Consignment Process in SAP MM

In Consignment Process, the vendor provides material and stores them on the Company premises. The vendor remains the legal owner of the material until the Company withdraw materials from the Consignment stores. Only then does the Vendor requires payment. The Invoice is due at set periods of time, for example, monthly. In addition, you can also arrange with the vendor that you take over ownership of the remaining consignment material after a certain period of time.

In this Consignment Process, we will not create purchasing document for the vendor, vendor himself send the material to our plant, though the material is available to our plant, the responsibility and ownership of the material is of vendor. A liability only arises when the material withdrawal (consumption) is posted in the system from Consignment Stock.

Some important points to Note:-
1. We don't write price in the Consignment Purchase Order. The price is taken from the Consignment Info Record.

2. Consignment Stock is the special kind of stock. The stock is lying at the Company Storage Location but the responsibility belongs to vendor.

3. Consignment Stock are not valuated. When the material is withdrawn it is valuated at the price of the respective vendor from Consignment info record.
4. Info records with info category Consignment is required to create before creation of Consignment Purchase Order. Here maintain the Price and Tax Code mandatory in the Info Records for material against vendor.

Configuration required for Consignment Process:

- Assign standard purchase organization to Plant (T. Code - OMKI)
SPRO path > SAP reference IMG > Enterprise Structure > Assignment > Materials Management > Assign Standard Purchasing Organization to Plant

Assign Plant code with the Purchase Organizations

- Activate the Consignment Info Record (T. Code - OMEV)
SPRO Path > SAP reference IMG > Materials Management > General Settings for Material Management > Activate Consignment Prices via Info Records

Activate the radio button of Consignment Info Record Active

- Maintain Automatic Account Assignment for Material Posting (T. Code - OBYC)

SPRO Path > SAP reference IMG > Materials Management >Valuation and Account Assignment > Account Determination > Account Determination without Wizard > Configure Automatic Posting

Consignment Payable    KON

Expenses/ Revenue from Consignment Material Consumption AKO

Offsetting Entry for Inventory Posting GBB-VBR

Consignment Process Step by Step:

1. Create Consignment Infor Record (Mandatory)

2. Create Consignment Purchase Order

3. Create Goods Receipt to update the Vendor Consignment Stock

4. Issue Material from Consignment stock to Unrestricted stock through Transfer Posting

5. Consignment Settlement 

1. Create Consignment Info Records (T. Code - ME11)
Create the Consignment Info Record using Info Type Consignment. Maintain the Price and Tax Code which are mandatory in the Info Record

2. Create Consignment  Purchase Order (T. Code - ME21N)
Create Consignment Purchase Order with Item Category K against the vendor. Here we not maintain the price, it will automatically pick from the Consignment Info Record. Conditions and Invoice Tab are not available in the item level at the Consignment PO.

3. Post Goods Receipt (T. Code - MIGO)
Post Goods Receipt against Consignment PO using 101 K Mov. Type (GR for Consign. Stock), this will update the Consignment stock of the vendor. After Goods Receipt, we can see the stock of the material using T. Code MMBE, the stock of the material shows in a Consignment Stock.
No Account Posting at this time since the material still belongs to the vendor.

We can also enter the Goods Receipt without Purchase Order in the Consignment stores using Transaction MB1C/ MIGO with 501+K Movement Type.
And for initial update of Stock for Consignment using Transaction MB1C/ MIGO with 561+K Movement Type.

To view Consignment Stock for vendor use T. Code MB54

4. Transfer Posting (T. Code - MB1B/ MIGO)
Perform Transfer Posting manually using Mov Type 411 Special Stock K (without reference of PO) on the material when the stock is ready to be transferred to company own's inventory. This Transfer Posting deduct (consume) the stock from the Vendor Consignment Stock and update the Company own Stock. We can view the stock from T. Code MMBE.
Alternatively, Consignment stock can also be consumed by Production Order using 261 K Mov. Type.

Accounting Entries:
Inventory Account (BSX)          Dr.
Consignment Liabilities (KON)       Cr.

5. Consignment Settlement (T. Coder - MRKO)
Run the Transaction MRKO to settle Consignment liability and pay the vendor. Think of this transaction is the self service invoice. The Consignment settlement is based on the quantity of stock which was consumed by Company. After settlement, the system will generate the Invoice Document.
First, we choose to Processing "Display" the available Document for settlement and select "Withdrawals not Settled" from Display options, then the information text is "Not Settled"
Go Back and select the Processing "Settle" and select "Withdrawals not Settled" from Display options and Execute, this will create the Invoice Document and information text is "Document Created"
Go Back and choose Processing "Display" and "Settled withdrawals" from Display options and Execute, then the Information Text is "Settled"

Accounting Entries
Consignment Liabilities (KON)        Dr.
Vendor Account                        Cr.

Consignment settlement is not connected to the purchasing information system, because the purchase order history is not updated during consignment settlements.

