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Promotion and Education Purchase Order Business Processes Fundamentals Promotion and Education Purchase Order Business Processes Fundamentals

Promotion and Education Topics Types of items purchased Types of purchase orders Components of Promotion and Education Topics Types of items purchased Types of purchase orders Components of the order cycle Pre-Order and Sourcing Order Cycle Lead times Order policies Typical system flow Communication Methods Emerging methods When the supplier gets the order … Purchase Order Business Processes Determining what to replenishment (setting stage for next class on Forecasting) © 2002 Computing Technology Industry Association, All rights reserved 2

Promotion and Education Background/Reference Available to public EIDX Business Models: Order Models http: //www. Promotion and Education Background/Reference Available to public EIDX Business Models: Order Models http: //www. eidx. org/publications/business_models/order/ordmodl. html EIDX class: “Purchase Order Business Processes” http: //www. eidx. org/publications/eidx. Classes. html Available to Task Group Members – will be incorporated into above references when task group has finalized the content EIDX working document: “Purchase Order Process Analysis” (available only to task team members) © 2002 Computing Technology Industry Association, All rights reserved 3

Promotion and Education Macro-level “business process” Macro-level Technology-independent business process example: A buyer orders Promotion and Education Macro-level “business process” Macro-level Technology-independent business process example: A buyer orders goods or services by sending a PO, a seller accepts the order for goods and services by sending a response; changes may occur Purchase Order PO Response BUYER © 2002 Computing Technology Industry Association, All rights reserved SELLER 4

Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface File Application Internet Rosetta. Net or Other XML EDI w/ XML Wrapper Rosetta. Net or Other XML Still the same if buyer Buyer’s Hub seller sends EDI PO and or Web sends EDI Application acknowledgment XML or proprietary Interface File Application Seller’s Hub or Web Application Extranet Fundamental definition applies regardless of technology © 2002 Computing Technology Industry Association, All rights reserved 5

Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface File Application Rosetta. Net or Other XML Still the same if EDI w/ supplier retrieves order XML from buyer’s web site Internet Wrapper (buyer is “sending” order to supplier’s Rosetta. Net desktop) or Other XML Buyer’s Hub or Web Application XML or proprietary Interface File Application Seller’s Hub or Web Application Extranet Fundamental definition applies regardless of technology © 2002 Computing Technology Industry Association, All rights reserved 6

Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface Promotion and Education VAN EDI File EDI w/ XML Wrapper XML or proprietary Interface File Application Internet Still the same if buyer orders via form on Rosetta. Net supplier’s web site or Other XML (buyer is “sending” order from his/her desktop to seller’s Buyer’s system) Hub or EDI w/ XML Wrapper Rosetta. Net or Other XML Web Application XML or proprietary Interface File Application Seller’s Hub or Web Application Extranet Fundamental definition applies regardless of technology © 2002 Computing Technology Industry Association, All rights reserved 7

Promotion and Education CM Hub Large Supplier Dist i Private Exchg Still the same Promotion and Education CM Hub Large Supplier Dist i Private Exchg Still the same if buyer accepts an auction bid Gateway that automatically generates a purchase order (the pre-order process is different) Large Supplier Small Suppli er Gateway Logisitic s Provider 3 PL Dist i Logisitic s Provider Public Exchange Small Suppli er Large Supplier Small Suppli er Public Exchange 3 PL Dist i Exchange + Repository Logisitic s Provider Large Supplier In this example, the buyer’s hub is interconnected to a public exchange. The first public exchange is is used by a distributor who issues a bid. The exchange is also connected to another exchange used by seller who issues a bid. Auction and reverse auction defined later in presentation. © 2002 Computing Technology Industry Association, All rights reserved 8

Promotion and Education Types of items purchased in Computing and Electronics* Assemblies/fabricated parts that Promotion and Education Types of items purchased in Computing and Electronics* Assemblies/fabricated parts that are inside manufactured computing and printing equipment Telecommunication and peripheral products that complement the computing equipment or are part of a system configuration Electronic Components that are used to build the assemblies * List is not exhaustive © 2002 Computing Technology Industry Association, All rights reserved 9

Promotion and Education Types of items purchased in Computing and Electronics* Wafers that are Promotion and Education Types of items purchased in Computing and Electronics* Wafers that are processed into electronic components (chips, diodes, etc. ) Raw material used to make the wafers Office supplies and equipment to run the company Services to support the production and physical plant * List is not exhaustive © 2002 Computing Technology Industry Association, All rights reserved 10

Promotion and Education Another View: Cost Accounting “Spend Areas” Direct material Indirect material Tooling Promotion and Education Another View: Cost Accounting “Spend Areas” Direct material Indirect material Tooling and Software Items that go directly into the product being built Items used as part of the manufacturing process Services Capital and other equipment Office supplies Software (other than software used in the manufacturing process) Items necessary for running the business typically 60% of an enterprise’s spend The commodity or accounting classification of the item being ordered may affect what is required on a purchase order. © 2002 Computing Technology Industry Association, All rights reserved 11

Promotion and Education What do we mean by “purchase order”? Definition: A commitment to Promotion and Education What do we mean by “purchase order”? Definition: A commitment to purchase goods and/or services from a vendor. The purchase order conveys information such as quantity description, and price of goods or services ordered. Terms and conditions may be specified in the purchase order document, or the PO may reference another document - a “global” terms and conditions agreement that applies to all orders unless specifically overridden Transportation requirements may be specified in the purchase order document or in the terms and conditions agreement © 2002 Computing Technology Industry Association, All rights reserved 12

