By John Jordan
SAP subcontracting is a procurement process in which a company provides components to an external vendor that manufactures or processes a finished or semi-finished material. In SAP S/4HANA, the components are managed as stock provided to the vendor, and their consumption is recorded when the subcontracted material is received.
Subcontracting connects purchasing, inventory management, Material Requirements Planning (MRP), and product costing. For example, a manufacturer can supply components to a subcontractor, create a subcontracting purchase order using transaction ME21N, and record the finished material's goods receipt while accounting for the components consumed.
In this article, we'll explain how subcontracting works in SAP, how overhead and special procurement settings affect the process, and how outsourced manufacturing relates to material costing.
Table of Contents
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What is Subcontracting in SAP
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Overhead in Subcontracting in SAP
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Special Procurement Type in Subcontracting
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Outsourced Manufacturing
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Glossary
What is Subcontracting in SAP?
In SAP S/4HANA, subcontracting typically begins with a purchase order using item category L. The purchasing company provides components to the subcontractor, where they are managed as stock provided to the vendor. The subcontractor uses these components to manufacture or process the ordered material.
When the finished material is received, SAP posts the goods receipt and records the consumption of the components from subcontracting stock. This process connects purchasing, inventory management, and material valuation without requiring an internal production order for the subcontracted operation.
The diagram below illustrates the subcontracting process, including purchasing, component provision, goods receipt, and invoice verification.
Overhead
In SAP S/4HANA, subcontracting is typically managed through purchasing rather than an internal production order. The purchasing company provides components to an external supplier, which performs the manufacturing or processing operation.
Because standard subcontracting does not require an internal production order, overhead calculation differs from the process used for in-house manufacturing. In internal production, overhead is often calculated using costing sheets and applied to manufacturing orders.
For subcontracted materials, the treatment of overhead depends on the material costing configuration, including the costing sheet, valuation variant, and applicable costing rules. The subcontracting service price, supplied component costs, and any applicable overhead can contribute to the planned cost of the subcontracted material.
For more information about how SAP determines the general ledger accounts used in material movements and procurement, see our article SAP Automatic Account Determination: OBYC and T030 in S/4HANA.
To configure subcontracting costs and overhead appropriately, ERP Corp SAP Experts can help review your costing structure, overhead calculation, and valuation settings.
Special Procurement Type
In SAP S/4HANA, the Special Procurement field in the material master's MRP 2 view helps determine how a material is procured during planning. Special procurement key 30 is commonly used for subcontracting, allowing MRP to plan procurement through an external subcontractor rather than in-house production.
The available special procurement keys and their behavior depend on your SAP configuration. Figure 1 shows an example in which procurement type F (external procurement) is combined with special procurement key 30 (subcontracting).
You maintain a material master view with Transaction MM02 or via menu path:
Logistics - Production - Master Data - Material Master - Material - Change - Immediately
Navigate to the MRP 2 tab to display the screen in Figure 1.
Figure 1: SAP Subcontracting Special Procurement Type 30
Right-click the Special procurement field and select Possible Entries to display a list of special procurement types as shown. MRP searches for a subcontract purchasing info record and creates a purchase requisition or purchase order for a subcontract vendor.
You create a subcontract purchase order with Transaction ME21N or by following menu path:
Logistics - Materials Management - Purchasing - Purchase Order - Create
Enter subcontract purchasing information to display the screen shown in Figure 2.
Figure 2: SAP Subcontract Purchase Order Line Item
You indicate that the material is to be procured by subcontracting by entering item category L (third column) when you create the purchase order line item. When you press Enter after entering a subcontract item category, two new icons appear in the Material Data tab of the item details as shown in Figure 3.
Figure 3: SAP Subcontract Components and Explode BOM in Material Data Tab
In transaction ME21N, enter item category L to create a subcontracting purchase order. Figure 3 shows the Components and Explode BOM options available in the purchase order item details.
Select Components to review or maintain the materials that the subcontractor requires. If a suitable bill of materials (BOM) is available, SAP can propose the component quantities automatically. You can review and adjust these quantities as needed.
The components supplied to the subcontractor are managed as stock provided to vendor. Transaction ME2O can be used to monitor subcontracting requirements and component stock. A transfer posting, commonly using movement type 541, moves components into subcontracting stock without recording their consumption at that point.
When the completed material is received against the subcontracting purchase order, SAP records the goods receipt and the associated component consumption. In a typical process, movement type 101 records the receipt of the subcontracted material, while movement type 543 records consumption of the components from stock provided to the vendor. Actual component quantities can be adjusted during goods receipt when they differ from the planned quantities.
Business Function LOG_MM_OM_1 (Outsourced Manufacturing)
In SAP ERP, business function LOG_MM_OM_1 introduced functionality for outsourced manufacturing, including enhanced integration between subcontracting procurement and Controlling (CO). Depending on the system configuration, this functionality could support CO production orders associated with subcontracting purchase order items, providing additional visibility into manufacturing costs.
