SAP Material Management – An Engine to Supply Chain

SAP Material Management in S/4HANA Logistics

SAP Material Management is an integral part of Logistics. in SAP. Logistics in SAP incorporates a number of separate areas together. This is to follow the movement of materials from the manufacturer to the consumer. Logistics, in essence, is the management of business operations. These include the acquisition, storage, transportation and delivery of goods along the supply chain.

Likewise, a supply chain is a network of retailers, distributors, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.

SAP MM – As an Engine to the Supply Chain

MM is an integral part of the logistic function within SAP. While looking at SAP Material Management in the supply chain, it has three important functions.

Material Flow

A material flow describes the movement of materials from the supplier to your company and then to the customer. Companies integrate with suppliers and customers not just interact with them. Therefore any improvements that provide visibility into material flows allow the company to be flexible and responsive to its customers.

Financial Flow

A financial flow includes finance-related documents created at each material movement. If we evaluate a material, the system makes a movement, credit or debit between accounts. This is to reflect where the material’s value is moving from. For Example, Inventory Debit and accounts Payable clearing accounts.

Information flow

An information flow includes transmitting orders (EDI) and updating the status of all deliveries. Companies that can show customers’ and vendors’ viability by using real-time information have a distinct competitive advantage over others.

Key Logistics Process handled by SAP Material management

Some important logistics and supply chain business processes in which MM plays a central role include the following

Procure-to-Pay-Process

In the P2P business process, we can procure material in two ways.

• Either a business user creates a request manually
• Or the system generates it automatically through a material planning program. Such as material requirements planning (MRP).

In an SAP system, we create this material request as a purchase requisition. Here the system converts it into a request for quotation (RFQ) and sends it to relevant suppliers.

Upon receipt, the system also maintains quotes from suppliers in the RFQ.

Further, we perform a price comparison of all the quotations received and choose one supplier to supply the required material.

We mark the remaining quotations as rejected to prevent users from mistakenly processing these quotations further. We also send rejection letters to the rejected suppliers.

Subsequently, we convert the successful quotations into a procurement element. Such as a quantity or a value contract, a scheduling agreement or a purchase order (PO).

However, if this procurement element goes through an approval process, then the system triggers a release strategy (approval process). Once released or approved, the goods are received in the warehouse.

Finally, the system records the supplier’s invoice and verifies it via a three-way matching process. These include:-

• Purchase Order
• Goods received
• Invoice received

And then finally we generate payment to the supplier.

Plan-to-Product Process

In this business process, a company produce products in-house. The planning involves both production planning and planning for raw materials and packing materials, which a company often procures.

This planning takes place using a materials planning program such as material requirement planning (MRP). The plan-to-product business process triggers raw and packing materials procurement.

Once the company receives these materials in their warehouse, they can start the production process. As the required raw and packing materials to produce a product are now available in the warehouse.

A goods issuance for the raw and packing materials, to produce a product, involves the inventory management area of materials management. When the product is produced, that product is delivered to the warehouse which again is a part of SAP MM functionality.

Order to Cash

The order-to-cash business process begins when the company receives an inquiry from a customer for a product. It maintains this inquiry in SAP S/4 HANA Sales. The Salesperson issues a quotation to the customer with reference to the same inquiry. If the customer accepts the quotation, it is converted into a Sales Order.

Subsequently, when you are ready to deliver the product to the customer, the company issues the product from its warehouse with reference to the sales order.

Issuing products and an inventory management process is in the domain of Material Management.

Finally, once we receive payment from the customer, billing work takes place. Further, we record the payment in the accounts receivables (AR) of the SAP system.

Maintenance Management

In this process, we procure the spare parts and consumables required to maintain a plant’s Machinery or Assets. We do this in two ways:-

• Either using the procure-to-pay business cycle or
• Issued from the warehouse.

Both are an inventory management process of MM and include reference to a maintenance order in plant maintenance.

SAP Material Management Integration

Material Management can easily integrate with the other tools and functionalities within S4 HANA.

Material flow of the Supply Chain

A material flow is the movement of a material from the supplier to the customer. To initiate flow, we must create a material requirement with the PP functionality through an MRP system. Or we can also create it with a sales order in SAP S/4 HANA Sales.

Subsequently, we need to send a purchase requisition to the supplier, relating instructions on the delivery date, quantity and price. Post this, the vendor sends the material.

Once approved, the material may be stored in the warehouse using WM. It is further used in Production through Production Order in PP.

Finally, once Finished Stock is available for the customer, it is picked from the warehouse and shipped to the customer using the Sales Functionality.

Financial Flow of the Supply Chain

The flow of financial information in a supply chain includes:-

• Vendor invoices
• Vendor payments
• Billing the Customer for supplying materials and
• Incoming payments.

The vendor supplies materials to your company and sends an invoice for payment.

SAP Vendors can be paid in two ways:-

1. Payment on receipt of the materials (two-way match)
2. Payment on receipt of the vendor invoice (three-way match)

The Accounts Payable department carries out this function. The invoice verification process within the SAP system is an excellent example of the integration between MM and SAP S/4 HANA Finance.

The financial flow of the supply chain has not changed in magnitude even though the information and material flows may have.

Explore: SAP S/4HANA Finance Training

SAP Material Management- Managing the Supply Chain of the industry

In this blog, we discussed how MM functionality in SAP is the foundation of any SAP Implementation. We also understood, where SAP Material Management fit into the structure.

We can describe SAP Material Management as the engine that drives a supply chain within SAP. SAP MM also integrates with other SAP modules like Sales & Distribution and FICO.

Watch Related Video: SAP FI-MM Integration