Cancelling Consignment Document
Cancel the Inventory Document (Doc. created using 411+K) in the Inventory Management and start Consignment settlement. The system will generates the Credit Memo for the returned document.
To include the cash discount in the accounts, include these in the consignment price. This ensures that the cash discount is implicitly posted during the goods withdrawal and settlement.
Delivery costs cannot be settled.
The Consignment liability account cannot be flagged as Post automatically only and must not be defined as a Reconciliation Account.

Note: Consignment settlement cannot be performed simultaneously by several users. The material documents are not blocked during settlement, which means duplicate settlement documents can be created.

Import Procurement Process in SAP MM

When we procure materials or services from outside the country for India, we have to pay the Custom Duty to the Government. We create the Import Purchase Order against the Foreign Vendor with the foreign currency. We also maintain some condition type in the PO conditions like Custom and Countervailing Duty in the Purchase Order. Now CVD  and AED is replaced with IGST after GST implementation.
We also define the Custom Vendor/ Commercial Vendor in these condition type and Tax Code will be zero in the Import Purchase Order. In Import cases, the GR-Based IV should not be checked as we are posting Commercial Invoice before the Goods Receipt.
Once the material is received in the Airport or Dockyard then we have to go clear the material for Custom Clearance. For this we have to pay the Custom Duties to the Indian Government. We post the Commercial Invoice (Bill of Entry) against the Custom Vendor. After the clearance of Custom Duty we received the goods in Company premises. And then Commercial Invoice reference is captured at the time of Goods Receipt at Company Storage Location. After GST Implementation, there is no pop-up appears for Commercial Invoice while doing Goods Receipt.
And then we post the Invoice Receipt against the Foreign Vendor.

As per the model GST law for Imports:
- to clear the goods from the customs, custom duties has to be paid for custom clearance.
- the custom invoice consists of the Basic Custom Duty (BCD), CESS and IGST in the GST regime.
- to create the customs invoice in MIRO, Basic Customs Duty is derived from the delivery cost line.
- IGST is computed on the Basic customs duty and the assesseble value.
- CESS quantity based is calculated on quantity in Custom Invoices.

SAP Notes for Import:
Customers have implemented below GST notes for Imports Scenario:
2458404 - GST India: Import
2491302 - GST India: Import Cess
2482200 - GST India - DDIC activity and configuration for GST Compensation CESS
This document covers the configuration to set up Imports Process for GST

Configuration Changes for GST: 

1. Create Condition Types (T. Code - OBQ1)
     a. Create JIMN (Non-deductible reference) and JIMD (Deductible reference) condition types
     b. Create JINC (Non-deductible reference) and JIDC (Deductible reference) condition types for Compensation Cess.
     c. Create ZIQN (Non-deductible reference) and ZIQD (Deductible reference) quantity based condition types for Compensation Cess.
*Note - Kindly note that the above condition types are reference condition types, customers can create than their own condition types.

2. Classify Condition Types
     a. For TAXINN tax procedure, assign Condition Types (JIMD, JIMN, JIDC, JINC, ZIQD, ZIQN) in the below path:-
SPRO > Logistics-General > Tax on Goods Movement > India > Basic Settings > Determination of Excise Duty > Maintain Excise Defaults (J_1IEXCDEF table)
    b. For JIMPOR Imports Pricing Procedure, classify your Custom Duty Condition (JCDB) in the below path:
SPRO > Logistics-General > Tax on Goods Movement > India > Basic Settings > Determination of Excise Duty > Maintain Excise Defaults (J_1IEXCDEF table)

3. Create Account Key
    a. Create JIM Accounting Key for deductible import GST condition and Compensation Cess in T. Code OBCN

4. Change the Tax Procedure
    a. Maintain the new entries for these Condition Type, Account Key JIM for Deductible and NVV for Non-detuctible and maintain 800 Routine in Condition Based Formula
    b. For Routine configuration please follow SAP Note 2491302.

5. Imports Pricing Procedure
    a. Custom Duty condition types in import pricing procedure remain as it is.


Process Step  By Step - 

1. Create Purchase Order (T.Code - ME21N): Create Import Purchase Order against Foreign Vendor with zero tax code and maintain the Custom Duty in the Condition Tab at the Item Level and maintain the Custom vendor in the Condition Type.

2. Post Commercial Invoice (T. Code - MIRO): Create Custom Invoice for Custom Vendor, enter details as required with the INR Currency as we are paying to Government. Enter the Custom Duty value and Qty.
And there will be a new field added Assessable Value in the Item level of MIRO, enter the Total Value (PO Value = net price *qty) here, enter the IGST Import Tax Code. The IGST calculation is based on the Custom Duty + Assessable Value
Accounting Entries
Custom Clearing A/C        Dr.
IGST Receivable A/C        Dr.
          Custom Vendor A/C        Cr.

3. Goods Receipt (T. Code - MIGO): Post Goods Receipt with reference to PO and received the quantity.
Accounting Entries:
Inventory A/C        Dr.
    Custom Clearing A/C     Cr.
    GR/IR Clearing A/C       Cr.

4. Post Invoice Receipt (T. Code - MIRO): Post Invoice Receipt for Foreign Vendor with reference to Import Purchase Order in the system.
Accounting Entries:
GR/IR Clearing A/C        Dr.
     Vendor A/C                Cr.

