O2C CYCLE – (ORDER TO CASH CYCLE)

About O2C:

O2C stands for Order To Cash which starts from the order management where we receive/Import the Purchase Order from the customers. The purchase order contains the information about the requirements details of the products, based on which we would be creating a Sales Order.

Below are the Pre-requisites for raising a Sales order:

The customers who raise the Purchase order are the once that are been defined in the TCA. The Items/Products that are been requested from the customer are the once that are defined in the Item Master which is been maintained in the Inventory Module. The price of the Items are been defined in the Price List along with the Modifiers (Offers and Discounts) which are maintained in Advance Pricing. Warehouses are to be defined where actually we stock the items. How we need to ship the products are been defined under Shipment Methods that are maintained in the Inventory Module. Sales Person information is also maintained in the Accounts Receivable or Order Management Modules.

Note: Customer provides the Request Date (RD) and we define the Schedule Ship Date (SSD)

First when the order is been taken the Order is in Entered State where in all the details of the Order Header and Order Lines are been entered in the system, then the order moves to Booking Stage.

In Booking Stage the scheduled Ship Date is been decided by considering the Ordered Quantity and then matching/comparing with the On Hand Quantity.

If the On Hand Quantity and the Ordered Quantity is same then Scheduled Ship Date and the Requested Date would be the same date else based on the ATP (Availability To Promise) check is done to decide the scheduled ship date. The ATP rules is based on the Demand source (Sales order) and the Supply Source which is nothing but the Purchase Order (Items not available may purchased from another vendor and supplied to the Customer) or another Inventory Organization or Work In Progress (Manufacturing Plant)

Once the booking process is completed all the information on the Product/Items are moved to the Shipping Department.

The task for the Shipping Department starts from actual moving the order from the Warehouse to the point where the Product/Items are been finally delivered to the Customer.

Below is the explanation for the process that is followed by the Shipping Department:

To have a better understanding of this let us consider a Scenario where in an Inventory organization has warehouses that are located at various locations, at each location of the warehouse there are stores where actually the Items are been placed. Items may be located at various stores here the task is to gather all the Items/Products that are required for a Sales Order at one place so that it would be packed and shipped all together. This is done once the details of the Item Quantity, Ship From, Ship To are moved from the Booking Process to the Store for Picking.

Note: Inventory Organization may be a Store, Distribution Center or Manufacturing Plant.

Once all the Items are been placed at one location, then these Items are then moved to the Staging Area where the packing and loading the Items and then to be transferred to the vehicle is been executed to do so the Shipping Department initiates Launch Pick Release here the system creates Move Order Transaction in the warehouse. The warehouse then Allocates Move Order, decides how much quantity are to be moved from one store to another and finally to the Stage Area. The system then generates move order Pick Ship Report based on which the Items are been Moved to the staging area.

This process of moving the Items from the Stores to the staging area is “Picking Process”.

Once the Goods reaches the Stage Area then transit of goods is done using Transact Move Order but here there is no change in the Physical Quantity of the Items which remains the same as the items are still in the stores.

Next step would be Shipping Execution where the Items are loaded in the vehicle for delivery also known as SHIPPED Stage here the delivery details are been created which has the information about the Initial Ship From and Ultimate Ship To location details along with the Items and the Quantity information.

Based on the Delivery Details the TRIP (Travel Plan) is decided, here the delivery Details gets associated to the Trip.

Once the Products/Items are ready for Shipment then the system generates the following reports

1. Commercial Invoice    (This contains information about the Quantity and cost but not the other details like Tax,     Fright charges etc)
2. Bill Of Lading
3. Vehicle Lading Details      (Documents about the Vehicle)

Once the Product/Items are been delivered to the specified destination the Trip is CLOSED, else an exception is been raised. Now when the Trip has closed and the Items are physically moved out of the warehouse then the Inventory is reduced and the “Interface Trip Stop” process runs.

The next process would be the Costing Process

Here only the Purchase Cost (Unit Price or the cost incurred to manufacture the Item) factor information is been entered in the Table MTL_INTERFACE, then a “Workflow Background Process” is initiated which considers the information from table MTL_INTERFACE and moves the cost factor to the Cost management to generate the COGS report (COST OF GOODS).

At this stage the Accounting entry would be

COGS A/c

To Inventory Material Cost A/c

Now the next step would be running the “Auto Invoice Master Program” as the Account Receivables are not aware of the sales order transaction. The Auto Invoice Master Program picks all the lines whose shipped status (Trip Status) is closed and inserts a record into AR_TRANS_INTEFACE table. Once this is done another program is initiated that is Auto Invoice program that picks up the records from the interface table and generates the Invoices.

The accounting transaction is

Receivable A/c

To Revenue

The print of the invoice is sent to the customer, customer then makes the payment and for this payment we create a cash receipt.

