Akila Wedasinghe
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SAP Special Procurement Processes
Interactive visualization of Subcontracting, Consignment, and Pipeline procurement processes in SAP
Subcontracting Process
Subcontracting is a process where you provide your own raw materials to a vendor who converts them into finished or semi-finished goods and returns them to you. You pay only for the conversion service, not for the materials.
Key Concept
Even though materials are physically at the vendor location, they remain your property and stay in your books as "vendor stock." You maintain ownership throughout the entire process.
Your Company
Owns materials
Subcontractor
Processes materials
Your Company
Pays for service
Business Example
A furniture manufacturer produces chairs but doesn't have the capability to paint them. They send unpainted chairs to a painting specialist who paints them and returns the finished products. The manufacturer pays only for the painting service.
Process Flow
Create a purchase order with item category L for the finished goods. The PO includes component materials that will be supplied to the vendor.
Transaction: ME21N
Important
The value in the PO represents only the service cost, not the material value.
Transfer raw materials to the subcontractor using transaction ME2O.
Materials remain in your books but are shown as vendor stock. No financial document is created at this stage.
The vendor uses your raw materials to create the finished goods according to specifications.
During this time, you can monitor the stock at vendor location using ME2O.
Receive the finished goods from the vendor using transaction MIGO.
During GR, the system automatically:
- Consumes the raw materials at vendor location
- Adds the finished goods to your inventory
- Creates financial entries for services rendered
Process the vendor invoice for the service provided using transaction MIRO.
The invoice is for the conversion service/processing cost only, not for the raw materials provided.
Master Data Requirements
Material Master
- Finished Good with special procurement key 30 (subcontracting)
- Raw Materials as normal materials
- Material Type needs proper configuration
Bill of Material (BOM)
- Define components needed to produce the finished good
- Set component quantities
- Created using transaction CS01
- BOM is essential for automatic component determination
Purchase Info Record
- Subcontracting category in info record
- Define subcontracting service price
- Link between material and vendor
Production Version
- Links BOM to material for MRP planning
- Created via transaction C223
- Required for MRP to create PRs with item category L
Financial Postings
During Goods Issue to Vendor, there are no financial postings because you still own the materials.
During Goods Receipt (MIGO), three financial transactions occur:
Transaction 1: Goods Issue of Components
Transaction 2: Goods Receipt of Finished Product
Transaction 3: Goods Receipt of Subcontracting Service
During Invoice Verification (MIRO):
Price Differences
If there is a difference between the PO price and invoice price, the difference is posted to the same expense account used in the goods receipt.
Special Considerations
Stock Reconciliation
Regular physical inventory at vendor location is essential to ensure proper material control and identify scrap.
The vendor stock belongs to you and should be regularly reconciled.
Over/Under Consumption
If the vendor uses more or less material than specified in the BOM, adjustments can be made during goods receipt.
For regular reconciliation, physical inventory processes should be used.
Alternative Material Supply
Raw materials can be supplied directly to the subcontractor from another vendor by specifying the subcontractor as the delivery location in the PO.
Consignment Process
Consignment is a process where a vendor places their materials at your location, but the materials remain the property of the vendor until you consume or transfer them. You pay only after consumption or transfer to your own stock.
Key Concept
Even though materials are physically at your location, they remain the vendor's property until consumed or transferred. No financial impact occurs when receiving consignment goods.
Vendor
Owns materials
Your Company
Stores materials
Your Company
Pays after consumption
Business Example
An automotive manufacturer has suppliers place components directly at their assembly line. The manufacturer only pays for the components after they are used in production. This reduces lead time and inventory holding costs.
Process Flow
Create a purchase order with item category K for the consignment materials.
Transaction: ME21N
Receive consignment materials using transaction MIGO.
No financial document is created since you don't own the materials yet.
The materials appear in your inventory as consignment stock.
When you need the materials, either:
- Consume directly from consignment stock to production/cost center
- Transfer from consignment to your own unrestricted stock
This is when financial documents are created and you become liable to pay.
Run periodic settlement for consumed/transferred materials using transaction MRKO.
Creates financial documents and liabilities to pay the vendor.
Typically done weekly or monthly, but should not cross month-end.
Master Data Requirements
Material Master
- Special procurement key 10 (consignment)
- For MRP to create consignment PRs
Purchase Info Record
- Consignment category in info record
- Define material price
- Essential for price determination during consumption/transfer
Account Assignment
- Proper GL accounts for consignment consumption
- GR/IR accounts for consignment
Financial Postings
During Goods Receipt of consignment materials, there are no financial postings because you don't own the materials yet.
During Consumption or Transfer to Own Stock:
When Transferring to Unrestricted Stock:
When Consuming Directly to Production/Cost Center:
During Settlement (MRKO):
Price Management
Purchase info record prices are critical as they determine the value when materials are consumed or transferred. Price changes in the info record will affect future transactions.
