History Of Maintaining Purchasing Organization

Published Date: 02 Nov 2017

Part B.

Maintain storage location: SAP enables the creation of a storage location (e.g. warehouse) for a plant. This storage locations allows for physical inventory management of stock materials been produced from plants. Therefore storage locations are assigned to individual plants usually based on close proximity. The storage location is represented by a 4-digit alphanumeric code. For example, maintaining two storage locations (warehouse 1 and warehouse 2) for a Plant DE01, the storage location code could be SL01 (for warehouse 1) and SL02 (for warehouse 2).

Maintaining purchasing organization: It entails the creation of the purchasing organization in which the naming or definition of the unit is required. A Purchasing Organization can be seen as an organizational unit saddled with the responsibility of negotiating contracts with vendors and purchasing goods or services for one or more plants. This is the first step in the configuration of the SAP organizational structure as it is the subject which all other required organizational units will be based on (i.e. the allocation of other units such as company codes and plants require a purchasing organization. For example, a company code with one or more plants can be allocated to a purchasing organization, likewise one or more plants can also be directly allocated to a purchasing organization), thus making it an important step. Either for centralized, decentralized or global procurement, the purchasing organization is required to be maintained. An example of a Purchasing Organization name for a company could be "PO Germany".

Assigning purchasing organization to company code: A company code is an organizational unit which is independent and can possess one or more plants. SAP configuration provides the possibility of allocating one or more company codes to a purchasing organization. A one-to-one purchasing organization – company code relationship means that all plants of the particular company code will be assigned to the same purchasing organization (this can be said to be a centralized procurement system for the company). In the case of a one-to-more relationship (e.g. a Corporate group), assigning all company codes to a purchasing organization will mean that all the plants of the different company codes will be assigned to one purchasing organization, thus this can be referred to as a centralized or global procurement system for the corporate group. However, a corporate group with two company codes can also maintain a decentralized procurement system by assigning each of the company codes to different purchasing organizations. Thus defining a centralized or decentralized procurement system is dependent on the organizational level/hierarchy.

Assigning purchasing organization to plant: This entails the assignment of individual plants to a purchasing organization. In this case, a company code which possess two plants can either set up a centralized procurement system in which both plants are assigned to one purchasing organization (as explained above) or set up a decentralized procurement system in which each of the plants are assigned to different purchasing organizations.

Assigning standard purchasing organization to plant: In a case where more than one purchasing organization procures for a particular plant, SAP allows for the possibility of assigning one of the purchasing organizations as the Standard Purchasing Organization so that the system assigns the standard purchasing organization automatically when a source is required for a transaction.

Assigning purchasing organization to reference purchasing organization (RORG): An RORG (which must have been defined in "Materials Management-> "Maintain Purchasing Organization") is a purchasing organization which is maintained with or without a plant or company code assigned to it but has a centrally agreed contract created for it. A purchasing organization can be assigned to the RORG in a situation whereby the purchasing organization wishes to make use of the favourable contract negotiated centrally by RORG with a vendor (for a product) to purchase that product. In this case, the company must have configured a decentralized system in which several purchasing organizations exist but with a Reference Purchasing Organization which any of the purchasing organizations could be assigned to in order to benefit from the centrally negotiated contract’s favourability.

Decentralized procurement can be referred to as the choice of an organization to have individual sections or separate locations (in terms of corporate group) attain their purchasing requirements through different assigned purchasing organizations (Joyce, 2006). Whereas Luzzini and Ronchi (2011) believe that centralized procurement is an organizational structure in which the decisions and policies to purchase materials are made by a centralized organizational unit. In addition, Schoenherr (2008) perhaps agreed that centralized procurement is the central dissemination of purchasing decision, responsibility and authority assigned to a specific organization while decentralized procurement refers to purchasing responsibilities being dispersed through various parts of the company. In terms of Global procurement, it has been argued that this can also be referred to as a centralized procurement system as it usually managed by a central entity in an organizational structure e.g. the headquarters of an organization (Pedraza-Martinez and Van Wassenhove, 2012). Yeniyurt et. al. (2012) further argued that global procurement entails the strategic decision to integrate the organization’s subsidiaries which might be geographically dispersed. The standardization of purchased products, organization of purchasing staffs and the centralization of the purchasing process is what global procurement builds on (Quintens et. al., 2006).

In the process of setting up a purchasing organizational structure for an organization, making a choice between the configurations of either a centralized structure (the use of only one purchasing organization) or a decentralized structure have their advantages depending on some factors; one of which is the geographical spread of the companies’ plants. Therefore, with the assumption that the plants are of considerable geographical range, a centralized purchasing organization is favourable for the configuration of SAP enterprise structure for a company with more than one legal entity as a centralized purchasing organization could help attain economies of scale, contribute to the reduction of administration cost; and reduce operational and supply risks (Bahinipati et. al., 2009). On the other hand, Parikh and Joshi (2005) highlighted that though a centralized purchasing organization could help in purchasing cost reduction; this advantage is only often attained in the case where the organization purchases a large volume of products or services. They further explained that a higher administrative and overhead cost is generated in the case of low volume purchases which in turn could also lead to delay in purchase. In addition to that, Munson and Hu (2010) agreed that most companies make use of a centralized procurement system in order to gain the benefit of quantity discount on purchase. Trautmann et. al. (2009) perhaps argued that organizations neither concentrate on centralized nor decentralized purchasing systems, instead they make use of hybrid purchasing organizations (this means centralizing some plants under one purchasing organization and keeping some others under individual purchasing organizations based on organizational categorization) due to the high level of global market competition; this would help the organization to leverage on the benefits in global sourcing. As highlighted previously by Bahinipati et. al. (2009), centralizing a company’s enterprise procurement structure helps in the reduction of risks but Juha and Pentti (2008) argued and concluded from their research that the organizational decision making in terms of risk is industry-specific. He explained that although risks might be perceived in a similar manner, the management and tolerance of risks by companies could be different from one another as results from the research conducted indicated that manufacturing organizations tend to manage risks by increasing formality and maintaining a centralized procurement system in their enterprise structure while high technology organizations were found to rely more on a purchasing decision making system which is decentralized to effectively manage risks.

In conclusion, it is important to review and analyse different factors and situations of an organization before deciding on either setting up one purchasing organization (centralized) or setting up more than one purchasing organization (decentralized). For example in the case of a company with more than one company code, it is possible and not a bad idea to assign all plants of both company codes to one purchasing organization, likewise it is also possible to assign some plants to a specific purchasing organization and assign the others to other or individual purchasing organizations (in the case where by the geographical location of one or more plants is far away from others).