Akila Wedasinghe
SAP S4 HANA MM
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SAP Outline Agreement
Complete Visual Guide to Understanding the Process, Types, and Benefits in SAP MM
What is an Outline Agreement?
An Outline Agreement is a long-term purchasing agreement between a vendor and a customer. It contains terms and conditions valid over an extended period and usually includes fixed prices, delivery terms, and quantity commitments.
Key Characteristics
Long-term contract between vendor and buyer
Used for repeated buying of the same materials
Has fixed conditions (price, quantity, delivery terms)
More optimized than creating multiple purchase orders
Valid for a specific time period (typically quarterly or yearly)
Business Perspective: Instead of creating multiple separate purchase orders for the same material, Outline Agreements provide an optimized buying process. They are especially beneficial for direct materials that are purchased repeatedly, helping procurement teams plan more effectively.
Key Performance Indicator: Many organizations track KPIs on percentage of purchases made against contracts vs. ad-hoc purchase orders. Higher contract utilization indicates better procurement practices.
Types of Outline Agreements
SAP supports two main types of Outline Agreements: Contracts and Scheduling Agreements. Each serves different procurement needs and follows different processes.
Contracts
A contract is a long-term agreement with a vendor to supply materials under predetermined conditions, with negotiated pricing and terms.
Types of Contracts:
Value Contract: Agreement up to a certain monetary value (e.g., $50,000)
Quantity Contract: Agreement up to a certain quantity (e.g., 5,000 units)
Process Flow:
Create contract with validity period
Release Purchase Orders against contract
Goods Receipt against Purchase Orders
Invoice processing
Scheduling Agreements
A scheduling agreement defines delivery schedules for long-term recurring requirements, focusing on specific delivery dates.
Types of Scheduling Agreements:
Without Release (LP): Delivery schedules go directly to vendor
With Release (LPA): Need to release schedule lines before delivery
Process Flow:
Create scheduling agreement with validity
Maintain delivery schedules (ME38)
(For LPA) Release schedule lines
Goods Receipt against schedule lines
When to Choose: Use contracts when the focus is on negotiated pricing over a period, but specific delivery dates are flexible. Use scheduling agreements when specific delivery dates and quantities are critical to your operations.
Contract Process Flow
Create Contract
Set vendor, validity, material, quantity/value
1
Release PO
Create PO with reference to contract
2
Delivery
Vendor delivers against PO
3
Goods Receipt
Post GR against the PO
4
Invoice
Process vendor invoice
5
Creating Contracts
Value vs. Quantity
Central Contracts
Ways to Create Contracts:
Direct Creation (ME31K): Create contract directly by specifying vendor, materials, conditions
From Purchase Requisition (ME31K): Create with reference to a purchase requisition
From RFQ (ME31K): Create with reference to a Request for Quotation
Business Process: Some industries, especially project-specific industries, create a purchase requisition first to identify requirements. Procurement teams then analyze these requisitions to determine total quantities needed for a period and create contracts accordingly, with better negotiated rates.
Technical Note: When creating from a purchase requisition, the purchase requisition type should be "Outline Agreement Requisition" (special document type). These requisitions are not MRP-relevant.
Value Contract
Limitation: Total monetary value (e.g., $50,000)
Tracking: System monitors consumed value
Best for: Services or varied materials
Usage: When the monetary constraint is more important than quantity
Quantity Contract
Limitation: Total quantity (e.g., 5,000 units)
Tracking: System monitors consumed quantity
Best for: Specific materials with fixed requirements
Usage: When the quantity constraint is more important than value
System Tracking: SAP automatically tracks consumption against contracts. S/4HANA provides Fiori apps that show graphical views of contract consumption, making it easier to monitor usage and expiration.
Central Contracts
Contracts can be centralized to cover multiple plants for better negotiation power and consistent terms across the organization.
Single contract for multiple plants: Create without specifying a plant
Better rates: Negotiate better rates due to higher volume commitments
Consistent conditions: Ensure same terms across organization
Real-World Example: A construction company with 10 different sites can create a central contract for cement to be supplied to all sites. By aggregating demand (e.g., 50,000 tons yearly), they can negotiate much better rates than if each site created individual purchase orders.
