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5 Subcontracting Process in SAP

You require the subcontracting process in SAP when a company outsources parts of
its manufacturing to subcontractors. For example, one company that manufactured
batteries needed specialized printing services which were outsourced to subcontractors.
Plastic boxes were provided to subcontractors and they did required printing on these
boxes. Later, the subcontractors returned the boxes back to the client. The
subcontractors charged the company for their services rendered per box.

Another example of the subcontracting process in SAP is when a company provided raw
sims and packaging materials to a subcontractor. The subcontractor converted the raw
sims into finished sims well packed and returned finished product back to the company.
They charged the company for their services rendered. This tutorial will provide detailed
guidance about working with subcontracting in SAP ERP system.

Steps of Subcontracting Process in SAP

Let’s start with discussing the steps that are involved in the subcontracting process in
SAP. They are summarized below:

 You order the end product using a subcontract order. The components that the vendor
needs to manufacture the end product are specified in the subcontract order.
 The components are posted to the stock of materials provided to the vendor. The
components are then supplied to the vendor.
 The vendor performs its service and delivers the ordered material (the end product).
The consumption of the components is posted.
 If, after the goods receipt has been posted, the vendor informs you that a larger or
smaller quantity of the components was actually consumed than planned in the
purchase order, you must make an adjustment.
 The vendor charges for his or her service. The invoice is posted.
Diagram of Subcontracting Process in SAP

Prerequisites

A material BOM needs to be created before any subcontracting order can be placed.
The bill of materials (BOM) is a formally structured list of the components that make up a
product. The list contains the object number of each component, together with the
quantity and unit of measure.

Subcontracting Requisition

The subcontracting requisition lists the finished material that is to be procured in a

subcontract item. Against each subcontracted item the system copies the material
components that are to be provided to the vendor from the bill of material (BOM). The bill
of material refers to the end product that the vendor will deliver.

The requisition for subcontracting must contain the item category ‘L’ which is used for
subcontracting in the SAP system.

Subcontracting Purchase Order

Subcontracting materials are sent to vendors for processing finished products. A

subcontracting purchase order is placed by converting the subcontracting requisition into
a purchase order. The system will generate a purchase order number internally.
 The rates quoted by the vendor for labour charges are mentioned in the purchase order
line items. If a purchase info record has been maintained, the service charges are
defaulted into the purchase order.

Provision of Components to Vendor for Processing

To receive material against the purchase order, SIM cards and packaging materials
need to be issued to the subcontractor. The materials that are provided to the
subcontractor are managed as stock provided to a vendor. The provision is a transfer
posting from the unrestricted use stock to the stock of material provided to a vendor.

The SIM cards supplier will be instructed to deliver the raw material at the
subcontractor’s premises. When the subcontractor receives the raw SIM cards at his
premises, he will inform the client and a goods receipt will be posted with reference to
the purchase order increasing the subcontractor stock in the system. If the material is
already available in the client own stock, it will be issued from the unrestricted use stock
to the vendor. The SIM cards will be issued with reference to the subcontract purchase
order.

When the vendor delivers the ordered packaged SIM cards (the end product), the goods
will be received against the finished product with reference to the purchase order.

At the time of receipt, the raw materials for each order item will be determined and the
system will create a goods issue accounting entry item for each raw material. As a result,
the material document will consists of the following items:

 Goods receipt items for the packaged SIM cards (end product) supplied by the vendor.
 Goods issue items for the SIM cards (components).

The goods receipt will be valuated at the subcontract price plus the value of the SIM
cards consumed.

Subcontracting Invoice

Invoices will be entered in the system against the purchase order. The vendor will be
billed only for items delivered. At the time of invoice receipt a liability is created against
the vendor. The liability created will only be of the amount charged by the vendor for
processing and does not include the material component value.

Example of Subcontracting Process in SAP

Create a Subcontracting Purchase Order

To create a subcontracting purchase order, start the transaction ME21N or navigate to

the following path in SAP menu: Logistics→ Materials Management→ Purchasing→
Purchase Order→ Create (ME21N).

