Akila Wedasinghe
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SAP Subcontracting Process Visualization
An interactive guide to understanding the complete subcontracting process flow, master data requirements, and different approaches in SAP.
What is Subcontracting?
Example: Chair Painting Process
A factory manufactures chairs but doesn't have the resources or expertise to paint them. Rather than investing in painting equipment and training, they use subcontracting:
Create a purchase order for painting service (not for the chairs)
Send unpainted chairs to the painting vendor
Receive painted chairs from the vendor
Post invoice for the painting service only
- Your company owns the raw materials throughout the process
- Raw materials are provided at no cost to the vendor
- Vendor only charges for conversion services
- Material remains in your company's inventory books while at vendor
- The vendor stock appears as a special stock in SAP
- Outsource production while maintaining quality control over materials
- Better inventory visibility and control
- Reduced capital investment in manufacturing equipment
- Ability to leverage specialized vendor capabilities
- Potential tax and cost advantages
Subcontracting Process Flow
Create a purchase order with item category L for the finished goods. The PO contains component materials that need to be supplied to the vendor.
This can be done:
- Automatically through MRP run (requires special procurement key 30)
- Manually creating a PO with Item Category L
Transaction: ME21N
Send raw materials to the subcontractor. This can be done through two approaches:
- Direct Movement: Using transaction ME2O to directly transfer materials
- Outbound Delivery: Create delivery document with picking, potentially with WM/EWM/TM integration
Materials remain in your books but are shown as being at vendor location.
The vendor uses your raw materials to create the finished goods according to specifications.
During this time, the materials remain on your books as vendor stock. You can monitor this stock using transaction ME2O.
Receive the finished goods from the vendor into your inventory.
During GR, the system automatically:
- Consumes the raw materials at vendor location
- Adds the finished goods to your inventory
- Creates accounting entries for services rendered
Transaction: MIGO
Process the vendor invoice for the service provided (not for materials).
The invoice is for the conversion service/processing cost only, not for the raw materials provided.
Transaction: MIRO
Master Data Requirements
- MRP Type: PD
- Special Procurement Key: 30 (for subcontracting)
- Accounting and general plant data
- Standard material master data
- For outbound delivery approach: Sales view data with transportation group and loading group
- Define the components needed to produce the finished good
- Set component quantities
- BOM is essential for automatic component determination
- Without BOM, components must be manually added to PO
- Links BOM to material for MRP planning
- Required for MRP to create PRs with item category L
- Created via transaction C223
- Must include BOM reference and usage
- Standard vendor master data
- For outbound delivery approach: Create corresponding customer number
- Link between material and vendor
- Define subcontracting service price
- Enable source determination
- Customer number for plant (like STO config)
- Customer for vendor
- Shipping point determination
- Delivery type assignment
Approaches for Sending Materials to Subcontractor
A simplified approach with fewer steps and less master data requirements.
Monitor subcontracting components and stocks
Choose the material to be sent to vendor
Use movement type 543 to transfer stock to vendor
- Simpler process with fewer steps
- Less master data maintenance
- Quicker execution
- No integration with shipping processes required
- Limited tracking capabilities
- No integration with warehouse management
- No transportation planning
- No packaging information
More comprehensive approach with additional tracking, warehouse integration, and transportation planning options.
Monitor subcontracting components and stocks
Choose the material to be sent to vendor
Generate delivery document instead of direct movement
Pick materials with transaction VL02N
Process PGI with transaction VL02N
- Harmonized warehouse processes (same as customer shipments)
- Enhanced tracking with delivery documents
- Transportation planning capabilities
- Integration with WM/EWM/TM
- Packaging information management
- Customer number for plant
- Customer number for vendor
- Sales view for raw materials
- Shipping point determination
Financial Impact of Subcontracting
When issuing raw materials to the vendor:
- No financial entries are posted because you still own the materials
- Materials simply move from your unrestricted stock to subcontracting stock
- System records the vendor to whom materials are allocated
- This appears as a stock transfer in material documents (MM)
System Impact
Stock is transferred from:
Unrestricted Stock → Subcontracting Stock
Material is still visible in your inventory, but marked as "at vendor location"
When receiving finished goods, three financial transactions occur simultaneously within one financial document:
Debit
- Consumption Account
- Example: "Consumption of Semi-Finished Goods"
Credit
- Component Stock Account
- Example: "Semi-Finished Goods Stock"
Value: Based on standard cost of components (raw materials)
Debit
- Finished Goods Stock
- Example: "Finished Goods Stock"
Credit
- Subcontracting Stock Change Account
- Example: "Subcontracting Cost of Production"
Value: Based on standard cost of finished goods
Debit
- Expense Account
- Example: "Purchased Services Expense"
Credit
- GR/IR Clearing Account
Value: Based on service price in purchase order
Let's say we send 20 unpainted chairs to vendor for painting:
- Standard cost of unpainted chair: 10 INR each (total: 200 INR)
- Standard cost of painted chair: 25 INR each (total: 500 INR)
- Service cost for painting: 10 INR per chair (total: 200 INR)
When we receive the 20 painted chairs, the system posts:
- Debit: Consumption Account (200 INR), Credit: Semi-Finished Goods Stock (200 INR)
- Debit: Finished Goods Stock (500 INR), Credit: Subcontracting Cost of Production (500 INR)
- Debit: Purchased Services Expense (200 INR), Credit: GR/IR Account (200 INR)
When processing the vendor invoice for the subcontracting service:
Debit
- GR/IR Clearing Account
Credit
- Vendor Account (Liability)
Debit
- GR/IR Clearing Account (PO amount)
- Expense Account (difference amount)
Credit
- Vendor Account (total invoice amount)
Note: The same expense account used in the goods receipt is used to record price differences.
Continuing our painting example:
- PO service amount: 200 INR (20 chairs × 10 INR)
- Invoice amount received: 250 INR (higher than expected)
The system posts:
- Debit: GR/IR Account (200 INR)
- Debit: Purchased Services Expense (50 INR) - for the price difference
- Credit: Vendor Account (250 INR) - total invoice amount
The invoice may be blocked for payment due to the price difference, requiring approval.
Unrestricted Stock
Raw Materials
No financial posting at goods issue
Subcontracting Stock
Materials at Vendor
Still on your books
Goods Receipt
Three simultaneous transactions
One financial document
Invoice Verification
Service payment
Handles price differences