Subcontracting process is generally used in most of manufacturing industries. In subcontracting process, raw materials are provided to subcontracting vendor. It’s being processed by subcontracting vendor, convert it to semi-finish material and deliver back.
Classic Subcontracting:
- Subcontracting
i. External vendor
ii. External vendor with chargeable components
iii. External processing
iv. Inter company
Outsourcing Production:
- Toll manufacturing
- Contract manufacturing
The following section explains each of the above scenario in detail
1.) Subcontracting:
i. Subcontracting with external vendor:
It is the allocation by one enterprise, assigning their one portion of a production process under agreement to another enterprise that is having some specialized skills in this process.
Subcontracting is often resorted to by manufacturing companies due to limited in house production capacities of a part of their Production Processes. In this scenario, the manufacturer sends Material (Inputs-Raw Material Semi Finished Goods like Spares components etc) from his Stock to the Subcontractor for Job-Work / Processing.
After the Processing the manufacturer receives back the Material in changed form or in other words a different Material or assembled condition.
SAP MM subcontracting process involves sending raw components to a vendor for specific manufacturing processes and receiving the value- added finished material back into inventory.The subcontractor sends the invoice for the job work performed.
It is a traditional process of outsourcing. All the transactions with external vendor will happen in ECC itself and no separate instance is required. A Bill of material set up is required for this process and stock tracking will be available in ECC. There is not much financial benefit out of this process but still manufacturer can leverage subcontractor‘s specialized skills
ii. Subcontracting with Chargeable components:
The Subcontracting with chargeable components solution allows manufacturer to record all
transactions with subcontractors under certain requirement act. In this process, manufacturer provides components to subcontractor on chargeable basis. Subsequently, manufacturer invoices the subcontractor for the chargeable components. On the other end, subcontractor sends invoice for the FG along with chargeable components, after the subcontractor completes the process and sends FG to the manufacturer.
Invoice based on component consumption. The components known as ―chargeable components. In the traditional Subcontracting, neither party makes any charge for any components and all the goods issue components at free of cost. SAP offers two ways of handling the invoices for the chargeable components. In one of these methods, the invoices only serve as documentary evidence of the sale of the components and are not actually paid. This document helps to track of components issued to the subcontractor.
Other method called percentage-based offsetting, manufacturer deduct the invoices from the subcontractor from a certain percentage of the invoices that you have sent it, and the subcontractor pays the difference. Stock movement is visible in this process
iii. External processing:
In case, certain components subjects to external processing, manufacturer sends particular component to the external vendor/subcontractor to perform the particular operation, thus
manufacturer can focus on other important activity and optimize the capacity of the plant. It is a simple form of subcontracting process.The source for this process is the creation of production order and certain operation of the production order which is subject to external processing will be assigned to the purchase requisition and the purchase order will be created based on the purchase requisition.Stock movement is not visible in this processing.
iv. Inter company Subcontracting:
In this process, company B acts as a Subcontractor and process components to make a finished product and sends back to company A. vendor plant assignment is required for this process and the components needs to be maintained as valuated in company A and Non-valuated in company B. Finally company B sends invoice to company A for the subcontracting charge.
All the above scenarios applicable to discrete manufacturing industries. It is a standard SAP functionality with minor configuration. component stock is easily traceable and system posts consumption of components immediately upon receipt of FG without further manual interaction. A proper set up of BOM is required for the smooth transaction.
1.) Toll manufacturing
In this process, Company A or Product owner procures raw materials widely known as API (Active Pharmaceutical Ingredients) from its affiliated companies or one of its approved third party suppliers. Some time, company procures from both affiliate and third party. Supplier delivers RAW/API directly to the Company B or Toll manufacturer. The toll manufacturer completes its manufacturing and sends the finished goods to the product owner facility or its distribution warehouse. Finally, the toll manufacturer submits invoice for the toll fee to the product owner. In
this, product owner owns complete stock and financial accounting and toll manufacturer Toll manufacturer sends component consumption details to the product owner enables to post RAW/API consumption against FG receipt.
