Enterprise-Level Purchasing Organization Discussion Paper
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Enterprise-Level Purchasing Organization Discussion Paper
PURCHASING ORGANIZATION
A purchasing organization is the unit within an enterprise that performs strategic activities related to purchasing for one or more plants. It evaluates and identifi es vendors, and it negotiates contracts and agreements, pricing, and other terms. An enterprise may have one or more purchasing organizations. Typically, there are three models of purchasing organizations: enterprise level, company level, and plant level. These models range from highly centralized to highly decentralized. We discuss each of these models in greater detail below.
Enterprise-Level Purchasing Organization Discussion Paper
The enterprise-level purchasing organization, also known as the cross- company code purchasing organization, is the most centralized model. There is only one purchasing organization for the overall enterprise and all of the plants within the enterprise. Figure 4-3 illustrates the GBI organizational structure using the enterprise-level model. There is only one corporate purchasing orga- nization, GL00, and it handles purchasing for all fi ve plants in both company codes (US00 and DE00). In this model, the purchasing organization is assigned to each plant, but not to the company code.
Figure 4-3: Enterprise-level purchasing organization
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Company-Level Purchasing Organization
With the company-level purchasing organization, also known as the cross- plant model, a single purchasing organization is responsible for multiple plants in one company code. Figure 4-4 illustrates such a model for GBI. In the fi gure, there are two purchasing organizations: US00 and DE00. US00 is responsible for all three U.S. plants, and DE00 is responsible for the two German plants. This approach is less centralized than the enterprise-level model. In this model the purchasing organization is assigned to both the plant and the company code. However, a purchasing organization can be assigned only to one company code.
Figure 4-4: Company-level purchasing organization
GBI has one company in the United States and one in Germany, each of which has its own purchasing organization. If GBI had additional compa- nies in other European countries, then each country could have a separate purchasing organization. Alternatively, one purchasing organization could manage purchasing for several countries. In fact, it is fairly common to set up a separate purchasing organization for each country to deal with that country’s distinctive set of laws, taxes, and business practices.
Plant-Level Purchasing Organization
The most decentralized model is the plant-level purchasing organization, also known as a plant-specifi c purchasing organization, in which each plant has its own purchasing organization. Figure 4-5 illustrates a plant-specifi c model for GBI. Note that each plant has its own purchasing organization
Organizational Data 87
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that is responsible for purchasing materials for that plant. As in the case of the cross-plant model, in this scenario the purchasing organization is assigned to both the plant and its company code.
Reference Purchasing Organization
Each purchasing organization model has its advantages and disadvantages. A highly centralized model enables an enterprise to negotiate favorable agreements because it purchases materials in large volumes. However, the enterprise may not be able to take advantage of local practices and rela- tionships with which it is not familiar. In addition, it may not be able to react quickly to changes in local conditions. Conversely, a highly decentral- ized model is preferred when vendors primarily serve a local geographic area and knowledge of local practices and conditions enables the enterprise to make favorable agreements. Ultimately, enterprises frequently adopt a hybrid model that consists of one centralized purchasing organization that can evaluate needs and opportunities for the entire enterprise and nego- tiate global contracts, which purchasing organizations then use across the enterprise. Such a purchasing organization is called a reference purchasing organization.
GBI has adopted a hybrid model to include a single global reference purchasing organization (GL00), as indicated in Figure 4-3, plus multiple com- pany-code-specifi c purchasing organizations, as indicated in Figure 4-4. In the United States, the purchasing organization (US00) is physically located in the Miami facilities, and in Germany the purchasing organization (DE00) is physically located in the Heidelberg facilities.
Figure 4-5: Plant-level purchasing organization
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PURCHASING GROUP
Whereas purchasing organizations are responsible for the strategic aspects of purchasing, such as negotiating contracts with vendors, purchasing groups carry out the day-to-day purchasing activities. A purchasing group is an indi- vidual or a group of individuals who are responsible for purchasing activities for a material or a group of materials. These activities include planning, creat- ing purchase requisitions, requesting quotations from vendors, and creating and monitoring purchase orders. A purchase order (PO) is a formal commu- nication to a vendor that represents a commitment to purchase the indicated materials under the stated terms. The purchasing group also serves as the main point of contact with vendors.
A purchasing group is not always an entity within the company. Some businesses outsource the group’s activities. Consider, for example, a case in which a company needs to acquire land or a building. The company most likely will retain a realtor to fi nd the property that best suits their needs. In this case, the realtor serves as the purchasing group. Similarly, many companies use the services of buyer agents to fi nd suitable vendors and buy materials from them because these agents are more familiar with the vendors. GBI has one pur- chasing group for North America (N00) and one for Europe (E00).