*Note-

• No more CVD and AED in Import Process after GST.
• Now only Custom Duty, Social Welfare Surcharge in PO Pricing Condition in GST
• No pop-up for Commercial Invoice at the time of Goods Receipt after GST. 
• There is configuration for the pop-up to display at the time of GRN.
• SPRO - SAP Ref. IMG - Logistics - General - Tax on Goods Movements - India - Basic Settings - Determination of Excise Duty - Maintain Excise Defaults

Master Data in SAP MM

Following are the master data available in the SAP MM:-

1. Material Master
2. Vendor Master
3. Info Records
4. Source List
5. Quota Arrangement

Material Master - The material master contains information on all the materials that the company procure or produce, stores, and sells. It is the company's central source of retrieving material-specific data. This information is stored in the individual material master records.

Vendor Master - Vendor master contains information about the vendor who supply materials and services to an enterprise. This information is stored in individual vendor master records. A vendor master record contains Vendor Name, address as well as order currency, payment terms and names of the important contact person.

Info Record - It is also known as Purchasing Information Record. It contains information a specific material and vendor supplying the material as a master data at purchasing organization or plant level.

Type of Info Record - Standard, Subcontracting, Consignment and Pipeline

Source List - Source list is used in the administration source of supply. It specifies the allowed  (or disallowed) sources of a material for a certain plant within a predefined period. Each source is defined by means of a source list record.

Quota Arrangement - It is a mechanism for determining the source of supply to which material requirements is assigned. It enables you to determine which is the valid source for the procurement of the material covered by a purchase requisition at any given time. Setting quotas allow you to automatically apportion the total requirement of material over a period among a number of different sources of supply.

Organizational Structures of SAP MM

The Organizational Structure in SAP MM consists of following Organizational levels:

• Client
• Company Code
• Plant
• Storage Location
• Purchase Organization
• Purchasing Group

Client - (T. Code - SCC4) - A client is a self contained in the SAP system with separate master records and its own set of tables.

Company Code - (T. Code - OX02) - The smallest organizational unit for which a self-contained set of accounts can be drawn up for the purpose of external reporting. These involves recording all relevant transaction and generating all supporting documents for financial statements such as Balance Sheets and Profit and Loss Accounts

Plant - (T. Code - OX10) - An organizational unit where a material are produced or procured, stores and sales and goods and services are provided. We can divide an enterprise into various plants according to production, procurement, maintenance and material planning.

Storage Location - (T. Code - OX09) - An organizational unit where materials are stored physically inside the plants. It also allowing us to differentiation of material stocks within a plant.

Purchase Organization - (T. Code - OX08) - An organizational unit subdivides an enterprise according to purchasing. It procures material and services, negotiate condition of purchase with vendors and is responsible for purchasing activities taken place in an organization

Purchasing Group - (T. Code - OME4) - An alphanumeric key for a buyer or a group of buyer who are responsible for purchasing of materials and services and deal with vendors. It is a subdivision of a purchase organization, which are responsible for day to day purchasing activities.

More details of Purchasing Organization

Possible forms of Purchase Organization:

• Enterprise Wide - One purchase organization is responsible for whole organization
• Company Specific - One purchase organization is assigned to and procures material and services for one company code in the organization
• Plant Specific - One purchase organization is assigned to and procures material and services for one plant in the organization

Types of Purchase Organization:

• Centralized Purchase Organization (1:n) - Centralized Purchasing with just one purchase organization. It is responsible for all company codes and plants.
• Decentralized Purchase Organization (m:n) - Distributed Purchasing with difference purchasing organization each responsible for each plant.
• Reference Purchase Organization - can be defined as an organization whose condition or contract are linked with other purchase organization. This organization can make conditions or contract that can easily be used in other purchase organization.

Definition:

1. Define Company Code (T. Code - OX02): SPRO Path -> SAP Ref. IMG -> Enterprise Structure -> Definition -> Financial Accounting -> Edit, Copy, Delete, Check Company Code
2. Define Plant (T. Code - OX10): SPRO Path -> SAP Ref. IMG -> Enterprise Structure -> Definition -> Logistics General -> Define, Copy, Delete, Check Plant
3. Define Storage Location (OX09): SPRO Path -> SAP Ref. IMG -> Enterprise Structure -> Definition -> Materials Management -> Maintain Storage Location
4. Define Purchasing Organization (T. Code - OX08): SPRO Path -> SAP Ref. IMG -> Enterprise Structure -> Definition -> Materials Managment -> Maintain Purchasing Organization
5. Define Purchasing Group (T. Code - OME4): SPRO Path -> SAP Ref. IMG -> Materials Management -> Purchasing -> Create Purchasing Groups

Assignments:

