Subcontracting Process in SAP MM

In SAP MM, subcontracting is a procurement method where a company outsources some or

all of its production to a vendor:
 Process: The company supplies components to the vendor, who then manufactures
the product and returns it to the company.
 Benefits: Subcontracting can help companies reduce production costs, improve
visibility and control, and increase efficiencies.
SAP Subcontracting involves sending components to a vendor to manufacture an assembly.
The vendor returns the completed assembly, and during goods receipt GR, the components
are issued from subcontract inventory. Subcontracting is a purchasing process with the
manufacturing occurring at the vendor location.
What is subcontracting process? Subcontracting is one of the procurement processes
available in MM. In this process, components are shared to vendor to get the final product.
Below are the steps involved in this process. Steps to perform subcontracting:
1. Create subcontracting Info record (Optional) – T Code – ME11
2. Create subcontracting PO with item category L – T Code – ME21N
Steps: ME21N —> Enter Item Category L –>, Material (End Product), PO Quantity,
Delivery Date, Net Price, Plant –> Click on Item Details –> Tab Material Data —
>Components, select Explode BOM –> Click on Components button –> Enter the sub
components –> Go back & Save.
Note: Components can be exploded through BOM (T Code CS01) or components can
be given manually also.
3. Create Transfer Posting with Movement Type 541 to issue the sub components to the
vendor T Code -ME2O/ MIGO
4. Goods Receipt for finished product – T Code -MIGO
Note: During goods receipt, final product will be received with movement type 101
and components will be consumed automatically with 543 movement type.
5. Invoice Receipt for the services performed – T Code – MIRO
Accounting entries for subcontracting: Example: Components cost is 100 INR,
Subcontracting Charges are 40 INR
There will be no account entries at transfer posting 541.
Accounting entries at the time of Goods Receipt 101 (&543) : Finished goods will be
received with 101 and the Components will be consumed with Movement type 543.
Here Dr means Debit (+Ve) and Cr means Credit (-Ve)
(BSX) - Stock A/c of Finished Product – 140 Dr
(BSV) - Change in Subcontracting Stock -140 Cr
(WRX) - GR/IR Clearing A/c – 40 Cr
(FRL) - Subcontracting Charges – 40 Dr
(BSX) - Stock A/c of Components (Raw Material) – 100 Cr
(GBB-VBO) - Consumption A/c of Components (Raw Material) – 100 Dr

Accounting entries at the time of Invoice Receipt :

(WRX) GR/IR Clearing A/C – 40 Dr

(KBS) Vendor A/C – 40 Cr

Accounting entries at the time of Payment :

Vendor A/C – 40 Dr
Company Bank A/C – 40 Cr

Examples:

We 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:
  We order the end product using a subcontract purchase order. The components that the
vendor needs to manufacture the end product are specified in the subcontract purchase
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 us that a larger or smaller
quantity of the components was actually consumed than planned in the purchase order, we
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 consist 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, we need to use Item Category ‘L’ which is used for subcontracting
documents. Also, we 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 we provide our components to
the subcontractor.

Components of Subcontracted Product

If there are any additional charges required, we input them in the Conditions tab as shown on the
screenshot below. Finally, we 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, we 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 we provide the number of our
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 we need to enter the
received finished material back into the SAP system by using the transaction MIGO. In MIGO, we
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 we provided to
the subcontractor earlier. The goods 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, we 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.

MIR
O Transaction: Enter Details and Amount

Click on Simulate button which will notify us 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.

Click Simulate Button

The Results of Simulation of Invoice Posting

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

Post Invoice Receipt.