Process Automation for the

Procurement of Direct Materials

By Dan Harmon
Director of CIBER’s SAP SRM Practice

Abstract:
Purchasing executives are discovering that plant closures, outsourcing, and price
reductions gained from the supply base can only go so far in helping to improve the
bottom line. What many leaders are missing is that they may already have the tools
in place to automate their direct material procurement process. Recent studies have
shown that automating this process provides significant cost reductions for processing
purchase order data and also allows the procurement professionals to move away from
transactional processing to more strategic activities such as sourcing, building supplier
relationships, and performing purchasing analysis.

This paper will present an analysis of a plan-driven procurement process for direct
materials. This analysis includes not only the activities and steps in such a process,
but also the data sets associated with each activity. Automation of this process will be
explored to highlight where an organization can find process improvements that lead to
positive impact on the bottom line. Several recent studies are referenced to identify the
benefits companies have obtained by automating the plan-driven direct procurement
process. Purchasing executives can use this information to analyze their own direct
material procurement processes to determine what benefits might be obtained.
 Process Automation of Plan Driven Procurement for Direct Materials

This paper does not attempt to analyze best practices for material planning, but begins the direct material
process analysis with receiving a material requirement. Starting with the material requirement allows this
paper to focus on establishing a process framework for direct material procurement activities, and not with
the planning or sourcing process. Establishing this process framework is necessary, as there is not a true
industry standard for plan-driven procurement and most companies that implement such a process will
undoubtedly enhance and customize it to meet their own unique requirements.

A basic understanding of the fundamental process and data establishes the framework for this paper to
further explore the opportunities to automate and enhance the plan-driven direct material procurement
process. Ultimately organizations can use the information presented to aid in the analysis of their own
direct material procurement processes.

Scope of Paper
 CIBER, Inc. 

For the past few years procurement organizations around the world have focused a significant
amount of time and resources on improving processes and applications to identify the best source
of supply for a material or service. Purchasing professionals have worked with their own IT
departments as well as software vendors to increase this sourcing functionality. The results of
these activities provided many benefits including material cost reductions, improved procurement
process efficiencies, and consolidated sources of supply.

Despite these improvements in the procurement
process, many organizations are missing out on
increased ROI and business benefits that can be
obtained by reviewing their existing processes for
direct material procurement. Today, the vast majority
of manufacturing companies employ some type
of enterprise resource planning (ERP) system to
support their purchasing and material management
processes. Typically, these ERP systems offer the
functionality to automate a plan-driven procurement
process. ERP systems are known for their ability
to support multiple threaded processes and vast
amounts of data and transactions. With the
automation of the processes and transactions
associated with the procurement of direct materials,
companies can expect improvements to their bottom
line by driving down transaction costs, reducing the
amount of data and transactional errors associated
with manual processing, and allowing their
procurement professionals to move away from the
support of daily purchasing transactions to a more
strategic role such as sourcing.
Even companies with automated plan-driven
procurement processes in place today can find
improvement opportunities by reviewing the
technologies used to support these processes. New
and improved applications now use service oriented
architecture (SOA) and common data standards such
as XML. These technology improvements include
multiple data transmission methods, faster transmission
processes, and increased data validation capability.
Additionally, these applications are making it easier
to incorporate the supply base into the direct material
procurement process. No longer is EDI the de facto
standard for data exchange between a company and
its supply base. With the introduction of internet-based
applications and systems, such as portals, companies
can now electronically exchange purchasing data with
the majority of their supply base using the appropriate
data standard and transmission method. Supplier
enablement, or the incorporation of the supply base
into all aspects of the procurement process, is another
step in the direct material procurement process that if
automated, will result in improved ROI.

