1. Implementing Manufacturing and Supply Chain Materials Management
  2. Global Procurement Flow

Global Procurement Flow

Global sourcing strategies can help make your supply chain resilient and cost-efficient. Two such strategies are centralized procurement and global procurement.

Let's look at both these strategies with examples.

Centralized procurement: In our example, we have a centralized procurement flow with these entities:

  • Procurement BU – Vision Corporation in Hong Kong, also referred to as Vision HK
  • Requisitioning BU – Vision Corporation in Seattle, USA also referred to as Vision US1
  • Sold-to legal entity (LE) – Vision US1

Here, Vision US1 is your Receiving BU as well as the Sold-to Legal entity (LE) that will pay the supplier. This means that while Vision HK BU is only facilitating the purchase, the entity that will be receiving the material as well as making the payment to the supplier is the same, that is Vision US1. Hence there is no intercompany financial transaction involved. This one-step payment process is centralized procurement.

Global procurement: Now let us consider a global procurement flow with these entities:

  • Procurement BU – Vision HK
  • Receiving BU – Vision US1
  • Sold-to LE – Vision China

Here, the sold-to LE on the PO line isn’t Vision USA, it’s Vision China. Even though the material will be received by Vision USA, the supplier will send an invoice to the Vision China legal entity and Vision China will make the payment to the supplier. The BU that receives the material and the one that pays the supplier are different entities. This is a global procurement. Global procurement can be orchestrated across two different Profit Center Business Units (PCBUs) those belong to the same legal entity or across two different legal entities.

Global Procurement in Financial Orchestration

Implement global procurement if these situations apply:

  • If you require intercompany billing
  • If you want to create intercompany accounting with transfer pricing

Entities in a Global Procurement Flow

Let’s look at the Global Procurement flow in detail. These are the entities in a global procurement flow:

  1. Requisitioning BU: A business unit that creates the requisition for the goods or services.
  2. Receiving BU: A business unit that receives goods or services from an external supplier used for financial orchestration.
  3. Procurement BU: A business unit that manages procurement contracts and purchase orders.
  4. Bill-to-BU: A business unit that manages the accounts payable invoice for the purchase transaction.
  5. Sold-to LE (BU): The legal entity that owns the supplier liability.

In global procurement the receiving BU and sold-to legal entity stamped on the PO are different. Global procurement can also be routed through one or more financial intermediary nodes.

In this example, we’ll create a financial orchestration flow for Vision Corporation, a multinational company that engages in a global procurement strategy for sourcing supplies internationally.

  • Vision Corporation is a hi-tech product design and manufacturing company, with headquarters in California, USA. It is modelled as an enterprise in Oracle Fusion Cloud Financials.
  • Vision US1 is the business unit that manages sales for the US region with its sales office in Seattle, WA. It is defined as a legal entity and as a business unit.
  • Vision Hong Kong or Vision HK is the procurement BU. It provides a global procurement function for Vision US1. It facilitates sourcing of goods from local suppliers in China.
  • Vision Corporation has a legal entity located in Shanghai, China. For the purposes of this example, we’ll refer to it as Vision China. This BU will receive the payables invoices from the suppliers of the China region. So it will be the Sold-to BU for this global procurement flow.
  • Fantastic Laptops is a supplier in China from whom Vision US1 imports laptops for office use. The goods are directly shipped from the supplier's warehouse in China to Vision US1 in Seattle.
Entities defined in a global procurement flow

These are the business decisions you'll take:

Decisions to consider In this example
Flow Type Procurement
Sold to Business Unit Vision China
Requisition Business Unit Vision US1 business unit
Receiving Business Unit Vision US1 business unit
Buyers Procurement Business Unit Vision HK
Buyers Bill-to Business Unit Vision China
Supplier Site Fantastic Laptops, Shanghai
Qualifier Optional
Accounting Transfer Price Based on source document price
Markup percentage 10
Currency Option Source document
Trade Distributions Required
Track Profit In Inventory Required
Intercompany Invoices Required
Item Purchased Laptops

Global Procurement Transactions

The transfer pricing rules allow the Vision China business unit to retain 10% of its intercompany margin when it engages with the Vision US1 entity. As part of the guidelines, intercompany payables and receivables invoices are required for the trade transactions upon ownership change which happens during the receipt of goods into the Vision US1 Seattle warehouse.

Here’s a summary of the transactions that take place in our example.