1. Assign Plant to Company Code (T. Code - OX18):  SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Logistics-General --> Assign Plant to Company Code
2. Assign Business Area to Plant/Valuation Area and Division (T. Code - OMJ7): SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Logistics-General --> Assign Business Area to Plant/Valuation Area and Division
3. Assign Purchase Organization to Company Code (T. Code - OX01): SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Materials Management --> Assign Purchase Organization to Company Code
4. Assign Purchase Organization to Plant (T. Code - OX17): SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Materials Management -->  Assign Purchase Organization to Plant 
5. Assign Standard Purchase Organization to Plant (T. Code - OMKI): SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Materials Management --> Assign Standard Purchase Organization to Plant
6. Assign Purchase Organization to reference Purch. Organization (T. Code - OMKJ):  SPRO Path --> SAP Reference IMG --> Enterprise Structure --> Assignment --> Materials Management --> Assign Purchase Organization to reference Purch. Organization

Difference between Assign Purchase Organization and Standard Purchase Organization with Plants:
A Purchase Organization is responsible for all purchasing activities taken place in this plant.

If several Purchase Organization procure for a certain plant, you can define one of them as the standard purchasing organization for the transactions "pipeline procurement", "consignment" and "stock transfers"
In source determination for stock transfers and consignment, the system automatically utilizes this standard purchasing organization. In the case of goods issues of pipeline materials, the purchasing info records of the standard purchasing organization are read.

Subcontracting Process in SAP MM after GST

Subcontracting is one of the manufacturing strategy by which a company decides to outsource some or all of its production operations to a vendor. In SAP, Subcontracting is one of the special procurement type in the SAP MM.

Subcontracting can be defined as the processing of the material by the external supplier to get the final products.

In this process, a manufacturing company provides raw materials/ components to a subcontracting vendor. The vendor in turn process these components to turn them into end products. This final product is then used by the manufacturing company to carry out the rest of the operations.

After GST Implementation, there is a change in the Subcontracting Configuration and Process.

As per GST law, we can run Subcontracting process in one of the following ways:

• With Challan
• Without Challan (with Invoice)

Subcontracting Configuration for GST

• Define Shipping Data for Plants: Assign Sales Organization, Distribution Challan and Division should be maintained for Supplying Plant from which the components are to be delivered. Table view – V_001W_IV, T. Code – SM30 Or SPRP -> SAP Ref. IMG -> Materials Managment -> Purchasing -> Purchase Order -> Set up Stock Transport Order -> Define Shipping Data for Plants
• New Billing Type define – ZSN SC Challan (No Taxes), ZSP – SC Invoice (with Taxes)
• Classify Subcontracting Billing Types: Maintain View J_1IG_V_SUBINV through Code – SM30 – Company Code, Sales Type, Billing Type, Billing Class – ZSN for Create Challan and ZSP for Create Invoice
• Use the existing SD Pricing Procedure or define a new Pricing Procedure for Subcontracting process
• Set up “Delivery to Billing Type” Copy Control. Copied with Billing Type “FX” and Sales Order “OR

Steps for Subcontracting Process:

• Material Master - Material Master should be available in system for both Finished and Raw Materials (T. Code – MM01). Components must have stock in the system. Extend the Sales View for the Raw Materials or Components
• Customer - Create Customer (T. Code – XD01) with necessary details as per Subcontractor Vendor
• Vendor - Maintain Subcontractor Vendor (T. Code – XK01) and assign Customer in the Vendor Master data.
• Sales Condition Record - Maintain Sales Condition Record for Material Pricing (T. Code – VK11)
• Subcontracting Info Record - Create Subcontracting Info Record (T. Code – ME11) (Optional)
• Subcontracting Purchase Order - Create Subcontracting Purchase Order (T. Code – ME21N) against Subcontracting Vendor with Item Category L. This will activate the “components” button in the Material data tab in the Item of the Purchase Order. Explode BOM or maintain the components manually and with zero tax
• Goods Issue to Subcontractor - Enter Transfer Posting with reference to Subcontracting Purchase Order through (T. Code MIGO/ MB1B)using 541 Movement type. This will issue the material to the Subcontractor. No Accounting Document generate at the time of Transfer Posting. This will update the stock of the material in the Stock Provided to Vendor in Stock Overview.
• If we are using T. Code – ME2O for issuing components to vendor, then system will create Outbound Delivery. And then Go To Change Delivery (T. Code – VL02N) to do PGI, which will generate Goods Issue document using Movement Type – 541.
• Subcontracting Challan - Create Subcontracting Challan with reference of Material Issue Document through T. Code -J1IGSUBCON. Then create Challan using “With Challan”, this will generate the Billing Document (ZSN – SC Challan Document in SD). No taxes have been maintained in the Challan Document. Any changes can be done in the Billing Document by using T. Code – VF02.
• Post Goods Receipt - When Vendor sends the materials, we post the Goods Receipt in the system using T. Code – MIGO with reference to Subcontracting PO having Movement Type 101 for final or end products and Mov. Type 543 for Components. Consumption of Components material from the Vendor Stock and Stock update for the Final Products.
• Reconcile Challan - Reconcile Challan with reference to goods receipt material document through T. Code – J1IGRECON. Select Manual and enter the Challan No. and Save the Data.
• Invoice Receipt - Post Invoice Receipt for Subcontracting Vendor for the service charges paid to the Subcontractor through T. Code – MIRO with reference to Subcontracting PO

