Subcontract Procurement
SAP
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Subcontracting Procurement in SAP MM
Subcontract Procurement
The subcontract procurement process is different from the other material procurement processes we’ve
discussed so far. It involves an agreement where you issue raw materials to a vendor, and the vendor makes
finished or semi-finished products from the raw materials. These finished or semi-finished products are
then supplied back to you.
Business Scenario
An enterprise is engaged in car manufacturing and procures components such as ring gears, pinions, and
axle shafts from a supplier. With subcontract procurement, the car-manufacturing enterprise issues the
raw materials (such as steel sheets) to the supplier, who then manufactures the components. The supplier
produces components per the design and quality standards given by the manufacturing company and sends
back these components to the manufacturing company. The supplier is paid for the labor charges. These
components are used by the manufacturing company to assemble the cars. The subcontract scenario
process flow is shown in Figure below, where the purchase requisition is converted to a PO and sent to the
vendor, and then the raw materials are issued via a goods issue. Upon arrival of the semi-finished or finished
components, a goods receipt is posted in the system. The vendor invoice is then posted, and payment is
processed by the finance department.
When you issue goods to subcontractors, there is no G/L account posting because you still own the stock.
Stock issued to the subcontractor is valuatedin stock valuation and is also shown in stock overview reports
until you post the goods receipt of the ordered material. When you post the goods receipt, the system
creates the material and accounting documents.
After the goods receipt is posted, the vendor’s invoice is entered with reference to the PO, and a
subsequent adjustment for overconsumption or underconsumption of the components can be made at the
same time. For the subcontract process, the bill of material (BOM) and subcontract info records can be
defined. The BOM is a list of materials—quantity included—required to manufacture a component. You
Subcontract Procurement
must create a BOM for the material you want a subcontract vendor to produce or assemble for you. Use
Transaction CS01 and select BOM Usage 1 (Production BOM). Then define all of the materials, with their
quantities, that are required to make one unit of subcontract material.
You may have a scenario where co-products are produced while manufacturing the end product. (Co-
products are the products that are produced along with the production of the main product.) You can define
these products in the BOM with a minus sign as shown in Item 0040, Component T-T401
Subcontract info records for subcontract procurement are different from info records for stock material
procurement. When creating an info record, select the info records category Subcontracting. The conditions
defined in the info records are then copied into the subcontract PO.
Subcontract Procurement
Process Steps:
The following are the process steps for subcontracting procurement:
1. Create a subcontract PO.
The subcontract PO is created with item category L. Each item contains the components that
should be provided to the vendor, and these components can be entered manually or can
be determined using a BOM explosion. The PO price is the vendor’s service price for the
labor. Conditions for subcontract orders can be stored in subcontract info records. Create a
subcontract PO via Transaction ME21N, and select item category L. Enter the material,
quantity, delivery date, plant, and supplier.
2. Post the goods issue.
After the subcontract PO is issued, you need to issue materials to the subcontractor. You can
check this component requirement via Transaction ME2O, which provides the SC Stock
Monitoring for Vendor report.
Subcontract Procurement
You can post a goods issue from the report by selecting the item and clicking on the Post
Goods Issue button. This will issue goods to the subcontractor. You can also issue goods via
Transaction MIGO_TR, with movement type 541. Enter the PO number, and the system will
use the PO to determine the materials and quantity that should be issued to the vendor.
When you issue goods to a subcontractor, the SAP system will create only a material
document. An accounting document isn’t necessary because this material is still owned by
your company.
3. Post the goods receipt.
Based on your subcontract PO, the subcontractor produces the material and supplies it to
you. When you receive the goods, you need to post a goods receipt transaction with
reference to the appropriate PO. This will update your stock quantity and will also post the
consumption of components you’ve issued to the subcontractor. Post the goods receipt via
Transaction MIGO and enter the PO number, and the system will supply the open PO
quantity.
When you post a goods receipt, the system will receive the final material with movement
type 101. All of the components required to manufacture the final material are posted with
movement Type 543, and co-products are posted with ovement type 545. The Direction
column in the goods receipt screen shows plus and minus (+/-) signs based on receipt and
consumption.
The subcontracting goods receipt will create an accounting document, and a minimum of six G/L accounts
will be posted. These accounts are as follows:
• Raw materials price
When you receive semi-finished goods from a subcontractor, the raw materials have been
consumed. Therefore, the SAP system will post the raw material price to the following accounts:
−− Raw material stock account: credit
−− Consumption account: debit
• Semi-finished materials price
Subcontract Procurement
When you receive semi-finished materials, their valuation price will be a total of the raw material
price and labor charges. Therefore, the SAP system will post to the following accounts:
−− Semi-finished material stock account: debit
−− Cost of goods manufactured: credit
• External labor price
Labor charges will be posted into intermediate accounts (i.e., GR/IR accounts) because vendor
liability will be created only when you post an invoice.
−− GR/IR account: credit
−− External labor account expense: debit
NOTE
You have a BOM for a semi-finished product, and you issue a PO to your vendor for one piece. One piece
each of material RM-1 and RM-2 is required to manufacture semifinished good SM-1. RM-1’s valuation
price is $10, RM-2’s valuation price is $20, and the labor charge is $5. Figure below shows the G/L
accounts that will be posted at the time of the goods receipt.
4. Post the invoice.
Upon receipt of the invoice from the vendor, post the invoice in the SAP system via
Transaction MIRO. Enter the document date, posting date, and PO number. The PO will
supply the item, quantity, amount, and price. Before saving, you can check the account
posting via the Simulate button.
5. Post the settlement.
Subcontract Procurement
If the vendor informs you of overconsumption or underconsumption after the goods receipt
has been posted, you must make an adjustment. In this case, settlement is entered with
reference to the PO. Transaction MIGO_GS is used for underconsumption and
overconsumption adjustments. After you post an underconsumption, this material will be
listed in the stock to be received from the subcontractor, and the vendor should return the
material to you. The movement type for underconsumption is 544, which will increase the
stock quantity in the available subcontractor stock. The movement type for
overconsumption is 543, which will decrease the stock quantity from the available
subcontractor stock. You can also use Transaction MB04 for overconsumption.
Configuration Steps
The use of item category L has the following effects on a PO item:
• The PO item can be created with or without a material master record. If a PO item is created with a
material number, specifying an account assignment category is optional.
• The indicators for goods receipt and invoice receipt are set as PO Item linked, which means PO
requires goods receipt and invoice receipts.
• The GR required indicator can’t be changed in the PO. This means the goods receipt must be posted
against the PO. However, the IR indicator can be unchecked in the PO, and, in this case, the invoice
will be optional with reference to the PO. The indicator for non-valuated goods receipt isn’t
proposed; neither can it be set manually in the PO. It means the goods receipt must be valuated and
will post an accounting document.