Subcontracting Process in SAP

You require the subcontracting process in SAP when a company outsources parts of
its manufacturing to subcontractors. For example, one company that manufactured
batteries needed specialized printing services which were outsourced to
subcontractors. Plastic boxes were provided to subcontractors and they did required
printing on these boxes. Later, the subcontractors returned the boxes back to the
client. The subcontractors charged the company for their services rendered per box.

Another example of the subcontracting process in SAP is when a company provided

raw sims and packaging materials to a subcontractor. The subcontractor converted
the raw sims into finished sims well packed and returned finished product back to the
company. They charged the company for their services rendered. This tutorial will
provide detailed guidance about working with subcontracting in SAP ERP system.

Steps of Subcontracting Process in SAP

Let’s start with discussing the steps that are involved in the subcontracting process
in SAP. They are summarized below:

 You order the end product using a subcontract order. The components that the
vendor needs to manufacture the end product are specified in the subcontract
order.
 The components are posted to the stock of materials provided to the vendor. The
components are then supplied to the vendor.
 The vendor performs its service and delivers the ordered material (the end
product). The consumption of the components is posted.
 If, after the goods receipt has been posted, the vendor informs you that a larger or
smaller quantity of the components was actually consumed than planned in the
purchase order, you must make an adjustment.
 The vendor charges for his or her service. The invoice is posted.

SS CUBE TECHNOLOGY 1
Diagram of Subcontracting Process in SAP

Prerequisites

A material BOM needs to be created before any subcontracting order can be placed.
The bill of materials (BOM) is a formally structured list of the components that make
up a product. The list contains the object number of each component, together with
the quantity and unit of measure.

Subcontracting Requisition

The subcontracting requisition lists the finished material that is to be procured in a

subcontract item. Against each subcontracted item the system copies the material
components that are to be provided to the vendor from the bill of material (BOM).
The bill of material refers to the end product that the vendor will deliver.

The requisition for subcontracting must contain the item category ‘L’ which is used
for subcontracting in the SAP system.

Subcontracting Purchase Order

Subcontracting materials are sent to vendors for processing finished products. A

subcontracting purchase order is placed by converting the subcontracting requisition
into a purchase order. The system will generate a purchase order number internally.

The rates quoted by the vendor for labour charges are mentioned in the purchase
order line items. If a purchase info record has been maintained, the service charges
are defaulted into the purchase order.

SS CUBE TECHNOLOGY 2
Provision of Components to Vendor for Processing

To receive material against the purchase order, SIM cards and packaging materials
need to be issued to the subcontractor. The materials that are provided to the
subcontractor are managed as stock provided to a vendor. The provision is a
transfer posting from the unrestricted use stock to the stock of material provided to a
vendor.

The SIM cards supplier will be instructed to deliver the raw material at the
subcontractor’s premises. When the subcontractor receives the raw SIM cards at his
premises, he will inform the client and a goods receipt will be posted with reference
to the purchase order increasing the subcontractor stock in the system. If the
material is already available in the client own stock, it will be issued from the
unrestricted use stock to the vendor. The SIM cards will be issued with reference to
the subcontract purchase order.

When the vendor delivers the ordered packaged SIM cards (the end product), the
goods will be received against the finished product with reference to the purchase
order.

At the time of receipt, the raw materials for each order item will be determined and
the system will create a goods issue accounting entry item for each raw material. As
a result, the material document will consists of the following items:

 Goods receipt items for the packaged SIM cards (end product) supplied by the
vendor.
 Goods issue items for the SIM cards (components).

The goods receipt will be valuated at the subcontract price plus the value of the SIM
cards consumed.

Subcontracting Invoice

Invoices will be entered in the system against the purchase order. The vendor will be
billed only for items delivered. At the time of invoice receipt a liability is created
against the vendor. The liability created will only be of the amount charged by the
vendor for processing and does not include the material component value.

SS CUBE TECHNOLOGY 3
Example of Subcontracting Process in SAP

Create a Subcontracting Purchase Order

To create a subcontracting purchase order, start the transaction ME21N or navigate

to the following path in SAP menu: Logistics→ Materials Management→
Purchasing→ Purchase Order→ Create (ME21N).

SAP Menu Path to ME21N Transaction

In ME21N transaction, you need to select a Document Type and provide a Vendor
as shown on the below screenshot:

SS CUBE TECHNOLOGY 4
Create a Subcontracting Purchase Order – Select a Document Type and Provide a
Vendor
In the Item Overview screen, you need to use Item Category ‘L’ which is used for
subcontracting documents. Also, you need to provide Material, Quantity, Delivery
Date, Plant, and Price.

