SAP MM ( Material Management Notes )

 

MM Theory Notes

SAP  MM  is  one  of  the  modules  of  SAP  that  deals  with  material management and inventory management.

 

·     Material Management as a process ensures no shortage of materials or any gaps in the supply chain process of the organization. SAP MM speeds up  the  procurement and material management  activities,  making the business run smoothly with complete time and cost efficiency.

 

·   It deals with managing the materials (products and/or services) and resources of an organization with the aim of accelerating productivity and reducing costs. At the same time, SAP MM is quite versatile to accommodate changes that are frequent in any business environment.

 

·     It deals with the Procurement Process, Master Data (Material & Vendor Master), Account Determination & Valuation of Material, Inventory Management, Invoice Verification, Material Requirement Planning, etc.

Procurement Lifecycle

 

Procurement in most modern organizations follow some sequential steps which are described below:

 

 

Requirement and Information Gathering

 

Procurement process starts with gathering information about a product and its quantity. Then for the required products and services, it is necessary to look for suppliers who can satisfy the requirements.

 

 

 

 

 

 

 

 

Supplier Contact

 

After gathering the requirements, one looks for the suppliers who can fulfill those requirements. Based on that, quotation requests or information requests are sent to the suppliers or they are contacted directly.

 

Background Review

 

Once the supplier is known, the product/service quality is checked, and any necessities for services such as installation, warranty, and maintenance parameters are investigated. Some samples of the products can be obtained for quality examination.

 

 

           Negotiation

 

Some negotiations with suppliers is made regarding the price, availability, and delivery schedule of the products/services. Thereafter, a contract is signed that is a binding legal document between the supplier and the ordering party. A contract will include all necessary information such as price and quantity of material, delivery date, etc.

 

 

Order Fulfilment

 

Ordered material is shipped, delivered to the ordering party, and the supplier is paid accordingly. Training and installation of product or services may also be included.

 

 

Consumption, Maintenance, and Disposal

 

As the products/services are consumed, the performance of the products or services is evaluated and any follow-up service support, if required, is analyzed.

 

 

Contract Renewal

 

Once the products or services are consumed or the contract expires and needs to be renewed, or the product or service is to be re-ordered, the experience with the vendors and service providers is reviewed. If the products or services are to be re-ordered, the company decides whether to order from the previous supplier or think about new suppliers.

BASIC PROCUREMENT ACTIVITIES

1.     Determination of Requirement – What material and services are required

2.     Requisition – The form or electronic transmission used to inform the Purchasing Department that the item or services are required for business purpose

3.     Purchase Order – When the requisition is approved it becomes PO

4.     Goods Receipt / Invoice Received – The material is received, condition and quality are verified. The invoice is received from vendor

5.     Invoice Verification / vendor payment – Reconciliation of the Invoice and PO is done. If everything is okay vendor is paid.

 

Type of Basic Procurement

 

There are two types of basic procurement:

 

·       Procurement for Stock vs Consumption

 

·       External vs Internal Procurement

 

 

Procurement for Stock vs Consumption

 

The following points show the difference between Procurement for Stock vs. Consumption:

 

·     Procurement for Stock - A stock material is a material that is kept in stock. These materials are kept in stock once received from the vendor. The stock of this material keeps on increasing or decreasing based on the amount of quantity received or issued. To order a material for stock, the material must have a master record within the system.

 

·     Procurement for Direct Consumption - When the procurement is for direct consumption, i.e., it will be consumed as soon as it is received, the user should specify the consumption purpose. To order a material for consumption, the material may have a master record within the system.

 

 

External vs Internal Procurement

 

The   following  points  show   the  difference  between   External  vs   Internal

Procurement:

 

·    External procurement - It is the process of procuring goods or services from external vendors.  There are three basic forms  of  external procurement generally supported by the purchasing component of the IT system.

 

o One-time orders are generally used for material and services that are ordered irregularly.

 

o Longer-term contracts with subsequent issue of release orders - For materials that are being ordered regularly and in large quantities, we can negotiate a deal with the vendor (seller) for pricing or conditions

and record them in a contract. In a contract, you also specify the validity date.

 

o Longer-term scheduling agreements and delivery schedules - If a material  is  ordered  on  an  everyday  basis  and  is  to  be  delivered according to an exact time schedule, then you set up a scheduling agreement.

 

·    Internal Procurement - Large corporate organizations may own multiple separate businesses or companies. Internal procurement is a process of getting material and services from identical companies. So, each of these companies maintain a complete bookkeeping system with separate Balance, Profit  and  Loss  Statements, so that  when  any trade  occurs between them, it will be recorded.

