Several organizations have had issues ensuring that users in the procurement process source their material requirements from the approved source of supply. I guide you on how to use a source list to resolve this challenge in the SAP ERP Materials Management Purchasing component (MM-PUR). The challenge has sometimes affected organizations’ annual budgets for procurement of materials when such purchasing is done with a non-approved source of supply, undermining several pricing conditions that have been reached with approved vendors. It can also affect the quality of procured materials. A vendor that may not have gone through the quality due diligence approval process of the organization may deliver substandard quality materials in detriment to the stipulated standards of the organization.

I describe how to use a source list as a tool to enforce user compliance. I also explain how to set up and implement the relevant control requirements at the plant and material levels. I look at the following areas:

• Relevance of controlling the source of supply
• The policy (business scenario)
• Using a source list in SAP ERP as a tool for compliance
• Source list functionalities
• Steps on how to set up source list control at the plant level
• Steps on how to set up source list control at the material level
• Tips on simulating and analyzing a source list.

Several times my colleagues and I have encountered management teams that are responsible for making procurement policies and vendor approvals that express frustration about not getting users 100 percent compliant in sourcing material requirements from the approved source of supply. This happens more in organizational structures that have a centralized purchasing organization, a structure in which purchasing administration is usually done from the head office even though buying is permitted in the plants by assigned purchasing groups. Users tend not to comply with stipulated sources of supply sometimes because they may not even be aware of such approved vendors, especially when such compliance is to be applied to every material requirement in the plant.

During such cases of non-compliance, we investigated to find out why some of these users were not complying100 percent with the sourcing policy of their organizations, and we found out the following:

• Favoritism: Sometimes this issue of non-compliance is caused by the selfish interest of the buyer or a group of personnel who have been induced or who may get some personal benefits from their preferred source of supply to the detriment of the stipulated rule of the organization.

• Information gap: A buyer who has been hired recently, although trained and given orientation about his or her sourcing policy, may not know how to differentiate between non-approved vendors and approved vendors because the organization did not provide a standard way to identify them. This issue usually occurs in organizations with a high volume of procurement activities and poor information management structure.

Further in this article, you will learn how we resolved this issue and how to apply the plant source list requirement or the material source list requirement.

Relevance of Controlling the Source of Supply

Controlling the source of supply for materials in an organization can go a long way toward helping organizations better manage their annual budgets and ensure the right quality and material availability. With the source list record in SAP ERP MM-PUR, organizations can achieve this by making it impossible for a user to purchase from a source of supply that is not approved for a particular material requirement in a plant.

It is therefore imperative for SAP procurement professionals to realize how important it is for organizations to implement this best practice as a way to enhance compliance with their sourcing policy. SAP procurement professionals also should recommend the use of a source list to organizations that do not have it as part of their requirements during the implementation of projects or support services.

In the SAP procurement process, after a requirement has been determined either automatically by material requirements planning (MRP) or manually by users, the next phase is to determine the source of supply, which can be external or internal. An external source of supply could be from an existing vendor with a contract, a scheduling agreement, a purchasing info-record, or with none of these, depending on what is to be procured and what the sourcing policies are. On the other hand, a request for a quotation may have to be sent to vendors for new price conditions and other business terms. The sourcing can also be internal, which means it is by a stock transfer using a stock transfer order.

It Starts with the Policy (Business Scenario)

Consider a scenario in which the management of an organization that is exploring the use of blasting cap wires as operating supplies for its exploration operations. This material is highly regulated in the industry. Based on the sensitivity of this material, the organization came up with a sourcing policy considering factors such as climate change, quality, delivery terms, price, manufacturers’ level of business stability, and capital base as criteria to choose a vendor.

A procedure was established to approve vendors based on these criteria, and a committee was then set up to screen or to carry out due diligence on vendors for the materials based on their compliance with the set criteria. In this organization, situations have arisen several times when materials were procured from vendors that were not approved as a source of supply for such materials. Using non-approved vendors resulted in a financial loss after the organization procured substandard materials that had to be returned after delivery, thereby creating a gap in the scheduled time for material availability, dispute resolution time, and importation charges that were non-refundable.

Now that the policy has been established, the management committee wants a solution so that users must comply with the approved sources of supply base on the new sourcing policy for the materials. They also want to be able to temporarily block any of the qualified vendors whenever they are put on probation.

