I.

Introduction
Subcontracting refers to the process of entering a contractual agreement with an outside
person or company to perform a certain amount of work. The outside person or company in
this arrangement is known as a subcontractor. Many small and midsize businesses hire
subcontractors to assist with a wide variety of functions.

Subcontracting is often done to reduce costs, as subcontractors can often utilize specialized
knowledge or resources and achieve cost advantages by producing in large numbers. For
example, a smaller business might use an outside firm to prepare its payroll, an accountant
to help with its record keeping and tax compliance, or a free-lance worker to handle a
special project.

This article describes subcontracting within the manufacturing industry, where producers
often subcontract painting, refinement or assembling of components.

A subcontractor in production is a 3rd party that performs complete production levels or

individual operations for another company.

II. Functionality
Details
Most manufacturing companies hand over certain tasks in the
Description of production process to an external business partner that is specialized on
functionality gap performing them. After the completion the subcontractor returns back
the refined product.
Impact on
Products that are worked on by a subcontractor must remain in the
Customers
official stock of the party that hands them over.
Business
90% of German manufacturing companies work with subcontracting.
Opportunity
95% of ByDesign Manufacturing Market requires subcontracting.
Because the functionality of subcontracting is missing in SP08, this Workaround process
was developed.

The idea of this Workaround is to simulate an inhouse-production of the components to get

a consistent process flow in the system. Therefore, the system creates production orders for
the components that are actually processed by the subcontractor. To keep track of where
the components currently are located, the corresponding amount of the components that are
physically located at the Subcontractor, is stored in a virtual storage location of this
Subcontractor in the system (see IV. How-to Setup).

To inform the subcontractor that he will receive parts that have to be processed by him and
to order this "Service" officially, a service order is created in the system and send to the
Subcontractor.
This process is explained in detail in V. User Guide, in form of a process documentation in
English as well as in German.

The functionality "Subcontracting" will be provided with FP 3.0.

III. Business Use

The subcontracting scenario decribed here is a multi-level subcontracting. Company X

orders material from a supplier who directly sends it to the first Subcontractor
(Subcontractor1). When the work is finished, Subcontractor1 sends the components
directly to the next Subcontractor (Subcontractor2), who again processes the component.
Afterwards this material is sent back to Company X.

It is important to keep in mind that Company X wants to know at any time where the
components are currently located. The components are in possession of Company X
throughout the whole process even if they are physically located at the
Subcontractors.

IV. How-to Setup

System Setup for multi-level subcontracting.

IV. Process Execution

V. User Guide
Find here a user guide describing the subcontracting process on the basis of an example in
a ByDesign test system ProcessDocumentation_Subcontracting.doc
Sub Contracting Cycle
(1) You have a material that can be procured externally, and you have maintained BOM
with components. Any waste generated and received during subcontracting process can be
maintained as component with negative quantity.

(2) You create a subcontracting PO (PO with Item Category L). You can also maintain
Purchase Info Record for Subcontract category for material and subcontractor.

(3) You make a transfer posting to issue components for SC PO. Material is sent to
subcontractor. As material remains under your ownership, system does not make any value
entry. But quantity is shown as "Material Provided to Vendor"

(4) You receive finished material against SC-PO. You also specify components consumed
in manufacturing of finished goods. Additionally, if you have negative components in
BOM, now you'll also receive subcontracting by-products. There are three events, so three
accounting entries are generated:

DR FG Stock/ SC By-Product Stock

CR Change in Stock (FG/ SC By-Product )
(for finished goods received)

DR Subcontracting Charges
CR GR/IR Clg
(for moneys payable to Subcontractor)

DR Consumption (Components)
CR Change in Stock (FG/ SC By-Product )
(material provided to Vendor is now charged to expense)

(5) You do the IV for SC Invoice, and the process is complete.

Process of Subcontract in MM
Sub-contract business process:
You want to buy material from the supplier (processed material/ assembled item) , but for
some reason (quality of certain item / price ) you will give some component to vendor .
Vendor shall process the item / use the item provided & supply the final item.

SAP process:
1.Create the finished goods material code.
2.Maintain the BOM for the material.
3.Create PO with item category as "L" .
4.Issue material to vendor with movement type 541
5.Receive the material against the PO with movement type 101.
6.MIRO to account for vendor's invoice for the service charge& material used by him.

Can anybody tell me how a process has to be given to subcontracting?

Suppose, I have 3 operations 1)weaving 2)dyeing 3)cutting & packing
if no 2 process (i.e Dyeing) has to be given to subcontracting, what process should i
follow ?

Vijay

The following process to be followed for subcontracting.

