Using Supply Chain Cost Management (2024)

Companies often design their legal structure for financial efficiency as well as efficiency in the physical flow of goods through the supply chain. Typically, the most optimal financial movement of goods is different from the most optimal physical movement of goods.

For example, the purchase requisitions from a group of subsidiary companies could be routed through a single international purchasing company who deals with the suppliers. As a result, the legal owners of the purchasing organizations will be different from the legal owners of the receiving organizations. This form of purchasing is known as global procurement.

The following discusses:

Global procurement trade flows
Trade agreements and accountingrule sets
Agreements converted to purchaseorders
Commonly used terms

Global Procurement Trade Flows

This figure illustrates a typical global procurement trade flow, in this case between a US corporation and its China supplier. The US corporation has a central procurement business unit which creates trade agreements and purchase orders on behalf of its subsidiaries.

The China supplier drop ships the goods directly to the US receiving inventory organization M1. However for legal and accounting purposes, the trade flows from the China supplier through the China sold-to legal entity (China Ltd), to the US receiving legal entity (US Inc). For management and profit tracking purposes, the trade flows from the China sold-to profit center business unit CN BU to the US receiving profit center business unit US West.

Financial Trade Agreements and Accounting RuleSets

A trade agreement defines the parties inthe trade relationship. In this example the trade agreement is betweenthe US corporation and the China supplier, and it defines the buying,selling, sold-to, and receiving legal entities, profit center businessunits, inventory organizations, and trade organizations.

The accounting rule sets define source documentsand accounting that is required in the legal and financial flow, alsoknown as the ownership change event flow. A rule set is associatedwith a financial route, and financial routes can have different accountingrule sets.

The following illustrates a trade agreement setupfor the US corporation:

Trade Agreement Converted to Purchase Orders

The trade agreement is used to create purchaseorders. The following illustrates a purchase order created under theUS Corporation trade agreement # GP001:

Document Type: Purchase Order
Document #: PO-GP001
Document Line #: 1
Document Line Detail: 1.1
Document Line Distribution #: 1.1.1
Item: SFO-CST_ASSET
Quantity: 100
UOM: Each
Currency: CNY
Price: 650
Sold-to Legal Entity: China Ltd.
Trade Organization: CN INV ORG
Deliver-to Organization: M1
Primary Trade Relationship #: PTR1

Global Procurement Common Terms

The following table describes the terms commonlyused in global procurement trading:

Terms	Definitions and Rules
buy-sell relationship	Relationship between two business units where oneacts as a buyer and the other as a seller of goods or services. Theseller records the revenue, cost of sale, and receivables. The buyerrecords the payables and inventory or expense. A buy-sell trade betweeninternal business units is settled through the transfer price.
asset item	Inventory item where the cost of acquisition is valuedas an asset on the balance sheet. The inventory cost is expensed whenit is consumed or sold.
expense item	Inventory item whose cost of acquisition is bookedas an expense.
transfer price	The unit price that one business unit charges anotherfor goods or services traded within the enterprise. The transferprice is typically based on the price list, cost plus or minus, orpurchase price plus or minus.
financial route	Designates how financial transactions are settled,can be different from the physical route, and may involve one or moreintermediary nodes. The intermediary nodes are internal business unitsthat are not part of the physical supply chain transaction but arepart of the financial route.
Incoterms	A series of sales terms in international trade, usedto define the rights and obligations of the trade partners with respectto the delivery of goods sold. Incoterms are used to divide transactioncosts and responsibilities between buyer and seller, and to reflecttransportation practices.
intercompany profit and loss	The internal profit or loss arising out of tradeamong business units in the enterprise. These internal profits andlosses are used for internal management but are typically eliminatedwhen producing the enterprise consolidated financial statements forexternal stakeholders.
intercompany trade	The trade of goods and services between organizationsbelonging to different legal entities within a conglomerate.
intracompany trade	The trade of goods or services between two internalorganizations within a legal entity.
ownership change event	The transfer of title of goods and services fromone party to another. This results in accounting and the creationof financial documents such as Accounts Receivable and Accounts Payableinvoices.
price list	Contains the basic list information and pricing attributesfor items or product groups.
pricing option	A method to compute the transfer price based on cost,source document price, or price list.
profit center	A business unit that operates with its own incomestatement and reports to the legal entity.
purchasing trade organization	The inventory organization reporting to the sold-tolegal entity identified in the purchase order. This organization isused for cost accounting the transactions in the sold-to legal entity.
qualifiers	Business attributes of a supply chain document ortransaction that determine the applicability of the trade agreement.
supply chain financial orchestration agreement	An agreement between the legal entities, businessunits, and trade organizations of a corporate group. The agreementdefines the parties in the trade relationship and the financial settlementprocess.
trade distributions	Subledger entries created by Oracle Receipt Accounting and Oracle Cost Accounting for Oracle Supply Chain Financial Orchestration trade transactions.
procurement business unit	Has central responsibility for the creation of tradeagreements and purchase orders on behalf of legal entities and businessunits under the holding company.