In large global companies, individual legal entities or even smaller group of business entities do their purchasing at their own level. This results in purchase of goods and services at smaller quantities which is costly and purchasing efforts are duplicated all over. If purchasing is done at corporate or larger level then economies of scale will kick in resulting in lower prices for purchases and duplicate purchase efforts are also eliminated.
How this is accomplished in SAP?
I have a case study of a very large steel manufacturer who had some 2000 vendors scattered around the world. Purchases were made at local level by many business groups. In many cases, the same vendors were supplying goods to these business groups. there was no central purchasing organization and all purchases were made without consideration of economies of scale or total purchasing effort duplication.
This steel manufacturer decided to centralize purchasing function at corporate level and decided to implement SAP. Here are the results after implementation was done and data was collected for one year after go live.
- Total number of vendor records reduced to only 2000 instead of existing 4500 records. This simplified procedures to deal with vendors as duplicate entries of vendors were totally eliminated
- Total purchasing effort in terms of processing number of invoices at finance department reduced to 60000 invoices per year compared to existing 140000 invoices.
- Saving in purchasing in terms of purchasing price of material achieved by 1.5%. this resulted in direct saving of $1.2 million. The cost of goods reduced due to purchasing of goods in large quantities instead of in smaller quantities.
A central purchasing organization was created at the corporate level. This purchasing organization was not assigned to any company code or plant. Then local purchasing organizations were created at plant level. Whenever a contract was made with vendors, it was done using the central purchasing organization. Later the contract was distributed to local purchasing organizations. Info record were created in the central contracts. These info records contained negotiated price of materials or services. Tax and transportation cost information was stored at local info records at plants. So cost of goods at plant level were calculated by adding the price at central contact and tax and transportation cost at local contract level.
One more part of the project was to eliminate duplicate entries of vendors. So vendor master creation and maintenance was moved to corporate office instead of at company code level.