1. Item code(material master) to be created at the stage of before dyeing.
2. Item code(material master) to be created after Dyeing as subcontracted item.(F30)
3. Bill of material to becreated for the material(2) calling for material(1)
4. Inforecord and source list to be created for material(2) with the corresponding vendor
5. PO to be released for material (2)
6.Along with PO the material(1) to be issued to vendor
7.On receipt of material when GR is made the stock with vendor will get updated.

B.N.Rao

How to Create a Subcontract Order?

To create a subcontract order, proceed as follows:
Enter the material you want to order and the item category for subcontracting (L) in the
order item.

Press ENTER to display the screen for component processing.

Enter the components that the vendor requires to manufacture the product.

Please note:
– You do not need to enter the date required for the components. This date is proposed by
the system when you press ENTER.

It is calculated as follows:
Delivery date of the item - Planned delivery time

– If you do not want the quantity of the components to be changed if the order quantity of
the end product is altered, set the indicator Fixed quantity (column F).

– You can determine whether the components are available on the date required by
selecting Edit -> Availability check.
 If you entered a bill of material as the material in the subcontract order, the components are
created automatically.

If you want to determine the components in the bill of material at a later date (for example,
if the bill of material is subsequently changed), choose Item -> Component -> New BOM
explosion. The existing components are deleted and redetermined in the bill of material.

Save the purchase order.

When you print the purchase order, the components are printed per order item.

Subcontracting Process
Purpose

This process shows you how to record transactions that relate to subcontracting with
chargeable components.

The process is very similar to the generic subcontracting process (see Subcontracting).
The main differences are that you invoice the subcontractor for the components provided
(step 3 in the process flow below), and it invoices you for the components that it has
consumed (step 6 (b)). You also offset the invoices against each other (step 7).

The process flow is illustrated by the following example: You subcontract the assembly of
motorcycle engines out to Redware Co. Redware charges you JPY 2,000 for each engine
that it assembles. The valuation price of all of the components that you provide Redware
Co. with is JPY 30,000; you charge it JPY 33,000 for these components.

Process Flow

...

1. You create a subcontract order, following the standard procedure. The system
proposes the labor charge from the info record for the subcontracting product.

For example, assume you create a subcontract order for the assembly of 10 engines. The
labor charge is JPY 2,000 per piece.

From the subcontract order, you print out a list of the products ordered and the components
provided (message type SC02) and send it to the subcontractor.

2. You check whether the subcontractor has any components left over from any previous
orders (see Monitoring Stocks of Material Provided to Vendor), and then issue the
necessary quantity of components. You can do that in the stock monitor itself (see
Providing Components for Existing Purchase Orders).
The system generates:

 A material document to record the transfer of the components from plant stock to
vendor stock

 The corresponding accounting document in the general ledger

From the delivery, you print out (a) a delivery note and (b) a list of the subcontracting
components (output types SC01 and SC02), and you send both to the subcontractor.

If the subcontractor purchases any components itself from another company instead of you
providing them, you can print out a list of the subcontracting components from the
subcontract order instead (message type SC01).

To continue with the example, assume that you provide Redware Co. with the components
for all 10 engines. The total value of the components is JPY 300,000. The system generates
the following accounting document:

It takes the chargeable components’ prices from the valuation prices in their master record.

3. You invoice the subcontractor for the chargeable components.

In our example, the system creates the following accounting document:

The price of the chargeable components in the example is JPY 330,000, which is
JPY 30,000 more than the chargeable component’s valuation price. That is because you are
invoicing the subcontractor for the components at a markup price. The system reads this
price from the chargeable component info record that you have created.

4. The subcontractor assembles seven of the engines that you ordered and delivers them
to you.
 5. When you receive the goods, you post a goods receipt, following the standard
procedure. The system generates:

 A material document to remove the components from the vendor stock and add the
new engines to the plant’s stock of subcontracting products

 The following accounting document

Assuming that the engine’s valuation price is JPY 40,000, and that the goods receipt is for
seven engines, the system debits the Subcontracting Products account by JPY 280,000, and
the Inventory Change account by the same amount.

The vendor stock goes down by JPY 210,000 – the cost of the components necessary to
produce seven engines – and the system debits this amount to the Material Consumption
account.

The system calculates the manufacturing expense from the subcontract order. Redware Co.
charges JPY 2,000 per engine. Here, the charge of JPY 14,000 is for the seven engines
delivered.

6. The subcontractor sends you an invoice. The invoice covers the labor cost and the cost
of the subcontracting components.

You enter the two parts of the invoice in two separate transactions:

...

a. You enter the part of the invoice for the labor cost following the standard
procedure.