Special Procurement

 

Special stocks are the stocks that are managed differently, as these stocks do not belong to the company. Special stocks are kept at some particular location. Special procurement and special stock types  are  divided  into  the  following categories:

 

 

Consignment Stocks

 

Consignment stocks are those material that is available at our store premises, however it still belongs to the vendor (seller) of the material. If you utilize the material from consignment stocks, then you have to pay to the vendor.

 

 

Third-party Processing

 

In third-party processing, a company passes on a sales order to the associate external vendor (seller) who sends the goods directly to the customer. The sales order is not processed by the company, but by the vendor (seller). Third-party items  can  be  entered  in  purchase  requisitions,  purchase  orders,  and  sales orders.

 

 

Pipeline Handling

 

In pipeline handling, the company need not order or store the material involved. It is obtainable as and when required via a pipeline (for example, oil or water), or another style of cable (such as electricity). The material that is consumed is settled with the vendor (seller) on a regular basis.

 

 

Returnable Transport Stock

 

The company orders goods from a vendor (seller). The goods are delivered with returnable transport packaging (pallets, containers) that belongs to the vendor

 

(seller) and is stored at the customer premises until they return it to the company.

 

 

Subcontracting

 

The vendor (the subcontractor) receives components from the ordering party with the help of which it produces a product. The product is ordered by your company through a purchase order. The components required by the vendor (seller) to manufacture the ordered product are listed in the purchase order and provided to the subcontractor.

 

 

Stock Transfer Using Stock Transport Order

 

Goods are procured and supplied within a company. One plant orders the goods internally from another plant (receiving plant/issuing plant). The goods are procured with a special type of purchase order – the stock transport order. You'll be able to request and monitor the transfer of goods with a stock transport order.

 

 

 

 

 

 

The  organizational structure in MM consists of the following organizational levels:

 

·    Client

 

·    Company Code

 

·    Plant

 

·    Storage Location

 

·    Purchasing Organization

 

·    Purchasing Group

 

Client

 

A client has the following attributes:

 

·    Client is a commercial organizational unit in R/3 system.

 

·    It has its own set of master data with independent table sets.

 

·    According  to  hierarchy,  a  client  occupies  the  highest  level  in  a  SAP

system.

 

·    Data that is maintained at the client level is valid for all organizational levels.

 

 

Company Code

 

A company code has the following attributes:

 

·    Within client, a company code is an independent accounting unit.

 

·    It is a legal entity that has its own profit, loss and balance statement.

 

·    It is the smallest unit in an organization for which a complete independent account set can be replicated.

 

 

Plant

 

The basic points to be noted about a plant are as follows:

 

·    Plant is an organizational unit within a company where activities take place.  A  plant  will  produce  goods  and make  goods  available  for  the company.

 

·    It is a unit having manufacturing facility, warehouse distribution center, or a  regional  sales  office  within  logistic.  It  subdivides  an  enterprise  in different aspects.

 

 

Storage Location

 

A storage location has the following attributes:

 

·    Storage location is an organizational unit, which actually differentiates between different material stocks in a plant.

 

·    Storage location is a place where stock is kept physically.

 

·    A plant can consist of multiple storage locations. All data is stored at storage location level for a particular storage location.

 

 

Purchasing Organization

 

The points to be noted about a Purchasing Organization are as follows:

 

·    A purchasing organization is an organizational unit under a company or a plant that is responsible for the procurement activities according to requirements. It is responsible for external procurement.

 

·    A purchasing organization can be at the client level, which is known as a centralized purchasing organization.

 

·    A purchasing organization can also be at the company or plant level, which is known as company-specific or plant-specific purchasing organization.

 

Different forms of purchasing can be described as follows:

 

 

Centralized Purchasing

 

Purchasing organization is not assigned to any company code. It procures for all company codes belonging to different client.

 

 

Company-Specific Purchasing

 

Purchasing organization is assigned to a company code only. The plant belonging to the company code can purchase through this purchasing organization.

 

 

Plant-Specific Purchasing

 

Purchasing organization is assigned to a  plant. Only this specific plant can purchase through this purchasing organization.

 

 

Purchasing Group

 

The attributes of a purchasing group are as follows:

 

·    Purchasing group is an organizational unit responsible for the everyday procurement activities within an organization.

 

·    It  is  a  buyer  or  a  group  of  buyers  responsible  for  the  procurement activities in a purchasing organization.

 

 

MASTER DATA

 

Master  data -  Data  that  is  created  centrally,  and  is  valid  for  all applications. It remains constant over time but we need to update it on a regular basis. For example: Vendor is a type of master data that is used for creating purchase orders or contracts.

 

·    Transactional data - Data that is associated with processing of business transaction is transactional data.

 

SAP Master Data is of the following two types:

 

·    Material Master Data

 

·    Vendor Master Data

 

Material Master Data

 

The key points to note about material master data are as follows:

 

·    This is the enterprise main source of material-specific data. This data will include  information  on  the  materials  that  a  company  can  procure, produce, store, or sell.

