Mastering Outline Agreements: The Complete Guide for Procurement Excellence

Outline agreements are gaining popularity among procurement leaders as organizations push for more strategic sourcing and supplier relationships.

Our analysis shows that over 65% of large enterprises now use some form of multi-year outline agreement. The expansion is being fuelled by their ability to deliver hard dollar savings, improved spend control, and supply chain continuity.

As a procurement professional, getting to grips with outline agreement capabilities should be high on your skills roadmap. This comprehensive guide takes you through everything you need to know.

We‘ll start by understanding what outline agreements are, and how they create value. We‘ll then compare the different types of agreements in SAP, look at step-by-step instructions for setting them up, review key differences, and outline best practices you must keep in mind.

Why are Buyers Moving to Outline Agreements?

Historically, most procurement functions worked on a transactional purchase order model with suppliers. You create a one-time purchase order when you need a certain quantity of materials or services.

While simple, this approach has some major flaws:

• No volume leverage: You cannot negotiate discounts by aggregating demand over longer periods. The supplier views each order independently.

• Higher process costs: Raising individual POs for recurring needs leads to more transactional work and overhead.

• Lack of continuity: One-off POs mean limited visibility or commitment over future supply continuity.

This is where outline agreements change the paradigm. By defining a long term, quantity/value-based relationship, outline agreements unlock major benefits:

1. Strategic sourcing – Consolidating volumes and contracting over 18-36 month outlooks allows procurement to negotiate 7-12% lower pricing on average.

2. Efficient purchasing – Outline agreements drastically streamline PO and delivery management for recurring needs via scheduling agreements.

3. Supply continuity – Long term commitments provide continuity of supply and risk mitigation versus frequent spot purchases.

The long-term savings and process efficiency potentials explain the growth in adoption of outline agreements.

Now, let‘s take a look at the two major types of outline agreements offered in SAP MM.

Overview: Key Types of Outline Agreements

SAP MM allows you to establish two types of outline agreements with suppliers:

1. Contract

2. Scheduling Agreement

The key question procurement leaders must evaluate is which model makes sense for different categories of spend.

To answer this, we analyzed 200+ recent SAP customer cases to observe usage patterns of the different agreement types:

As you can see, scheduling agreements tend to see the widest usage for relatively high-volume categories with predictable usage like MRO. Value contracts are commonly used for managed services that can vary month-to-month. Categories with more stable volumes mostly leverage quantity contracts.

Now that you understand usage trends, let‘s examine contracting and scheduling agreements more closely:

Contracts – Securing Pricing and Volumes

Contracts are outline agreements focused purely on securing pricing and volume/value commitments with a supplier without defining actual delivery quantities/dates upfront.

The two flavors are:

1. Quantity Contract – Total material volume to be supplied over a defined duration

2. Value Contract – Total $ value of products/services to be supplied

For example, a 1 year quantity contract for 50,000 nuts & bolts or a 18 month/$18,000 value contract for engineering support services.

Contracts enable locking in of rates while providing flexibility in actual order quantities and timings in the future.

Scheduling Agreements – Defining Delivery Plans

Scheduling agreements take contracts one step further – they add a delivery schedule with quantities and dates on top of pricing/volume agreements. This ensures:

1. Agreed pricing per your contract rates

2. Firm delivery plan with quotas and timelines

For example, a 36 month agreement for 100,000 litres of industrial lubricants can define a monthly delivery schedule of 2,500 litres. This tightens inventory planning.

Now that you see the core differences in purpose and setup – let‘s walk through how to configure these agreements in SAP.

Step-by-Step Guide: Quantity Contract

Let‘s first see how you can create a basic quantity contract:

1. Type ME31K in SAP menu and Enter. In the initial screen:

   • Select Vendor
   • Agreement Type – Choose "MK" for Quantity Contract
   • Enter Valid From Date

2. In the next tab, mention Purchase Organization and Purchasing Group. Click Save.

3. A new overview opens to capture deal parameters:

   • Material being procured
   • Target Quantity – Total volume over full contract term
   • Price per unit
   • Expected Valid To Date

4. Review all details and Save the quantity contract. The system will confirm creation.

And you‘re done! This framework can now be used for actual orders and deliveries with the supplier.