Using a Source List in SAP ERP as a Tool for Compliance

A source list is one of the functional records used during the source determination phase in the SAP procurement process. The source list brings both optimization and control to the source determination process in procurement. The source list for a material can automatically be considered for selection with the source determination check box, checked in a purchase requisition during creation. Note that the source list is relevant in controlling the source of supply assigned to either the purchase requisition document and purchase order document for external procurement or stock transfer requisition document and stock transfer order document for internal procurement.

During an SAP implementation project, which source list requirement would an SAP procurement expert recommend? To answer this, you need to consider the following:

• Does the organization have any standard for sourcing?
• Is there an established policy for sourcing?
• What factors are considered for choosing the organization’s source of supply?
• Is there a need to require compliance for all the organization’s materials based on location?
• Is the requirement relevant for certain materials based on the organization’s considered factors for choosing a source of supply?
• Is the material requirement procured externally or internally?

When these questions have been satisfactorily answered, you can then decide whether to implement a plant source list requirement or a material source list requirement. In creating your source list after you have decided if the source list requirement is at the plant or material level, you should also consider the following questions:

• For which plant or plants should the source list requirement be implemented?
• Is it one approved source of supply (fixed) or multiple?
• How frequent and how long should the source of supply be determined?
• Is there an outline agreement for the material?
• Is it relevant for MRP?

Source List Functionalities

A source list has several functionalities. Figure 1shows a non-assigned source list for a material D-0001 (stain cleaner) in plant Z100 (sales distribution plant Z100). A non-assigned source list is a source list that has been maintained for a material that does not yet have an assigned source of supply.

Figure 1

Overview of a non-assigned source list

To maintain a source list, execute transaction code (ME01) or follow menu path Logistics > Material Management > Purchasing > Master data > Source list > Maintain. Then input the material and the plant in which you want to maintain the source list requirement and click the enter icon  or press Enter on your keyboard.

The source list functionalities are used in the administration of sources of supply. They are used to determine which source is allowed and which source is disallowed. There are two types of source list requirements that can be implemented in an SAP system:

1. Plant source list requirement: This method can be used to control the source determination of all materials in a plant. The list makes it mandatory that every purchasing transaction using a purchase requisition, purchase order, stock transfer requisition, or order in that plant be subject to a source list. Otherwise, the system displays an error message. With this setup, it is not possible to create a purchase requisition, purchasing order, stock transfer requisition, and stock transfer order for any material. Also, if a source of supply is not in a source list for both external and internal procurement, the system displays an error message.

Here are some other things to know about source list functionalities:

• The source list is time dependent. This means a validity period must be assigned (valid-from and valid-to dates). Note that once a source of supply in the source list validity period expires, such a source is no longer determined during the source determination.
• You can define a source of supply as fixed. That means the source is considered the preferred sources over a particular period of time.
• The source list has a block check box that can be used to block a source of supply for a period of time.
• You can update the source list.
• You can display a source list.
• You can delete a source list.

How to Set Up Source List Control at the Plant Level

When do you use the plant source list requirement? A source list requirement at the plant level is relevant based on certain considerations. The organization wants to enforce compliance for all materials in a particular plant.

Consider a scenario in which an organization with company code 1000 has the following enterprise structure: a central purchasing organization 1000 at the headquarters and purchasing groups 200, 300, and 400 responsible for buying materials for a petrochemical plant 1100 (production plant 110) located in a different region from the head office. In this case, it is the responsibility of purchasing organization 1000 to carry out due diligence on vendors, negotiate pricing conditions and payment terms, and then approve vendors as the source of supply for the material requirements in their various plants. The purchasing groups are responsible for buying when there are requirements from the user departments. A decision was reached that all procurement of materials in the petrochemical plant 1100 (production plant 110) should only be from an approved source of supply. This is because it enjoyed a better discount having a particular vendor or set of vendors supply across plants, thereby cutting down cost.

The organization wants to enforce compliance of an internal source of supply for all materials in a plant.

