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EIDX Order Models - Supporting Documentation

General Information and Considerations

Order Models:  General Information and Considerations

 

Definitions

Purchase Order (PO) - A type of contract between a buyer and a seller.  Regardless of what it is called, there is always something that serves the legal function of "purchase order" when a buyer makes a request for goods or services to be provided.  When the seller agrees to provide the goods and services, and both parties agree on the price, a binding contract exists between  buyer and seller.  Note that the delivery dates don't have to be agreed upon in order for a binding contract to exist.  /The two major types of orders are Discrete Purchase Orders and Blanket Purchase Orders

  • Purchase Order – Discrete (Standalone) - A discrete, standalone PO is a one-time commitment to a supplier for material. The purchase order conveys information such as quantity, description, and price of goods or services ordered.  A purchase order specify terms and conditions, transportation requirements, etc. or one or more of these items may be contained in a Terms and Conditions Agreement (TCA) referenced on the purchase order.  See also Types of Discrete Purchase Orders.
  • Purchase Order - Blanket  - A Blanket Purchase Order (BPO) is a long-term commitment to a supplier for material against which multiple short-term releases will be generated to satisfy requirements. The BPO defines specific terms, conditions, and pricing terms not already contained in or more specific than terms in the contractual agreement.  There are several Replenishment Scenarios that use different types of Blanket Purchase Orders.

Receipt Acknowledgment - a/k/a Functional Acknowledgment, Control MessageWhen one party (e.g. buyer) sends an electronic message to another party (e.g. seller), the recipient sends back a signal back advising the sender that the message reached the intended destination, and indicating whether or not the message was syntactically correct and in conformance to the standard identified in the message.  The receipt acknowledgment is called a "business signal" by some in order to distinguish it from a business document containing business data.  A receipt acknowledgment has no legal authority - it does not address the business contents of the sent document.  The origin and destination are usually eBusiness gateways.  The signal sent back to the originator generally indicates that the message was received at the recipient's gateway; it does not guarantee that the message made into the recipient's back-end application.  The reliability of the interface between the recipient's gateway and recipient's back-end application should be determined as part of the testing and implementation process.

Acknowledgment (Order)
An acknowledgment advises a buyer that a purchase order has been received, and indicates whether the supplier has accepted all or part of the order. An acknowledgment may advise the buyer if any changes have been made or action is required, such as a rescheduling of dates, adjustment to price and/or quantity, etc.

Release - An authorization to produce or ship material which has already been ordered.

Release, Discrete - A stand-alone document or message, authorizing the shipment of material against a blanket order.

Release, Embedded - See Material Release Schedule.

Drop Ship - A process where a buyer places an order with a supplier for goods that are to be delivered to a third party.  All the financial transactions are handled by the buyer and supplier.  Goods marked for drop-ship should not affect the buyer's inventory counts.

  • Example:  An manufacturer's customer may order a repair/replacement part, and the manufacturer may send an order to the supplier indicating that the part should be shipped directly to the manufacturer's customer.
  • Example:  An OEM may outsource assembly of a product to a contract manufacturer.  The OEM may order component parts from their supplier and have them drop-shipped to the contract manufacturer.

Supplier-Managed Inventory (SMI) - (a/k/a Vendor-Managed Inventory). Any replenishment process where the supplier determines when to ship parts and how many units to ship.  Calculation of replenishment requirements may be forecast-based or consumption-based.

 

Which Order Model to Use

The choice of which Replenishment Scenario to use is the primary factor in deciding which Order model to use.  A secondary consideration is whether or not consignment (a/k/a supplier-owned inventory, line side stocking) does or does not need to be supported.

A purchase order is either a discrete order or a blanket order.  EIDX has developed business models for two order types:

  1. Traditional Discrete (Stand-alone) Purchase Order
  2. Blanket Purchase Order

A generally accepted guideline is that a blanket purchase order is cost-effective if a buyer anticipates purchasing an item from the same supplier more than six times per year. The use of a BPO eliminates the necessity of issuing a new discrete PO at the time of each release, resulting in efficiency and administrative cost savings. Minimum dollar amounts and minimum time periods BPOs may cover should be decided between trading partners. 

For more information:


Buyer- vs. Seller-Initiated Changes

Sellers should set the Transaction Set Purpose Code (BCA01) to '00' in the 865 transaction when acknowledging buyer  initiated changes.

