How SAP works?

– How Subcontracting process is mapped

In the Subcontracting Process, the materials are supplied to a vendor in order to perform a value
added service to the material.

Let us study the basics of Subcontracting to understand

 The different steps and events within the subcontracting process

 The management of the subcontracting (physical flow to supply components required)

There are 3 different subcontracting types:

Material Subcontracting - External Subcontractor in charge of manufacturing a product (sub-

assembly or finished product)

Operation Subcontracting - External Subcontractor in charge of completing one operation belonging

to manufacturing process

In House Subcontracting-External Subcontractor managed on the same way as an internal shop-floor

to manage the subcontractor capacity

The main difference between in-house subcontracting and operation or material subcontracting
consists in the capacity control of the subcontractor. Basically in-house subcontracting mode aims to
manage the subcontractor in the same way as an internal workshop.

Within one given Facility, the subcontracting activity can be managed by one Subcontracting
Department or by a local production line responsible . Purchasing master data are required for the
activity, but they can be modified in a given order.

Understanding Operational vs Material Subcontracting?

Business cases to be considered during in-house subcontracting process

 Indoor subcontracting when the subcontractor does execute its manufacturing operations
within industrial premises. Then, its operations have to be performed in a dedicated
workshop

 Outdoor subcontracting when the subcontractor does execute its manufacturing operations
outside Industrial premises

Mainly the following objectives will drive the design of in-house subcontracting process:

 To get all relevant master data related to in-house subcontracting process (incl.
manufacturing, procurement and inventory master data)

 To provide subcontractor with short and mid term planning

 To get capacity requirement (workload in hours) against each order and per subcontractor

 To manage load balancing between internal and external sources

 To execute and to follow-up operations with the same tools as an in-house manufacturing
workshop
  To manage in-house subcontracting process whatever the alternative procurement type is
(repetitive or discrete manufacturing mode / purchased or subcontracted procurement
mode)

 To be consistent with plant internal structure (workshop, production sector, cell, sub cell,
work center)

 To supply components to the subcontractor location

 To manage a relevant procurement process but as lean as possible (incl. invoice matching)

 To be consistent with CO processes

 To complete a full stocktaking process within the subcontractor location

 To be compliant w/ miscellaneous processes:

o Quality management

o Scrapping / Reworking

o Production order change management

Operation Subcontracting

 It consists of sending to a subcontractor and receiving from him a “Work in process” with
added operation realized by the subcontractor.

 In this type of subcontracting, the Core system doesn’t take into account the delivery of
components to the subcontractor

 For a given subcontracting operation, there should never exist administratively two
successive subcontractors. If there are two successive subcontracting operations, the first
subcontractor could be responsible for all the subcontracting process and will be the only
one who appears in the process.

Material Subcontracting

This subcontracting consists of buying the manufacturing of a sub-assembly with component

delivery.

1. The buyer keeps the ownership of components which he has delivered to the subcontractor.

2. The buyer pays the added value.

3. The sub-assembly and the components have different references.The vendor can also use
item(s) provided by himself to manufacture end product.This process is based on a purchase
relationship - the components are supplied based on free charge relation (and not by selling
them)

« In-House » Subcontracting

 The third type of subcontracting is to consider this activity as an internal production line.

 The objective is to follow this process with the same tools than an in-house workshop, it’s
possible:

o To consider the subcontracted quantity measured in hours (H) of internal production

 o Usually, the hourly rate is used as a basis of negotiation with the subcontractor

o If any other subcontracted units are used (KG, PCE…), they must be converted in
hours (H)

 To realize a workload analysis of the subcontracting activity by comparing monthly (or other
time frequency) the actual and planned workload.

 To have the budget of the planned workload for subcontracting activity

What changes needs to be done in SAP ?

For Inhouse Subcontracting

 MM02>The flag “E” is used as procurement type in case of in house subcontracting

 MM02>MRP4> A production version for in house subcontracting has to be created also.

 Routing > CA03>One routing by manufacturing mode is created

 Workcenter>CR03>To manage the capacity of the subcontractor, we create it as a work

center,The work center is created with a specific categories, as well as for the administrative
and execution ones.For this WC, the cost center is the one related the in house
subcontractor No activity type for administrative WC.