Consider a second scenario in which the purchasing organization 1000 in company code 1000 wants internal sources of supply to be restricted to assigned supplying plants only. Company code 1000 has zoned each production plant to some sales distribution plants in several regions, but due to the volume of business activity and geographical land mass of region Z, the organization established three production plants (1100, 0099, and 1200) and six sales distribution plants — Z100, Z200, Z300, Z400, Z500, and Z600 (all in region Z).

The assignment is as follows:

• Region Z-Northern Zone: Plant 1100 (production plant 110) – assigned to sale distribution plant Z600.

• Region Z-Southern Zone: Plant 1200 (production plant 1200) – Assigned to sale distribution plants Z400 and Z500.

• Region Z-Central Zone: Plant 0099 (production plant 0099) – Assigned to sale distribution plants Z100, Z200, and Z300.

This zoning concept was initiated because the organization discovered that there is usually a high logistics overhead allowing sales distribution plants to internally source their requirements from production plants that are not in their proximity. In the quest to cut down cost, the management had to zone the sales distribution plants to production plants closer to them.

To ensure this concept is properly administered, management came up with a policy to restrict each sales distribution plant to the assigned production plant as the only source of supply for the organization’s finished products, and therefore, the organization needs 100 percent compliance. You are required to implement this rule so that users are mandated to use only an assigned supplying plant (production plant) during their stock transfer procurement process.

These are scenarios for when you may need to implement the plant source list requirement. It is only the plant source list requirement that has the functionality to control both external and internal procurement sources of supply.

To set up a plant source list requirement execute transaction code SPRO and follow menu path SAP IMG > Material Management > Purchasing > Source List – Define Source List Requirement at Plant Level. The system then displays the screen in Figure 2.

Figure 2

Set up a plant source list requirement

Click the execute icon  beside Define Source List Requirement at Plant Level. This action displays the Change View “Source List/Plant”: Overview screen (Figure 3).

Figure 3

Select plants for source list requirement

In the Change View “Source List/Plant”: Overview screen, select the plant or plants that should have a source list requirement (Figure 3).

After you have checked the plant or plants, they become plants with a source list requirement. Next, save your selections by clicking the save icon  on the menu bar. This implies that whenever any material requirement is to be procured from this plant, whether internally or externally, the system displays an error message noting that a source list has not been maintained for the material. See “Business Scenario 1” for a practical scenario.

In my example in Figure 3, plant Z100 (Sales Distribution Plant Z100), Z200 (Sales Distribution Plant Z200), Z300 (Sales Distribution Plant Z300), Z400 (Sales Distribution Plant Z400), Z500 (Sales Distribution Plant Z500), and Z600 (Sales Distribution Plant Z600) have all been selected to be subject to the source list requirement.

Let’s test how it works.

Business Scenario 1

In this scenario assume that an organization with company code 1000 has a policy that all materials in plant 1100 (production plant 110) must be sourced from approved vendors. In this example, the organization uses material 6761 (soda powder) in Plant 1100 (Production Plant 110). Vendor T-K515B03 (Cadic Supplies) is the approved vendor.

The task: In this scenario the task is to test if the system displays an error message in a purchase requisition when a non-approved source of supply is assigned to material 6761 (soda powder) in plant 1100 (Production Plant 110).

Prerequisites include the following:

• Plant 1100 (Production Plant 110) must have been set up in the IMG as a plant with a source list requirement (Figure 4).
• A source list needs to have been created for the material 6761 (soda powder) in plant 1100 (Production Plant 110) with vendor T-K515B03 (Cadic Supplies)), as shown in Figure 5.

Figure 4

Plant 1100 (Production Plant 110) checked for a source list requirement

Figure 5

Source list for Material 6761 (soda powder)

To test this configuration, create a purchase requisition for material 6761 (soda powder) in Plant 1100 (Production Plant 110) using a non-approved vendor Z520 (Gazin Limited) as the source of supply.

To create a purchase requisition for material 6761 (soda powder) in plant 1100 (Production Plant 110), execute transaction code ME51n or follow menu path Logistics > Material Management > Purchasing > Purchase requisition > Create. The system then displays the screen in Figure 6.

Figure 6

Create a purchase requisition for material 6761 (soda powder)

After the purchase requisition document has been populated and the vendor Z520 (Gazin Limited) is assigned, click the enter icon or press Enter on your keyboard. The following error message then appears on the status bar: Source not included in list despite source list requirement.