Redware Co.’s invoice is for JPY 14,000 plus VAT (value-added tax). The system
generates the following accounting document:
 b. You enter the part of the invoice for cost of the subcontracting components –
known in the system as a “deductible payable” – as described under Entering Deductible
Payables.

The system records the vendor item on the subcontractor’s vendor account, but under a
nonstandard reconciliation account (in this example, called the Alternative Accounts
Payable account):

7. What you do next depends on which offset method you have agreed on with your
subcontractor:

 Consumption-based offset method

Under this method, no money exchanges hands for the chargeable components. It just
allows you to keep track of the value of the components that you have provided the
subcontractor with.

i. You pay the labor invoice, as described in Paying the Subcontractor,

which is recorded as follows:

ii. As described in Consumption-Based Offsetting, you clear (or “offset”)

the deductible payable from step 6 (b) against the amount that you have invoiced the
subcontractor for the chargeable components (from step 3).

That results in the following accounting document, which reduces the balance of the
Alternative Accounts Payable account to zero, and that of the Subcontractor Accounts
Receivable – Pending account to JPY 103,950. This is the amount that the subcontractor
still owes you for the components for the three engines that it still has to deliver.

 Percentage-based offset method

 Under this offset method, you pay the labor charge and the deductible payable from step 6
(b), minus a certain percentage of the amount that you have invoiced the subcontractor for
the chargeable components over the past month (from step 5), and minus any amount
carried forward from last month.

In fact, it may not necessarily be a month. It depends on what you have agreed with your
subcontractors.

To achieve this, you first calculate how much you can offset, and transfer it from the
Subcontractor Accounts Receivable – Pending account to the Subcontractor Accounts
Receivable – Due account. The difference between the two accounts is that the payment
program disregards the Pending account, but not the Due account.

...

i. You make this posting as described in Percentage-Based Offsetting.

If you assume that your offset percentage is 60%, you can charge the subcontractor for
40% of the invoices for chargeable components (JPY 346,500), which is JPY 138,600. In
addition, if you assume that you had JPY 20,000 carried forward from last month, the total
amount that the subcontractor owes you increases to JPY 158,600.

That gives you the following accounting document:

ii. You then run the payment program, which pays the subcontractor’s
labor charge and the amount that it invoiced you for the chargeable components, but only
after it has deducted the amount from the Subcontractor Accounts Receivable – Due
account:

 Payment condition offset

Under this method, you let the payables and receivables run their course, and pay them or
collect the receivables like any other open items.
What Is Subsequent Adjustment In Process Of
Subcontracting
ERP SAP ==> SAP Material Managment

After the subcontractor (as vendor) had delivered the ordered material (end product), you
posted the goods receipt to the subcontract order. The system determined the necessary
components for each purchase order item and created for each component a goods issue
item with the quantity that was determined in the purchase order.

If the vendor informs you after these postings that a greater or smaller quantity of the
subcontracting components was actually consumed than planned in the purchase order, you
must post a subsequent adjustment to correct the component consumption.

If the component is a by-product, you must post the corrected by-product receipt (excess
receipt) or by-product issue (short receipt).

"In Simple Words, suppose you have sent xx material 100 kgs to subcontractor for
processing of 100 yy component. The subcontractor has produced 95 yy by using 100 kgs
of xx. That means he has used 5 kgs excess material. But it was not of his fault. It was done
on account of die / mould or some other reason.

So you have to post a subsequent adjustment for 5 kgs of xx material and reconcile using
J1IFQ for making subcontracting challan complete. Similar case can be understand when
subcontractor processes 105 yy using 100 kgs of xx. That means 5 kgs of xx short
consumed. These types of adjustment can be known using t-code mb51 and movement type
121."

In the transaction for goods movements MIGO, select the business operation Subsequent
Adjustment from the list box. The system automatically chooses Purchase Order as the
reference document. Enter the document number of the purchase order and the item
number for which you want to post a subsequent adjustment.

So in the case of system, we have to choose the movement type 121 as and as automatically
the system chooses the HIDDEN movt type 543 or 544 based on our requirement and it’s
clear that both the movts 543 & 544 are Hidden movements and we cannot execute those
movts.
For the selected item, enter the difference quantity specified by the vendor and determine
with the Under consumption/Short Receipt indicator, whether a receipt or an issue is
concerned. If you set the indicator, it is an under consumption or short receipt. If you do
not set the indicator, it is an excess consumption or excess receipt.

Post the subsequent adjustment.

The specified quantities of the originally posted goods receipt are corrected by the system
to the subsequently adjusted quantities.