Sellers should set the Transaction Set Purpose Code (BCA01) to '19' in the 865 transaction when acknowledging seller initiated changes.  If the seller initiated changes conveyed in the acknowledgment 865 transaction are unacceptable to the buyer, an 860 transaction can be sent to request another set of dates.   If needed, further communications with the seller outside of the EDI process may be necessary.

Both buyer and seller initiated changes in any 865 transaction should be processed the similarly by the buyer’s system.  The major purpose of acknowledgments is to convey the scheduled ship or delivery date.  Supplier schedule dates are already established in the sales order system as noted in the 865 transaction.

 


Relationships between Dates, Lead Times and Supplier Performance Measures

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If order placed inside lead time, supplier's performance should not be based on requested delivery date if promised delivery date is within agreed lead time.  If order placed outside lead time, supplier performance may be based on requested deliver date.

Partners need to agree as to whether time will be measured in calendar days or work days.  For example, if buyer's factory runs 24x7 and seller's factory runs 8x5 ...

Transit times - buyer-controlled carrier vs. seller-controlled carrier.

On-time windows - days early and days late.


Typical Back-end Processing - Buyer

Generating the Purchase Order

See also Public vs. Private Processes.

Before it's an order - When folks talk about different procurement models, often the differences are in the pre-order processes - what happens before something becomes an order. There are some major categories:

  • Sourcing - Determining who to buy from and establishing their technical and financial qualifications
  • Pricing - Determining what the cost of the product or service will be
  • Planning - Anticipating what will be ordered, based on a buyer’s forecasted build plan or on historical usage

    These are factors in the lead time for procuring a product.

Once a requirement exists - The ERP application typically transfers orders to a procurement application; some ERP applications include a procurement function.

  • The system may assemble items for the same supplier onto one or more orders, based on order policies and order parameters. 
    • The fields are used as criteria for segregating demand into orders vary from partner to partner, and may include any of the following:
      • Buyer's location
      • Ship-to location
      • Invoice-to location
      • Seller's ship-from location, especially if supplier ships from multiple countries
      • Commodity type or accounting "spend" classification
      • Which buyer is responsible for the order
      • Shipment method
      • Tax exemption status
      • Order currency
    • Some parameters considered when creating an order line item include:
      • Pre-pack (packaging) size - minimum number of units per delivery
      • Supplier requirement for minimum order value (minimum amount of money) and/or minimum line item quantity for a product
      • Bundled items - items that must be ordered together
  • The system may automatically format and transmit the order if all the necessary information is configured in the system.
  • “Formatting” can be for hardcopy print, or can be the creation of a file in a proprietary or standard format
  • If any information is missing, the system may create an exception for the buyer to review. In this case, the buyer has to manually release the order for transmission

Processing the PO Response

When the buyer receives the PO response, processing activities may include:

  • Determining if the response matches a valid, open purchase order
  • Determining if the response is complete
  • Evaluating critical data fields to see if the seller's response matches or does not match the buyer's request, including:
    • Correct product identification
    • Price
    • Line item total quantities
    • Delivery schedule quantities
    • Requested delivery or shipment dates

If the seller's response doesn't match the buyer's requests, the buyer must decide whether the seller's response is acceptable and decide what action to take.


Typical Back-end Processing - Seller

See also Public vs. Private Processes.

Most of this is “overhead” processing that can be avoided by setting up repeat-buy products on blanket purchase orders, then generating releases for replenishment.  The seller typically does the following:

  • Determine if customer is a valid customer and information is current
    • Company name
    • Addresses
    • Credit status
    • Tax certificate number
    • Documentation requirements (certificate of conformance, etc.)
  • Determine if the trading partner agreement or contract is valid
  • Determine if it’s a new PO
    • If it’s not new, is it a confirming PO or a duplicate?
  • Determine whether the product a valid product
    • If it’s a configured system, determine whether the configuration valid and is standard or customized
  • Determine if there has been product revision since last order
  • Determine product availability
    • Is it an order for something that has been forecasted? If forecasted, is product allocated in the system?
    • If not forecasted, is the product available?
  • Determine if the pricing is correct
  • Generate order acceptance
    • The order acceptance completes the contract.
      • Same day ship may skip PO Acknowledgment generation and go right to ship notice generation. The ship notice still indicates order acceptance.
      • If ship notices are not enabled, same day ship may skip to invoice generation.  Shipping the items and sending an invoice still indicates order acceptance.
    • PO acknowledgment should be generated if not same day ship (or if customer requires it), and indicates order acceptance.
  • Fulfill the order
     

 

Last updated 01 February 2003