Toll manufacturing is extensively used by pharma industries, where the availability and sourcing of key raw materials and APIs are scattered across different geographical location. It is a not a standard SAP functionality. It is a complex process. Toll manufacturing functionality requires customized code change. It reduces effort of transferring API stock to Toll manufacturer. It gives more cost benefit through toll agreement and tax savings from finance perspective. API stock is difficult to trace and it needs custom development in case of third party toll manufacturer as well consumption of API/RAW against FG receipt.
2.) Contract manufacturing
Contract manufacturing looks similar to toll manufacturing, but it involves complete delegation of manufacturing process including RAW/API sourcing to the third party vendor who specialize in the particular product. Company A or Product owner procures Finished product from one of its approved third party contract manufacturer. Contract manufacturer procures RAW/API from its own source and manufacture complete product and delivers to Product owner company. It also sends finished product to the product owner designated warehouse. Finally, the contract manufacturer submits invoice to the product owner. In this, product owner owns final finished product and pays to contract manufacturer.
Contract manufacturing is extensively used by pharma and Consumer industries. Unlike toll manufacturing, it is not a complex process. It gives cost benefit and product owner focus on product marketing. SAP SCM solution suits for this type of contract manufacturing where product owner and contract manufacturer finds real time collaboration. It gives visibility of inventory at contract manufacturer‘s end
Configurations of Subcontracting process
Assign Sales Area to the supplying Plant
The supplying plant for a Subcontracting process must be assigned to a sales organization,Distribution Channel and Division.
Maintain the Sales org, Distribution Channel and Division using tcode SM30 for the view – ‗V_001W_IV ‗.
3.Maintain Customer for a Vendor
The Subcontracting vendor must be assigned a customer number.
Create a Customer master with the necessary details (Partner Function, Recon Account etc) for the sales area assigned to plant in step 2.
Maintain this customer number in the Vendor(Subcontractor) master details. Execute XK02 or bp and provide the subcontractor id. In the ‗Control‘ details, maintain the customer number.
Or bp
4.New Billing Document Types
A new document type to be created for outbound GST invoice.Execute transaction code VOFA. Copy existing document type FX into ZSP and ZSN.
NOTE: The document types ZSP and ZSN are only for reference. You may create document with
any other name.
Change the Transaction Group to ‗8‘ (Proforma Invoice) for Billing type ‗ZSN‘ and save.
5.Maintain the view J_1IG_V_SUBINV
Execute tcode SM30 and provide the view J_1IG_V_SUBINV. Select New Entries. Classify the Billing Types created in previous step in this view.
7.Copy Control
Set up ‗Delivery to Billing‘ copy control.Execute transaction code VTFA.
Create copy control for the new Billing types(ZSP and ZSN) created in step 4, by copying the existing copy control setting of the Billing type ‗FX‘ and Sales order type ‗OR‘. Save the settings.
Create subcontracting PO with item category L – T Code – ME21N
Steps: ME21N —> Enter Item Category L –>, Material (End Product), PO Quantity, Delivery Date,Net Price, Plant –> Click on Item Details –> Tab Material Data —>Components, select Explode BOM –> Click on Components button –>Enter the sub components –> Go back & Save
Create Transfer Posting with Movement Type 541 to issue the sub components to the vendor T Code -ME2O/ MIGO
1.With Challan
- Create the subcontracting PO using the transaction ME21N, with item category ‗L‘
- Create the material document with 541 movement type using the transaction ‗MIGO‘.
- Execute the transaction ‗J1IGSUB‘.
- In the Processing tab, you can either ‗create challan‘ or ‗display‘ existing challans.
- In the next screen, you can select the material document (541 movement type) and choose the ‗With Challan‘ button to create the billing document (Proforma invoice).
- Create the goods receipt for the subcontracting purchase order, using transaction ‗ME21N‘.
- Execute MIRO for the invoice verification for the service charges paid to the subcontractor.
- For the reconciliation of challans created, execute the transaction ‗J1IGRECON‘.
- There are two options provided for reconciliation: First In, First Out (FIFO) – It will automatically assign the existing challans to the goods receipt document.
Manual – Enter the challan number to reconcile the challan for the material document.
- Once the data is verified, click ‗Save‘ to update the reconciliation table.