Dell Computers and Intel Corporation illustrate how purchasing organizations manage both local and glo- bal procurement strategies. Dell has manufacturing facilities in the United States, Brazil, Ireland, Poland, China, Malaysia, and India. The company purchases vast quantities of Intel microprocessors for its various computer product lines (laptops, desktops, and serv- ers). In turn, Intel maintains a dedicated sales force at Dell’s headquarters to negotiate purchasing contracts and manage the relationship. Dell has a central pur- chasing organization that consolidates procurement requirements globally and negotiates pricing centrally with Intel. However, the actual purchase orders are cre- ated at the local Dell manufacturing facilities in each region. In other words, Dell US purchases chips from Intel US, Dell China purchases chips from Intel China,
and so on. All purchases are based on the global con- tract and pricing terms negotiated between Dell and Intel headquarters, but they are executed locally by the purchasing groups for the various plants. This arrange- ment ensures that Dell receives the best pricing and terms due to the aggregate demand and strategic over- sight of the centralized purchasing organization. At the same time, however, the local manufacturing facilities maintain control over the tactical purchasing activities because the purchasing organization is located on the same premises. Intel also benefi ts from this arrange- ment by gaining global visibility into Dell’s purchasing so that the company can better adjust their manufactur- ing capacity to provide the right amount of chips to Dell when and where they are needed.
Source: Dell & Intel company reports.
Business Processes in Practice 4.1: Dell & Intel
MASTER DATA In Chapter 2 we explained that business processes involve multiple types of master data. The four master data types that are relevant to the purchasing process are material master, vendor master, purchasing info records, and con- ditions. All four types are integrated in various combinations throughout the procurement process.
Master Data 89
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MATERIAL MASTER
In Chapter 2 we explained that data in the material master are grouped into different views that are relevant to different processes. We also examined one view in detail, namely, basic data, because these data are applicable to many processes. Recall that basic data include material number, description, and weight. Please review Chapter 2 for a complete list of materials that GBI utilizes. In addition to basic data, the views relevant to purchasing are fi nancial accounting, purchasing, and plant data / storage.
Financial Accounting Data
Financial accounting data include the valuation currency, the valuation class, and the price control. Valuation currency is the currency that the mate- rials will be priced in, such as U.S. dollars or euros.
The valuation class identifi es the general ledger accounts associated with the material. The general ledger accounts are used to maintain the value of the inventory in stock and are updated as materials are purchased, sold, or used in production. You may wish to review the appendix in Chapter 3 to familiarize yourself with the material accounts that GBI uses. Valuation class provides an important integration point between purchasing and fi nan- cial accounting because it allows the system to automatically make postings to appropriate stock or inventory accounts in the general ledger. Typically, all materials with similar characteristics are assigned to the same valuation class. Consequently, all fi nancial transactions for these materials are posted to the same general ledger account. For example, because off-road bikes and tour- ing bikes are both fi nished goods, their transactions could be posted to the same fi nished goods inventory account. In some cases, however, materials with similar characteristics are assigned to different valuation classes and therefore to different general ledger accounts. Referring back to the previous example, the bikes could be assigned to the off-road bike inventory account and the touring bike inventory account, respectively. Assigning materials with similar characteristics to different valuation classes is appropriate when a company maintains separate general ledger accounts for different materials. The last and simplest option is to assign materials with different characteristics to the same valuation class and therefore the same inventory account. This strategy is appropriate when the enterprise does not need to track the value of the mate- rials separately, as is the case, for example, with offi ce supplies.
Price control identifi es the method that is used to value the materials. The two options for price control are moving average price and standard price. Both options defi ne the price per unit of materials in stock, such as helmets. In the moving average price option, the total value of the materials is divided by the quantity in stock to determine the average price per unit. For example, if a fi rm has 1000 helmets in stock and they cost $34,000 to purchase, then the moving price is $34 (34,000/1,000). This price is called “moving” because it is updated each time a process step affects the price; it represents an average price of the materials in stock. Thus, if the enterprise purchases an additional 100 helmets for $3,500, then the new moving price increases slightly to $34.09 (($34,000 + $3,500)/(1,000 + 100)).
In contrast, standard price is constant for a specifi ed period of time and does not fl uctuate, even when an event occurs that causes the value of the
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materials to change. The standard price is updated periodically — for example, monthly or quarterly — to account for changes in the value of materials. Thus, in our example above, if the fi rm’s policy is to update the standard price at the end of each month, then it does not make any price changes when it purchases the additional helmets. Instead, it updates the standard price at the end of the month.
Purchasing Data
Another key component of the material master is the purchasing data or view. The key data in the purchasing view are the purchasing group, the goods receipt processing time, and the delivery tolerances. The purchasing group, which we discussed earlier as one of the organizational elements in procurement, is responsible for purchasing the materials.