Introduction
 Process Automation of Plan Driven Procurement for Direct Materials

The Process

Figure 1 represents a high level view of a direct material procurement process. It has purposefully been simplified in order to
facilitate the discussion of the various process activity steps and their associated data sets. While it is by no means a complete
end-to-end procure to pay process, the process flow contains enough activities to facilitate a high level presentation of what
the process is, and allows the inclusion of sub-processes where appropriate. Each activity is uniquely numbered to easily
identify it later in the paper

1 2 3 4
Material Purchase Purchase Purchase
Requirement Requisition Order Order
Generated Created Created Combine

5 6 7 8
Purchase Purchase Advanced
Goods
Order Order Shipping
Received
Delivery Response Notice Sent

9 10 11
3 Way Payment
Invoice Sent Match Data
Performed Generated

Figure 1 – Automated Plan Driven Procurement Process for Direct Materials

Step 1 - Material Requirement Generated The key concept to grasp for this activity is that even
with multiple systems or sources of requirements, it
Most manufacturing companies have deployed some
is still possible to automate this step to directly feed
ERP system that includes material resource planning
these requirements to a purchasing or ERP system.
(MRP) functionality. MRP is a complex process in and
Automating this activity not only ensures that the
of itself that takes into account existing inventory, sales
requirements are delivered in a timely and reliable
orders, work in process, and forecasted material needs.
manner, but also reduces the data errors associated
With MRP analysis and explanation beyond the scope of
with manually entering requirements.
this paper, we must assume that the output of this process
is a direct material requirement. An organization can
Middleware is one technology that can assist with
have multiple direct material requirement sub-processes
this process automation. Middleware is generally
and sources. Examples would include kanban systems,
defined as software that allows for data routing and
vendor managed inventory (VMI), and other alternative
transformation between two or more systems or
inventory systems.
applications.1 There are a number of middleware
software packages available, and many ERP systems
At a minimum the material requirement data set must
come already equipped with some form of middleware.
contain the material number, the quantity required,
Examples of middleware include IBM’s MQSeries,
and the due date. Typically most MRP systems add
Oracle’s Advanced Queuing, and SAP’s Process
additional data as determined by an organization’s
Integrator (PI).
unique requirements for this process.

Step 2 - Purchase Requisition Created
The second step of the direct material procurement
process is to generate a purchase requisition. The
purpose of this step is to check for sourcing, and
perform preliminary data validations and approvals
before creating a legally binding document such as
a purchase order. Material requirements without a
properly identified source of supply are held from
purchase orders until the proper source of supply is
determined. Direct material purchase requisitions
rarely require approvals since the prevalent thinking is
the MRP process insures the requirement is legitimate.
As such many ERP systems allow for automatic
approval of direct material requisitions.
The key data found in a purchase requisition includes
the material number, description, quantity, due date,
sourcing information, company code, cost center,
location code and address of the requesting plant or
department. Most organizations will add additional
data to the purchase requisition depending on their
requirements. With an automated process it is possible
to combine multiple direct material requirements into
a single purchase requisition which ultimately helps
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to reduce the amount of transactions and processing
time later in the process. During this step material
requirements that do not have a determined source
of supply are identified and flagged for a sourcing
activity.
Purchase requisitions can be created either in the
ERP system or in a purchasing or supplier relationship
management (SRM) system. Purchase requisitions
that are created in an SRM system may or may not
be transferred to an ERP system. The decision to