Summary of transactions that take place in our example

When Vision US1 business unit receives the laptop against the PO, it initiates the transactions as follows:

  1. Vision China pays the supplier Fantastic Laptops $1000 for their product. This is the price on the purchase order line.
  2. Vision China has a markup of 10% of its document price when it engages in trade relationship with Vision US1. So, the intercompany invoices are of the amount $1100.
  3. Vision China books an Intercompany COGS of $1000 and raises intercompany receivables invoice on Vision US1 for $1100.
  4. Vision Corporation USA books an intercompany accrual and creates the intercompany payable invoice to Vision China for $1100.
Accounting at the Supplier Facing BU (Sold-to LE): Vision China Accounting at the Receiving BU: Vision US1
Trade receipt accrual Trade clearing Debit $1000 Trade receipt accrual Trade clearing Debit $1100
Supplier accrual Credit $1000 Intercompany accrual Credit $1100
Trade in transit receipt Trade in transit Debit $1000 Trade in transit receipt Trade in transit Debit $1100
Trade clearing Credit $1000 Trade clearing Credit $1100
Trade in transit issue Intercompany COGS Debit $1000 Physical receipt Receiving inspection Debit $1100
Trade in transit Credit $1000 Trade in transit Credit $1100
Supplier payables invoice Supplier accrual Debit $1000 Physical receipt delivery Inventory valuation Debit $1100
Supplier payables Credit $1000 Receiving inspection Credit $1100
Intercompany receivables invoice Intercompany receivables trade Debit $1100 Intercompany payables Invoice Intercompany accrual Debit $1100
Intercompany receivables revenue Credit $1100 Intercompany payables Credit $1100

Summary of Tasks

The tasks involved to create a financial orchestration flow are:

  1. Creating documentation and accounting rules
  2. Creating transfer pricing rules
  3. Creating profit center business unit party relationships
  4. (Optional) Creating financial orchestration qualifiers
  5. Creating financial orchestration flows
  6. Setting financial orchestration system options
  7. Testing your financial orchestration flow

Creating Documentation and Accounting Rule

  1. In the Setup and Maintenance work area, access this task:

    • Offering: Manufacturing and Supply Chain Materials Management
    • Functional Area: Supply Chain Financial Flows
    • Task: Manage Supply Chain Financial Orchestration Documentation and Accounting Rules
  2. On the Manage Documentation and Accounting Rules page, click Actions, and then click Create.
  3. On the Create Documentation and Accounting Rule page, set the values listed in this table.
    Field Value
    Name Vision China Documentation and Accounting Rule
    Currency Option Buying Node
    Conversion Type Corporate
    Trade Distributions Selected
    Track Profits In Inventory Selected
    Intercompany Invoices Selected
    Effective Start Date Today's date
  4. Click Save and Close.

Creating Transfer Pricing Rule

Let’s create the Vision China Transfer Pricing Rule. The China business unit requires a 10% markup on the document price or PO price to realize a profit.

  1. In the Setup and Maintenance work area, access this task:
    • Offering: Manufacturing and Supply Chain Materials Management
    • Functional Area: Supply Chain Financial Flows
    • Task: Manage Supply Chain Financial Orchestration Transfer Pricing Rules
  2. On the Manage Transfer Pricing Rules page, click Actions, and then click Create.
  3. On the Create Transfer Pricing Rule dialog box, set the values listed in this table.
    Field Value
    Name Vision China Transfer Pricing Rule
    Accounting Transfer Price Source Document Price Basis
    Markup Percentage 10
    Effective Start Date Today's date
  4. Click Save and Close, and then click Done.

Creating Profit Center Business Unit Party Relationships

In this example, we will create the profit center BU Party relationship for the following business units:
  1. Intercompany buyer profile for Vision US1 BU
  2. Intercompany seller profile for Vision China BU

Intercompany Buyer Profile for Vision US1 BU

Let's create the party relationship for the Vision US1 BU profit center business unit. Vision Operations US1 is an intercompany buyer. It buys the goods from an internal organization, Vision China.