This functionality should not be assumed to work identically in every SAP S/4HANA system. Its availability and behavior depend on the SAP release, deployment model, and configuration. Organizations evaluating outsourced manufacturing should verify the supported processes in their specific SAP environment.
For standard SAP S/4HANA subcontracting, the purchasing process, stock provided to the vendor, component consumption, and material costing remain the primary concepts discussed in this article.
For a related discussion of how different production alternatives can be combined in material costing, see our article SAP Mixed Costing.
You can read more about outsourced manufacturing in this blog by Ross Christoph
Glossary
Subcontracting
Subcontracting is a procurement process in which a company supplies components to an external vendor that manufactures or processes a material. In SAP S/4HANA, subcontracting purchase orders commonly use item category L. Components are managed as stock provided to the vendor and are typically consumed when the finished material is received.
Activity Type
An activity type identifies activities provided by a cost center to manufacturing orders. The secondary cost element associated with an activity type identifies the activity costs on cost center and detailed reports
Bill of Material (BOM)
A bill of material (BOM) is a structured hierarchy of components necessary to build an assembly. BOMs, together with purchasing info records, allow cost estimates to calculate the material costs of assemblies.
Cost Center
A cost center is master data that identifies where the cost occurred. A responsible person assigned to the cost center analyzes and explains the cost center variances at the end of each period.
Cost Component
A cost component identifies costs of similar types, such as material, labor, and overhead costs by grouping together cost elements in the cost component structure.
Cost Component Split
The cost component split is the combination of cost components that makes up the total cost of a material. For example, if you need to view three cost components (material, labor, and overhead) for your reporting requirements, the combination of these three cost components represents the cost component split.
Cost Element
In SAP S/4HANA, cost elements are represented by general ledger (G/L) accounts that are relevant to Controlling (CO). They identify and classify costs recorded in financial and management accounting.
Primary cost elements represent costs originating outside Controlling, such as purchased materials or external services. Secondary cost elements are used for internal cost allocations, such as activity allocations and assessments.
For subcontracting, relevant G/L accounts help classify material costs, subcontracting service charges, and applicable overhead in the accounting and costing processes.
Cost Estimate
A cost estimate calculates the planned cost of producing or procuring a material in SAP S/4HANA. Depending on the procurement process and costing configuration, it can include component materials, production activities, external processing charges, and overhead.
For subcontracted materials, the cost estimate can include the value of components supplied to the subcontractor, the subcontracting service price, and applicable overhead. SAP determines these costs using the material's procurement settings, quantity structure, and valuation strategy.
The resulting cost estimate supports material valuation and helps organizations understand the planned cost of externally manufactured products.
Costing Sheet
A costing sheet summarizes the rules for allocating overhead from cost centers for cost estimates, product cost collectors, and manufacturing orders. The components of a costing sheet include the calculation base (a group of cost elements), the overhead rate (a percentage rate applied to the base), and the credit key (the cost center receiving credit).
Costing Variant
A costing variant controls how SAP calculates a material cost estimate. It combines settings that determine which quantities and prices are used, including the valuation variant and other costing parameters.
In SAP S/4HANA, the costing variant helps determine how purchased materials, internally produced components, and subcontracted materials are valued during cost estimation.
For subcontracting, the relevant configuration influences how SAP selects component prices, subcontracting service charges, and applicable overhead when calculating planned material costs.
Demand Management
Demand management involves planning requirement quantities and dates for assemblies, as well as defining the strategy for planning and producing/procuring a finished product.
Dependent Requirements
Dependent requirements are caused by higher-level dependent and independent requirements when running MRP. Independent requirements, created by sales orders or manually planned independent requirement entries in demand management, determine lower-level dependent material requirements.
External Processing
External processing of a manufacturing order operation is performed by an external vendor. This is distinct from subcontracting, which involves sending material parts to an external vendor who manufactures the complete assembly via a purchase order.
Goods Issue
A goods issue is an inventory movement that records materials leaving a particular stock location or being consumed for a business process.
In SAP S/4HANA subcontracting, components are commonly transferred to stock provided to vendor using movement type 541. This transfer changes where the inventory is held but does not itself record consumption.
When the completed subcontracted material is received, SAP typically records component consumption using movement type 543, reducing the stock provided to the vendor.
This distinction helps separate the physical provision of components from their consumption during subcontracting.
GR/IR
GR/IR (Goods Receipt/Invoice Receipt) is a clearing account used in SAP to manage timing differences between goods receipts and supplier invoices.
When a subcontracted material is received, SAP can post the relevant goods receipt accounting entries, including an amount to the GR/IR clearing account. When the subcontractor's invoice is posted, the corresponding GR/IR amount is cleared, subject to any differences or outstanding items.
