Subcontracting/Job work/ Contract manufacturing in SAP

This document covers subcontracting process in detail.

1. SUB-CONTRATING in SAP Ankush Garg This document covers various aspects of subcontracting process

2. Definition Subcontracting is a business arrangement where a company (the subcontractor) agrees to perform a specific task or provide a particular service for another company (the main contractor). Essentially, it involves outsourcing a portion of work to a third party, allowing the main contractor to focus on its core competencies. Key Players in Subcontracting: Main Contractor : The main contractor is the primary entity that has secured a project or contract. They may decide to subcontract certain tasks to other companies to ensure the project's successful completion. Subcontractor : The subcontractor is the company hired by the main contractor to perform specific tasks. Subcontractors bring specialized skills, resources, or expertise to the project, contributing to its overall success. Ankush Garg 20-07-2024 2

3. Benefits Cost Reduction : One of the most significant benefits of SAP contract manufacturing is cost reduction. Companies can save money by outsourcing the production process to external vendors who may have access to cheaper raw materials, production facilities, and labour. Improved Efficiency : SAP contract manufacturing allows businesses to leverage the expertise of their partners, resulting in improved efficiency and higher quality output. With SAP`s advanced software solutions, companies can monitor and manage their manufacturing processes seamlessly, ensuring timely delivery of products. Flexibility : SAP contract manufacturing offers businesses flexibility in terms of scaling up or down their manufacturing operations. This means they can adapt to changes in the market demand without having to invest in additional resources. Focus on Core Competencies: By outsourcing their manufacturing processes to SAP contract manufacturers, companies can focus on their core competencies, such as marketing, sales, and research and development, rather than managing the production cycle. Ankush Garg 20-07-2024 3

4. Challenges Quality Control : Ensuring quality control remains a challenge for SAP contract manufacturing, particularly when dealing with vendors in remote locations. Communication : Effective communication between the client and the contract manufacturer is critical to the success of the partnership. However, communication can be a challenge when dealing with vendors who operate in different time zones and speak different languages. Intellectual Property Protection : Companies must take steps to protect their intellectual property when outsourcing their manufacturing processes to external vendors. Ankush Garg 20-07-2024 4

5. Choosing the right partner Reputation : Look for a partner with a reputation for quality products & excellent customer service. Expertise : Choose a partner with expertise in your industry and the manufacturing processes you require. Technology : Ensure that your partner is equipped with the latest technology and software solutions to manage your manufacturing processes seamlessly. Location : Consider a partner`s location and proximity to your business to ensure efficient communication and logistics. Ankush Garg 20-07-2024 5

6. Types Classic Subcontracting External Vendor External vendor with chargeable components External Processing Inter company Outsourcing Production Toll manufacturing Contract manufacturing Ankush Garg 20-07-2024 6

7. Subcontracting with external vendor It is the allocation by one enterprise, assigning their one portion of a production process under agreement to another enterprise that is having some specialized skills in this process. Subcontracting is often resorted to by manufacturing companies due to limited in house production capacities of a part of their Production Processes. In this scenario, the manufacturer sends Material (Inputs-Raw Material Semi Finished Goods like Spares components etc) from his Stock to the Subcontractor for Job-Work / Processing. After the Processing the manufacturer receives back the Material in changed form or in other words a different Material or assembled condition. SAP MM subcontracting process involves sending raw components to a vendor for specific manufacturing processes and receiving the value-added finished material back into inventory. The subcontractor sends the invoice for the job work performed. It is a traditional process of outsourcing. All the transactions with external vendor will happen in ECC itself and no separate instance is required. A Bill of material set up is required for this process and stock tracking will be available in ECC. There is not much financial benefit out of this process but still manufacturer can leverage subcontractor's specialized skills Ankush Garg 20-07-2024 7