Enter Information about Items of Subcontracting Order

Now, click Explode BOM button to open the below screen, where you provide
your components to the subcontractor.

SS CUBE TECHNOLOGY 5
Components of Subcontracted Product
If there are any additional charges required, you input them in the Conditions tab as
shown on the screenshot below. Finally, you save the subcontracting purchase
order.

Pricing Conditions in a Subcontracting Purchase Order

Create a Transfer Posting

Use transaction MIGO to provide components to the subcontractor. In MIGO,

use Transfer Posting document type against Other, and movement type 541 as
highlighted on the screenshot below.

SS CUBE TECHNOLOGY 6
Create a Transfer Posting in MIGO Transaction
In the Item Overview Screen, you need to provide Material, Quantity, Plant, and
Storage Location. If the material is managed with batches, a batch number will be
shown as well.

Item Overview Screen of Transfer Posting

Now, click on Detail Data button.

Detail Data Button

It will open the screenshot shown below. Here in the highlighted box you provide the
number of your subcontractor.

Enter the Number of Subcontractor

Next, click on Check button to check whether the document is OK. Finally, click
on Post button to post the document.

Check and Post Material Document

SS CUBE TECHNOLOGY 7
Now, when the subcontractor returned the materials after performing the work you
need to enter the received finished material back into the SAP system by using the
transaction MIGO. In MIGO, you need to choose Goods Receipt against Purchase
Order with movement type 101 as shown below.

Goods Receipt in Transaction MIGO

Now, press to display the components provided to the subcontractor for

the finished material as shown on the screenshots below.

Display Components Provided to the

Subcontractor

Components
Provided to the Subcontractor

Next, click OK checkboxes as shown below. The first line corresponds to the goods
receipt of the final product, whereas the second two lines correspond to the issue of
components which you provided to the subcontractor earlier. The good receipt and
the goods issue will be done simultaneously by the SAP system.

Click OK Checkboxes
Finally, it is necessary to click Post button to save the document.

SS CUBE TECHNOLOGY 8
Click Post Button to Save Transfer Posting

Now, let’s display the document that we have just created. It can also be done
through via MIGO transaction. Start it and select Display against Material
Document while inputting the document number as shown below and click Enter.

Display
Material Document (Transfer Posting)
Please note the movement types used: 101 for Goods Receipt and 543 for Issue of
Components.

Items of Material Document

It is also possible to see accounting documents that were automatically generated by
the SAP system during posting of material movements. To do it, click on Doc.
Info button.

Doc. Info Tab

Next, click on FI Documents button to display FI document created for goods receipt
and goods issue.

SS CUBE TECHNOLOGY 9
Click FI Documents Button

The system will open a window with the list of documents in accounting. Double click
on Accounting Document.

List of Documents in Accounting

Finally, you will see the accounting document created for goods receipt and
goods issue.

SAP FI Document Corresponding to Transfer Posting

SS CUBE TECHNOLOGY 10
Post Invoice Receipt

The next step of subcontracting process in SAP is to do posting of invoice

receipt against the purchase order using the transaction MIRO.

Start MIRO Transaction

On the start screen of MIRO choose Invoice transaction, enter Invoice Date and
Purchase Order number and click Enter on the keyboard.

MIRO Transaction: Enter Incoming Invoice

Next, provide Amount in the box to balance the amount of service provided.

SS CUBE TECHNOLOGY 11
MIRO Transaction: Enter Details and Amount

Click on Simulate button which will notify you of any errors. If none, a green light will
turn on near Balance field and the SAP system will show you accounting document
which will be created.

Click Simulate Button

The Results of Simulation of Invoice Posting

Finally, click on Post button to save the invoice receipt (IR).

Post Invoice Receipt

SS CUBE TECHNOLOGY 12
 Vendor Consignment Process
51 Li kes 149,141 Vi ews 54 C omments

What is Vendor Consignment?

Vendor Consignment is a process wherein the supplier provides materials and stocks them
in the purchaser’s premises. The material remains in the books of the supplier (vendor) until
the same is withdrawn from the stock of the consignment and put to use. The inventory gets
transferred to the books of the purchaser only when the same is removed from the
consignment stock. The supplier (vendor) would not invoice the purchaser initially when they
come into the premises of the purchaser. The purchaser is liable to pay the supplier
(Vendor) only when the stock is withdrawn (consumed).

Key Process Design for the Consignment process for Vendors in

SAP
–

– Consignment has been designed as a special procurement type in SAP

– – The consignment stock is not valuated till the time it is consumed or withdrawn, since
theoretically, it lies in the books of the supplier (Vendor)

– – The consignment material number is the same as that of a material in unrestricted stock in
the purchaser’s books

– – Since the sourcing of a material can happen from multiple parties, the consignment stock
is maintained at the level of each supplier or vendor.

