SAP Procurement - Subcontracting

Subcontracting is one of the manufacturing strategy by which a company decides to outsource some or all of its production operations to a vendor. This process is considered better than a complete external procurement as there can be a tighter control on the product quality.

In a typical subcontracting process, a manufacturing company provides raw materials / components (say material A and B) to a subcontracting vendor. The vendor in turn processes these materials to turn them into an end product (say material C). This product (if not a finished product) is then used by the manufacturing company to carry out the rest of the operations to turn it into a finished product.

Standard SAP supports this process. To achieve this, a subcontracting purchase order for material C is created. Material A and B which constitute the Bill of Material (BOM) of material C are then delivered to the subcontracting vendor. Finally a Goods Receipt is posted when material C is received from the vendor.

SAP process flow:

1. Create a subcontracting Purchase Order (ME21N)

• Click on “Material Data” tab under “Item details” and then click on “Components” to view the components / make changes.
• Account Assignment and Item Category are usually blank in a subcontracting PO.

2. Delivery of components to subcontracting vendor (ME2O)

• Enter selection parameters like vendor and plant and click on Execute.
• Select the desired line, click on Create Delivery and a delivery will be created.

3. Post Goods Issue (VL02N)

• The movement type is usually 541.

4. Post Goods Receipt (MIGO)

5. Logistics Invoice Verification (MIRO)

Master Data Setting:
1. Material Master (MM01)

• Maintain special procurement key for subcontracting in MRP 2 view.

2. Bill of Material (CS01)

• If a material needs to be returned by the vendor after the subcontracting process is complete, it should be entered as a negative quantity in the Bill of Material (BOM).
  

Points to Note:
1. A material can be sent for subcontracting at any stage in the manufacturing process
2. Material to be received after subcontracting should have a different material code, than the components issued.
3. Routing can be used for external processing but not subcontracting.
4. MIGO – Transfer Posting (Mvt type 542) can be used to transfer scrap component back to the manufacturing location.