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How SAP works? – How Subcontracting process is mapped

Get your basics right !

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:
    • Quality management
    • Scrapping / Reworking
    • 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:
    • To consider the subcontracted quantity measured in hours (H) of internal production
    • Usually, the hourly rate is used as a basis of negotiation with the subcontractor
    • 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


Courtesy :Youtube

I would like to speak to any experts in subcontracting and see what challenges they face. Ping me if you would like to participate in my podcast show.

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