What is Subcontracting in SAP?

Subcontracting is when you send raw materials or semi-finished goods to a vendor (subcontractor) and the vendor uses them to produce a finished product, which is then delivered back to you.

1. The components remain your property.

2. The subcontractor charges you only for their processing service (plus additional charges like consumables, packaging, or scrap handling if applicable).

I. Key SAP Public Cloud Features for Subcontracting

1. Procurement Type: Subcontracting Purchase Order (PO).

2. Valuation: Finished product is valuated at standard price; components remain tracked as consumption.

3. Inventory Management: Components are sent to subcontractor stock (special stock type).

4. Integration: With MRP, costing, and finance (GR/IR clearing, subcontracting service cost).

II. End-to-End Process Flow

1. Master Data Setup

a. Material Master

o Finished Material (FERT / HALB) → Procured through subcontracting.

o Components (ROH / HALB) → Supplied to subcontractor.

b. BOM (Bill of Material)

o Define which components are needed to manufacture the finished material.

c. Info Record

o Subcontracting info record with pricing conditions (processing charges, freight, etc.).

d. Source List / Purchasing Info

o Subcontractor assigned as source.

2. Create Subcontracting Purchase Order (PO)

a. Create PO for finished material with Item Category = L (Subcontracting).

b. System automatically pulls components from BOM.

c. Pricing: Vendor charges subcontracting service fee.

3. Send Components to Subcontractor

a. Use Outbound Delivery (delivery document) to send raw materials/components.

b. Perform Goods Issue (GI): Stock moves from your unrestricted stock to subcontractor stock (Special Stock O).

c. No FI entry, only material document update.

4. Subcontractor Executes Production

a. Vendor uses your components to manufacture the finished product.

b. Sometimes by-products, scrap, or additional charges may be reported.

5. Receive Finished Product

a. Perform Goods Receipt (GR) against PO.

b. System posts:

o Debit finished product stock.

o Credit GR/IR clearing account.

o Consumption of components (auto backflush from subcontractor stock).

Accounting Entries example:

Dr. Inventory – Finished Goods

Cr. GR/IR Account

Components consumed from subcontractor stock → reduce raw material qty.

6. Invoice Verification

a. Subcontractor sends invoice (only service cost, not material).

b. Post invoice in MIRO → GR/IR cleared.

Accounting Entries example:

Dr. GR/IR

Cr. Vendor Account

7. Optional Scenarios

a. Subcontracting with Scrap: System records expected scrap quantity.

b. Subcontracting with By-products: Additional materials received from subcontractor.

c. Subcontracting with Chargeable Components: If subcontractor provides some material, captured as line items in PO.

d. Tax Handling: GST (India) determined automatically via tax procedure in PO.

III. Process Example (Public Cloud UI Apps)

1. Manage Purchase Orders → Create Subcontracting PO.

2. Create Outbound Deliveries → Ship components.

3. Post Goods Issue → Move stock to subcontractor.

4. Post Goods Receipt for PO → Receive finished goods.

5. Create Supplier Invoice → Post invoice for service charges.

6. Monitor Material Coverage → MRP automatically plans subcontracting requirements.

IV. Integration Touchpoints

a. MM (Materials Management): Subcontracting PO, stock monitoring.

b. WM/EWM (Warehouse): Manage component shipment and receipt.

c. FI (Finance): Subcontracting charges posted during invoice.

d. CO (Controlling): Cost tracked for subcontracting service.

e. PP (Production Planning): BOM explosion and component requirement.