Procurement Cycle: 2. Source of Supply Determination

In the previous posts I have written about procurement cycle and the first step of it (the requirement determination). In that step, user’s requirement is recorded as a Purchase Requisition (PR) document in SAP ERP. This PR needs to be processed by the buyer into a Purchase Order (PO) in the case of external procurement, or a Stock Transport Order (STO) in the case of stock transfer between plants. In this post I will explain more about general process of source of supply determination for external procurement PR.
PR item with source of supply
In the PR, user can propose source of supply of his requirement. The proposal can be an outline agreement or an info record. If the buyer agrees with the proposal, he can directly create a PO from that PR referring to the source of supply proposed. If he doesn’t agree with the user’s proposal, the buyer can find other source of supply for that PR item by himself. It can be an existing outline agreement or info record. Those can be done with ME57 t-code (Assign and Process Purchase Requisition).
Outline agreement is a longer-term arrangement between a company and a vendor concerning the supply of materials or the performance of services over a certain time frame (validity period) on the basis of predefined terms and conditions (such as unit price, delivery terms, terms of payment, etc).
An example of processing PR referring to an outline agreement:
A company has an outline agreement with a vendor that valid for a year (let say valid until 31.12.2010). In the outline agreement, the vendor agrees to supply the company the material “M” with 100 USD unit net price. When a user creates a PR to request the material “M”, he can assign the outline agreement to the PR item as source of supply. Then the buyer can directly create a PO for that PR referring to the outline agreement (with 100 USD as unit price and other terms and condition agreed in the outline agreement). With this source of supply, the buyer does not have to search the possible vendor for the material at every time a user requests the material “M”, so he can save PO processing time. In SAP there are two types of outline agreement which are Contracts and Scheduling agreements. I will write a post about the outline agreement in detail later.
Info record is one of the master data in SAP ERP Purchasing besides material and vendor master data. Info record links a material with a vendor in a purchasing organization or plant. Info record stores the general, conditions, purchasing, and text data of a material that is supplied by a vendor. For example: in info record of material “X” and vendor “V”, the unit net price is 105 USD (which is valid to the next two months), incoterms is DDP, etc. When a user creates a PR to request material “M”, he can assign the info record as source of supply of the PR item. Then the buyer can directly create a PO for that PR referring to the info record (with 105 USD as unit price and other terms). With this source of supply, the buyer does not have to search the possible vendor for the material at every time a user requests the material “M”, so he can save PO processing time.
Info record can be created or updated manually (with ME11 or ME12 t-code), or from other documents such as quotation, outline agreement, purchase order, etc. In fact, in the previous example of outline agreement as source of supply, SAP determines the conditions in the PO created from the info record (that is created/updated when the outline agreement is created/updated), not directly on the outline agreement document. I will write a post about the info record in detail later.
PR item without source of supply
If the PR is created without source of supply, the buyer can assign source of supply by himself with ME57 t-code. SAP can propose the existing valid source of supply of the material/service to the PR items, such as outline agreement or info record.
If there is no valid source of supply at that time, the buyer can create Request For Quotations (RFQs) documents to one or some prospective vendors. The buyer can access the procurement history of the material/service specified in the PR (with ME1M: List of Info records per material, ME2M: List PO per material, ME3M: List outline agreement per material, or ME4L: list of RFQ per material), so he can see which vendors that have provided it to the company before. He can also create the RFQ to the new prospective vendor that might have never provided the material/service to the company before.
Request For Quotation (RFQ) is an external purchasing document that usually used as bidding process invitation. RFQ is sent by a company to the prospective vendor to request the vendor providing a quotation which contains information about the price and delivery conditions, terms of payment, etc that the vendor formally agree in case it is appointed to provide the material/service to the company.
RFQ can be created from ME57 t-code. On the ME57 screen, the buyer can select the PR items that will be processed into RFQ. RFQ can also be created from ME41 t-code. An RFQ can contain items from one or several PR documents. Data from PR document, such as material number, short text, quantity, delivery date, etc will be copied into the RFQ, so the buyer does not have to re-enter them.
For one bidding process, the buyer usually sends RFQ to more than one vendor. The buyer must create an RFQ for each vendor (which usually contains the same items). The vendor address and other data can be obtained from vendor master data. The buyer can also create an RFQ to a vendor that has not been created in the vendor master data by using “one-time vendor”. The buyer must enter the address and other data of the “one-time vendor” when creating RFQ.
Each RFQ has its own RFQ number. All RFQs in one bidding process can be grouped with a collective number. Collective number is a 10 characters field in the header data of RFQ document. It can be alphanumeric. Several RFQs with same collective number can be listed, such as in price comparison, based on the collective number.
In the RFQ, the buyer must include the information about the material/service needed from the vendors (copied from the PR), the latest submission date of the quotation, the preferred term of payment, currency,  incoterm, etc. RFQ can be printed in a hardcopy and sent to the vendor, or it also can be sent through email.
The vendor will receive the RFQ and will check whether they can supply the materials/services specified in the RFQ or not. If the vendor can, it will send the quotation to the buyer. The quotation should contain the offering regarding the material/service specified in the RFQ, such as the price and conditions, the delivery date, the term of payment, incoterm, the validate date of the quotation, etc. The vendor should also include the RFQ number in their quotation so the buyer will know the RFQ that the quotation refers to.
Quotation and its relationship with RFQ
The buyer will input the information in the vendor’s quotation to the SAP quotation document with ME47 (Maintain Quotation) t-code. The quotation document in SAP is the same with the RFQ document, they’re a single document. The data of an RFQ and the corresponding quotation are stored in the same record in the same table in SAP.

