Vendor Subcontracting Process

Vendor Subcontracting

Subcontracting cycle consist of:

Creating Purchase Order > Provision of components > Manufacturing of Goods/Service provision > Delivery of goods > Goods Receipt of subcontracting item and by products > Subsequent adjustment > Invoice Receipt > Invoice settlement > Payment. 

Vendor subcontracting process most of the time it is happening in manufacturing process industry. Customer supplies required components, raw materials, consumables , sub assemblies to the subcontractor.

Materials can be dispatched from own storage location or plant to vendor. Materials can be dispatched directly to vendors location. This can be done by maintaining the vendor code in delivery tab on purchase order.

Lets take following an examples to understand the business scenario in better manner:

1. A mobile company selling their own mobile in global market. They don't have their own manufacturing unit. They are designing the products and getting it manufactured by some one vendor. Such vendors are called subcontractors . This company is buying raw materials, components , sub assemblies from other regular vendors/suppliers and supplying these materials to the subcontractor.
   Subcontractor is manufacturing the whole assembly and converting into finish product which is mobile handset. Final assembly is getting shipped back to either customer's location as per purchaser order given to subcontractor. It may come its own warehouse or directly get shipped to customer.
2. Another example could be car manufacturer is getting in an agreement with vendor to supply the engine assembly, which is getting assembled by the subcontractor. Raw materials required to manufacture engine assembly supplied by business , who issues the purchaser order. Raw materials could be e.g. Engine cylinder,cranks shaft assembly, piston rings, engine head etc.
   Subcontractor assembles it into the finished good- an engine assembly and sends back to customer location.

Details of whole process in SAP

1. Creating Purchase Order
   Purchase Order having item category “ L ”
   Purchase Order mentions subcontracting item and Components to be provided are mentioned in purchase Order by exploding Bill Of Materials or manually.
   Price mentioned in Purchase Order is subcontracting price. You can also maintain Purchase Info Record for Subcontract category for material and subcontractor.
2. Provision of components or raw materials:
   Components can be provided by following ways :
   MB1B : Transfer posting by using Movement type 541+O with reference to subcontract Purchase Order. Or w/o reference to subcontractor order.
   ME2O : Monitoring of SC stock ( Purchasing ). Here also system uses Movement type 541+O  MIGO : You can provide component directly from vendor by using movement 101+O.
3. Goods Receipt of subcontracting purchase order item
   Finished material against subcontracting purchase order can be received in MIGO.Goods Receipt is same as normal Goods Receipt by using Movement 101.System determines consumption of components and creates goods issue by using movement 543+O
   A material document is getting generated with two items.
     => Goods receipt of finished Goods,which was delivered by the vendor.  
     => Goods issue items for the consumed components to convert the finished assembly.
   In this transaction system carries out the posting of material document along with an accounting document if material is valuated.
4. Rejection or scrap handling
   Take an example of nut and bolt which are getting screw threads. While doing this operation on steel rod, shearing action happens and excess materials is getting removed. Such materials can be considered as scrap or rejection.
   Another example consider,while manufacturing mobile assembly ,screen of mobile  2% scrap is getting scrapped.
   Such scrap or rejection can be maintained in bill of materials. System will propose additional quantity in purchase order.
   System carries out posting with movement type 545+O at vendor location. This can be brought to business's own location by movement type  542+O
5. Treatment of By-product
   It is same way like rejection or scrap. This can be done by maintaining negative quantity in Bill Of Materials.
   System carries out posting with movement type 545+O at vendor location. This can be brought to business's own location by movement type  542+O.
   Examples of By-product
   Cereal food fines – from breakfast cereal processing
   Corn steep liquor – from corn wet-milling
   Distillers grains – from ethanol fermentation
   Glycerol – from the production of biodiesel
   Grape seed oil – recovered from leftovers of the wine making process
   Molasses – from sugar refining
6. Invoice receipt
   It is normal as handled in standard procurement process via T code 'MIRO'
7. Vendor Payment
   It is getting handled in the FI module via T code 'FBL1N'