The accounting entry:

Confirm Cash A/c

To Receivables

Once we remit the cash receipt into the bank for clearance then the entry would be

Remitted A/c

To Confirm Cash

Later the remitted receipt moves to the cash management module and when we reconcile the receipt the entry is

Cash A/c

To Remittance

Following are the Various Statuses in the O2C Cycle

1. Entered
2. Booked
3. Picked
4. Awaiting Shipment
5. Shipped
6. Closed

This ends the Order to cash cycle.

FUNCTIONAL P2P (PROCURE TO PAY) OVERVIEW

What is P2P?

P2P stands for Procure to Pay. It’s a business process which involves the fulfillment of goods, items, resources etc in an organization inventory to keep business running smoothly and it ends with payment followed by reconciliation.

P2P Process:

Lets us consider an Inventory Organization where actually the items or the goods are placed. For any organization the Inventory Org can be located at different places.

Pictorial representation of Inventory Org located at various locations:

Each Inventory Org located at various locations has a Store In-charge whose job is to have a note on the Items in his Store and raise a demand for an item whenever needed in other terms he raises a Indent on the items for his store. Doing so manually becomes difficult so this can be done using some Planning method one of the planning method is “MIN-MAX PLANNING”. Using the MIN-MAX PLANNING he generate a report with the requirements of those items whose On-Hand quantity is minimum.

The Requirement report is then transferred to the Requisition Interface Table to be sent to the next department say the Purchase Department. To avoid or not to disturb the work of the two departments the Indent requirement is first stored in the Interface table. Now the Purchase Department runs a program “Requisition Import Program”. The Requisition Import Program picks up all the records that are available in the Requisition Interface Table and creates the Requisition.

Let us now put some light on the INDENT and REQUISITION before going forward:

Indent is a Term where in we have the details of the Goods/Items that are required where as Requisition is the term where the details of the goods or items are been recorded along with their estimated price quote.

Now coming to Requisition these are of two types:

1. Internal Requisition
2. Purchase Requisition

Internal Requisitions are created if the Items are to be imported from one Inventory location to another location in the same organization. Here the source of the requisition would be INVENTORY. There is no approval process for internal requisition.

Purchase Requisitions are created if the goods are to be imported from external suppliers. Here the source of the requisition would be SUPPLIERS. The purchase requisition are been sent for approvals.

Going ahead we would discuss about the various APPROVAL METHODS for the Requisitions

Why we need requisition approval?

Requisition approval is required to restrict the requisition that has been raised.

Requisition approvals can be done in two ways:

1. EMP/SUPERVISOR Hierarchy
2. POSITION Hierarchy

In EMP/SUPERVISOR Hierarchy, based on the requisition amount that is raised the requisition travels the hierarchy and reached the appropriate person who has the authority to approve or reject the requisition.

Illustration Fig a:

Supervisor 1 is the manager of Emp 1 who has the authority for approval when the requisition amount is 10000 or less, if it’s above 10000 and less than 30000 then Supervisor 2 would approve who is the manager of Supervisor 1 else Supervisor 3 would be approving this is how the approval of pass in the hierarchy from one Supervisor to another and finally gets rejected.

In POSITION Hierarchy, the requisition may reach the appropriate person who has the authority to approve in two ways:

1. Direct
2. Hierarchy

To avoid the confusion between the two approval methods(POSITION Hierarchy and EMP/SUPERVISORHierarchy) ,So in case of POSITION Hierarchy there might be many hierarchies which can be named at one time which is not possible in case of EMP/SUPERVISOR Hierarchy where only one hierarchy is allowed at one time.

This can be better understood with the help of the below diagram (Position Hierarchy):

Illustration Fig b:

Again based on the limitation at every stage the requisition moves from Position Manager if he is authorized to approve a certain amount to Senior Position Manager in case of Position Hierarchy -Hierarchy Method. Where as in case of Position Hierarchy -Direct Method the requisition moves directly to the Senior Position Manager who has the authority to approve as we have defined and structured a hierarchy.

Note: Not only Requisition but Purchase order, Invoices and releases also require Approval

Moving ahead once the Requisition is approved the next stage is inviting the Supplier. Suppliers can be invited by raising a RFQ (Request for Quotation). For the required items and the goods we request the Supplier to send us there Quotation and according the best Quotation is been selected and approved.

For all the RFQ that are been sent by the various suppliers we perform Quotation Analysis to choose the best Quotation based on various factors like Price, Accessibility etc and then Approve the Quotation.

The price that is been quoted in the quotation are been considers for further transaction for a period of time.

Once the Quotations are approved a purchase order is created and sent to the supplier.

Below is the Structure of the Purchase Order:

Note:

Person who is defined as a Buyer is the one who creates a Purchase Order and Purchase order is sent to those Suppliers that are defined in the TCA (Trading Community Architecture).

Going ahead for each Shipment we have a receipt routing associated. Receipt routing is a process that is used for Inspection by the receiving dept.