  1. In the Setup and Maintenance work area, access this task:
    • Offering: Manufacturing and Supply Chain Materials Management
    • Functional Area: Supply Chain Financial Flows
    • Task: Profit Center Business Unit Party Relationships
  2. On the Manage Profit Center BU to Party Relationships page, click Actions, and then click Create.
  3. On the Create Profit Center BU to Party Relationships page, set the values listed in this table. Leave all other fields at their default value.
    Field Value
    Profit Center Business Unit Vision US1 BU
    Default Trade Organization V1
    Ship-to Location Leave empty
    Customer Vision Distribution Center
    Supplier Number 20061
  4. In the Profit Center BU Profiles section, edit the Intercompany buyer profile.
  5. In the Bill to BU for Payables Invoice and PO section, set the values listed in this table. Leave all other fields at their default value, and then click OK.
    Note: The bill-to BU stamped on the PO is not the one provided by Supply Chain Financial Orchestration. Bill-to BU is derived by the Oracle Procurement module from the supplier site assignment for the client BU.
    Field Value
    Procurement Business Unit Vision HK BU
    Bill to Business Unit Vision US1 BU
  6. In the Customer Locations for Seller's Receivable Invoice and Sales Order section, set the values listed in the following table. Leave all other fields at their default value, and then click OK.
    Field Value
    Profit Center Business Unit Vision China
    Default Trade Organization C1
  7. On the Create Profit Center BU to Party Relationships page, click Save and Close.

Intercompany Seller Profile for the Vision China BU

To create the party relationship for the Vision Manufacturing profit center business unit, do the following:
  1. On the Manage Profit Center BU to Party Relationships page, click Actions, and then click Create.
  2. On the Create Profit Center BU to Party Relationships page, set the values listed in this table. Leave all other fields at their default value.
    Field Value
    Profit Center Business Unit Vision Manufacturing
    Default Trade Organization C1
    Ship-to location Leave Empty
    Customer Vision US1
    Supplier Number 20061
    Vision China BU is an intercompany seller. It sells the goods to an internal organization, Internal-Vision US1.
  3. In the Profit Center BU Profiles section, edit the intercompany seller profile. Set the values as listed in this table. Leave all other fields at their default value, and then click OK.
    Field Value
    Receivables Business Unit Vision China BU
    Customer Address Set Vision China
  4. Edit the intercompany buyer profile and set the values listed in the following table. Leave all other fields at their default value, and then click OK.
    Field Value
    Buyer's Procurement Business Unit Vision US1
    Buyer's Bill to Business Unit Vision US1
    Supplier Site Shanghai-Internal
  5. On the Create Profit Center BU to Party Relationships page, click Save and Close.

Creating Financial Orchestration Flows

Let's see how to create a financial orchestration flow for global procurement.

  1. In the Setup and Maintenance work area, access this task:
    • Offering: Manufacturing and Supply Chain Materials Management
    • Functional Area: Supply Chain Financial Flows
    • Task: Manage Financial Orchestration Flows

  2. On the Create Financial Orchestration Flow page, in the Primary Routes section, click Actions, Add Row. Set the values listed in this table. Leave all other fields at their default value.

    Field Value
    Sold To Business Unit Vision China
    Sold To Legal Entity Vision China
    Receiving Business Unit Vision US1 BU
    Receiving Legal Entity Vision Corporation
    Effective Start Date Today's date

  3. On the Create Financial Orchestration Flow page, in the Primary Routes section, click Actions, Add Row. Set the values listed in this table. Leave all other fields at their default value.

    Field Value
    Selling Business Unit Vision China BU
    Selling Legal Entity Vision China
    Buying Business Unit Vision US1
    Buying Legal Entity Vision Corporation
    Selling Trade Organization Vision China Org
    Buying Trade Organization Leave empty
    Transfer Pricing Rule Vision China Transfer Pricing Rule
    Documentation and Accounting Rule Vision China Documentation and Accounting Rule
    Receivables Invoice Type Intercompany
    Receivables Credit Memo Type Credit Memo
    Payment Terms Immediate

  4. Click Save.

Setting Financial Orchestration System Options

Set the Financial Orchestration system options by following these steps:

  1. In the Setup and Maintenance work area, from the Tasks menu, click Manage Implementation Projects.

  2. On the Implementation Project page, in the Task list, open the Manage Supply Chain Financial Orchestration System Options task.

  3. On the Manage Financial Orchestration System Options page, click Actions and Create. Enter the values listed in this table.

    Field

    Value

    Item Validation Organization

    V1
    Consider service item for descriptive global purchase order processing Select this check box to configure the global procurement business process flow for description lines either with a service item or without the service item setup.

    Service Item

    RR_RP_Item24

    Maximum Number of Records per Batch

    100

    Calculate tax for trade receipt accrual

    Select this check box
    Process referenced RMA without forward flow as unreferenced Select this check box if you want to automatically process RMA transactions that do not have forward flows associated to it.

  4. Click Save and Close.

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