Mastering Subcontracting Process in SAP MM: A Comprehensive Guide

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The subcontracting process in SAP MM is critical in the manufacturing industry because it enables businesses to utilize specialized expertise to produce more goods. This article examines various subcontracting scenarios that may arise within the SAP ECC system. The text discusses traditional subcontracting, toll manufacturing, contract manufacturing, and the essential prerequisites for the operation of each.

Introduction of Subcontracting Processes in SAP MM

Companies that manufacture products but do not have a large manufacturing capacity often employ the subcontracting process in SAP MM. This works by distributing raw materials to subcontractors for specialized production processes. Subcontractors are contracted to work on raw materials or process them before returning them to the manufacturer in various stages or completed forms. SAP MM has two options for handling invoices with costly parts: offset them based on a percentage or present evidence of sale.

External processing involves sending specific components to an external vendor or subcontractor to perform a specific operation, allowing the manufacturer to focus on other activities and optimize plant capacity. This process is a simple form of subcontracting and requires vendor plant assignment.

Subcontracting Process in SAP MM

Inter-company subcontracting involves Company B acting as a subcontractor and processing components to create a finished product. The components are maintained as valuated in company A and non-valuated in company B, and the subcontracting charge is sent back to company A.

Toll manufacturing involves Company A procuring raw materials from its affiliated companies or approved third-party suppliers. All these scenarios are standard SAP functionality with minor configuration, making component stock easily traceable and posting consumption of components immediately upon receipt of FG.

Toll manufacturing is a complex process used in the pharmaceutical industry, where raw materials and APIs are scattered across different locations. It involves a company procuring from both affiliates and third parties, with the supplier delivering raw or API directly to the toll manufacturer. The toll manufacturer completes its manufacturing and sends the finished goods to the product owner’s facility or distribution warehouse. The toll manufacturer submits an invoice for the toll fee to the product owner, who owns the complete stock and financial accounting.

Contract manufacturing is similar to toll manufacturing but involves complete delegation of the manufacturing process, including RAW/API sourcing to a third-party vendor who specializes in the particular product. The contract manufacturer procures RAW/API from its source, manufactures the complete product, and delivers it to the product owner company. The contract manufacturer then submits the invoice to the product owner, who owns the final finished product and pays the contract manufacturer.

SAP SCM solution is suitable for contract manufacturing as it provides real-time collaboration between the product owner and the contract manufacturer. Configurations for this type of manufacturing include assigning sales areas to the supplying plant, maintaining customers for the vendor, creating new billing document types, creating subcontracting POs, creating transfer postings, reconciling challans, and updating reconciliation tables.

The subcontracting process in SAP MM is simplified and controlled through the subcontracting cockpit, which provides high visibility and control over the overall subcontracting process. It offers features such as ALV Grid-based monitoring, the ability to change shipping points and batch numbers when outbound deliveries are created, visibility in subcontracting purchase orders, PP orders, STO, and deliveries, new movement types for one-step or two-step stock transfer to vendors, and a stock position indicator at the subcontractor’s end.

The subcontracting process in SAP MM cockpit also allows for the creation of subcontracting components (BOM) when inbound delivery is being created, allowing for the assignment of subcontracting material quantities and batches in the Inbound Delivery screen. This functionality allows for the posting of goods receipts from the same screen without entering batches again, improving productivity and batch tracking from sourcing to selling.

New movement types are introduced to monitor subcontracting stock and consignment stock more effectively, allowing for one-step or two-step stock transfers to vendors. The purchase order is created, and the subcontracting vendor is assigned as a recipient. The component consumption and scrap report provides high visibility on consumption and scrap out of subcontractor work, with the scrap report indicating whether the scrap is under control or not.

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SNC integration allows suppliers to plan replenishment and subcontracting, with key information sent automatically to SAP. Component consumption can be automatically booked, accurately monitored, and tracked in batches. The subcontracting information record can be updated with real-time component consumption at the subcontractor’s end.

In summary, the subcontracting process in SAP offers several benefits, including improved visibility, improved functionality, and enhanced functionality.

What is the subcontracting process in SAP MM?

The subcontracting cycle involves purchasing material from suppliers and maintaining a BOM with components. Waste generated during the subcontracting process can be maintained as a negative quantity. A subcontracting PO (PO with Item Category L) is created, and the Purchase Info Record is maintained for the subcontract category. The material is sent to the subcontractor, and the system does not make any value entry, but the quantity is shown as “Material Provided to Vendor.” The process includes receiving finished material against the SC-PO, specifying components consumed in manufacturing, and receiving subcontracting by-products.

The Subcontracting Process in SAP MM involves creating the finished goods material code, maintaining the BOM for the material, creating a PO with item category “L”, issuing material to the vendor, receiving the material against the PO, and using MIRO to account for the vendor’s invoice. If no dyeing process is required for subcontracting, the process should be followed.