Receipt Routing are broadly classified into 3 ways:

1. Direct Delivery
2. Standard Delivery
3. Instruction Delivery

Below is the Receipt Routing Approach:

Once the goods are received at the stores these are then used for the Manufacturing in the organization or it is moved to the specific department further that may sell the goods or consume it.

For the goods that we have received there is an invoice that is been sent by the supplier. Now the invoice that is sent is been approved by the department that has raised the Purchase order(PO). The approval is done by using matching methods.

There are 2 Matching methods:

1. 2 Way   (In 2 way matching the Invoice Qty and the PO Qty are matched)
2. 3 Way  (In  way matching the Invoice Qty , PO Qty and Received Qty are matched)
3. 4 Way  (In  way matching the Invoice Qty , PO Qty, Received Qty and Accepted Qty are matched)

Moving to the financial part the actual accounting process starts when we have received the goods at the gate where in the journal entry would be:

Receiving Inventory A/c

To Accrual A/c

Note: Accrual Account is a Liability which is not invoiced, where we are not liable to pay at this stage.

Next we receive at the store for this the entry would be:

Material Cost A/c

To Receiving Invoice A/c

Once the Invoiced is raised by the Supplier then the entry would be:

Accrual A/c

Invoice Price Variance A/c

To Liability A/c

NOTE: Invoice Price Variance is accounted when there is a difference in the Invoice sent and the goods actually received by the Purchasing Department.

Once the payment is made then the entry would be:

 Liability A/c

To Cash Clearance A/c

Once we reconcile payments then the entry would be:

Cash Clearance A/c

To Cash A/c

Once the Goods that we have received moves to another department for Manufacturing or consumption of the item then the entry would be:

Expense A/c

To Material A/c

The Final entry in the Ledger would be:

Expense A/c

To Cash A/c

This concludes the complete process of Procure To Pay Cycle.

Reconciling A/P Accrual Accounts Balance

At any given time, the balance of the A/P accrual accounts can account for the following transactions:

• Uninvoiced Receipts

• Over-invoiced Receipts

• Invoice Price Variance (for transactions created using Release 9)

• Errors (Invoices or inventory transactions charged to this Account by mistake)

You need to analyze the balance of the A/P accrual accounts, distinguish accrued receipts from invoice price variances, and identify errors.

Analyzing the A/P Accrual Account Balance

You need to monitor potential problems with purchasing and receiving activities that can affect the accuracy of your A/P accrual accounts. You can use the Accrual Reconciliation Report to identify the following problems in receiving, purchasing, inventory, work in process, or accounts payable transactions:

• Quantities differ between receipts and invoices

• Incorrect purchase order or invoice unit prices (previous releases only)

• Discrepancies in supplier billing

• Invoice matched to wrong purchase order or wrong purchase order line

• Received against the wrong purchase order or order line

• Miscellaneous inventory or work in process transactions that do not belong to the accrual accounts

• Payables entries for sales tax and freight that do not belong to the accrual accounts

Using the Accrual Reconciliation Report

Use the Accrual Reconciliation Report to analyze the balance of the Accounts Payable (A/P) accrual accounts. To submit this report, you must have Purchasing and Payables installed. You can accrue both expense and inventory purchases as you receive them. When this happens, you temporarily record an accounts payable liability to your Expense or Inventory A/P accrual accounts. When Payables matches and approves the invoice, Payables clears the A/P accrual accounts and records the liability from the supplier site. See: Accrual Reconciliation Report. Typically, you run this report at month end. After you have entered your receipt transactions and matched your invoices, you can run the Accrual Reconciliation Report for any transaction date range and identify any differences between your PO Receipts and A/P Invoices. This report also displays any miscellaneous transactions recorded in error to your accrual accounts. These miscellaneous transactions or transactions unrelated to purchase order receipts may be from Payables, Inventory, or Work in Process (depending on your installation). After you have researched the reported accrual balances, you can use the Accrual Write-Off form to indicate which entries you wish to remove and write off from this report. And, after you have written off these entries, you can use the Accrual Write-Off Report as supporting detail for your manual journal entry.

Resolving Quantity Differences

The Accrual Reconciliation Report lets you easily identify quantity differences (i.e., when the quantity received for a purchase order shipment is smaller than the quantity invoiced). Such differences leave residual balances that never clear from the A/P accrual accounts. You should investigate the cause of these differences and take corrective actions before closing your period. Common causes of quantity differences include late inventory receipts, incorrect receipt quantities, and supplier overbilling. To correct late receipts, ensure that receivers enter all receipts into inventory. To correct receipt quantities, enter receipt corrections. To correct overbilling errors, follow your standard procedure for supplier debit memos to clear the difference.

Resolving Price Differences

The Accrual Reconciliation Report lets you determine how much you should have paid and whether the PO or invoice is correct. Such differences leave residual balances that never clear from the A/P accrual accounts. You should investigate the cause of these differences and take corrective actions before closing your period.