Building Supply Chain resilience with Flexible Purchase Commitment in S/4HANA

Supply chains must be agile and responsive in today’s unpredictable and disruptive global environment. Ideally, suppliers would want to know in the early stages the exact order quantities of an item with enough lead time to procure raw materials and plan the production process and delivery schedule. However, that is rarely the case. For buyers, the inability to accurately predict size/color splits, sales regions, or store locations, early enough in a product life cycle leaves both suppliers and businesses with long lead times and more risk to a plan formed in some cases many months earlier. This in turn impacts margins due to overstocking and/or understocking, for example, having to sell seasonal items at marked-down prices.

At least 70% of your agility is out of your direct control. Agile procurement has a key role in helping you bring it back under control - Proxima Group [1]

To reduce the impact, one of the recent SAP developments with S/4HANA is the Flexible Purchase Commitment (FPC) strategy. FPC enables businesses to make high-level contractual commitments in the preliminary stages of planning with a promise to provide more specifics on the order later, giving not only the flexibility to adapt to market changes, but also allowing your suppliers to make raw material purchases and plan their production. This provides critical time to chalk out a plan without impacting the overall timescale thus minimizing losses, and maintaining a good relationship with your suppliers. Let’s dive in and understand Flexible Purchase Commitment in more detail.  

What exactly is Flexible Purchase Commitment in SAP S/4HANA?

Flexible Purchase Commitment within SAP S/4HANA helps businesses in all industry verticals, but especially Fashion and CPG, meet their requirements from their Supplier Network on time. Businesses can use Flexible Purchase Commitment to place orders with suppliers at a high level, such as the style, without committing to size or color or even a ship-to-location, giving them and their suppliers enough room/flexibility to start production and receive size, color quantities, and delivery destinations just in time. This allows both parties to adapt to today’s ever-changing supply chain.

In essence, Flexible Purchase Commitment in S/4HANA lets businesses respond to changes more flexibly by combining buying commitments and delaying the color, size, and destination decisions to a later stage. No precise decisions are expected from businesses at an early stage – they only need to lock in top-level decisions related to the highest level of the product so suppliers can get started earlier ultimately reducing timelines and adding a level of flexibility.

Current Pain Points in Businesses

An early commitment of Raw materials and Finished Goods: Typically, businesses must provide raw material commitments to suppliers in the initial stages to enable them to start production early. They then have to account for raw material costs in the overall margin, which is difficult especially if multiple styles use the same fabric for example. Businesses do not have a crystal-clear view of what they require in terms of color and dimension early enough in the critical path. Plans evolve, making it difficult for the business to quote an exact specification against the item they want. These changes to the plan mean that accurately predicting and quantifying the item specifications is impossible at an early stage. For example, they can’t answer how many blue and red or what sizes they would need.

Ideally, businesses (retailers) should keep procurement commitments at a high level. Today it is often offline in spreadsheets and with promises to give out detailed info on each product in its variations, be it color, size, etc., later. This way suppliers can at least move ahead with the production of the core product (generic article) or style and post confirming the plan can factor in the variables. The advanced high-level commitment followed by order details at a later time reduces product delays, customer dissatisfaction, and negative margin analysis.

Inability to postpone the Final Ship-to-Destination: In addition to the size and color planning complications, retailers don’t always have a final store/warehouse destination when they start planning. In the early stages, they may only know the quantity but won’t know the endpoint with absolute certainty. The changing destinations make it difficult for the business to specify where the final order will be delivered. Ordinarily, companies wish to postpone decisions related to the final ship-to-location till the last minute. However standard purchase orders usually need a delivery destination at the beginning as part of the contract. To reduce the lead time and impact on the critical path, most organizations agree to off-the-system plans. This delays the point at which the purchase orders are created with the final Terms and delivery destinations quantified and in turn, formal documentation of the requirement.

Longer Supply lead time: Assuming that you don’t place orders in the planning cycle “off the system” as it evolves, you end up with a longer lead time, waiting until the plan is finalized before placing any orders. And a long lead time means that you need to start the development of new products earlier.

Absence of Financial and Operational Visibility:  Organizations that are forced into working “off the systems” with earlier commitments, risk financial exposure and cash management issues, as the commitments are not automatically recorded in the system.  Equally, there is an operational impact with using tools like Advanced Available to Promise early in the cycle, seeing as you can’t see the full supply chain until such a point that the final purchase orders make their way onto the system.