Promotion and Education Purchase Order Roles In any purchase order transaction, the buyer is Promotion and Education Purchase Order Roles In any purchase order transaction, the buyer is not necessarily the end user and the seller is not necessarily the manufacturer. Buyer may be a Prime Contractor (PC, a/k/a OEM), Contract Manufacturer (CM), Distributor (DS), Value-Added Reseller (VAR), Third-party Purchasing Agent, etc. Seller may be a Component Supplier, Contract Manufacturer, Distributor, Third-party Exchange, etc. Seller may even be a “buyer” or “customer” disposing of excess purchased goods. The roles may affect what is required on a purchase order. © 2002 Computing Technology Industry Association, All rights reserved 13

Promotion and Education Types of Purchase Orders An order is either a discrete PO Promotion and Education Types of Purchase Orders An order is either a discrete PO or a blanket PO. Confusion arises because there are many types of orders and many terms being used in different ways by different people Discrete PO: A one-time commitment to a vendor for material. Typically, such an order my be for inventory parts or for non-inventory materials and services. Blanket Purchase Order (BPO) is a long-term commitment to a vendor for material against which short-term releases will be generated to satisfy requirements. © 2002 Computing Technology Industry Association, All rights reserved 14

Promotion and Education Types of Purchase Orders 1. Identified as Standard Catalog Order Warranty/Service Promotion and Education Types of Purchase Orders 1. Identified as Standard Catalog Order Warranty/Service Still need to determine if some are synonyms 1. Job Order Contract Order 2. Service Order 4. Direct Procurement PO 3. Repair Order 5. Drop-Ship Order – routinely used ship-to address 4. Replacement Order 5. Warranty Order Standard Configuration Order 6. Work Order (for services) 2. Confirming Order 3. 6. 7. Spot-buy PO (but not all spot-buy Pos) Blanket PO Types Synonyms/legal terms Could apply to “standard” or some of the other order types A. Customer Order To be categorized Some could be “standard” 1. Bill-only PO 2. Build-to-Order (BTO) 3. Configure-to-Order (CTO) 4. Consignment Order 5. Drop-Ship Order – nonroutine ship-to address 6. Government Order 7. Internal Order 8. New customer or infrequent customer (not an established account) 9. Spot-buy PO 1. Still need to determine if some are synonyms Blanket PO 2. Evergreen Order D. Standalone PO 12. Work Order for MRP 3. Standing Purchase Order E. Trade Order 13. Replenishment Order B. Intra-company Order 10. Requisition PO C. Sales Order 11. Subcontract Order © 2002 Computing Technology Industry Association, All rights reserved 15

Promotion and Education Types of Purchase Orders “Standalone” is used as a synonym for Promotion and Education Types of Purchase Orders “Standalone” is used as a synonym for “discrete” PO. Technically, a discrete PO is really only “standalone” if all terms are contained on the PO itself, rather than referring to any separate, terms and conditions agreements. Increasingly, the term “Standard PO” is being used when referring to discrete purchase orders for “Direct Procurement”, which is the procurement of direct material (defined on previous slide). “Confirming” means that the PO is being sent to confirm an order that has already been placed verbally. © 2002 Computing Technology Industry Association, All rights reserved 16

Promotion and Education Types of Purchase Orders may be “configure-to-order”. The system components may Promotion and Education Types of Purchase Orders may be “configure-to-order”. The system components may individually be catalog or standard product, but the combination of components for a system are customized. A custom configuration may be assigned a GIAI (Global Individual Asset Identifier). GIAI belongs to one, and only one asset or system. If the seller determines that a certain custom configuration is ordered frequently (several GIAI’s contain identical components and configuration), that configuration may become a standard configuration and be assigned a GTIN. An order may be “build-to-order”, if a customized product is being built for a particular customer. © 2002 Computing Technology Industry Association, All rights reserved 17

Promotion and Education Types of Purchase Orders may be for a seller’s “standard” or Promotion and Education Types of Purchase Orders may be for a seller’s “standard” or “off-the-shelf” product. This may be called a “catalog order”. The seller’s catalog may be publicly available (on the web, etc. ), or the seller may have previously provided a public or customer-specific catalog to the buyer; the order references the fact that the pricing comes from the catalog Orders may be for a “standard configuration” for a system, i. e. a personal computer may be sold in a package that includes a default memory chip, default accessories, etc. A “standard configuration” is assigned a part number (such as a GTIN - Global Trade Item Number - a standard for part numbers) that represents the configured system. The individual components have their own part numbers, but the part number of the configured system is what goes on the purchase order. The part number for “standard configuration” may be part of the seller’s catalog. © 2002 Computing Technology Industry Association, All rights reserved 18

Promotion and Education Types of Purchase Orders The buyer and seller may have previously Promotion and Education Types of Purchase Orders The buyer and seller may have previously negotiated a contract (purchase agreement) which sets pricing a period of time. There may be more than one contract between a buyer and seller, as some commodities may have more or less volatility in pricing. A short term contract would be used where pricing is volatile but partners want to freeze pricing for a month or two. A longer term contract would be used for commodities that have fairly stable pricing. The contract may specify conditions under which the contracted pricing does not apply. The order references the fact that the pricing comes from the contract A contract for systems may specify pricing for standard configurations, or the contract may establish pricing for a customer-specific configuration which is being purchased repetitively; the customer-specific configuration in this case is assigned a part number. © 2002 Computing Technology Industry Association, All rights reserved 19

