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The purpose of this document is to introduce the subcontracting process in purchasing.


Subcontracting is one of the manufacturing strategy by which a company decides to outsource some or all of its production operations to a vendor. This process is considered better than a complete external procurement as there can be a tighter control on the product quality.

In a typical subcontracting process, a manufacturing company provides raw materials / components (say material A and B) to a subcontracting vendor. The vendor in turn processes these materials to turn them into an end product (say material C). This product (if not a finished product) is then used by the manufacturing company to carry out the rest of the operations to turn it into a finished product. To achieve this, a subcontracting purchase order for material C is created. Material A and B which constitute the Bill of Material (BOM) of material C are then delivered to the subcontracting vendor. You can enter the components manually or determine the components using BOM explosion.

The system automatically creates reservation items for MRP-relevant components. The purchase order price is the vendor's subcontracting service. Conditions for subcontract orders can be stored in a subcontractor purchasing info record. You can link service specifications for services to subcontract items. This means that you can provide the vendor with clearly lay out, detailed specifications about performance of the required services. Service specifications are only intended for information purposes, in other words, they do not have an effect on an item’s value.

The components at the subcontractor's site are managed in a special stock for the vendor. This stock is valuated and available for MRP. It is not allocated to a specific storage location. Components can only be withdrawn from the stock of material provided by the vendor. You can monitor the stocks of provided materials by means of evaluations.

Finally a Goods Receipt is posted when material C is received from the vendor.

SAP process flow

1. Create a subcontracting Purchase Order (ME21N)

  • Click on “Material Data” tab under “Item details” and then click on “Components” to view the components / make changes.
  • Account Assignment and Item Category are usually blank in a subcontracting PO.

2. Delivery of components to subcontracting vendor (ME2O)

  • Enter selection parameters like vendor and plant and click on Execute.
  • Select the desired line, click on Create Delivery and a delivery will be created.

3. Post Goods Issue (VL02N)

  • The movement type is usually 541.

4. Post Goods Receipt (MIGO)

5. Logistics Invoice Verification (MIRO)

Master Data Setting

1. Material Master (MM01)

  • Maintain special procurement key for subcontracting in MRP 2 view.

2. Bill of Material (CS01)

  • If a material needs to be returned by the vendor after the subcontracting process is complete, it should be entered as a negative quantity in the Bill of Material (BOM).

Points to Consider

1. A material can be sent for subcontracting at any stage in the manufacturing process
2. Material to be received after subcontracting should have a different material code, than the components issued.

3. Routing can be used for external processing but not subcontracting.
4. MIGO – Transfer Posting (Mvt. type 542) can be used to transfer scrap component back to the manufacturing location.