Can you update me the account postings for sub-contracting process at various stages.

Subcontracting Process

Subcontracting without Payment of Duty

Creation of Subcontracting PO (ME21N)

Transfer Posting of Components to Subcontractor (Mvmt Type - 541)

(MB1B/ME2O/MIGO)

Creation of Subcontracting Challan w.r.t. Transfer Posting Doc (J1IF01)

Goods Receipt w.r.t. Subcontracting PO and Refer Subcontracting Challan at the time of
GR (MIGO) {GR with 101 and auto consumption of components with 543 movement}

Reconciliation of Subcontracting Challan (J1IFQ)

Completion of Subcontracting Challan (J1IF13)

Generation of Annexure IV (J1IFR)

Note: - In this case, you have to maintain the Assessable Value for the Components to be
supplied to Vendor in J1ID and also Excise Tax rates for the Chapter IDs linked with these
components. So during J1IF01, system will take the Assessable Value as Excise base Value
and calculates the Excise Duties by taking Excise Tax Rates.

Subcontracting under Full Payment of Duty

Creation of Subcontracting PO (ME21N)

Transfer Posting of Components to Subcontractor (MB1B/ME2O/MIGO)

Creation of Outgoing Excise Invoice w.r.t. Transfer Posting Document (J1IS) - Used to
send the components to Subcontractor's. Here 57F4 Challan is not created.
Accounting Entry: -

CENVAT Input BED - Cr

CENVAT Input ECS - Cr
CENVAT Input ECS - Cr
CENVAT Suspense A/c - Dr

Capture Vendor Excise Invoice at the time of GR of Finished Goods w.r.t. Subcontracting
PO (MIGO)

Post Excise Invoice for FG received from Subcontractor (J1IEX)

Accounting Entry: -

CENVAT Input BED - Dr

CENVAT Input ECS - Dr
CENVAT Input ECS - Dr
CENVAT Clearing A/c - Cr

Master Data:-

MM01- Material Masters for Components and FG

XK01 - Vendor Master (Subcontractor)
CS01 - BOM for FG
ME11 - Purchase Info record for Subcontracting

The Subcon Process in SAP Purchasing Modules

Subcontracting Processing

When a main BOM item is a subcontract item (in the item category field of PO/PR line
item, the value is "L"), then the system will automatically know that the sub items need to
be issued out. Such issue, from the internal system processing view point, is only a transfer
from one storage location to the subcontractor vendor storage location rather than a
consumption. It will only be deemed a consumption when the parent item is received back
from the vendor. The system will automatically track all the items sent to the vendor
waiting to be receieved back.

The following are the pre-requisite procedure for handling subcontract items:

• When setting up the subcontracted parent item (material type HALB), the material
master has a procurement type of "F" and special procurement of 30. The effect is
that when the purchase requistion was created by MRP or manually, the item
category will be "L".
• BOM items for the main part has been setup to contain all the materials which must
be supplied FOC to the vendor.
 • There is no need to setup the routing for the sub-contracted main item.

The following are subcontracted related procedures:

• Finding out what sub-items need to be issued to subcontractors and issue them.
• Finding out what sub-items have been issued to subcontractors and waiting to come
back.
• Receiving subcontracting item (from the store viewpoint, there is no difference
from normal receiving).
• Invoice processing : the invoice is only for the services and is no difference from
normal processing.

Invoke transaction ME2O

• Leave the Date required, Material and Plant blank unless you wish to limit the
listing to a specific area. Check the Only Negative available SC stocks if you only
want to look at the cases where materials need to be handed to the subcontractor. If
you do not check this, then items which have already been issued to the
subcontractor and waiting to come back will also be shown.
• To issue the items to the subcontractor, select the item, then click Post goods issue
button.
• Enter the storage location from which the sub-items is taken out, and the quantity
given.
• If there is not sufficient on hand stock to be given to the subcontractor, then the
system will issue a "0 items posted" message. If there is sufficient quantity, the
system will transfer the quantity to the vendor storage location. On this screen, you
can also check the on hand stock balance by clicking the stock overview and
stock/requirement buttons. You may also palce the cursor on a PO number and
display the PO details giving rise to this SC issuing requirement.

Subcontract Posting

Material Document
101 + Receive in the new Material after sub-contract
543 - Clear the quantity in Material Provision for Vendor

Accounting Document
Debit Inventory - New Part 150
Credit Inventory - Purchase Offset 150

Debit Service cost for sub-contract 50

Credit GR/IR - Inventory 50

Debit ROH - Material Consumed 100

Credit ROH - Material Consumed 100