Promotion and Education Types of Purchase Orders A “drop ship” order is a type Promotion and Education Types of Purchase Orders A “drop ship” order is a type of discrete order where a buyer places an order to have goods shipped to third party. Often confused with “consignment” because the inventory shipped to the third party is usually consigned, i. e. physically in the possession of the 3 rd party, but not owned by that party. Inventory is consigned from seller’s perspective if seller retains ownership while 3 rd party possesses inventory. Inventory is consigned from buyer’s perspective if seller transfers ownership to buyer when inventory is shipped to the 3 rd party. © 2002 Computing Technology Industry Association, All rights reserved 20

Promotion and Education Types of Purchase Orders Consignment can apply to situations other than Promotion and Education Types of Purchase Orders Consignment can apply to situations other than a drop ship to a third party. A buyer and a seller in a bilateral (two party) relationship can set up a consignment program. There are two schools of thought as to whethere’s such a thing as a distinct “consignment order” type. For some, an order is an order. Consignment is something prenegotiated, and each party’s system know whether or not a part is on the consignment program. Others want an order explicitly identified as a “consignment order” because they have problems with customers putting parts on the consignment program without notifying the seller in advance. Regardless, the content of the “consignment order” is not significantly different from the content of a non-consignment order. © 2002 Computing Technology Industry Association, All rights reserved 21

Promotion and Education Types of Purchase Orders A bill-only PO is typically used in Promotion and Education Types of Purchase Orders A bill-only PO is typically used in a consignment process. The goods have been shipped to the consignee via one purchase order. When the event occurs that triggers the transfer of ownership, the consignee sends another PO to the seller. This second PO is the ‘bill-only PO’ and it’s purpose is to trigger invoice/payment process; no goods are shipped (they were already shipped on the first PO). EIDX and Comp. TIA do not recommend the use of bill-only purchase order for consignment The emerging use for bill-only PO is the case where software has been downloaded from a web site or otherwise provided for trial usage, and a bill-only purchase order, usually for creditcard payment, is placed after-the-fact. © 2002 Computing Technology Industry Association, All rights reserved 22

Promotion and Education Types of Purchase Orders The term “Requisition” is commonly used for Promotion and Education Types of Purchase Orders The term “Requisition” is commonly used for non-inventory materials and services. Generally, the “requisition” is the request sent to the purchasing department. To fulfill the requisition, depending on the need, the buyer may place a discrete PO, launch a “spot-buy” order process, or fulfill the order via an existing blanket purchase order. A spot-buy PO is a discrete order for an unplanned purchase not made under contract terms. The purchase usually made on a one-time basis, usually to fulfill a short-term need, such as the need to acquire parts on an emergency basis to replace damaged parts or to fulfill unexpected customer demand. A spot-buy PO may also be used to purchase material being auctioned by a seller, or to award a seller that has won a reverse -auction bid. The seller in a spot-buy may or may not be the seller the buyer usually obtains the item(s) from Auction and reverse auction defined later in presentation © 2002 Computing Technology Industry Association, All rights reserved 23

Promotion and Education Types of Purchase Orders “Trade Order” and “Intra-company Order” are legal Promotion and Education Types of Purchase Orders “Trade Order” and “Intra-company Order” are legal distinctions. A trade order is any purchase order transaction with another company. An intra-company order is a purchase order transacted between organizations within the same company. Companies in most jurisdictions must be able to maintain these distinctions by law. An Internal Order is a type of intra-company order. The order could be for stockroom inventory transfer or for products that the selling organization also provides to external customers on trade orders. © 2002 Computing Technology Industry Association, All rights reserved 24

Promotion and Education Types of Purchase Orders A Work Order is an order authorizing Promotion and Education Types of Purchase Orders A Work Order is an order authorizing specific work, repairs, etc. , to be done. Work orders historically were intra-company, with company roles pre-defining the relationship between service provider and service user. Work Order is now sometimes used synonymously with Service Order. A Work Order (usually spelled workorder) is also used to schedule the shop floor; in Material Requirements Planning (MRP), the work order for the product or subassembly to be built is “exploded” against a Bill of Materials to generate component demand. The MRP workorder was historically intra-company, but in these days of virtual enterprises, workorders may be sent to the external partners to whom manufacturing work has been outsourced. A Job Order is used synonymously with Work Order. © 2002 Computing Technology Industry Association, All rights reserved 25

Promotion and Education Types of Purchase Orders Customer Service and Support processes for products Promotion and Education Types of Purchase Orders Customer Service and Support processes for products use specialized types of order processes for services, repair and/or replacement of goods. Service orders (Order for services) can be one-time requests, part of a warranty and/or service package, or a blanket agreement for miscellaneous services. Repairing items is a “service”. Repairs may be part of a warranty process, and the repair order is sometimes called “warranty order”. If items can’t be repaired, terms of the warranty or service package may specify conditions for replacement. The “replacement order” may be paired with a “return order” for the items being replaced. Orders for services not associated with products (e. g. for consulting services, contract employees) may use a name other than “purchase order”, such as Professional Services Agreement (PSA). © 2002 Computing Technology Industry Association, All rights reserved 26

Promotion and Education Self Study: See EIDX web site - Order Model Supporting Documentation Promotion and Education Self Study: See EIDX web site - Order Model Supporting Documentation * Types of Purchase Orders Blanket Purchase Order (BPO) is a long-term commitment to a vendor for material against which short-term releases will be generated to satisfy requirements. The BPO defines specific terms, conditions, and pricing terms not already contained in or more specific than terms in the contractual agreement. The general recommendation is that a BPO is issued for a single item, however, trading partners may agree to process multiple item BPO's. A comprehensive list of reasons for this recommendation is on the EIDX web site (URL below). An “evergreen” BPO is a renewable BPO. More information is available on the EIDX web site (URL below). * http: //www. eidx. org/publications/business_models/order/ordmodl_support. html © 2002 Computing Technology Industry Association, All rights reserved 27