What are the Benefits of Flexible Purchase Commitment in SAP S/4HANA?

Shorten the purchase cycle/supply cycle: Provide your suppliers with high-level requirements early in the planning cycle enabling your suppliers to get to work with the preliminary order, sourcing raw materials, planning their production, etc., and incorporate other details/variations on the fly as and when they are understood.

Finalize the Ship-to-destination later: Under normal conditions, businesses find it difficult to forecast the ship-to-destinations from the supplier into the supply network, especially in fashion or when launching new products. Businesses typically do not know early in the purchasing cycle where the product might end up, based upon store prediction or wholesale orders in a global climate. With Flexible Purchasing, businesses can defer the last ship-to-location decision for as long as possible.

 For instance, a business that fulfills orders for different countries and then different regions within North America for example, won’t know until late into the supply cycle where exactly the orders from the factory should be delivered. With Flexible Purchasing in SAP, the business can enter into a purchase contract without specifying the final destination and get the manufacturer to start manufacturing the desired goods. On a later date, the supplier receives the destination details and routes it straight to the destination, avoiding off-the-system ordering or moving product around from one DC to another post-delivery from the Vendor.

Place orders with generic articles alone: Flexible Purchase Commitment in SAP S/4HANA lets businesses easily manage an article's varying characteristics. Businesses can create purchase contracts based on a generic article or style, without the need to specify the exact variants (size or color), as subitems. Flexible Purchase Commitment allows businesses to set variants for a generic article as “Optional.” Businesses only need to commit to the generic article and leave out variant details from the contract for a later date. Allowing the factories to manufacture items “in the greige” before dyeing in the final color. Any value-added services can also be delayed until just in time.

Let’s say a fashion retail brand wants 500 units of a shirt. In the beginning, they would place an order for 500 units of a generic shirt (undyed), not knowing the exact color. The Supplier would initiate the production on this right away and won’t request additional details until later in the cycle when they expect the business to confirm the secondary details size and color. In this scenario, the supplier starts work on the generic item with the right fabric, assembles the right raw materials, starts the production planning, and only leaves the color and size until it is required.

Ability to Pre-pack: Combining Flexible Purchase Commitment with pre-pack provides agility for businesses and reduces effort in the warehouse for retailers. For example, businesses may not know the exact composition of a pre-pack early on in the order placement cycle. But as the planning evolves, orders can be bundled and pre-packed by the vendor followed by cross-docking when goods reach the warehouse. This is especially valuable for seasonal changes in the fashion industry, allowing the initial drop for a style change with a mix of color and size to be bundled together and immediately shipped to the relevant stores rather than be put away and picked. Store replenishment items can then be put away at a more convenient time for picking later.

Wrapping Up

Businesses are looking to integrate more resilience into their supply chain to preserve customer relationships. This requires businesses to embed flexibility in the way they approach their agreements with Suppliers. A not-so-rigid approach lets them accommodate changes later on and gives the suppliers a head start on what to produce, how many, and for which regions, before finalizing the full extent of the order. This accelerates processes and keeps them moving in the right direction, helping them stay ahead and react to unexpected situations.

Normally, businesses are expected to give concrete details of the articles early on in the purchase cycle. This means they’ll have to commit to the specific details of each item at the earliest and don’t have the luxury to delay these decisions till the end. Suppliers don’t proceed till they have the granular information on each product. The production begins when they have collected the size and color details (fashion) and know where the order will be shipped. The volatile demands make early decisions intimidating for businesses and this is where Flexible Purchase Commitment comes into play.  

96% of procurement leaders say that agility is more important than cost savings - Wakefield [2]

With Flexible Purchase Commitment, businesses can work with generic articles and can wait until the last minute to make ship-to-location decisions based on market reads. The lead time stays short on the Supplier side and businesses get the goods delivered on time.  There is no need to fret about overstocking or understocking, delayed orders, or disappointed customers. Flexible Purchase Commitment in SAP S/4HANA ensures your business impact is minimized to market disturbances, maintains continuity, and stays better positioned to tackle heavy global demands with a stable and responsive supply chain.