Standard purchase order scenarios

You can review the different types of purchase order scenarios.

Note: Though not illustrated in these scenarios, cost factor retrieval is a standard part of cost calculation.

Standard PO - scenario 1 – see Figure 1

A purchase order is created for item ABC. The PO creation message has identified the expected supplier (S1) of ABC for this particular transaction. A quantity of 50 pieces is required. On entry, the replacement cost for buying ABC from S1 is retrieved and stamped on the PO as the line price. A quantity of 50 pieces of ABC is received against the PO line (or ASN). For each receipt the value of inventory at the receiving location is recalculated and a new average cost, based on the received quantity and expected cost of the PO line, is determined. Finally, the information about the receipt (quantity received, item, expected price) is sent to the financial application.

  1. Sterling™ Order Management System Software perform Replacement Cost Retrieval
    1. Criteria used: Order Date, Supplier, Item, Order Quantity
    2. A user exit allows the standard Sterling Order Management System Software retrieval to be bypassed
    3. If no user exit is implemented, Sterling Order Management System Software retrieves the price from the specified Price List
    4. Sterling Order Management System Software updates the PO line with expected cost – from either the user exit invocation or retrieval from Sterling Order Management System Software
    5. Result PO price = $2.00 each piece
  2. Each receipt line transaction in Sterling Order Management System Software performs the steps 3 through 5.
  3. Sterling Order Management System Software recalculates the Inventory Value
    1. Current Inventory Value = $250
    2. Value of new receipt = 50*2.00 = $100
    3. New Inventory Value = $350
  4. Sterling Order Management System Software recalculates the Average Cost
    1. On-Hand Inventory (pre-receipt) = 120
    2. On-Hand Inventory (post-receipt) = 170
    3. New Inventory Value = $350
    4. New Average Cost = 350/170 = $2.058824
  5. Sterling Order Management System Software publishes the change in inventory value (used for integration to financial applications).
    Figure 1. Purchase order scenario 1
    PO_scenario1_a

Standard PO - scenario 2 – see Figure 2

A purchase order is created for item ABC. The PO creation message has identified the expected supplier (S1) of ABC for this particular transaction. A quantity of 50 pieces is required. On entry the replacement cost for buying ABC from S1 is retrieved and stamped on the PO as the line price. On receipt of the PO acknowledgement from S1, it is noted that the per-unit price has been increased. This new price is entered on the original PO as a PO change. A quantity of 50 pieces of ABC is received against the PO line/Shipment. For each receipt the value of inventory at the receiving location is recalculated and a new average cost, based on the received quantity and expected cost of the PO line, is determined. Finally the information about the receipt (quantity received, item, expected price) is sent to the financial application.

  1. Sterling Order Management System Software performs Replacement Cost Retrieval
    1. Criteria used: Order Date, Supplier, Item, Order Quantity
    2. A user exit allows the standard Sterling Order Management System Software retrieval to be bypassed
    3. If no user exit is implemented, Sterling Order Management System Software retrieves the price from the specified Price List
    4. Sterling Order Management System Software updates the PO line with expected cost – from either the user exit invocation or retrieval from Sterling Order Management System Software
    5. Result PO price = $2.00 each piece
  2. Sterling Order Management System Software updates the PO Price from Supplier
    1. Price from inbound message must change PO price
    2. New price = $2.10
  3. Each receipt line transaction in Sterling Order Management System Software performs steps 2 through 6.
  4. Sterling Order Management System Software recalculates the Inventory Value
    1. Current Inventory Value = $250
    2. Value of new receipt = 50*2.10 = $105
    3. New Inventory Value = $355
  5. Sterling Order Management System Software recalculate the Average Cost
    1. On-Hand Inventory (pre-receipt) = 120
    2. On-Hand Inventory (post-receipt) = 170
    3. New Inventory Value = $355
    4. New Average Cost = 355/170 = $2.088235
  6. Sterling Order Management System Software publishes the change in inventory value (used for integration to financial applications).
    Figure 2. Purchase order scenario 2
    PO_scenario2

