Contract Management and Assembly
• 10   External Sourcing
• 11   Invoice and Payables Management
• 12   Supplier Management
• 13   Centralized Procurement
• 14   Sourcing and Procurement Analytics
• 15   Integrating SAP S/4HANA with SAP Ariba and SAP Fieldglass
• 16   Customizing the UI
• 17   Conclusion
• The Author
• Index
• Service Pages
• Legal Notes