RFQ/Quotation documents, like other Purchasing documents, consist of three sections, which are header, item overview, and item details. The header data of RFQ/quotation are stored in EKKO table. The item detail data of RFQ/Quotation are stored in EKPO table.

In standard SAP ERP, the difference between RFQ and Quotation documents is only the screen layout of the transaction that can edit and display them. Some fields, such as: net price, quotation, quotation date, tax code, etc are shown in maintain quotation (ME47) and display quotation (ME48) transaction. In transaction create/edit/display RFQ (ME41/ME42/ME43), those fields are suppressed / hidden.
So, basically, when the buyer create RFQ (from ME57 or ME41 t-code), SAP create a new record in the EKKO table with the RFQ number as a primary key, and some records (same with the count of RFQ items) in the EKPO table with the RFQ number and RFQ item number as primary keys. At this stage, the quotation, quotation date, net price, tax code fields are blank. When the buyer maintain the quotation (input the vendor’s quotation information to SAP) with ME47 t-code, by entering the RFQ number in the initial screen, some fields such as the quotation, quotation date, net price (and other conditions), tax code, etc are input into SAP. The corresponding fields on the EKKO and EKPO tables are updated.
When a Quotation is maintained, the “Status of purchasing document” field (STATU) in EKKO table is updated from blank to A (RFQ with quotation). In EKPO table, the “RFQ status” field (STATU) of the RFQ items that have been maintained (not necessarily all items of the RFQ) are updated from blank to A (Quotation exists in case of RFQ item). With these fields, we can distinct which RFQ and RFQ items that have been maintained (have quotation) in ABAP programming.
When the buyer maintain quotations, he can use the info update indicator (a field in the item detail, EKPO table) to define whether the info record is to be created (if there is no info record for the material and vendor before) / updated (if there is an info record for the material and vendor before), or not. SAP will copy the conditions from the quotations to the info record.In the next article, I will explain about the 3rd step of Procurement Cycle, which is “vendor selection“.


5 thoughts on “Procurement Cycle: 2. Source of Supply Determination

  1. Hi Good day! This post was a very nice and very helpful for the Newbie in the SAP World!

    Keep it up! Many Thanks!

    -SAP Novice

  2. Pingback: Procurement Cycle - Vendor Selection | - Integrated ERP Software Solution Guide: SAP ERP

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