Promotion and Education Types of Purchase Orders There are multiple ways a BPO can Promotion and Education Types of Purchase Orders There are multiple ways a BPO can be set up A BPO may specify a firm or estimated total quantity with no delivery schedules specified; in this case, releases are issued later either by way of a material release planning schedule or by way of discrete releases. A BPO may specify a total quantity and predetermined delivery schedules; in this case, blanket change orders are used to make adjustments to the delivery schedules. Instead of specifying any quantity (firm or estimated), a BPO may specify a total value (e. g. total number of dollars) to be purchased. This type of BPO is also called “standing purchase order”. Finally, a blanket order might be issued as a vehicle to ship against, where the TCA calls out that quantity commitments are forecast-based. © 2002 Computing Technology Industry Association, All rights reserved 28

Promotion and Education Types of Purchase Orders When should blanket orders be used? A Promotion and Education Types of Purchase Orders When should blanket orders be used? A generally accepted guideline is that a blanket purchase order is cost-effective if a buyer anticipates purchasing an item from the same supplier more than six times per year. The use of a BPO eliminates the necessity of issuing a new PO at the time of each release, resulting in efficiency and administrative cost savings. Minimum dollar amounts and minimum time periods BPO's may cover should be decided between trading partners. A standing purchase order (type of BPO) is cost-effective in the purchase of repetitive, low cost, expendable items from one vendor, in order to avoid the processing costs associated with standalone orders. © 2002 Computing Technology Industry Association, All rights reserved 29

Promotion and Education Types of Purchase Orders Regardless of what it’s called, there is Promotion and Education Types of Purchase Orders Regardless of what it’s called, there is always something that serves the legal function of “purchase order”. For the remainder of the class, we will focus on orders for physical materials, and especially on procurement of direct materials. © 2002 Computing Technology Industry Association, All rights reserved 30

Promotion and Education Before it’s an Order When folks talk about different procurement models, Promotion and Education Before it’s an Order When folks talk about different procurement models, often the differences are in the preorder processes - what happens before something becomes an order. There are some major categories: Sourcing: Determining who to buy from and establishing their technical and financial qualifications Pricing: Determining what the cost of the product or service will be Planning: Anticipating what will be ordered, based on a buyer’s forecasted build plan or on historical usage These are factors in the lead time for procuring a product. © 2002 Computing Technology Industry Association, All rights reserved 31

Promotion and Education Pre-Order and Sourcing means: Qualifying an existing approved supplier for a Promotion and Education Pre-Order and Sourcing means: Qualifying an existing approved supplier for a new product Qualifying an existing approved supplier for an old product they did not previously supply Finding and qualifying a new supplier for old and/or new products. If there is no supplier who provides what you want with the quality that you require, you can built it yourself or fund the startup of a new supply source e. g. HP, Compaq and others funding startup of Converge, Inc. © 2002 Computing Technology Industry Association, All rights reserved 32

Promotion and Education Pre-Order and Sourcing Identifying sources and settling on pricing are often Promotion and Education Pre-Order and Sourcing Identifying sources and settling on pricing are often done together. When the source is established, there may still be a need to readdress pricing, either order by order, or for long-term contracts. These are methods for sourcing and pricing: Quote process: Buyer sends request for quotation and seller responds with a quote Quote may include lead time commitment, pricing, product availability, etc. Catalogs: Seller’s “public” catalog or a customerspecific catalog of products and pricing. © 2002 Computing Technology Industry Association, All rights reserved 33

Promotion and Education Pre-Order and Sourcing and pricing methods (continued): Contracts: Long term agreements Promotion and Education Pre-Order and Sourcing and pricing methods (continued): Contracts: Long term agreements for pricing and listing of which products the pricing applies to Auctions, reverse auctions: defined on later slide Account setup: Getting a new customer or supplier set up in partner systems * This is an example of a problem that is often perceived as a purchase order problem because purchase orders are typically the first transaction type a company moves to an e. Business solution. There may be fewer problems with purchase order implementations if setup of partner identification data, including ship-to, bill-to and other location types, is handled during the account setup stage. * Don’t add more fields to your “standard” purchase order to compensate for the problem. Fix the problem at its source and keep your standard PO simple. © 2002 Computing Technology Industry Association, All rights reserved 34

Promotion and Education Pre-Order and Sourcing and pricing methods (continued): Product setup: Exchanging part Promotion and Education Pre-Order and Sourcing and pricing methods (continued): Product setup: Exchanging part data, product categorization, etc. for new product or for new source This is another example of a problem that is often perceived as a purchase order problem because purchase orders are typically the first transaction type a company moves to an e. Business solution. * There may be fewer problems with purchase order implementations if setup of product identification data, including cross-references between buyer and seller product identifiers, is handled during the account setup stage. * Don’t add more fields to your “standard” purchase order to compensate for the problem. Fix the problem at its source and keep your standard PO simple. Many of sourcing, pricing and forecasting methods are worthy of classes by themselves. This presentation just covers enough to understand the impact on purchase order processes. © 2002 Computing Technology Industry Association, All rights reserved 35

Promotion and Education Order Cycle Lead Times Information LT - how long it takes Promotion and Education Order Cycle Lead Times Information LT - how long it takes to get the information needed to get the ordering started Negotiation lead time - how long it takes to establish pricing and terms for a single order (see also ‘contracting lead time’ on later slide) Order lead time (LT) - how long it takes to order it Includes how long it takes to get the order from buyer to seller Admin LT - how long the document preparation and signature gathering takes © 2002 Computing Technology Industry Association, All rights reserved 36