For Material Subcontracting

 MM02>the Procurement type is F for external procurement, and that special procurement is
“30” for Subcontracting

 CS01>Create material BOM, Make sure that the list of components is correct with the right
quantities, and note the alternative BOM number

 MM02>select the version subcontracting @ MRP4 - Prod version.Be sure that the
alternative BOM is the right one, and that the light is green

 ME11>[Logistics >> Material Management >> Purchasing >> >> Master Data >> Info Record
]with combination of vendor+ material+ Purchase Org+Plant- Chose Subcontracting info
record to maintain the delivery time, the standard quantity, and that there is a price.

 ME11>Logistics >> Material Management >> Purchasing >> >> Master Data >> Source list
>>In the 1st screen, you enter the sub assembly code, the plant code, and press enter.In the
second screen, be sure that a record exists concerning the sub assembly and the vendor

For Operation subcontracting

 CS01>Create material BOM>If you double click on one of the item of the BOM, you see the
detail of the item, and in the status tab, the material provision indicator. If its value is L, the
item is provided by the vendor, otherwise, it is provided by the plant

 CA01>[Logistics >> Production >> Master Data >> Routings >> Routings >> Standard
Routing >>create]>If the material is concerned with operation subcontracting, one of its
operations must have a subcontracted control key.

 Note the operation number>By clicking on the button CompAlloc, you get the allocation of
the components among the operations.For example 2 components are allocated to the
 operation XXX which is subcontracted, and will have to be made available to the
subcontractor.

 In the operations overview screen, double click on the subcontracted 020 operation:You get
the detail data of the operation, in particular data for external processing.Note that the field
Subcontracting is flagged, and note the Purchasing info record number.

 ME11>Maintain vendor purchase info record>with Info record as subcontracting.

One of a good presentation on subcontracting

The following are the business scenario:

- For some service activities we have to send some materials or machines etc outside to a vendor
- After some activities (value addition) there it will come back to my shop floor or warehouse.

What will be the actual procedure to execute the operation so that I can track the material
movement which is going outside and coming back?

Go through these steps for subcontracting step by step method:

There are two types of subcontracting relevant for PP module:

1. Operation subcontracting
2. Assembly subcontracting.

Assembly subcontracting:

Total product can be given for subcontracting.

We have to give the raw materials to vendors and they would supply the assembly.
This can be done with special procurement type 30 with procurement type F.

In that case you need to create X (FG) and their child parts (A/B/C).
You need to do the following setting for the same-

1) FG material master Special Procurement type 30 in MRP-3.

2) During MRP run select indicator 3 for create purchase requisition.
3) Convert PR into PO and maintain item category L and explode the BOM
4) In Sub-Con Purchase order, System will collect automatically its child parts.
5) Transfer the material by Mvmt-type 541 referring the Purchase order to the Vendor. This will give
a Mat Doc Number.
6) You can receive the complete FG thru simple MIGO process mentioning.

Operation subcontracting:

Within in-house production if some capacity bottleneck exists in any operations then you can assign
this job to some vendors to carryout this job in his premises and supply us the semi-finished part.
This can be done via control key example PP02 (external processing control key and activate the
subcontracting Check box in routing).

Option1:
1) In Control key PP02 enable external processing and in the routing in the operation detail enable
external processing under radio button sub contract.
2) In Order type dependent parameter T code OPL8 enable reservation / PR creation - 3 (immediate
reservation / PR creation) during release / confirmation.
3) Create Info record T code ME2O only for vendor no material combination. (You are not going to
issue material for the vendor through SAP) system will not allow through ME2O since it is operation
subcontract.
4) Run MRP it will not create PR directly since the it is enable in OPL8 only after release.
5) Do the In-house operation then confirm the in -house operation in CO11n. Once the previous
operation is confirmed PR is generated automatically.
6) Then Convert PR to P.O. In purchase order only operation description will appear. since no
component is assigned. And the order type will be F.
7) Then make separate DC (Gate pass). Consult your MM guy for this.
8) If any component is assigned to the operation. Do stock transfer to Vendor storage location till
such time it comes to factory again.
9) While return from vendor do MIGO against the P.O and it will come settle in prod order.
10) Payment to the vendor is through service record entry concept. Consult MM gut for this.

Option 2:
1) You have to create separate material master for that operation. Treating that it will be a different
material
2) Create Vendor master with Material and Vendor combination
3) Create BOM with header material and this material as item for the header.
4) Create Routing for the header material with only one operation with control key PP02.
5) Assign the item material to this operation.
6) Run MRP this will create PR automatically. Then convert PR to PO
7) Send material to the vendor through ME2O
8) Do the GR MIGO the item will come have header material and it will automatically update in
unrestricted stock.
9) Payment to the vendor will be with different not as service entry concept consult MM guy for this