SAP Menu Path to ME21N Transaction

In ME21N transaction, you need to select a Document Type and provide a Vendor as
shown on the below screenshot:
Create a Subcontracting Purchase Order – Select a Document Type and Provide a
Vendor

In the Item Overview screen, you need to use Item Category ‘L’ which is used for
subcontracting documents. Also, you need to provide Material, Quantity, Delivery Date,
Plant, and Price.

Enter Information about Items of Subcontracting Order

Now, click Explode BOM button to open the below screen, where you provide your

components to the subcontractor.

Components of Subcontracted Product

If there are any additional charges required, you input them in the Conditions tab as
shown on the screenshot below. Finally, you save the subcontracting purchase order.

Pricing Conditions in a Subcontracting Purchase Order

Create a Transfer Posting

Use transaction MIGO to provide components to the subcontractor. In MIGO,

use Transfer Posting document type against Other, and movement type 541 as
highlighted on the screenshot below.
Create a Transfer Posting in MIGO Transaction

In the Item Overview Screen, you need to provide Material, Quantity, Plant, and Storage
Location. If the material is managed with batches, a batch number will be shown as well.

Item Overview Screen of Transfer Posting

Now, click on Detail Data button.

Detail Data Button

It will open the screenshot shown below. Here in the highlighted box you provide the
number of your subcontractor.

Enter the Number of Subcontractor

Next, click on Check button to check whether the document is OK. Finally, click
on Post button to post the document.

Check and Post Material Document

Now, when the subcontractor returned the materials after performing the work you need
to enter the received finished material back into the SAP system by using the
transaction MIGO. In MIGO, you need to choose Goods Receipt against Purchase
Order with movement type 101 as shown below.

Goods Receipt in Transaction MIGO

Now, press to display the components provided to the subcontractor for the

finished material as shown on the screenshots below.

Display Components Provided to the Subcontractor

Components Provided to the Subcontractor

Next, click OK checkboxes as shown below. The first line corresponds to the goods
receipt of the final product, whereas the second two lines correspond to the issue of
components which you provided to the subcontractor earlier. The good receipt and the
goods issue will be done simultaneously by the SAP system.
Click OK Checkboxes

Finally, it is necessary to click Post button to save the document.

Click Post Button to Save Transfer Posting

Now, let’s display the document that we have just created. It can also be done through
via MIGO transaction. Start it and select Display against Material Document while
inputting the document number as shown below and click Enter.

Display Material Document (Transfer Posting)

Please note the movement types used: 101 for Goods Receipt and 543 for Issue of
Components.

Items of Material Document

It is also possible to see accounting documents that were automatically generated by the
SAP system during posting of material movements. To do it, click on Doc. Info button.
Doc. Info Tab

Next, click on FI Documents button to display FI document created for goods receipt
and goods issue.

Click FI Documents Button

The system will open a window with the list of documents in accounting. Double click
on Accounting Document.

List of Documents in Accounting

Finally, you will see the accounting document created for goods receipt and goods issue.
SAP FI Document Corresponding to Transfer Posting

Post Invoice Receipt

The next step of subcontracting process in SAP is to do posting of invoice

receipt against the purchase order using the transaction MIRO.

Start MIRO Transaction

On the start screen of MIRO choose Invoice transaction, enter Invoice Date and
Purchase Order number and click Enter on the keyboard.
MIRO Transaction: Enter Incoming Invoice

Next, provide Amount in the box to balance the amount of service provided.

MIRO Transaction: Enter Details and Amount

Click on Simulate button which will notify you of any errors. If none, a green light will
turn on near Balance field and the SAP system will show you accounting document
which will be created.
 C
lick Simulate Button

The Results of Simulation of Invoice Posting

Finally, click on Post button to save the invoice receipt (IR).

Post Invoice Receipt

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