Promotion and Education Order Cycle Lead Times Manufacturing LT - how long it takes Promotion and Education Order Cycle Lead Times Manufacturing LT - how long it takes to build it Transit time - how long it takes to transport ordered item Material Handling LT - how long it takes to get from the truck at the back door to the product line on the floor Testing/quality assurance LT - how long it takes seller to inspect outgoing material and how long it takes the buyer to inspect incoming material © 2002 Computing Technology Industry Association, All rights reserved 37

Promotion and Education Order Cycle Lead Times Long-term relationships Contracting lead time - how Promotion and Education Order Cycle Lead Times Long-term relationships Contracting lead time - how long it takes to set up long-term contracts. Ideally, this is happening in parallel with daily procurement activities. Impact of quality problems Rework/repair LT If you don’t have sufficient safety stock on hand, do you order more goods or wait for what you’ve gotten in to be repaired or reworked? Safety stock = Inventory reserved for protection against fluctuations in demand and/or supply © 2002 Computing Technology Industry Association, All rights reserved 38

Promotion and Education Order Cycle Lead Times New products and/or new vendors Sourcing LT Promotion and Education Order Cycle Lead Times New products and/or new vendors Sourcing LT - How long it takes to find a new source for an item Engineering Development LT - How long it takes to make engineering changes to a product or component Vendor Technical Qualification LT - How long it takes to qualify a vendor for their ability to provide reliable, highquality goods Additionally, the vendor may need to be qualified to provide components product-by-product Vendor Financial Qualification LT - The time it takes to determine that the vendor is financially reliable and is likely to remain in business for the foreseeable future. © 2002 Computing Technology Industry Association, All rights reserved 39

Promotion and Education Order Cycle Lead Times Aggregated lead time from raw material supplier Promotion and Education Order Cycle Lead Times Aggregated lead time from raw material supplier to end consumer Final product to ship Assembly to final product Component to assembly Wafer to component Silicon into wafer Sand into silicon Rocks into sand A wafer can take 6 months to process A Boeing jet takes 3 years from quote to cash Good forecasting is the most important factor in reducing lead time, so that manufacturer’s can build ahead with some confidence of selling what’s built. © 2002 Computing Technology Industry Association, All rights reserved 40

Promotion and Education Accelerating the Supply Chain In Supply Chain Management, all IT projects Promotion and Education Accelerating the Supply Chain In Supply Chain Management, all IT projects are about reducing cost and reducing cycle time. When evaluating the impact of a solution, the evaluation of the impact of the change should look at the supply chain holistically - the whole supply chain process, not just parts. Ask this important question: Does the solution reduce the overall cycle time and/or cost, or does it just shift it somewhere else, or, even worse, does it increase cycle time and/or cost in another part of the whole process? © 2002 Computing Technology Industry Association, All rights reserved 41

Promotion and Education Order Policies A good Procurement application helps automate generation of orders Promotion and Education Order Policies A good Procurement application helps automate generation of orders to conform to buyer’s and seller’s order policies Minimum order quantity or minimum dollar value of order Pre-pack sizes (number of units in a package) Whether or not one order can contain more than one ship-to (sold-to) location Whether or not direct and indirect materials can be ordered on same PO Maximum number of items per PO © 2002 Computing Technology Industry Association, All rights reserved 42

Promotion and Education Typical System Processing Generation of demand is covered later, but once Promotion and Education Typical System Processing Generation of demand is covered later, but once demand exists … The ERP application typically transfers orders to a procurement application; some ERP applications include a procurement function. The system may assemble items for the same supplier onto one or more orders, based on order policies and order parameters The system may automatically format and transmit the order if all the necessary information is configured in the system “Formatting” can be for hardcopy print, or can be the creation of a file in a proprietary or standard format If any information is missing, the system may create an exception for the buyer to review. In this case, the buyer has to manually release the order for transmission © 2002 Computing Technology Industry Association, All rights reserved 43

Promotion and Education DC , CO Gross Requirements Div MRP PM 2020 x PM Promotion and Education DC , CO Gross Requirements Div MRP PM 2020 x PM 2400 J/ PM 2400 P PM 2400 J/ PM 2450 P GENPO Scenes This is an example! PM 2400 D POPLAN Behind the PM 5100 J/ POLOAD PM 2605 J/ PM 2605 P Ex ce pt io ns PM 6100 J/ PM 6100 P PM 5100 J/ POFORMAT PM 5150 J/ POPRINT Code Definitions PM 6562 D PM 2606 D PM 6580 D Paper CO PM 2480 D PM 6335 J/ PM 6335 P PM 6590 R PM 5120 R PM 6335 R TIC NO IP SH PM 6332 D PM 2604 D PO AC Ks PM 6331 D PM 6330 J/ PM 6330 P PM 6590 J/ PM 6590 P PM 5120 J/ PM 5120 P ES PM 2602 D PM 6580 J/ PM 6580 P IPOTRAX PM 5804 D Paper PO PM 2480 J/ PM 2480 P HPP PM 5801 R PM 2601 R OPENPO PM 2603 D PM 2606 J/ PM 2606 P PM 5120 W PARMS DC, D V PM 2605 D PM 2024 D FORMAT PM 2600 J/ PM 2600 P Code Definitions PM 6330 D PM 6561 D LEGEND CHANGE ORDERS Division-Direct FORECASTS Gateway Purchase Orders CONSOLIDATED FORECASTS © 2002 Computing Technology Industry Association, All rights reserved PROCESS FLOW DB READ/UPDATE 44

