Sub Contracting Process in Material Management(MM)

Sub contract order processing is used in material management. The customer orders the end-product using a Sub-Contract order and sends the components to the Sub-Contractor. The Sub-contractor works on it and converts this into the end product. But while receiving back the processed material, the customer can’t take full quantity back (i.e. for the complete quantity of components that was sent to the Sub-contractor). Instead, it will be received partly and for the rest of the quantity, the Customer asks the Vendor / Subcontractor to deliver at a later date.

The vendor receives materials (components) with which it produces the end product. The following are involved:

  1. You order the end product using a sub contract order. The components that the vendor needs to manufacture the end product are specified in the purchase order.
  2. In Inventory Management, the components are posted to the stock of material provided to the vendor. The components are then supplied to the vendor.
  3. The vendor performs its service and delivers the ordered material (the end product). The consumption of the components is posted.
  4. If, after the goods receipt has been posted, the vendor informs you that a larger or smaller quantity of the components was actually consumed than planned in the purchase order, you must make an adjustment.
  5. The vendor charges for his or her service. The invoice is posted in Invoice Verification.

The quantities of the components to be provided to the vendor are entered into the stock of material to be provided to the vendor. This stock has the following features:

  • It is managed as part of your total valuated stock and is available for MRP.
  • It is only managed at the plant level, since it is not stored at your own company but on the vendor’s site.

You can take a physical inventory of the stock of material to be provided to the vendor.
Subcontracting Scenario

Sub contracting scenario

This is the new Business requirement, which needs to be dealt with in the ERP scope
Subcontracting scenario

Concerns with Sub contracting

While processing the components, the sub-contractor has fed full quantities, hence the out-put is for the total quantity of components. But after partial delivery, the Subcontractor is left with the remaining quantity of the processed material

Now, the Business requirement is that this left-out material should be treated as processed material. Hence, the valuation needs to be higher than the components. And this should reflect as available stock in availability checks.

How does the ERP understand this?

From the normal Sub-Contracting process, it is implied:

  • When the material was sent, it was a raw material.
  • When the finished material was received, only partial quantity was received. Hence, only the partial material gets converted to the End product.
  • As no GR has been made for the remaining material, this would be valuated as the raw material, at which this was sent out to the vendor.

Possible Solution with Sub contracting

Transfer posting (Material to Material)
Post the remaining quantity of components to End Product at the Sub-contracting vendor storage location using Transfer Posting with movement type 309 (Material to Material)
Now,

  • The material is valuated as End product.
  • This will be reflecting in all the Planning Runs(MRP).

In such a situation where there is only partial delivery from the sub-contractor and the components sent to the sub-contractor has transformed a change, the remaining material at the vendor’s end has to be considered as End product.

This can be achieved by Transfer Posting (Material to Material).
Thus

  • The material is valuated as End product.
  • This will be reflecting in all the Planning Runs (MRP).

The vendor delivers the material and submits the Invoice for his/her service charge. The remaining process is according to “Normal Sub-contracting Process”.

Understand more about Subcontracting in this PDF Document.

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