Accounting Entries at the time of Goods Receipt:

BSX – Stock A/C for Assembly/ Semi-Finished  – Dr.                          11000

BSV – Change in Subcontracting Stock    Cr.          11000-

FRL – Subcontracting Charges     Dr.          10000

WRX – GR/IR Clearing (Semi-Finished) A/C           Cr.          10000-

BSX- Stock A/C for Components                                Cr.          1000

GBB-VBO Consumption A/C for Components     Dr.          1000

Accounting Entries at the time of Invoice Receipt:

GR/IR Semi Finished Clearing A/C             Dr.          10000

IGST or SGST/CGST Taxes A/C                    Dr.          900, 900 (CGST/SGST) or 1800 (IGST)

Vendor A/C        Cr.          11800

T. Code - MBLB To display Stock to Subcontractor

Integration of SAP MM with Other Modules/ Main Components in SAP MM

MM with PP Module - MM deals with the material procurement on the basis of Production required, therefore it is linked with PP Module. It is integrated in the area like MRPs, Receipt and Issue material against Production Order.
Material Requirement Planning is based on Stocks, expected receipts, expected issues. It generated planned orders or purchase requisitions which can be converted into Purchase Order/ Contract. Inventory Management is responsible for the staging of the components required for production orders.The receipt of the finished products in the warehouse is posted in Inventory Management.

MM with SD Module - SD module is proportionally linked with MM Module because it uses the information of the material when creation of sales order or when the quantity sent for production.
It is integrated in the area like Delivery, Availability Check, Stock Transfer Requirements etc. As soon as the Sales order is created, can initiate a dynamic availability check of stock on hand.When the delivery is created, the quantity to be delivered is marked as schedule for delivery. It is deducted from the total stock when the goods issue is posted. PO can be directly converted to delivery for a stock transfer requirement.

MM with WM Module - The WM Module is related to MM Module because it maintains information about the material storage and material transfer inside the organization.

MM with FICO Module - The FI Module is linked with MM Module because every operation performed in MM Module like Goods Receipt and Invoice Receipt directly impact the financial operation of the organization.
It is integrated in the area like Material Valuation, Vendor Payment, Material Costing, etc.Whenever inventory posting are debited, it updates the G/L Accounts online in the background. Logistic Invoice Verification will vendor liability in vendor account immediately on posting the document. Any advance given again update the PO History. For every Inventory Posting is corresponding CO document to update profit center accounting reporting Finished Goods costing is link through MM and PP. Procurement of capital item cost can be directly booked against asset number.

MM with QM Module - It is integrated with QM for Quality Inspection at Goods Receipt.
In the case of goods movement, the system determines whether the material is subject to an inspection operation. If so, a corresponding activity is initiated for the movement in the Quality Management System. Based on quality parameters vendor evaluation is done.

MM with PM Module: The material/ service requirement is mentioned in Maintenance Order. This leads to generation of PR. This PR is converted to PO by MM. The goods for a PO will be in warded to Maintenance by MM. The spares which were reserved for maintenance order will be issued by MM against the reservation number.


Main Components in MM Modules

Purchasing - allow user to control the entire purchasing process

Inventory Management - allow users to keep track of the material in stock. It also helps user to perform operation like Goods Receipt, Goods Issue and Physical Stock Transfer

Invoice Verification - allow users to verify invoice from vendor. The invoices compared with Purchase Order and Goods Receipt in the following three ways:- Content, Price and Quantity

Physical Inventory - allow users to keep track of the material stored in an organization

Valuation - allow users to calculate the value of all fixed and current assets, along with all payable, at a certain time and with the legal appropriate legal requirements.

Material Requirement Planning - it helps user to create a material procurement plan for a plant and company

Material Master - helps user to manage all the materials related data.

Service Master - helps an organization keep records of the services that is procures

Foreign Trade / Customs - allow users to manage the export and import merchandise among different custom territories.

Procurement for Stock vs. Procurement for Direct Consumption

In Material Management, we procure either for material or for direct consumption.

Procurement for Stock - A stock material is a material that is kept in stock. Such materials are placed in storage following a goods receipt. When goods is received by or issued from stores or from warehouse, the stock in hand is increased or reduced by the amount of quantity received or issued.

When you order a material for stock, the system does not require an account assignment. This is because the posting to the appropriate stock and consumption accounts occurs automatically after each goods movement. Furthermore, the value and the quantity of the stocked material are updated in the material master record.

To order a material for stock, the material must have a master record.

Procurement for Direct Consumption - When you procure for direct consumption, you specify the consumption purpose by entering an account assignment (for example, cost center). On goods receipt, the material or service counts as having been consumed.

If a material is procured for direct consumption, the consumption account for Financial Accounting is posted when the goods receipt is entered. The total quantity and value of existing stocks for the material are not affected.

Material Account Assignment - For each item of a purchasing document, you specify whether procurement is for stock or for direct consumption. In a purchasing document, you can enter items with or without account assignments.