Promotion and Education Typical System Processing At the buyer’s Gateway or Message Broker If Promotion and Education Typical System Processing At the buyer’s Gateway or Message Broker If the format of the transmission file created by the procurement system is proprietary, the file may be sent to a a gateway application which may invoke translation of the order file into a standard format, such as X 12, EDIFACT, Rosetta. Net XML or other XML standard. The “gateway” may be inside the enterprise or may belong to a service provider outside the enterprise © 2002 Computing Technology Industry Association, All rights reserved 45

Promotion and Education Example of Data Flow Inside the Enterprise Interface Files POs, Chg Promotion and Education Example of Data Flow Inside the Enterprise Interface Files POs, Chg Ords, Forecasts, etc. Gateway PO Acks, ASNs Invoices © 2002 Computing Technology Industry Association, All rights reserved Procurement Application Finance Application 46

Promotion and Education Order Communication Methods Comp. TIA survey results released February, 2001 © Promotion and Education Order Communication Methods Comp. TIA survey results released February, 2001 © 2002 Computing Technology Industry Association, All rights reserved 47

Promotion and Education Base Technology Options - User View EDI File XML or proprietary Promotion and Education Base Technology Options - User View EDI File XML or proprietary Interface File EDI w/ XML Wrapper XML Standard Application Dial-up – PTP, VAN or ISP Internet – PTP, VAN or ISP Buyer’s Web Application Seller’s Web Application EDI File EDI w/ XML Wrapper XML or proprietary Interface File XML Standard Application Extranet, VPN, or 3 rd Party VPN © 2002 Computing Technology Industry Association, All rights reserved 48

Promotion and Education Emerging Methods Exchanges (public, private) Trading partner communities/trading hubs Type of Promotion and Education Emerging Methods Exchanges (public, private) Trading partner communities/trading hubs Type of private exchange; participants must be members of the trading community Auction: Items or services available for sale are posted by sellers, and buyers place bids for them (a/k/a “standard” auction). Reverse Auction: Buyers post their needs and or what price range they are looking for, and suppliers bid for the business. © 2002 Computing Technology Industry Association, All rights reserved 49

Promotion and Education Network of Hubs, Exchanges, Marketplaces OEM Small Suppli er CM Hub Promotion and Education Network of Hubs, Exchanges, Marketplaces OEM Small Suppli er CM Hub Large Supplier Small Suppli er VAN Dist i Clearinghouse Logisitic s Provider 3 PL Dist i CM OEM Small Suppli er Dist i Public Exchange Large Supplier 3 PL Logisitic s Provider © 2002 Computing Technology Industry Association, All rights reserved Exchange + Repository Large Supplier Logisitic s Provider 50

Promotion and Education Then, when the seller gets the order Typical processing steps * Promotion and Education Then, when the seller gets the order Typical processing steps * * Most of this is “overhead” processing that can be avoided by setting up repeat-buy products on blanket purchase orders, then generating releases for replenishment. Determine if customer is a valid customer and information is current Company name Addresses Credit status Tax certificate number Documentation requirements (certificate of conformance, etc. ) Determine if the trading partner agreement or contract is valid © 2002 Computing Technology Industry Association, All rights reserved 51

Promotion and Education Then, when the seller gets the order Typical processing steps Determine Promotion and Education Then, when the seller gets the order Typical processing steps Determine if it’s a new PO If it’s not new, is it a confirming PO or a duplicate? Determine whether the product a valid product If it’s a configured system, determine whether the configuration is standard or customized Determine if there has been product revision since last order Determine product availability Is it an order for something that has been forecasted? If forecasted, is product allocated in the system? If not forecasted, is the product available? Determine if the pricing is correct © 2002 Computing Technology Industry Association, All rights reserved 52

Promotion and Education Then, when the seller gets the order Typical processing steps, continued Promotion and Education Then, when the seller gets the order Typical processing steps, continued Generate order acceptance * * The order acceptance completes the contract. Same day ship may skip PO Acknowledgment generation and go right to ship notice generation. The ship notice still implies order acceptance PO acknowledgment should be generated if not same day ship (or if customer requires it), and indicates order acceptance Fulfill the order © 2002 Computing Technology Industry Association, All rights reserved 53

Promotion and Education Part II Purchase Order Business Processes in Computing and Electronics Industries Promotion and Education Part II Purchase Order Business Processes in Computing and Electronics Industries

Promotion and Education Replenishment Scenarios Self Study: Complete table on EIDX web site - Promotion and Education Replenishment Scenarios Self Study: Complete table on EIDX web site - Replenishment Scenarios * Business process scenarios are made up of component business models; component business models represent “implementable chunks” of processes. * http: //www. eidx. org/publications/business_models/replenishment/replmodl. html © 2002 Computing Technology Industry Association, All rights reserved 55

Promotion and Education Purchase Order Process At a fundamental level, the process could be Promotion and Education Purchase Order Process At a fundamental level, the process could be described as “send PO, acknowledge PO”. Similarly, one can look at changes as “request change, respond to change”. This same fundamental process holds for all order types. © 2002 Computing Technology Industry Association, All rights reserved 56

Promotion and Education Self Study: Business model is on EIDX web site - Replenishment Promotion and Education Self Study: Business model is on EIDX web site - Replenishment Scenario 1* Replenishment Scenario 1 Purchase Orders are best understood in the context of replenishment scenarios. In this scenario, the replenishment trigger is the order, and so all the overhead associated with an order applies. Lead time is usually order lead time + all or part of the manufacturing lead time + some of the other lead time components, such as transit time. * http: //www. eidx. org/publications/business_models/replmodl 1_activity. html © 2002 Computing Technology Industry Association, All rights reserved 57