To create a subcontract order, enter the material and item category for subcontracting in the order item, press ENTER to display the screen for component processing, and enter the components required for manufacturing the product.

Configuration settings in SAP ECC:

Steps on configuring SAP ECC for subcontracting processes, including item category determination in deliveries, document type setup, subcontract order setup, and more.

To activate business functions and configuration settings in SAP ECC, one must activate the main business function LOG_MM_OM_1 (Outsourced Manufacturing—Part 1) for serial numbers and LOG_MM_SERNO (Serial Numbers in Purchasing with Integration in Inventory Management & Shipping). The minimum software requirement is SAP ECC 6.0 EhP4. Configuration settings include defining item category determination in deliveries, document types for purchase requisitions, determining serial number profiles, and assigning document types for purchase orders.

Supplying plants need to be assigned to the subcontracting delivery type ZL. Default document types for stock transport orders should be maintained with one-step or two-step procedures. For SNC integration, the field timely consumption needs to be activated to update real-time component consumption in ECC.

In a multilevel subcontracting process, raw materials are provided to subcontracting vendors, who process and consume them to produce semi-finish material and send it back. The SAP system requires a material master setting for subcontracting materials, updating BOM in production versions, and maintaining a Purchasing Info record.

The step-by-step process includes creating a subcontracting purchase order to SC Vendor-01, indicating the vendor in the Item Detail Delivery tab, entering the net price, and executing the subcontracting purchase order to SC Vendor-02. The system automatically selects movement type 101 O (GR to SC Vendor) and posts the material stock as stock provided to the vendor.

Subcontracting Process Flow

SAP T Code-MM01 and XK01/BP Process Flow

  • Creation of material masters for finished goods and components (SAP T code-MM01) and vendor masters (SAP T code-XK01/BP).
  • Creation of info record (Info record category as L(Subcontracting) SAP T code-ME11) for updating lead time, standard qty, and subcontracting charges.
  • Creation of Bill of Material (BOM) (SAP T Code CS01) for subcontracting.
  • Creation of subcontracting PO (SAP T code: ME21N) for subcontracting.
  • PO release by business stakeholders (SAP T code- ME29N or ME28).
  • Issuing components to subcontractor via 541 movement type (SAP T code- MIGO/MB1B).
  • Goods receipt by the manufacturer (SAP T code- MIGO/MB1B).
  • Invoice verification by the accounting clerk in the accounts payable department.
  • Vendor payment by the baking team in the accounts payable department (SAP T code- F100).

What is a BOM in subcontracting?

Bill of Materials in Subcontracting

  • Provides a list of components and raw materials needed for subcontracting.
  • Serves as a communication tool for understanding material requirements, cost estimation, inventory management, and quality control.
  • Can be single-level, multi-level, or where-used, depending on project needs.
  • It helps predict prices, monitor goods, plan purchases, and avoid stockouts.
  • Common forms include single-level, multi-level, and where-used.

How to process order subcontracting in SAP?

Listed below are a few additional subcontracting scenarios:

Production Order for Subcontracting:

  • Preparation of a production order for the finished product.
  • Specification of subcontracting methods.
  • Generation of purchase requisitions and purchase orders.
  • Creation of a Material Master, Bill of Materials, Production Order, Release Production Order, and Purchase Order.

Procurement Orders and Subcontracting:

  • Generation of a purchase order for the final product.
  • The subcontractor is responsible for supplying the required products and labor.
  • Creation of a material master, purchase order, optional supply shipping, and final product receipt.

Additional Considerations:

  • Additional core data is required by suppliers.
  • Creation of proper accounting records for subcontractor jobs.
  • Effective supervision and contact with subcontractors.

Conclusion:

Efficient subcontracting processes are vital for manufacturers seeking to optimize resources and focus on core competencies. By leveraging SAP ECC and implementing the right configurations, companies can streamline their subcontracting workflows, ensuring smooth operations and effective collaboration with external partners.

How does subcontracting impact inventory management in SAP MM?

Subcontracting in SAP MM significantly impacts inventory management by introducing unique processes and considerations. These include material movements and stock management, stock monitoring and control, inventory valuation, cost allocation, inventory optimization, and reporting and analytics. Subcontracting reduces inventory levels, lowers carrying costs, and improves inventory turnover. It also allows companies to leverage external vendors’ expertise, leading to an efficient supply chain. SAP MM provides detailed reports on subcontracting stock, material movements, and consumption, enabling informed decision-making and real-time insights. By effectively managing subcontracting stock and material movements, companies can achieve better inventory control, reduce costs, and enhance supply chain efficiency. For more information, companies can contact SAP MM for further details.

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