If you order for stock materials, the ordered material must have a material master record. If you order consumable materials, the ordered material may have a material master record.

Procurement Cycle in SAP MM

Procurement Cycle

The Procurement Cycle of materials and services consists of different phases given below:

1. Determination of Requirements
2. Source Determination
3. Vendor Selection and Comparison of Quotation
4. Purchase Order Processing
5. Purchase Order Follow up/ PO monitoring
6. Goods Receipt & Inventory Management
7. Invoice Verification
8. Payment to Vendor

1. Determination of Requirement - Material requirements are identified by various departments to the Purchasing Manager or via Material Requirement Planning. Purchase Requisition can be created manually or automatically in the system.

2. Source Determination - The procurement component help us to identify the possible source of supply based on Past orders or existing longer-term purchase agreement. Request for Quotation are created in the system and send to different vendors. And then we maintain the price in the Quotation which are provided by Vendor.

3. Vendor Selection and Comparison of Quotation - In this we finalize the vendor based on the price comparison of different Quotation. The comparison list ranks the quotation by item from lowest to highest price. Rejection letter sent automatically to the rejected vendor.

4. Purchase Order Processing - Purchase Order is created against selected Vendor with reference to Purchase Requisition or Request for Quotation. And send PO to vendor.

5. Purchase Order Follow Up/ PO Monitoring - Here we monitor the Purchase Order. The system check the status of the PO's like whether on-time delivery has been done or not, how much quantity still pending. It provides an up-to-date status of all PR, RFQ and PO.

6. Goods Receipt and Inventory Management - Vendor send the materials and then we post the Goods Receipt in the system to received the material by entering Purchase Order for reference.

7. Invoice Verification - Invoice is received from vendor after Goods Receipt and then Invoice is verified by Ordering Vendor. And then Invoice post in the system.

8. Payment to Vendors - The last step of Procurement cycle is payment to Vendors and is also known as Procure to Pay process. In this phase, Vendors are get paid as per the payment terms.

Material Management

Material Management

SAP MM stands for Material Management. It is also known as Procure to Pay process. From procuring a material from Vendor and till the payment to be done to Vendor, this whole process is known as Procure to Pay process.

SAP MM is one of the important modules in SAP. It supports the Procurement and Inventory functions like creating Purchase Requisition, Purchase Order and doing Goods Receipt which happen in our daily activities.

MM consists of all Master Data like Material Master, Vendor Master, Info Record, Source List and Service Master. We create or do changes in the Configuration based on the business requirements. We create transactions like Purchase Requisition, Quotation, Purchase Order and Goods Receipt in the system.

Purchasing enables us to effectively handle the following tasks:

- the external procurement of materials or services

- the determination of possible sources of supply for a requirement that arises either in materials planning or directly in a user department

- the monitoring of goods received and services provided

Subcontracting in Purchasing SAP MM

Subcontracting:

Subcontracting is one of the manufacturing strategy by which a company decides to outsource some or all of its production operations to a vendor. In SAP, Subcontracting is one of the special procurement type in the SAP MM.

Subcontracting can be defined as the processing of the material by the external supplier to get the final products.

In this process, a manufacturing company provides raw materials/ components to a subcontracting vendor. The vendor in turn process these components to turn them into end products. This final product is then used by the manufacturing company to carry out the rest of the operations.

The process involved given below:

1. We order the final product using a subcontract order. The components that the vendor needs to be manufacture or process the final product are specified in the purchase order. The individual component items can either be: entered manually or copied from the existing Bill of Material
2. In Inventory Management, the components are posted to the stock of material provided to vendor. The components are supplied to the vendor.
3. The vendor performs its service and delivers the ordered material (the final products). The consumption of the components is posted.
4. If, after the goods receipt has been posted, the vendor informs you that a larger or smaller quantity of the components was actually consumed than planned in the purchase order, you must make an adjustment.
5. The vendor charges for his or her service. The invoice is posted in Invoice Verification.

Process of Subcontracting:

1. Create Subcontracting Info Record (T. Code – ME11) Optional.
2. Create Subcontracting Purchase Order (T. Code – ME21N) with Item Category “L”. Maintain Components manually or Explode BOM in the Item at Material Data Tab in the Purchase Order
3. Issue material to Subcontracting Vendor (T. Code – MIGO or MB1B) with reference to Purchase Order using Movement Type 541. No Accounting Document generates here.
4. If we are using T. Code – ME2O for issuing components to vendor, then system will create Outbound Delivery. And then Go To Change Delivery (T. Code – VL02N) to do PGI, which will generate Goods Issue document using Movement Type – 541.
5. Create Goods Receipt (T. Code – MIGO) with reference to Purchase Order using Movement Type 101 for final product and 543 for Components
6. Create Invoice Receipt (T. Code – MIRO) for Subcontractor.