Promotion and Education Overview - Discrete PO This traditional representation used for electronic exchanges Promotion and Education Overview - Discrete PO This traditional representation used for electronic exchanges is a user -friendly type of “use case” diagram. It’s a summary of interactions with “the system”. In the case of Discrete PO, the interactions take the form of a few messages that are exchanged (middle of the diagram. © 2002 Computing Technology Industry Association, All rights reserved 58

Promotion and Education This activity diagram is easier to see on the EIDX web Promotion and Education This activity diagram is easier to see on the EIDX web site Order Model 1 - Activity Diagram * The actual processing life cycle of a purchase order is a bit more complex than just “send PO, acknowledge PO”. 1. The buyer creates and sends an order. 2. The seller responds to the order. . . … and during the lifetime of the order the supplier may re-acknowledge the order. 3. The buyer processes response or reacknowledgment or sellerrequested change. In initial response, order is either accepted or rejected. * http: //www. eidx. org/publications/business_models/order/ordmodl 1_activity. html © 2002 Computing Technology Industry Association, All rights reserved 59

Promotion and Education 4. When seller acknowledges or reacknowledges with changes, it is essentially Promotion and Education 4. When seller acknowledges or reacknowledges with changes, it is essentially supplierrequested change to the PO. The buyer has to decide whether or not to accept the changes. 5. Buyer responds to either reject, accept or send a counterproposal to supplier’s changes. 6. Buyer may initiate a change request during the PO’s life cycle. 7. The seller may respond by rejecting, accepting or sending a counterproposal to the buyer’s changes. © 2002 Computing Technology Industry Association, All rights reserved 60

Promotion and Education Overview - Blanket PO This is very similar to the model Promotion and Education Overview - Blanket PO This is very similar to the model for the discrete PO. © 2002 Computing Technology Industry Association, All rights reserved 61

Promotion and Education The activity diagram for a Blanket PO looks exactly like the Promotion and Education The activity diagram for a Blanket PO looks exactly like the activity diagram for the discrete PO. When you isolate maintenance of the order, the process looks same. The differences are the context and fundamental process, and contents of the transactions. for the details regarding what changes are allowable. This activity diagram is easier to see on the EIDX web site Order Model 2 - Activity Diagram * * http: //www. eidx. org/publications/business_models/order/ordmodl 2_activity. html © 2002 Computing Technology Industry Association, All rights reserved 62

Promotion and Education Replenishment Scenario 2 In this scenario, the replenishment trigger is a Promotion and Education Replenishment Scenario 2 In this scenario, the replenishment trigger is a separate signal than the order. By using a BPO, most of the overhead has occurred up front, so release signals require very little processing. Lead time depends on contractual arrangements for liability, and with a good contract, lead time can be reduced essential to transittime (next slide). Self Study: Business model is on EIDX web site Replenishment Scenario 2 * http: //www. eidx. org/publications/business_models/replenishment/replmodl 2_activity. html © 2002 Computing Technology Industry Association, All rights reserved 63

Promotion and Education Example of Agreement for Liability and Volume /Schedule Flexibility Frozen Window Promotion and Education Example of Agreement for Liability and Volume /Schedule Flexibility Frozen Window Financial Commitment for Finished Components Trade-Off Window Financial Commitment for Subassemblies and Raw Material Planning Window Forecast Visibility Only. No Financial Commitment Length of each window may vary by commodity è Frozen window may be equal to transit time for off-the-shelf parts if buyer's volume is comparatively small è Frozen window may be several weeks for custom parts or if buyer has exceptionally high volumes l. Default windows may be negotiated with overrides/exceptions by part number and/or order l Contracts can also cover allowable demand fluctuation. This will be covered in class on forecast-based replenishment processes. © 2002 Computing Technology Industry Association, All rights reserved 64

Promotion and Education This activity diagram is easier to see on the EIDX web Promotion and Education This activity diagram is easier to see on the EIDX web site - Order Model 3 A - Activity Diagram * * http: //www. eidx. org/publications/business_models/order/ordmodl 3 a_activity. html © 2002 Computing Technology Industry Association, All rights reserved 65

Promotion and Education This activity diagram is easier to see on the EIDX web Promotion and Education This activity diagram is easier to see on the EIDX web site Order Model 3 A - Activity Diagram * 1. The buyer checks to see if BPO covers replenishment requirement or needs to be renewed. 2. If BPO needs to be renewed, BPO order model is invoked. 3. If BPO is still valid, buyer releases replenishment signal for transmission to the seller. 4. Seller processes release. A response may only be required if for some reason the seller cannot fulfill the demand on time, but this should be an exception case and actual response is immediate shipment. 5. Hopefully if contractual agreement has allowed releases to be issued with minimal lead time, changes to releases should be minimal. * http: //www. eidx. org/publications/business_models/order/ordmodl 3 a_activity. html © 2002 Computing Technology Industry Association, All rights reserved 66

Promotion and Education Replenishment Scenario 3 This scenario is very similar to Replenishment Scenario Promotion and Education Replenishment Scenario 3 This scenario is very similar to Replenishment Scenario 2, except that here, the replenishment trigger is a embedded in forecast file, so some steps in the model for the buyer-managed release are here in the scenario model instead. But … it’s still a release against an established BPO. Self Study: Business model is on EIDX web site Replenishment Scenario 3 © 2002 Computing Technology Industry Association, All rights reserved 67