perform this transfer is based upon several factors
including the level of control required to support the
process, how much purchasing functionality is used in
the ERP system, and how well the requisition process
is implemented in the organization.
Step 3 - Purchase Order Created
The purchase order (PO) creation is arguably the
most important step in the direct material procurement
process. This is a legally binding document between
the buyer and the seller. The PO contains all of the
data found in the purchase requisition and adds key
data that is typically pulled from a contract. This data
 Process Automation of Plan Driven Procurement for Direct Materials
includes supplier information (name, number, address,
contact person), prices, shipping methods and costs,
units of measure, and payment terms.
The Importance of Contracts
Contracts are extremely important in an automated
direct material procurement process as they provide a
reliable source of data that facilitates the generation
of the PO and insures the buying organization is
getting the best negotiated price for the material.
The use of contracts increases an organization’s
compliance with purchasing policies while reducing the
amount of maverick buying. The Gartner Group also
emphasizes the use of contracts as a best practice.
“The identification and efficient management of all
contracts with suppliers is an underrated process,”
it reports. “Although contracts are at the heart of the
supplier management activity, most enterprises have
no formal systems in place to manage the contract
lifecycle. This lack of visibility and control will often
cause an enterprise to fail to extract full value from the
contract and the supplier relationship.”2
Many software vendors that provide purchasing
applications are enhancing their contract and
sourcing functionality to meet the growing needs and
demands of their clients. Contract management was
identified as a key strategic advantage for best-in-
class direct material procurement in the 2007 Direct
Material Sourcing Study by Aberdeen. Best-in-class
procurement organizations had 98% of their direct
materials under spend management which resulted in
63% greater contract compliance.3 Clearly, contracts
play a vital role to these best-in-class performers.
Step 4 - Purchase Order Combine
Purchase orders using the same vendor can be
combined to reduce transactions and processing.
This allows a vendor to receive a single purchase
...
Key to automating the direct material plan
driven procurement process is the ability to
exchange purchasing data electronically with
your supply base.
order that might include multiple plants, departments,
and materials. Again, this is usually an automated
feature of the SRM or purchasing application that will
require some up front effort to properly enable. Certain
customs, tax, and legal requirements will restrict the
opportunity to combine PO’s but the benefit obtained
from a combination process can easily offset the effort
required to develop and support such an activity.
Step 5 - Purchase Order Delivery
Key to automating the direct material plan-driven
procurement process is the ability to exchange
purchasing data electronically with your supply base.
This activity, also known as supplier enablement,
provides several benefits including reduced data
processing costs, improved processing time, and
enhanced communication with the supply base. A 2005
study to determine future procurement trends revealed
that information sharing between the purchasing
organization and its supply base was key to collaboration
and cost reduction efforts.4 As the PO is one of the more
important purchasing data sets, logically it must be
included in any supplier enablement strategy.
Electronic PO delivery generally falls into the following
methods: electronic data interchange (EDI), extensible
markup language (XML), FAX, or e-mail. Regardless
of the type of transmission method used, a standard
PO form must be developed to insure that the right
data is consistently delivered to the supply base. While
one could debate that FAX and e-mail are not truly
electronic, these transmission methods are typically
much faster than the traditional process of printing a
hard copy PO and sending it via postal mail.
Supplier Enablement Strategies
As in step 1 of this process, middleware can be used to
enable the electronic sharing of purchasing data with
the supply base. A key issue with this solution is the

