SAP S4HANA MM

Subcontracting process
 Subcontracting process

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:

1. Subcontracting
i. External vendor
ii. External vendor with chargeable components
iii. External processing
iv. Inter company

Outsourcing Production:

1. Toll manufacturing
2. 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 :

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 foe 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.

CoCd SDTy BillTy Bill Class

IN01 OR ZSN 1 (Subcon. Challan)

IN01 OR ZSP 2 (Subcon. Invoice)

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.

1. 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.
 2. Create Transfer Posting with Movement Type 541 to issue the sub
components to the vendor T Code -ME2O/ MIGO

1. With Challan

2. Create the subcontracting PO using the transaction ME21N, with

item category ‗L‘

3. Create the material document with 541 movement type using the
transaction

‗MIGO‘.

4. Execute the transaction ‗J1IGSUB‘.

 5. In the Processing tab, you can either ‗create challan‘ or ‗display‘
existing challans.

6. 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).

7. Create the goods receipt for the subcontracting purchase order,

using transaction

‗ME21N‘.
 8. Execute MIRO for the invoice verification for the service charges
paid to the

subcontractor.

9. For the reconciliation of challans created, execute the transaction

‗J1IGRECON‘.

10. 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.

11. 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

-
material document,

then the 541-material document cannot be reversed until the

challan is

cancelled first.

goods receipt

document (543 movement type), then the challan cannot be

cancelled.

2. Without Challan
 1. Create the subcontracting PO using the transaction ME21N, with
item category ‗L‘

2. Create the material document with 541 movement type using the
transaction

‗MIGO‘.

3. Execute the transaction ‗J1IGSUB‘.

4. In the Processing tab, you can either ‗create challan‘ or ‗display‘

existing challans.

5. In the next screen, you can select the material document (541
movement type) and

choose the ‗Without Challan‘ button to create the billing document.

6. Create the goods receipt for the subcontracting purchase order,

using transaction

‗ME21N‘.

7. Execute MIRO for the invoice verification for the service charges
paid to the

subcontractor.

8. 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.

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)

1. 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.
2. 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.
3. 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
4. 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 storge with reference to the goods issue document
reference. The stock will be moved to subcontractor‘s unrestricted area.

5. 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
6. 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 funtion

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)

Prerequsite:

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—>Purchasing Info record—

>Define Screen Layout—>Screen layout – Info record

In case of SNC integration, to update real time component consumption in

ECC, teh 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).