Vendor consignment, a standard functionality in materials management within Enterprise Asset Management (EAM), enables companies to reduce their inventory of spare parts. Learn how to execute vendor consignment using your own stock as well as materials from multiple consignment vendors.
Vendor consignment is a standard functionality in materials management (MM) wherein you purchase materials from the vendor on a consignment basis. When the delivery comes, although the materials are stored in your warehouse, they are still legally owned by the vendor until they are consumed. The vendor is paid only after confirming the consumption. You can set up this functionality in Enterprise Asset Management (EAM), also known as Plant Maintenance, which is a part of SAP ERP Central Component under logistics. In EAM, you can create notifications and work orders that form the basis for executing maintenance tasks, including consumption of materials. In addition to EAM, implementing MM, Financial Accounting (FI), and managerial accounting (CO) are prerequisites for inventory management with consignment.
For every organization, profitability is directly linked to the inventory management of raw materials and consumables it uses directly or indirectly for production or service to the customer. Vendor consignment is a method of achieving low levels of inventory by postponing the liability to the vendor until the actual consumption is recorded. In Enterprise Asset Management (EAM) applications, spare parts used in maintenance activities can be consumed from consignment stock through SAP standard functionality. Without consignment, as soon as materials are received, customers must take ownership of them and pay the vendors based on the purchase terms.
There are several advantages to using vendor consignment:
- A reduction in inventory of your own stock
- Fewer steps in the procure-to-pay cycle
- Timely payment to vendors as a result of fewer clerical efforts owing to the absence of a three-way matching process for purchase order (PO), goods receipt (GR), and invoice receipt (IR)
- Elimination of duplicate invoices
- Systematic segregation of consignment inventory from your own stock and the ability to track consignment stock using standard transactions
- No need for vendors to invoice the customers and they can track this stock using customer consignment functionality if they have an SAP system
In EAM applications, you create a work order either manually or through preventive maintenance runs. Materials or spare parts not only can be assigned to the work order for the operations to be performed but also can be copied from a task list in the case of preventive maintenance orders. To register consumption of spare parts automatically upon confirmation of work, SAP provides a backflush indicator that you can maintain in the MRP2 view at the plant level in the material master (shown in step 1). Alternately, you can select the backflush indicator in the material assignment screen of the work order. However, some companies prefer to withdraw stock from the warehouse as soon as a work order is released and before starting actual work, without using the backflush indicator. Figure 1 shows the process flow for the vendor consignment process in EAM.
Vendor consignment process flow in EAM