GR Open Quantity – Goods receipt open quantity
Challan Quantity – Quantity available in challan
Reconciled Quantity – Challan quantity reconciled against the Goods receipt quantity
GR Remaining Quantity – Remaining quantity of goods receipt after challan reconciliation
Sub. status – Status of the subcontracting challan (F- Fully Reconciled, P-Partially Reconciled)
1.1 With Challan – Cancellation Process
If the subcontracting challan is already created for a 541- material document, then the 541-material document cannot be reversed until the challan is cancelled first.
If the challan is already reconciled against the subcontracting goods receipt.
document (543 movement type), then the challan cannot be cancelled.
Without Challan
- Create the subcontracting PO using the transaction ME21N, with item category ‗L‘
- Create the material document with 541 movement type using the transaction ‗MIGO‘.
- Execute the transaction ‗J1IGSUB‘.
- In the Processing tab, you can either ‗create challan‘ or ‗display‘ existing challans.
- In the next screen, you can select the material document (541 movement type) and choose the ‗Without Challan‘ button to create the billing document.
- Create the goods receipt for the subcontracting purchase order, using transaction ‗ME21N‘.
- Execute MIRO for the invoice verification for the service charges paid to the subcontractor.
- For the consumed materials create Vendor invoice through ‗FB60‘.
Note: You can create ‘With Challan‘ and ‗Without Challan‘ billing in the same screen. To do so, select the material document(s) and choose the With Challan and/or the Without Challan buttons.
Note: During goods receipt, final product will be received with movement type 101 and components will be consumed automatically with 543 movement type
Accounting entries at the time of Goods Receipt 101 (&543) : Finished goods will be received with 101 and the Components will be consumed with Movement type 543.
Accounting entries at the time of Goods Receipt 101 (&543) : Finished goods will be received with 101 and the Components will be consumed with Movement type 543.
Here Dr means Debit (+Ve) and Cr means Credit (-Ve)
(BSX) Stock A/c of Assembly – Dr
(BSV) Change in Subcontracting Stock – Cr
(FRL) Subcontracting Charges – Dr
(WRX) GR/IR Clearing A/c – Cr
(BSX) Stock A/c of Components – Cr
(GBB-VBO) Consumption A/c of Components – Dr
Classic Subcontracting
Create Subcontracting Purchase order
– Purchase order process with Serial number (In case of Equipment
Repair)
– Outbound delivery of subcontracting components via Subcontracting
Cockpit
– Goods issue for delivery and shipment to subcontractor (Stock-in-
Transfer)
– Shipping notification (ASN) from Subcontractor for Main material as well
as Components
– Goods receipt for purchase order delivered by subcontractor (Through
Inbound delivery method)
– Component reservations and consumption of component quantities as
provision of material
– Component consumption history
– Scrap analysis
– SNC Integration
Outsourcing Data Flows
Functionality Improvement
– Serial number assignment in Subcontracting Purchase order (In case of Serial profile active)
– Subcontracting Cockpit
– New Movements
– Subcontracting Components (BOM) in Inbound delivery (IBD)
– Consumption history
– Scrap Report
– Monitoring component consumption, Batch tracing, Transfer of AMPL (In case of SNC Integration)
Subcontracting Cockpit
The subcontracting cockpit is simple to use and control the overall subcontracting process. It gives high visibility towards subcontracting process.
The advantages of Subcontracting cockpit are as under:-
– ALV Grid based
– Monitoring subcontracting stock
– Facility to change the shipping point and batch number when the
outbound delivery is getting created
– Visibility in Subcontracting purchase order, PP orders, STO
and deliveries
New movement types available to make one step/two step
stock transfer to Vendor (Example, Movement type 30A & 30C: Transfer
of unrestricted-use
stock to subcontracting stock in two steps # stock removal)
– Stock position indicator at subcontractor‘s end (positiv or negative)
– Individual delivery can be created for each component
– The output report can be downloaded and the list can be sent via email
Transaction: ME2ON
Goods issue to subcontractor ―outbound delivery‖ will appear in the purchase order history overview. Hence, it is useful for the SCM team to check whether the particular SC order components have been issued or not by navigating further.
Serial Number Assignment
Serial number can be assigned when the subcontracting Purchase Requisition/Purchase Order is getting created.
When you send the equipment for repair, there is no need of input serial number again.
