Business & Technology Nexus

Dave Stephens on technology and business trends

Transactional Scope

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A few of my posts will just be level-setting stuff. Good material to file away, but hardly exciting. This one falls into that camp. It covers Procurement’s transactional scope.

The diagram above describes the transactional flow of a typical procurement application. Demand enters the system in the form of requisitions. Requisitions are created from individual employee requests, from project work, or from inventory and production systems. Often requisitions are subject to an approval process achieved via an approval hierarchy. That hierachy will usually match an organization’s management hierarchy and will also contain some added complexity. Approval authorization limits are placed at each level of management. For some goods and services a specialist approver, somtimes called a Subject Matter Expert, is required to sign-off on the request.

Requests are often converted directly into Purchase Orders, but are sometimes held to achieve minimum order quantities or volume discounts. Requisitions sometimes also require sourcing to be performed via a RFI or RFP or RFQ or reverse Auction.

Sourcing can have different objectives – sometimes for a purchase to be made “on the spot,” often called a spot buy. But often sourcing activities are performed to make longer-term decisions about who to buy from. Exhaustive evaluations of not just price, but quality, capacity, and speed result in a long-term contract.

Once a purchase order is issued, organizations record the expected cost of goods and services ordered as a liability. The reason is a PO represents a binding legal agreement or “promise to buy”. Many suppliers will not begin to perform work without one!

Employees receive and optionally record receipt of goods and services. Performance of work by the supplier triggers their systems to issue the “bill” or invoice. Once an invoice is received, most organizations control cash flow by not paying immediately. Instead, pre-negotiated “Payment Terms” are followed, the most common being “Net30”. Once the invoice becomes due, payment is issued via an EFT, Check, or other disbursement method.


Written by Dave Stephens

02/18/06 9:47 AM at 9:47 am

Posted in Opinion

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