Process of Subcontracting with Challan (CIN):

1. Material Master should be available in system for both Finished and Raw Materials (T. Code – MM01). Components must have stock in the system
2. Maintain Subcontractor Vendor (T. Code – XK01)
3. Maintain Excise Rate Maintenance (T. Code – J1ID). Chapter Id, Material and Chapter Id, Assessable Value, Cenvat Determination, Vendor Excise Details
4. Create Subcontracting Purchase Order (T. Code – ME21N) with Item Category “L”. Maintain Components manually or Explode BOM in the Item at Material Data Tab in the Purchase Order
5. Issue material to Subcontracting Vendor (T. Code – MIGO or MB1B) with reference to Purchase Order using Movement Type 541. No Accounting Document generates here.
6. Create Subcontracting Challan (T. Code – J1IF01) with reference to Material Issued Document.
7. Create Goods Receipt (T. Code – MIGO) with reference to Purchase Order using Movement Type 101 for final product and 543 for Components. Refer the Challan here and assign it with GR
8. Reconcile Challan (T. Code – J1IFQ) with reference to Goods Receipt and reconcile the quantity.
9. Create Invoice Receipt (T. Code – MIRO) for Subcontractor Vendor.

Accounting Entries

• At the time of Goods Receipt

          Inventory (Finished Goods) A/C                            Dr

          GR/ IR Clearing A/C                                                               Cr

         Subcontracting Charges A/C                  Dr

        Subcontracting Stock in Change A/C                     Cr

        Consumption of Component A/C                            Dr

       Inventory of Component A/C                                  Cr

• At the time of Invoice Receipt

        GR/IR Clearing A/C                                Dr

         Vendor Payable A/C                                               Cr

Subcontracting with GST

After GST Implementation, there is a change in the Subcontracting Configuration and Process.

As per GST law, we can run Subcontracting process in one of the following ways:

• With Challan
• Without Challan (with Invoice)

Subcontracting Configuration for GST

• Assign Sales Organization, Distribution Challan and Division should be maintained for Supplying Plant from which the components are to be delivered. Table view – V_001W_IV, T. Code – SM30
• New Billing Type define – ZSN SC Challan (No Taxes), ZSP – SC Invoice (with Taxes)
• Maintain View J_1IG_V_SUBINV through Code – SM30 – Company Code, Sales Type, Billing Type, Billing Class – ZSN for Create Challan and ZSP for Create Invoice
• Use the existing SD Pricing Procedure or define a new Pricing Procedure for Subcontracting process
• Set up “Delivery to Billing Type” Copy Control. Copied with Billing Type “FX” and Sales Order “OR”

Steps for Subcontracting Process:

• Material Master should be available in system for both Finished and Raw Materials (T. Code – MM01). Components must have stock in the system. Extend the Sales View for the Raw Materials or Components
• Create Customer (T. Code – XD01) with necessary details as per Subcontractor Vendor
• Maintain Subcontractor Vendor (T. Code – XK01) and assign Customer in the Vendor Master data.
• Maintain Sales Condition Record for Material Pricing (T. Code – VK11)
• Create Subcontracting Info Record (T. Code – ME11) (Optional)
• Create Subcontracting Purchase Order (T. Code – ME21N) against Subcontracting Vendor with Item Category L. This will activate the “components” button in the Material data tab in the Item of the Purchase Order. Explode BOM or maintain the components manually and with zero tax
• Enter Transfer Posting with reference to Subcontracting Purchase Order through (T. Code MIGO)using 541 Movement type. This will issue the material to the Subcontractor. No Accounting Document generate at the time of Transfer Posting. This will update the stock of the material in the Stock Provided to Vendor in Stock Overview
• Create Subcontracting Challan with reference of Material Issue Document through T. Code -J1IGSUBCON. Then create Challan using “With Challan”, this will generate the Billing Document (ZSN – SC Challan Document in SD). No taxes have been maintained in the Challan Document. Any changes can be done in the Billing Document by using T. Code – VF02.
• When Vendor sends the materials, we post the Goods Receipt in the system using T. Code – MIGO with reference to Subcontracting PO having Movement Type 101 for final or end products and Mov. Type 543 for Components. Consumption of Components material from the Vendor Stock and Stock update for the Final Products.

Accounting Entries:

BSX – Stock A/C for Assembly/ Semi-Finished  – Dr.                          11000

BSV – Change in Subcontracting Stock    Cr.          11000-

FRL – Subcontracting Charges     Dr.          10000

WRX – GR/IR Clearing (Semi-Finished) A/C           Cr.          10000-

BSX- Stock A/C for Components                                Cr.          1000

GBB-VBO Consumption A/C for Components     Dr.          1000

Stock – Semi finished	Dr	65000	BSX	Inventory Posting (needs the cost elements
Consumption of Semi	Cr	65000	BSV	Change in stock account
Contract Expenses	Dr	60000 (Subcontracting Charges)	FRL	External activity (needs the cost elements
GR/IR Semi finished	Cr	60000- (Subcontracting Charges/PO price)	WRX	GR/IR Clearing Account
Consumption of Raw Mat	Dr	5000 (ROH Mat Price)	GBB-VBO	Offestting entry for inventory posting (needs the cost elements)
Stock – Raw Materials	Cr	5000 (ROH Mat Price)	BSX	Inventory Posting

If the material having Standard Price (S), then Price Difference A/C will also comes in picture.