amount of effort required to develop the connections
(or interfaces) to each supplier. As the supply base
grows, so do the number of connections and amount of
resources required to support the process.
Middleware is generally considered an acceptable
solution for EDI and XML transmission methods.
However most SRM and ERP systems have built-in
functionality that permit purchasing data to be sent via
FAX or e-mail to the supply base. This will require the
development of standard forms but the cost of enabling
this transmission method in an SRM or ERP system
is typically less than the effort required to do it using
middleware.
Supplier portals can also be used to electronically
transmit procurement data to and from the supply
base. Most SRM systems offer some form of supplier
portal to facilitate the electronic exchange of data and
communications with the supply base. These portals
can be configured to offer better electronic data
processing for those suppliers that might not be able to
support EDI or XML transmission methods.
A final strategy for supplier enablement is the use of a
third party company that specializes in providing access
to a supplier network. The supplier network is a pre-
existing organization of various suppliers and vendors
that are electronically connected via an e-market
software system. Procuring companies that join an
existing supplier network receive an immediate benefit
when their suppliers are already part of the network.
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Development effort and testing will be required to
enable new suppliers to join the network. Most supplier
networks charge a fee to join the network. This fee
is usually passed on to the supplier which in turn
receives the positive opportunity to perform electronic
transactions with any company that is on the network.
Another added benefit to a procurement organization
is that the company providing the supplier network
assumes the responsibility of ensuring that the proper
connections and transmission methods are made with
the supply base. For companies with a very large supply
base this can become a significant time and resource
savings. Procurement software vendors such as Ariba,
Perfect Commerce, Oracle, and SAP either offer their
own supplier network or have partnered with at least
one company that specializes in providing a supplier
network.
Regardless of the solution chosen it is important to
establish one method of communication with each
supplier for all data sets. This reduces the amount of
maintenance effort for all parties and aids in developing
a standard communication strategy with the supply
base.
Step 6 - Purchase Order Response
The purchase order response (POR) is sent from the
supplier to the buyer providing notification that the
supplier has accepted the PO as is. A POR containing
changes to the original PO may also be sent to the buyer.
This situation typically triggers a PO change request in
the buyer’s purchasing system that ultimately results in
 Process Automation of Plan Driven Procurement for Direct Materials
...
The advanced shipping notices are important
to the buyer as they provide notification as to
when to expect delivery of the goods ordered.
a new PO containing the changes being issued to the
supplier. Upon receipt of this new PO, the supplier
would then issue another POR to accept the new PO.
This can become an iterative process as the supplier
attempts to address both the demands of the buyer
as well as their own inventory and production levels.
Automation of this process ensures that multiple
versions of the PO and POR can be simultaneously
supported without causing interruption to either
business.
Step 7 - Advanced Shipping Notice Sent
The advanced shipping notice (ASN) is sent from the
supplier and/or freight company to the buyer when the
order is ready to be shipped out. The ASN contains
order information, shipping instructions, delivery
methods, and due dates. ASN’s are important to
the buyer as they provide notification as to when to
expect delivery of the goods ordered. This provides
the buyer with the necessary lead time to prepare for
the arrival of the material.
Step 8 - Goods Received
Much like the POR activity in step 6, the goods receipt
step can initiate a multitude of sub-processes and
activities. In its most simple form, the goods receipt
is entered only once in the buying organization’s ERP
or SRM system. This single entry would complete the
order-to-confirmation sub-process. The reality of this
activity is that many orders are delivered incomplete,
or in multiple stages, or contain poor quality materials
that must be returned, or contain the wrong materials
that must be returned. As such the goods receipt
process typically is an iterative activity that continues
until all materials on the PO have been received.
While most SRM systems allow for a confirmation
document to be created ahead of the actual goods
receipt, the goods receipt is typically manually entered
by a receiving clerk when the materials arrive. New
technology advances in radio frequency identification
(RFID) tags and advanced bar code reading systems
are allowing some companies to automatically confirm
received materials in the appropriate system.
A goods receipt contains much of the information
found on the PO but also includes quantity delivered,
delivery address, date and time of receipt, recipient
identification, and supplier address and contact
information.
Step 9 - Invoice Sent
The invoice is the process step where the supplier
requests payment from the buyer. In general an
invoice is not issued until after the materials have
been shipped. The reality of this activity is that many
times the buying organization can receive the invoice
before the materials arrive and are received into the
system. This can be due to logistical issues, shipping
delays, and the fact that an electronic invoice can
be delivered in much less time than it actually takes
to ship the materials. Also, changes to the PO, the
return of unwanted, unordered, or damaged goods,
and data errors found on the invoice leads to mistakes
in invoice processing, which ultimately results in either
over or under payment to the supplier.
Invoices are generally processed by the accounts
payable (AP) department of the finance organization.
Given that the AP organization is very rarely aware of
what is being procured by the purchasing organization,
and the renewed emphasis on auditing and spans of
control required by the Sarbanes-Oxley (SOX) act of
2002, most invoices receive considerable scrutiny from
the AP department. As many companies can process
upwards of thousands of invoices a day, there is a
tremendous benefit to be realized to both the supplier
and the buyer when invoices can be transmitted in a
standard electronic format. Electronic invoices benefit
suppliers by providing faster posting and transmission