 

·    Since  there  are  different  departments  in  an  enterprise  and  each department works on some specific material, they will enter different information regarding their material. So, each user department has its own view of the material master record. The data screens that are used to create material master can be divided into two categories:

 

o Main Data: It includes basic data (base unit of measure, weight), purchasing data (over tolerance and under tolerance), and accounting data (standard price, moving price).

 

o Additional  Data:  It  includes  additional information  such as short description about material, currency, etc.

 

Material master has four characteristics, which we will discuss one by one in the following sections.

 

 

Material Types

 

Materials with some common attributes are grouped together and they are assigned               to   a   material   type.   It   differentiates  the   materials  and  allows

organizations  to  manage  different  materials  in  a  systematic  manner  in accordance to a company’s requirement.

 

Material Groups

 

Material group is a wider range of material type. Materials with some common attributes are taken together and they are assigned to a material group. For example: We have some materials that are to be packaged, so the material type can be electrical or food products, but we can group these material types and put them in the packaged material group. Follow the steps given below to create a Material Group.

 

 

PURCHASE INFO RECORD

Material and  vendor master are  separate data records for keeping information of materials and vendors from where material is procured. The combined information of material and vendor altogether is kept in a record that we call as purchase info record. The key points about purchase info record are as follows:

 

·    Purchasing  info  record  stores  information  on  material  and  vendor, supplying that material. For example, a vendor’s current price of a particular material is stored in info record.

 

·    Purchase info  record can be maintained at  the plant  level or at the purchasing organization level.

 

·    Info record can be maintained for four procurement types, which are as follows:

 

o Standard: Standard info record has information on standard orders (orders include details of vendor and material). This info record will include vendor’s price for supplying a particular material.

 

o Subcontracting: Subcontracting info record has the information on subcontract orders. It includes price for assembling the raw material that is supplied by the ordering party.

 

o Pipeline:  Pipeline  info  record  has  information  on  material  that  is provided by vendor through pipes. For example, water, electricity, etc.

 

o Consignment: Consignment info record has information on material that is kept at the premises of the ordering party. It contains vendor’s price that is to be paid for withdrawing material from a consignment stock.

 

SOURCE DETERMINATION LIST

The combined information of material and vendor is kept in a record that is known as purchase info record. But a particular material can be ordered from different vendors in different time intervals. This information can be maintained in a list that is called as the source list. The key points to note about a source list are as follows:

 

·    Source list includes a list of possible sources of supply for a material over a given framework of time.

 

·    Source list specifies the time period of ordering a particular material from a given vendor.

 

·    Source list can be copied from one plant to another plant. Source list can be created by the following two ways:

·    Automatically

 

·    Manually

PURCHASE REQUISITION

Procurement in every organization starts with gathering requirements. Once requirements are gathered, we need to inform the purchasing organization. A Purchase Requisition is a document that contains a list of requirements. The key points to note about a purchase requisition are as follows:

 

·    A  purchase  requisition  is  a  request  that  is  made  to  the  purchasing organization to procure a certain list of materials.

 

·    It is an internal document and remains within the organization.

 

·    Purchase requisition needs approval from the purchasing organization.

 

·    If a purchase  requisition has already been approved, then it can be modified only to a limited extent.

 

·    Purchase requisition can be created for the following procurement types:

 

o Standard: Getting finished material from vendor.

 

o Subcontracting: Providing raw material to vendor and getting finished material.

 

o Consignment: Procuring material that is kept in company’s premises and paying to vendor for that.

 

o Stock transfer: Getting material from within the organization.

 

o External service: Getting services like maintenance from a third-party vendor.

 

 

REQUEST FOR QUOTATION  ( RFQ)

 

Vendor selection is an important process in the procurement cycle. Once requirements are gathered, we start looking for possible suppliers who can fulfill the requirements at the best possible price. So, a request is made to the vendors to submit their quotations indicating the price of the material along with their terms and conditions. This request is known as the request for quotation (RFQ). Listed below are the key points to note about a request for quotation:

 

·    Request for quotation is a form of invitation that is sent to the vendors to submit a quotation indicating their pricing and terms and conditions.

 

·    It contains details about goods or services, quantity, date of delivery, and date of bid on which it is to be submitted.

 

·    Quotation is a reply by a vendor in response to a request for quotation. An RFQ can be created by the following two ways:

·    Manually

 

·    Automatically from a Purchase Requisition

 

 

OUTLINE CONTRACT

 

Vendor selection is an important process in the procurement cycle. Vendors can be selected by quotation process. After having shortlisted a vendor, an organization enters into an agreement with that particular vendor to supply certain items with certain conditions. Typically when an agreement is reached, a formal contract is signed with the vendor. So, an outline agreement is a long- term purchasing agreement with a vendor.