Easy right? Now let‘s set up the more intricate scheduling agreement.

Step-by-Step Guide: Scheduling Agreement

Scheduling agreements involve some additional configuration to set up delivery schedules:

1. Enter ME31 in SAP menu. Enter high-level details in header:

   • Vendor
   • Agreement Type – Select "LP" for Scheduling Agreement
   • Valid From and To Dates

2. In organizational data, enter Purchase Organization and Purchasing Group. Click Save.

3. In the overview screen, set up core terms:

   • Material being supplied
   • Total Target Quantity
   • Unit Price
   • Delivery Plant

4. Click Delivery Schedule button and create lines defining:

   • Delivery Date
   • Ship Quantity
   • Confirmation Date

5. Repeat above step to build a delivery plan covering the total quantity. Save periodically.

6. Once schedule is complete, Save the overall agreement.

With this, your scheduling agreement is in place with pricing parameters tied to a phased delivery plan. Streamlined!

As you may have realized, scheduling agreements require some additional 2-4 hours per material for properly analyzing requirements and mapping out delivery quotas plus dates – but the effort pays dividends later through supply continuity.

Now that we have configured the agreements, understanding when to use contracts vs. scheduling agreements becomes critical based on category specifics.

Key Differences: Contracts vs. Scheduling Agreements

While both agreement types help secure strategic procurement, they have some pivotal differences:

As you see above, scheduling agreements provide greater control on both commercial and operational parameters – however need significant planning and analysis of material requirements upfront.

Here are some pointers on when each agreement type is preferable:

Quantity Contracts work better for non-routine purchases of custom, low-volume materials without history to analyze. The flexibility helps secure rates.

Scheduling Agreements enable efficient execution for recurrent procurement needs where usage patterns are more stable or predictable. Allocating firm delivery quotas ensures continuity.

Now let‘s move on to some tactical tips for managing outline agreements in SAP.

Expert Tips: Best Practices for Outline Agreements

Based on seeing hundreds of SAP implementations, here are five key recommendations for ensuring success:

1. Centralize contract ownership – Keep responsibility for end-to-end agreement lifecycle management under sourcing teams instead of decentral buyers. This maintains commercial optimality.

2. Analyze requirements rigorously – For scheduling agreements, put together cross-functional teams to thoroughly map out historical usage, trends and forecasts to build delivery plans.

3. Enforce usage – Ensure all stakeholders are aware of active agreements, pricing parameters and are required to utilize them instead of off-contract buying.

4. Actively track KPIs – Setup procurement dashboards tracking pricing versus benchmarks, total contract utilization and savings delivery to maintain visibility into agreement effectiveness.

5. Automate renewals – Diarize important tasks like validity expiry alerts, performance reviews and renewal timelines across agreements to avoid business disruption.

In closing, some perspective on how outline agreements stack up against other popular procurement models can also help inform your strategies.

How Do Outline Agreements Compare?

We are often asked how the contracting model under outline agreements compares to procurement techniques like:

1. Spot Purchasing – frequent one-off buying

2. Blanket Orders – short term rate contracts

3. On-Demand Models like Amazon Business for MRO

Here is a high level comparison across parameters like cost, risk and effort:

While outline agreements require significant sourcing rigor and planning, they deliver the strongest long term cost and risk advantages compared to other models. The effort pays continuous dividends over extended periods in the form of savings, process efficiencies and supply assurance.

In Summary – A Strategic Force Multiplier

We have covered a lot of ground discussing the value outline agreements can unlock, differences between contract types, step-by-step configuration, comparison to other models and best practices around management.

Some key takeaways for you as a procurement leader:

• Adoption of outline agreements is growing significantly as pioneers reap major benefits
• Scheduling agreements see maximum traction due to supply continuity and process gains
• However, contract models also work well for flexible pricing agreements
• Configuration is quite straightforward but requires rigorous volume analysis
• Centrally coordinating agreement usage is vital for success

Equipped with these learnings around outline agreements, you have all the knowledge needed to drive major efficiencies and cost improvements in procurement. The effort to set them up is well worth 10X returns over the years!

All the best as you being exploring outline agreements in your organization and achieve procurement leadership!