Key Configuration Steps for Subcontracting in S/4HANA MM 2023 Server

Key Configuration Steps for Subcontracting in S/4HANA MM 2023 Server

Subcontracting in SAP S/4HANA MM (Materials Management) 2023 allows businesses to outsource production processes while maintaining control over inventory, costs, and procurement. Proper configuration ensures seamless integration between Material Requirements Planning (MRP), Purchasing, Inventory Management, and Finance.

This guide provides a step-by-step breakdown of the five key configuration areas for subcontracting in S/4HANA MM 2023, including master data setup, procurement processes, inventory management, valuation, and integration with production planning.

Master Data Configuration for Subcontracting

Before executing subcontracting processes, you must configure material masters, vendor masters, and subcontracting-specific settings in S/4HANA.

Configuring Material Master for Subcontracting Components

Subcontracting involves sending raw materials (components) to a vendor for processing. These components must be properly classified in the material master.

Key Steps:

• Material Type: Ensure components are marked as raw materials (ROH) or semi-finished goods (HALB).
• MRP Views (MRP1 & MRP2):

– Set MRP Type to PD (External Procurement) if the component is procured externally.
– Define Procurement Type as F (External) if the vendor supplies the component.
– Enable Subcontracting in MRP3 by selecting “Subcontracting” in the Special Procurement field (e.g., 30 – Subcontracting).
– Accounting Views (Accounting 1 & 2):
– Assign a valuation class (e.g., 3000 for raw materials).
– Ensure price control is set to Standard Price (S) or Moving Average (V).

Example:
If a company sends Steel Sheets (Material: STEEL-100) to a vendor for machining, the material master should have:

• MRP Type: PD
• Special Procurement: 30 (Subcontracting)
• Procurement Type: F (External)

Vendor Master Configuration for Subcontractors

Subcontractors must be classified as vendors with specific settings to enable subcontracting processes.

Key Steps:
– General Data (Vendor Master – General Tab):
– Assign Vendor Account Group (e.g., 0001 – Domestic Vendors).
– Set Purchasing Organization and Company Code.
– Purchasing Data (Purchasing Tab):
– Define Order Currency (if different from company code).
– Set Incoterms (e.g., EXW – Ex Works for subcontracting).
– Enable Subcontracting in Partner Functions (Transaction: MK01).
– Accounting Data (Accounting Tab):
– Assign Reconciliation Account (e.g., 210000 – Trade Payables).
– Define Payment Terms (e.g., Net 30).

Example:
A subcontractor Vendor: MACHINE-ShOP should have:

• Partner Function: LF (Subcontractor) in Purchasing Data.
• Incoterms: EXW (Ex Works) since the vendor processes materials at their site.

Subcontracting-Specific Material & Vendor Linkages

To ensure smooth subcontracting, link components, subcontractors, and finished goods in the system.

Key Steps:
– Info Record (Transaction: ME11):
– Create an info record for the finished good (e.g., MACHINED-PART) with the subcontractor.
– Set Special Procurement Key to 30 (Subcontracting).
– Define Planned Delivery Time (e.g., 5 days).
– Source List (Transaction: ME01):
– Assign the subcontractor as a source of supply for the finished good.
– Set MRP Relevance to 1 (Relevant for MRP).
– Quota Arrangement (Transaction: MEQ1):
– If multiple subcontractors exist, define quota arrangements to split demand.

Example:
For MACHINED-PART, the Info Record should have:

• Vendor: MACHINE-ShOP
• Special Procurement: 30
• Planned Delivery Time: 5 days

Procurement Process Configuration for Subcontracting

Subcontracting procurement involves purchase orders (POs) with components and goods receipts for finished goods. Proper configuration ensures automated component issue and cost tracking.

Creating Subcontracting Purchase Orders (POs)

Subcontracting POs must include both the finished good and components sent to the vendor.

Key Steps:
– Transaction: ME21N (Create PO)
– Enter Vendor (subcontractor) and Material (finished good).
– In the Item Details, set:
– Item Category: L (Subcontracting)
– Account Assignment: K (Cost Center) or A (Asset) if applicable.
– Under Components Tab, add all raw materials sent to the vendor.
– Component Assignment:
– Enter Component Material Number and Quantity.
– Set Movement Type to 541 (Subcontracting Issue).