The result: Note that an error message appears on the status bar at the bottom of Figure 6. This message implies that either a source list does not exist for the material or that the vendor Z520 (Gazin Limited) is not an approved source of supply and is not listed in the source list for the material. Therefore, this vendor cannot be used.

Business Scenario 2

After the production of products in several production plants in company code 1000, each sales distribution plant is required to procure finished products from its assigned production plant only. This is a case of an internal procurement process using a stock transfer order.

Plant 1100 (Production Plant 110) has been approved as the only internal source of supply for material D-0001 (stain cleaner) in Plant Z100 (Sales Distribution Plant Z100). For the organization to get 100 percent user compliance, the plant source list requirement has to be set up and a source list needs to be created.

Task: In this scenario, the task is to test if the system will display an error message in a stock transfer order when a non-approved source of supply is assigned to material D-0001 (stain cleaner) in Plant Z100 (Sales Distribution Plant Z100).

Prerequisites include the following:

• Plant Z100 (Sales Distribution Plant Z100) must have been set up in the IMG as a plant with a source list requirement, as shown in Figure 3.
• A source list needs to have been created for material D-0001 (stain cleaner) in Plant Z100 (Sales Distribution Plant Z100) with supplying plant 1100 (Production Plant 110), as shown in Figure 7.

Figure 7

Source list for material D-0001 (stain cleaner)

You can test this configuration by creating a stock transfer order for material D-0001 (stain cleaner) in plant Z100 (Sales Distribution Plant Z100) using a non-approved supplying plant 1200 (Production Plant 1200) as the source of supply.

To create a stock transfer order for material D-0001 (stain cleaner) in plant Z100 (Sales Distribution Plant Z100), execute transaction code ME21n or follow menu path Logistics > Material Management > Purchasing > Purchase Order > Create > Vendor/Supplying Plant known. The system then displays the screen in Figure 8.

Figure 8

Create a stock transfer order for material D-0001 (stain cleaner)

The result: Note that the system displays an error message on the status bar at the bottom of Figure 8. This message implies that either a source list does not exist for the material or that the supplying plant 1200 (Production Plant 1200) is not an approved source of supply and is not listed in the source list for the material. Therefore, this plant cannot be used.

How to Set Up Source List Control at the Material Level

The source list requirement can also be set up at the material level to control the source of supply for material requirements. In this case, the setup is done in the material master record for the individual material. A source list requirement at the material level is relevant based on certain considerations.

The organization requires that the source of supply for procuring certain materials in a particular plant must be from an approved vendor or vendors. In this case, the control is not plant-wise, but just on specific materials.

Consider a scenario in which an organization with company code 1000 manufactures radioactive products. This organization procures some of its very sensitive radioactive materials from vendors that have been thoroughly screened to pass certain global radioactive trade regulations. The organization has a central purchasing organization, four plants where these materials are used, and purchasing groups for these materials in each plant. To ensure that the material is procured only from the verified and certified vendors, the source list requirement for the material is set up in the material master record in the purchasing view. For this requirement to be relevant in a plant, the source list check box in the purchasing view must be selected in the material master record of a material in the plant.

When the source list check box is selected in the purchasing view, the system displays the error message Source not included in list despite list requirement in the following circumstances:

• A material that has a source list requirement maintained is called up in the purchase requisition or purchase order and a source list has not been maintained for such material.
• A non-approved vendor that is not in the source list is assigned as source of supply.

Whenever this message appears in the status bar, the system cannot proceed unless a source list is maintained if none exists or an approved vendor in the source list is assigned.

A source list requirement for a material is set up in the material master record of that material, to be precise, at the Purchasing view.

To set up a source list requirement in the material master record, execute transaction code MM02 or follow menu path Logistics > Materials Management > Material Master > Material > Change > MM02 – Immediately.

In this scenario, the material has been created before now (Material 6773 thorium oxide powder).

In the Change Material initial screen, enter the number of the material in the Material field, click the Select View(s) button, and then in the Select View(s) list that appears on the right side of the screen, choose the Purchasing view. Click the enter icon or press Enter on your keyboard (Figure 9).