This depends on Configuration: SPRO->MM->Inventory Management and Physical Inventory-> Goods Receipt-> Price Difference for Subcontract Orders at Goods Receipt

In this step, you configure for each valuation area whether price differences are generated for a Subcontract order at the time of the goods receipt if the manufactured material is managed at Standard price and the standard price varies from the receipt value (externally performed service+value of components+delivery costs)

Example:

Semi finished 400 (Standard Price), Subcontracting Charges 250 and Components 100

-> Without Price Differences

Stock A/C Semi-finished       Dr       400+       BSX

Stock Change                       Cr       400-        BSV

Ext. Service A/C                    Dr       250         FRL

GR/IR Clearing A/C              Cr        250-        WRX

Components Stock A/C        Cr        100          GBB-VBO

Comp. Consumption A/C      Dr         100-        BSX

-> With Price Differences

Stock A/C Semi-finished       Dr       400+       BSX

Stock Change                       Cr       350-        BSV

Price Difference                    Cr         50-         PRD

Ext. Service A/C                    Dr       250         FRL

GR/IR Clearing A/C              Cr        250-        WRX

Components Stock A/C        Cr        100          GBB-VBO

Comp. Consumption A/C      Dr         100-        BSX

• Reconcile Challan with reference to goods receipt material document through T. Code – J1IGRECON. Select Manual and enter the Challan No. and Save the Data.
• Post Invoice Receipt for Subcontracting Vendor for the service charges paid to the Subcontractor through T. Code – MIRO with reference to Subcontracting PO

Accounting Entries:

GR/IR Semi Finished Clearing A/C             Dr.          60000

IGST or SGST/CGST Taxes A/C                    Dr.          5400, 5400 (CGST/SGST) or 10800 (IGST)

Vendor A/C        Cr.          70800

Scrap in Subcontracting

There are two cases of handling the scrap in Subcontracting Process

Taking back the scrap from Subcontractor or not taking the scrap generated from Subcontractor.

In first case, maintain the Scrap material as By-products in negative value in the BOM or PO. Then take the material in the stock while doing Goods Receipt using 545 Movement Type for Scrap. This material updated int he “Stock Provided to Vendor.” Then do Goods Receipt to update the stock in the Unrestricted using 542 Mov. Type.

In second case, define that the Scrap % in material master & BOM. Then do the subsequent adjustment through MIGO.

Accounting Entries for Scrap:

Stock A/C for Scrap      Dr      (BSX)

Consumption from Subcon. Stock/ Inv. Change A/C        Cr     (GBB-VBO)

Cancel Challan

According to SAP Notes 2459411 – GST IN: Cancel challan created using “Create Challan” Option in J1IGSUBCON

Q. How to cancel pro forma invoice (Challan) created using “Create Challan” option in T. Code – J1IGSUBCON?

Ans: 1. Go to T. Code – VF02 and enter the pro forma invoice number

2. Go to “Billing Document” menu and click on “Complete”

3. For this challan, J_1IG_SUBCON-STATUS field will be updated as “R”

Important Notes:

*Challan Status in the SAP system

F      Fully Reconciled

P      Partially Reconciled

C      Challan Created

D     Document Reversed

R    Challan Reversed

I      Invoice Created

S      Invoice Reversed

*Company can sends Material directly to the Subcontractor without payment to tax

*Company can sends material to Subcontractor without bringing them in the premises and can still avail the credit of tax paid on such inputs or capital material

*Inputs or Capital materials sends to a Subcontractor need to be returned within 1 yr or 3 yrs, respectively, on the date on which materials send to Subcontractor.

*Subcontractor can sends to another job-worker for processing, dispatch the goods to any of the place without payment of tax, remove the goods on payment of tax within India and without payment of tax for export outside India.

*the input or capital goods shall be send to the Subcontractor under the cover of the Challan issued by the Company

*the responsibility of keeping proper account for the inputs and capital should be lie under the principal

*Under Sec. 19 of the CGST Act, 2017 provides that the Company shall be entitled to take the credit of input tax paid on material send to the Subcontractor for job work. The principal can take the credit when the material send to Subcontractor, need not to wait till the material to be return from Subcontractor.

*Under Sec. 143(5) of the CGST Act, 2017, waste generated at the premises of the job-worker may be supplied directly by the registered job-worker from his plac of business on payment of tax or such waste may be cleared by the principal, in case the job-worker is not registered.

*Transitional Provision- Inputs, as such, or partially processed inputs which are sent to a Subcontractor prior to introduction of GST under the provisions of existing law (Central Excise) and if such goods are returned within 6 months from the appointed day (the day on which GST will be implemented) no tax would be payable. If such goods are not returned within prescribed time, the input tax credit availed on such goods will be liable to be recovered. For the purpose of these provisions during the transitional period, the manufacturer and the job-worker are required to declare the details of such goods sent/ received for job-work in prescribed format GST TRANS-1, within 90 days of the introduction of GST.