When a company receives materials from a vendor, it requires a certain amount of time to receive them and place them into storage. For instance, it must unpack the boxes, count the materials, inspect their quality, and physi- cally move them to the appropriate storage location. This is the goods receipt processing time. An estimate of this time is included in the material master. The ERP system utilizes this estimate in planning activities, for instance, to determine when an order should be placed so that the materials are available when they are needed.
It is not uncommon for the shipment from a vendor to include either more or less material than the actual quantity ordered. When this occurs, the receiving organization may or may not accept receipt, depending on its poli- cies and its agreements with its vendors. The delivery tolerances in the mate- rial master specify how much over delivery and under delivery the ordering party will accept. If the quantity delivered is within these tolerances, then the ordering party accepts delivery. If the quantity exceeds the tolerances, then it refuses the shipment and returns it to the vendor.
Some of the data in the material master can vary for each relevant orga- nizational level. In purchasing, the relevant organizational level is the plant. If a company has multiple plants, then the material must be defi ned for all plants in which it is stored. For example, the purchasing group and goods receipt processing time can vary by plant.
Plant Data / Storage
Most materials that are purchased from a vendor or produced in-house ulti- mately are received into inventory. For this step to occur, the plant data / stor- age view must be included in the material master. The plant data/ storage view includes data that are needed to properly store materials. Examples of these data are:
- Environmental requirements such as temperature and humidity
- Special containers that are required for storage
- Shelf life; that is, how long a material can be stored before it becomes obsolete or unusable (common in pharmaceutical and food services industries)
- Instructions for special handling, for instance, if the material is fragile or hazardous.
Master Data 91
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Demo 4.1: Review material master
VENDOR MASTER
Vendor master data include the data needed to conduct business with a vendor and to execute transactions related to the purchasing process. Data in the vendor master are grouped into three segments: general data, accounting data, and purchasing data. The relationships among the three segments and the two departments responsible for the data—accounting and purchasing—are depicted in Figure 4-6. Figure 4-7 highlights the specifi c data that are included in each segment.
Figure 4-6: Segments of vendor master data
General data include the vendor’s name, address, and communication information such as phone and fax numbers. These data are defi ned at the cli- ent level and are consistent across all company codes and purchasing organi- zations in the enterprise (client). General data are common to the purchasing and accounting departments and can be maintained by either department.
Accounting data include tax-related data, bank data, and payment terms and methods. These data are defi ned at the company code level (recall from Chapter 2 that fi nancial accounting is maintained at the company code level) and are relevant to all purchasing transactions in the company code. The accounting department will typically complete this segment of the vendor master.
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Figure 4-7: Examples of vendor master data
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Accounting data must also specify the reconciliation account in the gen- eral ledger. Recall from Chapter 3 that a vendor account is a subledger account and that the reconciliation account identifi es the accounts payable account in the general ledger associated with the vendor. If the vendor supplies multiple companies (company codes) within the enterprise, then the data very likely will vary for each company. The reconciliation account will be different if each company uses a different chart of accounts and general ledger accounts. Bank data and payment terms may vary as well. Thus, accounting data are maintained separately for each company code with which the vendor had dealings.
Finally, purchasing data include various terms related to determin- ing prices, creating and communicating purchase orders, verifying invoices, and other steps involved in executing purchases with the vendor. The pur- chasing department will typically complete this segment. Purchasing data are defi ned at the purchasing organizational level and are applicable only to that organization. If an enterprise has multiple purchasing organizations that deal with the vendor, then it must maintain separate data for each one. For example, delivery and payment terms may vary for different purchasing organizations.
Both GBI US and GBI DE have 12 vendors that supply raw materials and trading goods. These vendors are listed in Table 4-1. Appendix 4A pro- vides additional details about these vendors. Note from the appendix that each vendor supplies specifi c materials to GBI.
GBI US Vendors GBI DE Vendors
- Olympic Protective Gear • Boomtown Tire & Wheel • Dallas Bike Basics • Lightbulb Accessory Kits • Space Bike Composites • Night Rider Aluminum Products • Spy Gear • Rapids Nuts n Bolts • Green Blazers Seats • Fun n the Sun Seats n Bars • Sunny Side Up Tire • Redwood Kits
- Burgmeister Zubehör OHG • Pyramid Biking • ABS Brakes GmbH • Flat Tire and More • Gummi Schultze • Lohse Schraube • Thick Spoke • Main Carbon • Shell Gear • Cologne Bike Supplies • Sachsen Stahl AG • Run & Fun
Enterprise-Level Purchasing Organization Discussion Paper
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