Inbound Delivery Creation with Subcontracting Components
The subcontracting components (BOM) can be entered when the Inbound
delivery is getting created. This functionality allows to assign
subcontracting materials and its batches including quantities in Inbound
delivery screen.
– Subcontracting components can be entered
– Assignment of subcontracting material quantities and batches from the
stock overview in Inbound delivery creation screen itself
– Posting Goods receipt from the same screen without entering batches
again
– Manual batch entry completely removed
– Productivity can be improved because of absence of batch manual entry
– Improves batch tracking from Sourcing to Sell in case of SNC
integration
Stock Transfer (One Step & Two Step) and Monitoring
The new movement types are introduced to monitor subcontracting stock and consignment stock in a more effective way.
– Track subcontracting components in transit as well as at subcontractor‘s
end
– Transfer stock from supplying plant to subcontractor directly in one step
in case of STO
– Process can be completed in single step
– Multiple posting reduced
The Purchase order is getting created. Assign the subcontracting vendor as a recipien. In case of two step procedure, use ―30A mvoement type to issue the components from the supplying plant.
Once the component issued from the supplying plant, it will come to the SC in transit. The same can be monitored under stocks at Subcontractor.
The document will be updated in outbound delivery document flow
Finally, do the Place in storage with reference to the goods issue document reference. The stock will be moved to subcontractor‘s unrestricted area.
Component Consumption and Scrap Analysis
The component consumption and scrap report will give high visibility on
consumption and scrap out of subcontractor work
– Scrap report indicates whether the scrap is under control or not
– Scrap report provides average scrap for a specific vendor
– Component consumption report provides consumption of components for a specific purchase order and will be automatically update in case of SNC integration
– The purchase order history can be navigated from this report
and further drilldown of consumed components also possible
SNC Integration
With SNC integration, supplier can plan replenishment and subcontracting. The confirmation of work in SNC, key information is sent automatically to SAP.
– Component consumption can be booked automatically in a timely manner
– Monitoring of component consumption exactly
– The vendor can monitor the shipped component from Customer
– Timely consumption enables to book the consumption of subcontracting components separate from the goods entry
– Batch tracking For the subcontracting info record, select ―RT consumption in Purchase organization data view. In case, SNC integration, ECC will be updated with the real time component consumption at subcontractor‘s end. The consumptions of the subcontractor are displayed in the component consumption history.
Key Business function
To achieve the above functionalities, one needs to activate the following business function and subsequent configuration settings in SAP ECC. Main business function: LOG_MM_OM_1 (Outsourced Manufacturing – Part1)
for Serial number, LOG_MM_SERNO (Serial Numbers in Purchasing with
Integration in Inventory Management & Shipping)
Prerequisite:
Business_Function_Basis_Com (Business Function Basis (COM))
Minimum Software Requirement:
SAP ECC 6.0 EhP4
Configuration Settings:
Define Item Category Determination in Deliveries:
Menu Path:
SPRO—>Logistics Execution—>Shipping—>Deliveries—>Define Item Category Determination in Deliveries
Here, create a new combination of delivery type and item category for the subcontracting delivery type (LB) with usage as ―V.
Define Document types for Purchase Requisition:
Menu Path:
SPRO—>Materials Management—>Purchasing—>Purchase Requisition—>Define Document Types
Here, assign the serial number profile to the Purchase requisition document type. The same profile should be assigned to the serial number procedure ―PRSL‖.
Determine Serial Number Profiles
Menu Path: SPRO—>Materials Management—>Purchasing—>Serial Numbers—>Determine Serial Number Profiles
Here, create a serial number new procedure ―POSL‖ and ―PRSL‖ for purchase order and purchase requisition respectively and assign the same to serial profile.
Define Document Types for Purchase Order:
Menu Path: SPRO—>Materials Management—>Purchasing—>Purchase Order—>Define Document Typess
Here, assign the serial number profile to the Purchase requisition document type. The same profile should be assigned to the serial number procedure ―POSL‖.