Standard PO - scenario 3 – see Figure 1

A purchase order is created for item ABC. The PO creation message has identified the expected supplier (S1) of ABC for this particular transaction. A quantity of 50 pieces is required. On entry the replacement cost for buying ABC from S1 is retrieved and stamped on the PO as the line price. A quantity of 40 pieces of ABC is received against the PO/ASN. For each receipt the value of inventory at the receiving location is recalculated and a new average cost, based on the received quantity and expected cost of the PO line, is determined. Finally the information about the receipt (quantity received, item, expected price) is sent to the financial application.

  1. Sterling Order Management System Software performs Replacement Cost Retrieval
    1. Criteria used: Order Date, Supplier, Item, Order Quantity
    2. A user exit allows the standard Sterling Order Management System Software retrieval to be bypassed
    3. If no user exit is implemented, Sterling Order Management System Software retrieves the price from the specified Price List
    4. Sterling Order Management System Software updates the PO line with expected cost – from either the user exit invocation or retrieval from Sterling Order Management System Software.
    5. Result PO price = $2.00 each piece
  2. Each receipt line transaction in Sterling Order Management System Software performs steps 3 through 5.
  3. Sterling Order Management System Software recalculates the Inventory Value
    1. Current Inventory Value = $250
    2. Value of new receipt = 40*2.00 = $80
    3. New Inventory Value = $330
  4. Sterling Order Management System Software recalculates the Average Cost
    1. On-Hand Inventory (pre-receipt) = 120
    2. On-Hand Inventory (post-receipt) = 160
    3. New Inventory Value = $330
    4. New Average Cost = 330/160 = $2.0625
  5. Sterling Order Management System Software publishes the change in inventory value (used for integration to financial applications).
    Note: Any additional receipt transactions that receive the outstanding quantity, follow the above process. But any adjustment to an existing receipt that is done in a warehouse management system must be manually entered in the financial application.

Standard PO - scenario 4

Item JJJ currently has an average cost of $3.50. The current on-hand quantity in the system is -20 and the inventory value is -$70. A receipt is made for 15 units of JJJ against a PO that has a line price of $4.00.

  1. Sterling Order Management System Software sets the average cost to the PO line price (Average cost from $3.50 to $4.00)
  2. New on-hand quantity = -5 (-20+15)
  3. Sterling Order Management System Software recalculates the new inventory value
    1. Since the on-hand quantity started as negative, Sterling Order Management System Software uses the MODIFIED calculation
    2. New Inventory Value = On-Hand * New Average Cost = -$20
  4. Sterling Order Management System Software determines the write-off in inventory value
    1. A standard inventory event publishes an increase of $60.00 (15 * $4) to the inventory value of the item
    2. An additional inventory write-off event publishes the write-off amount as $10.00 calculated as (Old Inventory value + Change in inventory value due to the receipt – New final inventory value) or (-$70 + $60 – (-$20) = $10.00

Standard PO - scenario 5

Item JJJ currently has an average cost of $3.50. The current on-hand quantity in the system is -20 and inventory value is -$70. A receipt is made for 25 units of JJJ against a PO that has a line price of $4.00.

  1. Sterling Order Management System Software sets the average cost to the PO line price (Average cost from $3.50 to $4.00)
  2. New on-hand quantity = 5 (-20+25)
  3. Sterling Order Management System Software recalculates the new inventory value
    1. Since the on-hand quantity started as negative, Sterling Order Management System Software uses the MODIFIED calculation
    2. New Inventory Value = On-Hand * New Average Cost = $20
  4. Sterling Order Management System Software determines the write-off in inventory value
    1. A standard inventory event publishes an increase of $100.00 (25 *$4) to the inventory value of the item.
    2. An additional inventory write-off event publishes the write-off amount as $10.00 calculated as (Old Inventory value + Change in inventory value due to the receipt – New final inventory value) or (-$70 + $100 – ($20) = $10.00