Example:
A PO for 100 units of MACHINED-PART includes:

• Item Category: L
• Components:

– STEEL-100 (50 kg per unit)
– SCREW-200 (4 per unit)

Automating Component Issue with Movement Type 541

When the PO is saved, components are automatically reserved and issued to the vendor upon goods issue.

Key Steps:
– Goods Issue (Transaction: MIGO)
– Use Movement Type 541 to post component consumption.
– The system reduces stock and updates the PO history.
– Stock Overview (Transaction: MMBE)
– Verify that components are no longer in unrestricted stock.
– PO History (Transaction: ME23N)
– Check that component issue is recorded under Document Flow.

Example:
After posting 541 for STEEL-100 (5,000 kg), the stock reduces from 10,000 kg to 5,000 kg.

Goods Receipt for Subcontracted Finished Goods

Upon receiving the processed goods, perform a goods receipt (GR) to update inventory and trigger accounting entries.

Key Steps:
– Transaction: MIGO (Goods Receipt for PO)
– Select PO Number and Item.
– Enter Received Quantity (e.g., 100 MACHINED-PART).
– Use Movement Type 101 (GR for PO).
– Automatic Account Postings:
– Inventory Account (Finished Good) is credited.
– GR/IR Clearing Account is debited (until invoice is posted).
– Subcontracting Settlement:
– The system links component costs to the finished good.

Example:
After GR for 100 MACHINED-PART:

• Stock increases by 100 units.
• GR/IR Account shows $5,000 (pending invoice).

Inventory & Valuation Management in Subcontracting

Subcontracting impacts inventory valuation, stock movements, and cost flow. Proper configuration ensures accurate financial reporting.

Configuring Stock Types for Subcontracting

Subcontracting involves special stock types to track materials at the vendor’s location.

Key Steps:
– Special Stock Indicator:
– Stock at Vendor (Type ‘O’) is used for components sent to subcontractors.
– Subcontracting Stock (Type ‘K’) is used in some industries (less common in S/4HANA).
– Transaction: OMJJ (Define Special Stock Types)
– Ensure ‘O’ (Stock at Vendor) is active.
– Stock Overview (MMBE):
– Filter by Special Stock ‘O’ to see components at the vendor.

Example:
After Movement Type 541, STEEL-100 appears in Special Stock ‘O’ under Vendor: MACHINE-ShOP.

Valuation & Price Control for Subcontracted Goods

Subcontracting affects material valuation, requiring proper price control and costing settings.

Key Steps:
– Material Valuation (Transaction: OMWM):
– Assign valuation class (e.g., 3000 for raw materials, 7920 for finished goods).
– Set Price Control to Standard (S) or Moving Average (V).
– Costing Variants (Transaction: OKTZ):
– Ensure subcontracting costs are included in product costing.
– Actual Costing (Transaction: CKMLCP):
– Run actual costing to settle variances between planned and actual costs.

Example:
If MACHINED-PART has a standard cost of $50, but actual subcontracting costs are $55, actual costing adjusts the inventory value.

Handling Scrap & Yield Variances in Subcontracting

Subcontractors may return less than expected due to scrap or yield losses. Configure the system to account for these variations.

Key Steps:
– Scrap Percentage in BOM (Transaction: CS01):
– Define scrap % in the BOM component (e.g., 5% scrap for STEEL-100).
– Goods Receipt with Scrap (Transaction: MIGO):
– If the vendor returns 95 units instead of 100, post a shortage using Movement Type 551 (Scrap).
– Variance Analysis (Transaction: CKM3):
– Compare planned vs. actual yields and adjust standard costs if needed.

Example:
If 100 MACHINED-PART were expected but only 95 were received:

• Post 5 units as scrap (551).
• Update BOM scrap % if this is a recurring issue.

Integration with Production Planning (PP) & MRP

Subcontracting must align with MRP, production orders, and demand planning to avoid supply chain disruptions.

MRP Configuration for Subcontracting Components

MRP must recognize subcontracting demand and trigger procurement accordingly.