Set Up Subcontract Order:
Menu Path: SPRO—>Materials Management—>Purchasing—>Purchase Order—>Set Up Subcontract Order
Supplying plant needs to be assigned to the subcontracting delivery type ―ZL‖
Default Document Type for Stock Transport Orders:
Menu Path: SPRO—>Materials Management—>Purchasing—>Purchase Order—>Set up Stock Transport Order—>Assign Document Type, One-Step Procedure,Underdelivery Tolerance
Here, maintain document type for the supply plant and receiving plant combination with one step or two step procedure. In case of one step procedure, the stock will be directly go to subcontractor‘s stock without going to the receiving plant.
Setting for Field Seletion group for SNC Integration:
Menu Path:
SPRO—>Materials Management—>Purchasing—>Purchase Order—>Set up Stock Transport Order—>Assign Document Type, One-Step Procedure,Underdelivery Tolerance
Here, maintain document type for the supply plant and receiving plant combination with one step or two step procedure. In case of one step procedure, the stock will be directly go to subcontractor‘s stock without going to the receiving plant.
Setting for Field Seletion group for SNC Integration:
Menu Path:
SPRO—>Materials Management—>Purchasing—>Purchasing Info record—>Define Screen Layout—>Screen layout – Info record
In case of SNC integration, to update real time component consumption in ECC, the field timely consumption needs to be activated. The below screenshot shows the activation of the field ―Timely consumption in info record.
Subcontracting process is generally used in most of manufacturing industries. In subcontracting process, raw materials are provided to subcontracting vendor. It‘s being processed by subcontracting vendor, convert it to semi-finish material and deliver back. Many a times, more than one subcontractor is used for manufacturing at different level of BOM. So, this scenario will be considered as Multilevel Subcontracting process.
Scenario :-
In this scenario as shown in below structure, two raw materials (SUBCON- RM01 & SUBCON-RM01) are provided to first subcontracting vendor (SC Vendor-01).
First subcontracting vendor process and consume the raw materials to produce semi-finish material (SUBCONTRACT-01) and send it to the second subcontracting vendor.
Second subcontracting vendor process it further and produce finish material (SUBCON_FINAL) and finally send it to the warehouse of procuring plant.
Mapping procedure of a given scenario in SAP system.
A] Master Data required
Material Master setting for Subcontracting Materials (MM01)
BOM 1 (CS01)
Subcontract material SUBCONTRACT-01(HALB) (Sp. Proc 30)
– Raw Material (SUBCON-RM01) (ROH)
– Raw Material (SUBCON-RM02) (ROH)
BOM 2 (CS01)
Subcontract material (SUBCON_FINAL) (FERT) (Sp. Proc 30)
-SUBCONTRACT-01(HALB) (Sp. Proc 30)
Update BOM in Production versions (MM02)
Maintain these BOM in production version (Material master MRP 4 view) of respective header material. So it will automatically explode when we create purchase order.
*Purchasing Info record is optional.
B] Step by step process :-
Subcontracting Purchase Order to SC Vendor-01
1) Create Subcontracting Purchase Order to SC Vendor-01 for material(ME21N)
2) Indicate SC Vend in Item Detail Delivery tab to SC Vendor-02 (also tick the check box)
3) Enter Net Price (Processing cost)
4) In the item detail tab,Material data click on components and Explode BOM 1
Goods Issue to Subcontractor (ME2O)
1) Post Goods Issue according to the Purchase Order number (4500000863) above.
Subcontracting Purchase Order to SC Vendor-02
1) Create Subcontracting Purchase Order to SC Vendor-02 (ME21N)
2) Keep delivery address to plant as by default.
3) Enter Net Price (Processing cost)
4) In the item detail tab,Material data click on components and Explode BOM 2
Goods receipt for first subcontracting purchase order items(MIGO)
1) This is generally done when SC Vendor-01 has sent confirmation of sending the goods to SC Vendor-02
As we have maintain delivery address of SC Vendor-02 in the delivery tab of first purchase order. System automatically selects movement type 101 O (GR to SC Vendor)
After saving this document system posts this material stock as stock provided to vendor.
Therefore no need to transfer the material through ME2O. (It is already delivered).
Do Invoice Verification for first subcontracting purchase order (MIRO)
Goods receipt for second Subcontracting purchase order items (MIGO)
This is done when SC Vendor-02 sent finished product to our warehouse.
This material stock is posted in our plant storage location.
Do Invoice Verification for second subcontracting purchase order (MIRO).