 

The key points to note about an outline agreement are as follows:

 

·    An outline agreement is a long-term purchasing agreement with a vendor containing terms and conditions regarding the material that  is  to  be supplied by the vendor.

 

·    The terms of an outline agreement are valid up to a certain period of time and cover a certain predefined quantity or value.

 

An outline agreement can be of the following two types:

 

·    Contract

 

·    Scheduling Agreement

 

 

Contract

 

A contract is a long-term outline agreement between a vendor and an ordering party over a predefined material or service over a certain framework of time. There are two types of contracts:

 

·    Quantity Contract: In this type of contract, the overall value is specified in terms of the total quantity of material to be supplied by the vendor.

 

·    Value Contract: In this type of contract, the overall value is specified in terms of the total amount to be paid for that material to the vendor.

 

 

Scheduling Agreement

 

A scheduling agreement is a long-term outline agreement between the vendor and the ordering party over a predefined material or service, which are procured on predetermined dates over a framework of time. A scheduling agreement can be created in the following two ways:

 

·    Creating scheduling agreement

 

·    Maintain scheduling lines for the agreement

 

 

QUOTA ARANGEMENT

A particular material can be procured from different vendors depending upon the requirement. In this way, the total requirement of a material is distributed to different vendors, i.e., the quota is assigned to each source of supply. This is known as quota arrangement. The key points to note about quota arrangement are as follows:

 

·    Quota  arrangement  divides  the  total  requirement  of  material  among certain sources of supply, i.e. vendors, and then assigns a quota to each source.

 

·    This  particular  quota  specifies  the  portion  of  material  that  is  to  be procured from an assigned vendor or source.

 

 

·    The mandatory setting before creating a quota is that the info record and the source list should be maintained for the particular material. Also, in the material master, the source list and quota arrangement usage check boxes should be checked. This setting can be made in the material master by  going  to  TCode  MM03.  In  purchasing  view,  check  the  quota arrangement usage and the source list. Setting is now maintained for quota arrangement.

 

 

PURCHASE ORDER TYPE

 

For different procurement types, there are four types of purchase orders, which are as follows:

 

·    Subcontracting Purchase Order

 

·    Consignment Purchase Order

 

·    Stock Transfer Purchase Order

 

·    Service Purchase Order

 

 

Subcontracting Purchase Order

 

In subcontracting, the vendor (the subcontractor) receives components from the ordering party with the help of which it produces a product. The product is ordered by your company through a purchase order. The components required by the vendor (seller) to manufacture the ordered products are listed in the purchase order and provided to the subcontractor.

Follow the steps given below to create a subcontracting purchase order. TCode to create Purchase Order: ME21N

Subcontracting Item Category: L

 

1.  Provide the TCode in the command field.

 

2.  It will take you to the purchase order screen.

 

3.  Provide all the necessary details such as the name of the vendor, item category, name of material, plant for which material is procured, and the date of delivery.

 

4.  Click on Save. Subcontracting Purchase order will be created.

 

Consignment Purchase Order

 

In  consignment,  material  is  available  at  the  organization  store  premises, however it still belongs to the vendor (seller)/Owner of the material. If you utilize the material from the consignment stocks, then you have to pay to the vendor.

Follow the steps given below to create a consignment purchase order. TCode to create Purchase Order: ME21N

Consignment Item Category: K

 

1.  Provide the TCode in the command field.

 

2.  It will take you to the purchase order screen.

3.  Provide all the necessary details such as the name of the vendor, item category, name of material, plant for which material is procured, and the date of delivery.

 

4.  Click on Save. Consignment Purchase order will be created.

 

 

Stock Transfer Purchase Order

 

In stock transfer, goods are procured and supplied within a company. One plant orders the goods internally from another plant (receiving plant/issuing plant). The goods are procured with a special type of purchase order known as the stock transport order.

Follow the steps given below to create a stock transfer purchase order. TCode to create Purchase Order: ME21N

Stock Transfer Item Category: U

 

1.  Provide the TCode in the command field.

 

2.  It will take you to the purchase order screen.

 

3.  Provide all the necessary details such as the name of the vendor, item category, name of material, plant for which material is procured, and the date of delivery.

 

4.  Click on Save. Stock Transfer Purchase order will be created.

 

 

Service Purchase Order

 

In service, a third party provides services to a company. These services include maintenance functions such as electricity and oiling of machines. Follow the steps given below to create a service purchase order.

 

TCode to create Purchase Order: ME21N Service Item Category: D

 

1.  Provide the TCode in the command field.

 

2.  It will take you to the purchase order screen.

 

3.  Provide all the necessary details such as the name of the vendor, item category, name of material, plant for which material is procured, and the date of delivery.

 

4.  Click on Save. Service Purchase order will be created.

 

 

INVENTORY MANAGEMENT

 

 

More notes to be added