times, helping them to receive payments in a more
timely manner. Electronic invoices benefit the buying
organization by removing the manual process of
receiving the invoice and entering it into the system,
and the associated data errors that occur with manual
entry.
As detailed in the Supplier Enablement Strategies
section, there are a number of systems and delivery
methods available for handling electronic invoices.
Regardless of the chosen solution, it must be able to
support a number of transmission techniques as not
all suppliers will be able to standardize on one or two
transmission methods.
Step 10 - Three-Way Match Performed
The three-way match activity involves analyzing the
data found on the purchase order, the goods receipt,
and the invoice to determine that the quantities and
prices are within predetermined tolerances. Payment
data is generated only when the evaluated data fields
are within the tolerances levels. Out of tolerance data
flags the invoice for manual processing and an AP
clerk must manually determine why the match did not
occur and what steps can be taken to correct the issue.
Usually this involves contacting the receiving clerk,
vendor, and/or buyer to understand the discrepancy.
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Clearly this becomes a labor intensive process when
mismatches occur. While process automation and
electronic data transmission help insure that accurate
data is reliably delivered in a timely manner, there is
no process that can guarantee 100% three-way match
success. A study published in 2005 commissioned by
the Commercial Solutions division of Visa revealed
that best practice organizations achieved automated
payments on only 71% of their transactions.5
The three-way match is not the only way to insure that
proper payments are scheduled and made. Many
companies perform some form of a two-way match
that includes variations of the data found on the PO,
the goods receipt, and the invoice. Additionally,
evaluated receipt settlement (ERS) offers another
alternative for generating payment information. ERS
typically involves generating payment data after
receipt of the materials; an invoice is not required.
Previously mentioned supplier enablement strategies
such as middleware, supplier portals, and third party
supplier networks all offer some form of electronic
invoice processing. Additionally, many of today’s ERP
systems have functionality in their finance modules to
facilitate electronic invoice processing. Finally, there
are a host of vendors that offer services for electronic
10 Process Automation of Plan Driven Procurement for Direct Materials
invoice processing, paper invoice processing, and the
conversion of paper invoices to electronic invoices.
Companies that receive a large amount of paper
invoices that require significant resources to process
manually should consider the ROI that could be
gained by moving to an electronic invoice process
solution. Not only will an electronic invoice solution
reduce the headcount required to process invoices,
but additional savings can be obtained by processing
the invoices in a more timely manner and taking
advantage of improved payment terms.
Step 11 - Payment Data Generated
The final step that we will address in this paper is the
generation of the payment data. While this is not the
final activity in an end-to-end procure-to-pay process,
it represents a logical termination point as this is a
financial process and must be performed in a finance
system. An ERP system will offer this functionality
but an SRM system will not. However, there is
overlap in how ERP and SRM systems handle invoice
processing. An SRM system can accept and process
an invoice; however, it is not a financial system. The
SRM system flags the finance system for the actual
payment to be scheduled. An ERP system can both
process the invoice and generate the payment data.
The optimum process will depend on how the finance
and procurement organizations are structured and
what SRM and ERP functionality has been deployed.
Standardize, Standardize, Standardize!
It is important to note that as with any process,
companies that employ a consistent, standard
process throughout their organization are more
likely to experience success. Standard procurement
processes are effective in reducing maverick buying,
improving compliance, and facilitating reporting on
total spend. Additionally, standard processes make
it is easier for a supplier to support a new division
...
The key is to limit this amount of customization to
address only the pertinent issues.
or department as the supplier already knows how to
interact with the new organization due to the standard
process. A key finding of the 2006 Aberdeen Direct
Materials Sourcing Benchmark Report revealed
that true direct material cost savings can only be
obtained with an enterprise wide process.6 Legal,
regulatory, and regional issues will impact process
standardization as customization must be performed
to meet these unique requirements. The key is to
limit this amount of customization to address only the
pertinent issues.
Conclusions
With most manufacturing companies today employing
some form of ERP they clearly have the opportunity to
automate their direct material procurement process.
Given the advancements in functionality and ease of
use of today’s web based SRM systems there is also
opportunity for significant ROI for the implementation
or increased use of an SRM system. In a March 2007
article, Andrew Douglas, UK director of procurement
at Oracle, estimates that most organizations with
purchasing technology use only half of it, defeating
one of the key objectives for having it.7 SRM systems
were predominately known for supporting the indirect
material procurement process but with increased e-
sourcing and direct material processing functionality,
companies need to evaluate the cost benefits of using
an SRM system in addition to their ERP system.
A shift to using more SRM functionality also correlates
with a broader movement by many organizations to
elevate the status of procurement to a strategic and
executive board level. With an increased focus on
the bottom line many organizations are realizing that
creating a chief procurement officer (CPO) leads to a
strategic investment in the procurement organization.
As a strategic function procurement can better drive
component and module standardization, and form
strategic partnerships with the supply base to better
support new product introductions.8