Key Steps:
– MRP Group (Transaction: OPPQ):
– Assign MRP Group (e.g., SUB01) to subcontracting materials.
– Define Procurement Type as F (External).
– MRP Run (Transaction: MD01):
– Ensure subcontracting components are included in MRP scope.
– Check MRP List (MD04) for proposed purchase requisitions.
– Planning Time Fences (Transaction: OPPK):
– Set firming horizon to prevent last-minute changes.

Example:
Running MRP (MD01) for MACHINED-PART generates a purchase requisition for STEEL-100 if stock is low.

Linking Subcontracting to Production Orders

If subcontracting is part of a larger production process, integrate it with production orders.

Key Steps:
– Production Order (Transaction: CO01):
– Create a production order for the finished product.
– Assign subcontracting operation (e.g., Operation 0020 – External Machining).
– Component Assignment:
– Link subcontracting PO to the production order.
– Order Settlement (Transaction: CO88):
– Settle subcontracting costs to the production order.

Example:
A production order for ASSEMBLY-X includes:

• Operation 0020: External Machining (Subcontracting)
• Linked PO: PO for MACHINED-PART

Demand Management & Subcontracting Lead Times

Subcontracting introduces additional lead times, requiring adjustments in demand planning.

Key Steps:
– Planned Delivery Time (Info Record – ME11):
– Set realistic lead times (e.g., 5 days for machining).
– Safety Stock (Transaction: MD21):
– Increase safety stock for subcontracted components.
– Demand Forecasting (Transaction: DP90):
– Use historical data to predict subcontracting demand.

Example:
If MACHINED-PART has a 5-day lead time, MRP should trigger procurement 7 days in advance to account for transport delays.

Financial & Controlling Aspects of Subcontracting

Subcontracting impacts cost accounting, invoice verification, and profit analysis. Proper configuration ensures accurate financial reporting.

Invoice Verification for Subcontracting (MIRO)

Subcontracting invoices must match POs, GRs, and component costs.

Key Steps:
– Transaction: MIRO (Invoice Verification)
– Enter PO Number and Invoice Amount.
– System automatically checks against GR quantity.
– Price Variance Handling:
– If invoice price differs from PO price, post to a price difference account.
– Subcontracting Settlement:
– The system allocates component costs to the finished good.

Example:
If PO price = $50/unit but invoice = $55/unit, the $5 difference posts to Price Difference Account (e.g., 400000).

Cost Center & Profit Center Allocation

Subcontracting costs must be allocated to the correct cost objects.

Key Steps:
– Cost Center Assignment (Transaction: KS01):
– Assign subcontracting costs to a production cost center.
– Profit Center (Transaction: KE59):
– Link subcontracting POs to a profit center for profitability analysis.
– Cost Object Controlling (Transaction: CO88):
– Settle costs to production orders or projects.

Example:
MACHINED-PART costs are allocated to:

• Cost Center: PROD-001 (Machining)
• Profit Center: PC-100 (Automotive Division)

Reporting & Analytics for Subcontracting

Use S/4HANA analytics to monitor subcontracting performance, costs, and vendor efficiency.

Key Steps:
– Subcontracting Cockpit (Fiori App: Manage Subcontracting Orders):
– Track PO status, component consumption, and GRs.
– Cost Reports (Transaction: S_ALR_87013611):
– Analyze subcontracting cost variances.
– Vendor Performance (Transaction: ME80FN):
– Evaluate subcontractor lead times and quality.

Example:
Using Fiori App, a manager sees:

• PO Completion Rate: 95%
• Average Lead Time: 6 days (vs. planned 5)
• Cost Variance: +3% (due to material price increases)

Conclusion

Configuring subcontracting in SAP S/4HANA MM 2023 requires meticulous master data setup, procurement process alignment, inventory valuation controls, MRP integration, and financial tracking. By following these five key configuration steps, businesses can optimize outsourced production, reduce costs, and maintain supply chain visibility.

Key takeaways:
✅ Master Data: Properly classify materials, vendors, and special procurement keys.
✅ Procurement: Use Item Category L and Movement Type 541 for component issue.
✅ Inventory & Valuation: Track special stock (O) and actual costing variances.
✅ MRP & PP Integration: Align subcontracting with production orders and lead times.
✅ Financial Controls: Ensure accurate invoice verification, cost allocation, and reporting.

By leveraging S/4HANA’s advanced capabilities, companies can streamline subcontracting operations while maintaining financial and operational control.