– – The price of the consignment is maintained in the purchasing info records (PIR) of the info
category, Consignment

– – When the withdrawal happens from the consignment stock of a supplier, the goods receipt
in the purchaser’s books happens at the price maintained in the purchasing info records of
type consignment for that vendor and material combination.

– – The goods receipt against a consignment purchase order is always non valuated

Basic Configuration Steps for Vendor Consignment Process in

SAP
1. 1. Activate Purchasing Info Record for Info category as Consignment. The Configuration
transaction code for the same is OMEV.

SS CUBE TECHNOLOGY 13
1. 2. Configure the special procurement type 10. This is done in IMG Node:

IMG>Production>Material Requirement Planning>Master Data>Define Special Procurement

Type

3. Assign the special procurement type in the material master. The Master Data transaction
code for the same is MM02. This is done in MRP2 view of the material master

SS CUBE TECHNOLOGY 14
4. Create a purchasing info record (PIR) of the category, Consignment. This is done using
the transaction code ME11.

SS CUBE TECHNOLOGY 15
SS CUBE TECHNOLOGY 16
 5. Maintain the automatic account assignment for material posting. The below transaction
need to be maintained in the configuration transaction code OBYC

– a. Consignment Payables: KON

– b. Expense/Revenue from Consignment Material Consumption : AKO

– c. Offsetting entry for Inventory Posting : GBB – VBR

Consignment Process Steps in SAP

SS CUBE TECHNOLOGY 17
 The consignment process steps in SAP are fairly simple. It involves creating a purchase
order, doing a good receipt and a withdrawal of the stock from Vendor’s books. The last step
in the consignment process for a vendor is the settlement of the vendor’s liability. The steps
are highlighted as:

1. 1. Procurement – A standard purchase order is created with item category as K using the
transaction code ME21N. There is no price which is applicable for a consignment purchase
order and hence should not be entered at the time of creation of purchase order.

SS CUBE TECHNOLOGY 18
The goods receipt is done using the standard transaction code MIGO. The stock is posted as
consignment stock without value. The same would reflect as a special stock for the vendor.
Since the material lies in the purchaser’s premises, the same would be reflected in terms of
quantity at a storage location as well till the time the same is consumed for use. The same
can be checked in the standard stock reports in transaction code like MMBE. There is no
accounting document which is created when the GRN is done in case of a consumption
purchase order.

SS CUBE TECHNOLOGY 19
1. 2. Consumption – Consumption of consignment material happens when goods issue is done
with item category K. The price at which the goods issue will be done will be picked from the
purchasing info record which has been created for consignment for the material and vendor
combination. In this particular case, to elaborate the process a production order was created
and a goods issue was done with the item category K against the production order.
Generally the consignment materials are part of Bill of Materials (BOM). Goods issue
document is posted in such a case when activity confirmation is done for the production
order through transaction code CO15.

SS CUBE TECHNOLOGY 20
 In the above case, the price is picked from the purchasing info record which would have been
created for the material and vendor combination.

3.

1. 3. Settlement – The next step in the vendor consignment process is the settlement of the
vendor liability. This is done through transaction code MRKO

This would display the withdrawals from the consignment stock which have taken place and
for which the liability for the vendor has not been created. You also have the option to check
the accounting entries for the withdrawals for consumption made from the consignment
stock for a vendor.

SS CUBE TECHNOLOGY 21
After analysing the unsettled withdrawals, you can create the vendor liabilities by selecting
Settle from the main screen. This will settle the outstanding entry in Consignment Account
Payables account and create a vendor liability. The price of vendor liability creation will
happen at the Info Record Price.

SS CUBE TECHNOLOGY 22
SS CUBE TECHNOLOGY 23
 Accounting Entries

1. 1. At the time of Goods Receipt – No Accounting entries are generated at the time of
goods receipt

2. 2. At the time of Withdrawal or Consumption of Consignment Stock –

(a) a. The material is valuated at moving average Price (Price Control in Material Master
is “V”)

Consumption Account DR (Account Assignment OBYC-GBB-VBR)

To Consignment Payable A/c (Account Assignment OBYC-KON)

The unit value of material comes from the Info record Price for material vendor
combination for info category Consignment

(b) b. The material is valuated at standard price (Price Control in Material master is “S)

Consumption A/c DR (Account Assignment OBYC-

GBB-VBR)

To Consignment Payable A/c (Account Assignment OBYC-

KON)

Price Difference A/c (Dr/Cr) (Account Assignment OBYC-

AKO

SS CUBE TECHNOLOGY 24