Figure 9

Select the Purchasing view

After you click the enter icon or press Enter on your keyboard, the system displays the organizational levels screen in which you enter plant 1300 (Production Plant 1300) where the material sourcing is to be controlled. After you click the enter icon or press the Enter key, the system displays the screen in Figure 10. In the Purchasing tab, go to the Other data/manufacturer data section and select the Source list check box.

Figure 10

The master record for Material 6773 (thorium oxide powder)

Click the save icon to save your data.

To test this material source list requirement scenario, I use a plant for which the source list requirement has not been set up or is not active — Plant 1300 (Production Plant 1300) as shown in Figure 11.

Figure 11

Plant 1300 not checked for source list requirement

Based on the organization’s policy, the procurement sourcing committee has approved vendor T-K515B03 (Cadic Supplies) to be the source of supply for Material 6773 (thorium oxide powder) in Plant 1300 (Production Plant 1300). To enforce 100 percent compliance with this policy, a source list requirement has been set up for the material 6773 (thorium oxide powder) master record and a source list is maintained, respectively.

With this setting, when a user in Plant 1300 (Production Plant 1300) tries to create a purchase order to purchase the material 6773 (thorium oxide powder) with non-approved vendor Z520 (Gazin Limited) as the source of supply, the system displays an error message (Figure 12).

Figure 12

Purchase order for material 6773 (thorium oxide powder)

The result: Note that the error message on the status bar in Figure 12 indicates that this purchase order cannot be created unless a source list is created if none exists or the approved source of supply for the material in the source list is assigned. With this setup, organizations can get 100 percent user compliance to the approved source of supply.

A source list can work with a purchasing info-record, quota arrangement, and outline agreements to further optimize the source determination process.

Tips on Simulating and Analyzing a Source List

In this section I list some tips to remember when you simulate or analyze the source list requirements.

How to Simulate Source Determination (Source List)

The source list can be used to determine which source of supply is suggested for a purchase requisition item. Simulation of source determination is basically to check that the source of supply is correctly maintained. It is not an important routine in source determination, though.

The idea is to check which source of supply would be automatically determined in the purchase requisition.

There are two simulation scenarios:

• Which sources of supply would be suggested if the source list were the only source option (this implies that the source determination is determined without taking outline agreements, info records, or quota arrangements into consideration)

• Which sources of supply would be suggested by the system in requisitions or purchase orders taking outline agreements, info records, and quota arrangements into account

Steps on How to Simulate a Source Determination in the Source List

To simulate a source determination in the source list, you need to complete three steps:

1. Go to the overview screen for the source list.
2. On the menu bar select Extras > Simulation > Source list (in the scenario in which only the source list should be considered in the source determination process) or on the menu bar select Extras > Simulation > Source of supply (in the scenario in which outline agreements, info records, and quota arrangements should be considered in the source determination). 
3. Choose the order date for which the simulation is to be carried out. Then click the enter icon or press the Enter key on your keyboard to display the effective source of supply.

How to Analyze Source List Records

The objective of this function is to help check for materials with no source list record in a given date or date range within a plant or range of plants. With this transaction, you can detect materials with a missing source list record in the case of a plant with a source list requirement.

To use the source list analyzing functions, follow menu path Logistics > Material Management > Purchasing > Master data > Source list - Follow-on functions > Analyze.

The system then displays the Analyze Source list screen. In this screen enter the material number or interval of material numbers if you want it to be material specific or leave this field blank. You can also enter the plant or interval of the plants for which you wish to analyze the source list records.

The next step is to set the scope of the analysis. First, set the dates for which you want to check the availability of the source list record for a material in the plant. You can also set if the analysis should be restricted only to plants with source list requirements.

Now run the analysis. All the materials whose source list records are not properly maintained are displayed based on the criteria selected. With the displayed result, you can make a decision on materials for which the source list record should be properly maintained.

Patrick Imhen

Patrick Imhen is a business analyst and a certified SAP ERP consultant with proficient knowledge, skills, and experience in Materials Management (MM), Sales and Distribution (SD) and Plant Maintenance (PM) gathered from successful SAP implementations projects, support, training, business process analysis, modeling, unit testing, and integration testing. He has profound understanding of the supply chain process across industries and helps organizations cut the cost of operation and improve process optimization. He has more than 10 years’ experience in the business environment and six years’ experience in the SAP domain.

You may contact the author at patrick.imhen@zocoderesources.com.

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