An organization need not undertake a global,
enterprise-wide software implementation to realize
noteworthy improvements in processing capability.
Each activity step in the plan-driven direct material
procurement process can be automated in some
fashion, either completely or partially, and more than
likely using existing applications and systems. An
APQC study revealed that organizations which have
an automated procurement process or which are in
the process of automating, have an average cost
of $7.41 per PO versus a cost of $19.21 for those
without automation. Additionally, companies with
automation were found to be able to process $1
billion in procurement with 34.5 FTE’s, versus 74.6
FTE’s per billion without automation.9 The automation
of key activities in this process can lead to reduced
process cycle time, increased data accuracy, and less
human interaction; all significant reasons to perform
an evaluation of the present process. Consider the
following quote from a January 2006 AMI research
alert:
The automation of procurement execution as part of
pull-based replenishment of direct materials is driving
true process collaboration between manufacturers
and suppliers. With the aid of technology such as that
presented here, companies can expect to streamline
buyer productivity, eliminate non-value-added
activities, reduce direct material inventory across
the supply chain, and improve the supply network’s
capability to meet customer demand as is required for
DDSN (demand driven supply network).10
Finally, today’s procurement organizations should
consider updating their supplier enablement strategy
to take advantage of technological gains in this
area. With an increased focus on core processes
and strategic initiatives, manufacturing organizations
presently supporting their own internal supplier
enablement strategy should decide if they are in the
business of making a product or supporting a complex,
point-to-point interface system with their suppliers.
Many companies will discover that today’s supplier
enablement solutions offer increased functionality,
ease of use, and quick on-boarding for their suppliers.
The costs for such a project can easily be justified
given the returns of automated direct material
procurement and improved communication with the
supply base.
CIBER, Inc. 11
About the author
Dan Harmon
Director of CIBER’s SAP SRM
Dan Harmon is Director of CIBER’s SAP Supplier
Relationship Management (SRM) Practice, which
specializes in project implementations and upgrades for
the SAP SRM suite of applications. Dan has more than
13 years of IT experience and 10 years of SAP project
experience including multiple global rollouts of various
SAP systems, modules and functionality.
Prior to joining CIBER in 2005, Dan worked for more
than 20 years at the Motorola Semiconductor Products
Division, which was later spun off into Freescale
Semiconductor. He held a variety of positions in
manufacturing, test engineering, QA, and IT. Dan’s
broad experience gives him a unique perspective on
system implementation and process automation. He has
presented at numerous SAP conferences on different
topics and has authored articles on Product Lifecycle
Management (PLM) processes and configuration
management. He can be reached at 602-206-0244 or
at dharmon@ciber.com.
1
http://www.middleware.org/
2
E-Business Best Practices. SupplyChainBrain.com.
September 2002.
3.
Aberdeen Group. “Direct Materials Sourcing –
Living in a Material World.” May 2007.
4.
Ogden, Jeffrey A., Peterson, Kenneth J., Carter, Joseph R.,
Monczka, Robert M. “Supply Management Strategies for
the Future – A Delphi Study.” Journal of Supply Chain
Management, Summer 2005, p. 36.
5
“Procure to Pay Best Practices.” Visa Commercial
Solutions. February 2006.
6
Bharadwaj, Sudy. Aberdeen Direct Materials Sourcing
Benchmark Report. March 2006.
7
Parker, Robin. Tomorrow’s World. Supply Management,
March 29, 2007, p. 22.
8
“Procurement Benchmarks Show Wide Variation between
Top and Bottom Performers.” Supply Chain Digest.
October 4, 2006.
9
Loftus, Paul. “Procurement Practices for High
Performance.” FAO Today. November 2006.
10
Aimi, Greg, Rizza, Mickey, and Swanton, Bill. “Supplier
Collaboration Streamlines Direct Material Procurement.”
AMI Research Alert. 1/19/2006.
 CIBER, Inc. (NYSE: CBR) is a pure-play international system integration
consultancy with superior value-priced services for both private and
government sector clients. CIBER’s global delivery services are offered
on a project or strategic staffing basis, in both custom and enterprise
resource planning (ERP) package environments, and across all
technology platforms, operating systems and infrastructures.

Founded in 1974 and headquartered in Greenwood Village, Colo., the

company now serves client businesses from over 60 U.S. offices, 22
European offices and five offices in Asia. Operating in 18 countries, with
over 8,000 employees and annual revenue of nearly $1 billion, CIBER
and its IT specialists continuously build and upgrade clients’ systems to
“competitive advantage status.” CIBER is included in the Russell 2000
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