Promotion and Education Replenishment Scenario 4 This is the supplier-managed inventory scenario, where the Promotion and Education Replenishment Scenario 4 This is the supplier-managed inventory scenario, where the supplier determines what to release. It’s still a release against an established BPO. Self Study: Business model is on EIDX web site Replenishment Scenario 4 © 2002 Computing Technology Industry Association, All rights reserved 68

Promotion and Education The processing is similar to buyer-managed release, with a couple of Promotion and Education The processing is similar to buyer-managed release, with a couple of exceptions. 1. The seller checks the buyer’s BPO to see if it covers replenishment requirement or needs to be renewed. 2. The seller issues and processes a release in their system just as if the buyer had issued the release. © 2002 Computing Technology Industry Association, All rights reserved 69

Promotion and Education More Purchase Order Issues As mentioned earlier, some problems that is Promotion and Education More Purchase Order Issues As mentioned earlier, some problems that is often perceived as a purchase order problem because purchase orders are typically the first transaction type a company moves to an e. Business solution. Likewise, some problems are perceived as EDI issues because historically, EDI has been the first e. Business solution implemented. The differences are really differences in assumptions about the business process that went into the design of partners’ applications, and has little to do with specific implementation technology. Examples on the next slide. . . © 2002 Computing Technology Industry Association, All rights reserved 70

Promotion and Education Examples of why the data format standard is not the problem. Promotion and Education Examples of why the data format standard is not the problem. . . The buyer’s system allows multiple line items per order and multiple schedules per line item. The seller’s system only allows one line item/one delivery schedule per order The buyer’s system allows shipto location at the line item level and multiple ship-to locations per order. The seller’s system allows shipto location only at the header level, one ship-to location per order. The supplier’s system splits a delivery by creating a new line item on the PO. The buyer’s system cannot process the acknowledgment because the new line item is invalid, and the buyer’s system is expecting a delivery split to become a new sub-line item on the existing line item. © 2002 Computing Technology Industry Association, All rights reserved 71

Promotion and Education More Purchase Order Issues There are often disagreements about what should Promotion and Education More Purchase Order Issues There are often disagreements about what should and should not be automated Fact of life: some decisions need to be made by human beings; artificial intelligence has not evolved to the point where machines can make all decisions Example: Processing of acknowledgments where the supplier’s response is to take one of the buyer’s requested deliveries and split it into two deliveries with two different dates How does the buyer’s application know whether or not the change made by the supplier is acceptable? Doesn’t the buyer always have to review such a situation and make a decision about what follow-up action to take? © 2002 Computing Technology Industry Association, All rights reserved 72

Promotion and Education More Purchase Order Issues There are often disagreements into what level Promotion and Education More Purchase Order Issues There are often disagreements into what level of exception handling should be designed into the B 2 B process When deciding whether the system should handle processing of an exception is needed, one has to evaluate the number of incidences of the exception and the risk to the trading partners if the exception is not caught by the application against the cost of building the exception handling in. Example: Sequence checking PO documents to ensure that all acknowledgments and changes are processed in the right order. If there are so many changes occurring that this is a problem, wouldn’t it be more effective to find out why the order management process is so out of control that multiple changes are occurring? © 2002 Computing Technology Industry Association, All rights reserved 73

Promotion and Education More Purchase Order Issues Seller-initiated change - seller requests a change Promotion and Education More Purchase Order Issues Seller-initiated change - seller requests a change to an order: Some say this is a distinctly different process than a seller acknowledging or re-acknowledging an order with changes to the buyer’s requested dates, quantities, pricing, etc. , and that a different set of transactions are needed. Others argue that a change is a change - it’s just another PO response. Does it make a difference? Well, in the later case, the PO response mapping can be used to process a sellerinitiated change; in the former case, it means yet another set of maps that are part of the purchase order management package. In X 12 and EDIFACT, seller-initiated changes are handled in PO response documents. Rosetta. Net is developing separate PIPs for seller-initiated change. © 2002 Computing Technology Industry Association, All rights reserved 74

Promotion and Education Determining What to Order Setting the Stage for Exploring Replenishment Processes Promotion and Education Determining What to Order Setting the Stage for Exploring Replenishment Processes

Promotion and Education Determining what to Order Needs may be … Based on a Promotion and Education Determining what to Order Needs may be … Based on a request (a requisition) Based on past consumption (historical demand) May replenish exactly what was used May base replenishment quantity on usage trends Based on forecast of future demand Based on events such as product promotions or product discontinuation or seasonal demand fluctuations Based on unplanned demand © 2002 Computing Technology Industry Association, All rights reserved 76

Promotion and Education Role of Forecasting Forecasts can be used to. . . Reduce Promotion and Education Role of Forecasting Forecasts can be used to. . . Reduce Lead Times by allowing the supplier to anticipate orders Increase assurance of supply Reduce total inventory in the supply chain pipeline Optimize allocation of manufacturing capacity Facilitate faster reaction to fluctuations in demand © 2002 Computing Technology Industry Association, All rights reserved 77

Promotion and Education Generating Requirements For direct material, demand is typically is generated in Promotion and Education Generating Requirements For direct material, demand is typically is generated in an ERP (Enterprise Requirements Planning) system The build planned is loaded Using bills of materials (BOMs), demand for product is “exploded” into demand for component materials The ERP system compares the component demand to inventory on-hand on-order, and generates suggested orders as needed Suggested orders may automatically generate purchase orders, or a buyer may have to explicitly release the suggested order to the procurement application Forecast-based replenishment will be covered in more detail in another class. © 2002 Computing Technology Industry Association, All rights reserved 78

Promotion and Education Questions? Comments? Feedback is welcome! Promotion and Education Questions? Comments? Feedback is welcome!