Special Considerations
Returns to Vendor
Consignment stock can be returned to the vendor without financial impact since it's still their property.
Price Fluctuations
For materials with frequently changing prices, maintaining up-to-date purchase info records is essential.
Consider interfaces or mass upload tools to update prices regularly.
Settlement Timing
Regular settlement cycles should be established and followed consistently.
Settlement should generally not cross month-end for proper period-end accounting.
Pipeline Process
Pipeline materials are supplied continuously through a fixed delivery mechanism (like a physical pipeline, power line, etc.) where physical control of the material is difficult. Payment is based on consumption measured by meters or readings.
Key Concept
Pipeline procurement is used for continuously supplied materials where there is no physical receiving process. No purchase orders are created; consumption is recorded directly.
Vendor
Provides continuous supply
Your Company
Consumes directly
Your Company
Settlement based on consumption
Business Examples
- Utilities like electricity, water, gas
- Oil delivered through pipelines
- Raw materials delivered through dedicated pipes (e.g., palm oil from a nearby producer)
- Any materials where physical receipt control is difficult or impractical
Process Flow
Record consumption based on meter readings or other consumption measures.
Using transaction MIGO with special movement types:
- 261P: Consumption to cost center
- 291P: Consumption to account assignment
- 281P: Consumption to network/project
- 201P: Consumption to order
Run periodic settlement for consumed materials using transaction MRKO.
Creates financial documents and liabilities to pay the vendor.
Often triggered by receipt of vendor invoices (e.g., utility bills).
Master Data Requirements
Material Master
- Material type: Pipeline
- Non-stock material
- No inventory management
Purchase Info Record
- Essential for price determination
- Define material price
- No PO but info record is essential
Movement Types
- Special pipeline movement types must be configured
- Typically in the range 261P-292P
Financial Postings
During Consumption Recording:
When Consuming to Cost Center:
During Settlement (MRKO):
Special Considerations
Automation Possibilities
Modern implementations can include automated meter reading integration.
Systems can be connected through IoT or middleware to automatically record consumption.
System Integration Levels
- L1: Basic sensors and meters
- L2: Control systems collecting data
- L3: Manufacturing execution systems
- L4: ERP systems (SAP)
- L5: Advanced planning systems
Reconciliation with Invoices
Often, consumption is recorded based on vendor invoices (utility bills).
Match consumption recording with actual invoiced amounts.
Comparison of Special Procurement Types
| Feature | Subcontracting | Consignment | Pipeline |
|---|---|---|---|
| Ownership during process | Your company owns materials throughout | Vendor owns until consumption/transfer | Direct consumption, no stock |
| Material location | At vendor premises | At your premises | Continuous flow, no physical storage |
| Item category | L | K | No PO used |
| Special procurement key | 30 | 10 | N/A |
| Initial GR Financial Impact | None | None | Direct expense posting |
| Key transaction | ME2O | MIGO with item category K | MIGO with movement type P |
| Settlement needed | No | Yes | Yes |
| Common business use | Outsourcing production steps | Reducing lead time and inventory costs | Utilities and continuous material flow |
Financial Flow Comparison
Subcontracting
Material Issue: No financial posting
Goods Receipt: Three transactions in one document (RM consumption, FG receipt, service receipt)
Invoice: Standard invoice processing
Consignment
Material Receipt: No financial posting
Consumption/Transfer: Financial posting occurs
Settlement: Required to create vendor liability
Pipeline
No Receipt: Materials are continuously supplied
Consumption Recording: Direct expense posting
Settlement: Required to create vendor liability
Master Data Comparison
| Master Data | Subcontracting | Consignment | Pipeline |
|---|---|---|---|
| Material Master | Special procurement key 30, BOM link | Special procurement key 10 | Material type: Pipeline |
| Purchase Info Record | Subcontracting category | Consignment category | Standard info record |
| Bill of Material | Required | Not required | Not required |
| Production Version | Required for MRP | Not required | Not required |
| Movement Types | Standard | Standard | Special P movement types |
When to Use Each Process
Use Subcontracting When:
- You want to outsource a production step but maintain control over materials
- Quality of raw materials is critical to your end product
- You want to leverage vendor's specialized capabilities without investing in equipment
- You have excess capacity in raw material production but bottlenecks in processing
Use Consignment When:
- You want to reduce lead time by having materials available on-site
- You want to reduce working capital by not paying for materials until used
- You need high material availability but want to minimize inventory costs
- Supplier is willing to maintain stock at your location
Use Pipeline When:
- Materials are continuously supplied through fixed channels
- Physical control of material receipt is difficult or impractical
- Consumption is measured through meters or readings
- Typical for utilities (electricity, water, gas) or bulk liquids/gases