Advanced Feature: Central Procurement allows creation of centralized contracts across multiple SAP systems, extending the benefits beyond a single SAP instance.
Scheduling Agreement Process Flow
Create SA
Set vendor, validity, material, quantity
1
Delivery Schedule
Define quantities and dates (ME38)
2
Release (LPA only)
Release schedule lines to vendor
3
Delivery
Vendor delivers as per schedule
4
Goods Receipt
Post GR against schedule line
5
Key Difference from Contracts: Unlike contracts (which require release POs), scheduling agreements don't need additional purchase orders. The delivery schedule lines directly drive vendor deliveries and goods receipts.
LP vs. LPA
Delivery Schedules
JIT Process
LP (Without Release)
Visibility: Delivery schedules directly visible to vendor
Process: No additional release step needed
Complexity: Simpler process flow
Best for: Stable, predictable requirements
LPA (With Release)
Visibility: Delivery schedules are internal initially
Process: Requires explicit schedule line release
Control: More control over what vendor sees
Best for: Just-In-Time (JIT) delivery processes
Document Types: LP and LPA are the document types in SAP for scheduling agreements without and with release requirements respectively.
Delivery Schedule Management (ME38)
Delivery schedules define specific quantities required on specific dates, and can be updated as planning needs change.
Flexible planning: Maintain and change delivery schedules as needed
Date-specific: Define quantities for specific delivery dates
Goods Receipt control: GR is restricted to scheduled quantities for each date
Key Difference from PO: In POs with delivery schedules, the GR can be posted for any quantity up to the total PO quantity. In scheduling agreements, GR is restricted to the specific scheduled quantity for each date.
Benefits Over PO Schedules: Unlike purchase order schedules (which are defined at creation time), scheduling agreement schedules can be freely modified later without changing the overall agreement.
Just-In-Time (JIT) Process
For LPA scheduling agreements, you can implement JIT delivery processes for precise scheduling control:
Real-World Example: Concrete delivery at construction sites needs precise timing - if concrete arrives too early or too late, it can't be used. JIT scheduling ensures vendors deliver exactly when needed, while providing forecasts for their planning.
Configuration: JIT requires setting up release profiles in SAP and JIT indicators in the material master. This determines which schedule lines are considered JIT vs. forecast.
Benefits of Outline Agreements
Better Negotiated Rates
Long-term commitments allow for better price negotiations with vendors, especially with centralized procurement.
Centralized Procurement
Central contracts can serve multiple plants, increasing buying power and ensuring consistent terms.
Reduced Administrative Work
Fewer documents to create compared to multiple individual purchase orders for repeated buys.
Streamlined Planning
Scheduling agreements provide better visibility for future requirements and delivery planning.
Optimized Buying Process
More efficient than creating individual purchase orders for recurring materials and services.
Fixed Conditions
Secure fixed prices and terms for extended periods, reducing price volatility risk.
Process Optimization: While it's possible to use multiple purchase orders for repeated buys, outline agreements represent an optimized procurement process. Many organizations track KPIs to measure the percentage of spending through contracts vs. ad-hoc purchase orders.
When to Use Which Type?
Decision Factors: The key decision between contracts and scheduling agreements often comes down to delivery precision. If exact delivery dates are critical (like with concrete or just-in-time manufacturing), use scheduling agreements. If price negotiation is the primary focus with flexible delivery timing, contracts are better.
Key SAP Transactions
Contract Transactions
ME31K: Create Contract
ME32K: Change Contract
ME33K: Display Contract
ME2C: List Contracts
Scheduling Agreement Transactions
ME31L: Create Scheduling Agreement
ME32L: Change Scheduling Agreement
ME33L: Display Scheduling Agreement
ME38: Maintain Delivery Schedules
Process Integration: Both outline agreement types integrate with standard SAP goods receipt (MIGO) and invoice verification processes, with specialized validations for schedule-based receiving.
SAP S/4HANA Enhancements: The newest versions of SAP provide Fiori apps with graphical views of contract consumption, making it easier to track usage, expiration, and compliance with procurement KPIs.