In SAP S/4HANA, the GR/IR process helps reconcile the receipt of subcontracted materials with the subcontractor's invoice. The exact accounting entries depend on material valuation and account determination settings.
Master Data
Master data is information maintained in SAP that supports business processes and remains relatively stable over time.
In SAP S/4HANA subcontracting, important master data includes the material master, supplier master data, bill of materials (BOM), and purchasing info records.
These records help SAP determine procurement settings, identify the components supplied to subcontractors, and calculate planned subcontracting costs.
Material Master
The material master contains the information SAP uses to manage a material across purchasing, inventory management, production planning, and accounting.
In SAP S/4HANA, material master data is organized into views for different business functions. The MRP 2 view contains procurement settings, including Procurement Type and Special Procurement Type.
For subcontracting, transaction MM02 can be used to maintain these settings. Procurement type F and special procurement key 30 are commonly used together to plan subcontracted materials, depending on plant configuration.
Production Order
A production order is used for discrete manufacturing. A BOM and routing are copied from master data to the order. A sequence of operations is supplied by the routing, which describes how to carry out work-steps.
An operation can refer to a work center at which it is to be performed. An operation contains planned activities required to carry out the operation. Costs are based on the material components and activity price multiplied by a standard value.
Purchase Price Variance
When raw materials are valued at the standard price, a purchase price variance will post during goods receipt if the goods receipt or invoice price is different from the material standard price.
ME20 Subcontract Stock Overview
Transaction ME2O provides an overview of subcontracting component requirements and stock provided to vendors in SAP.
Purchasing and inventory management teams can use ME2O to review component availability, identify shortages, and support the replenishment of materials needed by subcontractors.
The available functions and replenishment options depend on the SAP system version and configuration.
Purchasing Info Record
A purchasing info record stores purchasing information for a material and supplier, including pricing and other procurement conditions.
In SAP S/4HANA subcontracting, a purchasing info record can contain the subcontracting service price associated with an external supplier.
Depending on the valuation strategy and SAP configuration, the purchasing info record price may be used when calculating the planned cost of a subcontracted material.
Purchase Order
A purchase order is a purchasing document used to procure materials or services from an external supplier.
In SAP S/4HANA, a subcontracting purchase order typically uses item category L. It identifies the material to be supplied by the subcontractor, the subcontracting service price, and the components required for manufacturing or processing.
Transaction ME21N can be used to create a subcontracting purchase order. When the completed material is received, SAP records the goods receipt and the associated consumption of components provided to the vendor.
Purchase Requisition
A purchase requisition is an internal purchasing document that identifies a requirement to procure a specified quantity of material or services by a required date.
In SAP S/4HANA, Material Requirements Planning (MRP) can generate purchase requisitions based on material requirements and procurement settings.
For subcontracted materials, MRP can create procurement proposals using the material master's procurement type F and special procurement key 30, depending on configuration. Purchasing can then convert the relevant purchase requisition into a subcontracting purchase order using item category L.
Procurement Type
The Procurement Type field in the material master's MRP 2 view determines whether a material is produced internally, procured externally, or both.
SAP supports three standard procurement types:
- E – In-house production: The material is manufactured internally.
- F – External procurement: The material is purchased from an external supplier.
- X – Both procurement types: The material can be produced internally or procured externally.
For subcontracting, procurement type F is commonly used together with special procurement key 30. This combination allows MRP to plan external procurement through a subcontractor while accounting for the components required to manufacture the material.
Special Procurement Type
The Special Procurement Type field in the material master's MRP 2 view provides additional instructions for how a material is procured or produced.
In SAP S/4HANA, special procurement key 30 is commonly used for subcontracting. When combined with procurement type F (external procurement), it allows Material Requirements Planning (MRP) to plan procurement from an external subcontractor rather than through in-house manufacturing.
Special procurement keys and their behavior depend on SAP configuration, so the settings should be verified for the relevant plant.
Stock Provided to Vendor
Stock provided to vendor is inventory owned by the purchasing company but physically held by a subcontractor for manufacturing or processing.
In SAP S/4HANA, components are commonly transferred to subcontracting stock using movement type 541. The transfer does not itself record component consumption.
When the completed subcontracted material is received, SAP typically records the goods receipt using movement type 101 and consumes the relevant components from stock provided to the vendor using movement type 543.
Transaction ME2O can be used to monitor subcontracting stock and component requirements.
Standard Price
The standard price in the Costing 2 view determines the inventory valuation price if price control is set at standard (S). The standard price is updated when a standard cost estimate is released. You normally value manufactured goods at the standard price.
Valuation Variant
The valuation variant is a costing variant component that allows different search strategies for materials, activity types, subcontracting, and external processing. For example, the search strategy for purchased and raw materials typically searches first for a price from the purchasing info record and then Planned Price 1.