8. Subcontracting with Chargeable components The Subcontracting with chargeable components solution allows manufacturer to record all transactions with subcontractors under certain requirement act. In this process, manufacturer provides components to subcontractor on chargeable basis. Subsequently, manufacturer invoices the subcontractor for the chargeable components. On the other end, subcontractor sends invoice for the FG along with chargeable components, after the subcontractor completes the process and sends FG to the manufacturer. Invoice based on component consumption. The components known as “chargeable components.” In the traditional Subcontracting, neither party makes any charge for any components and all the goods issue components at free of cost. SAP offers two ways of handling the invoices for the chargeable components. In one of these methods, the invoices only serve as documentary evidence of the sale of the components and are not actually paid. This document helps to track of components issued to the subcontractor. Other method called percentage-based offsetting, manufacturer deduct the invoices from the subcontractor from a certain percentage of the invoices that you have sent it, and the subcontractor pays the difference. Stock movement is visible in this process Ankush Garg 20-07-2024 8

9. External processing In case, certain components subject to external processing, manufacturer sends component to the external vendor/subcontractor to perform the operation, thus manufacturer can focus on other important activity and optimize the capacity of the plant. It is a simple form of subcontracting process. The source for this process is the creation of production order and certain operation of the production order which is subject to external processing will be assigned to the purchase requisition and the purchase order will be created based on the purchase requisition. Stock movement is not visible in this processing. Ankush Garg 20-07-2024 9

10. Intercompany Subcontracting In this process, company B acts as a Subcontractor and process components to make a finished product and sends back to company A. Vendor plant assignment is required for this process and the components needs to be maintained as valuated in company A and Non-valuated in company B. Finally, company B sends invoice to company A for the subcontracting charge. Ankush Garg 20-07-2024 10

11. Toll manufacturing In this process, Company A or Product owner procures raw materials widely known as API (Active Pharmaceutical Ingredients) from its affiliated companies or one of its approved third-party suppliers. Some time, company procures from both affiliate and third party. Supplier delivers RAW/API directly to the Company B or Toll manufacturer. The toll manufacturer completes its manufacturing and sends the finished goods to the product owner facility or its distribution warehouse. Finally, the toll manufacturer submits invoice for the toll fee to the product owner. In this, product owner owns complete stock and financial accounting, and toll manufacturer Toll manufacturer sends component consumption details to the product owner enables to post RAW/API consumption against FG receipt. Toll manufacturing is extensively used by pharma industries, where the availability and sourcing of key raw materials and APIs are scattered across different geographical location. It is a not a standard SAP functionality. It is a complex process. Toll manufacturing functionality requires customized code change. It reduces effort of transferring API stock to Toll manufacturer. It gives more cost benefit through toll agreement and tax savings from finance perspective. API stock is difficult to trace, and it needs custom development in case of third-party toll manufacturer as well consumption of API/RAW against FG receipt. Ankush Garg 20-07-2024 11

12. Contract manufacturing Contract manufacturing looks like toll manufacturing, but it involves complete delegation of manufacturing process including RAW/API sourcing to the third-party vendor who specialize in the product. Company A or Product owner procures Finished product from one of its approved third-party contract manufacturers. Contract manufacturer procures RAW/API from its own source and manufacture complete product and delivers to Product owner company. It also sends finished product to the product owner designated warehouse. Finally, the contract manufacturer submits invoice to the product owner. In this, product owner owns final finished product and pays to contract manufacturer. Contract manufacturing is extensively used by pharma and Consumer industries. Unlike toll manufacturing, it is not a complex process. It gives cost benefit and product owner focus on product marketing. SAP SCM solution suits for this type of contract manufacturing where product owner and contract manufacturer finds real time collaboration. It gives visibility of inventory at contract manufacturer's end Ankush Garg 20-07-2024 12

13. Movement types & A/C entries in SAP Action Movement Type Accounting Key Dr/Cr RM issue to vendor 541 - - Return RM without job 542 - - FG receiving 101, 543 BSX (Stock A/C FG) Dr (+) BSV(change in stock) Cr(-) FRL(vendor charges) Dr(+) WRX(GR/IR clearing A/c) Cr(-) BSX(Stock A/C RM) CR(-) GBB-VBO(Consumption A/C) Dr(+) Invoice Receipt - WRX(GR/IR clearing A/C) Dr(+) KBS(Vendor A/C) Cr(-) Ankush Garg 20-07-2024 13