Leverage Control and Lower Procurement Costs by Exploiting the Subcontracting Process in PP/DS with Third-Party Provision of Components

  • by Alok Jaiswal, Consultant, Infosys Limited
  • August 21, 2017
Learn the process flow, master data setup, and the subcontracting process with third-party provision of components in SAP Advanced Planning and Optimization (SAP APO) Production Planning and Detailed Scheduling (PP/DS) with integration to SAP ERP Central Component (ECC).
Learning Objectives

Reading this article, you’ll learn about:

  • The normal subcontracting process and the process with third-party provision of components
  • Master data setup in SAP ERP Central Component (ECC)
  • Integration via the Core Interface (CIF) of master data from ECC to SAP Advanced Planning and Optimization (SAP APO)
  • How to simulate a Production Planning and Detailed Scheduling (PP/DS) planning run in SAP APO and how to interpret the planning results for materials at different locations
Key Concept
In a normal subcontracting process, a manufacturing plant has a contractual agreement with a subcontractor to build the product where components would be provided by the plant. The functionality for the third-party provision of components enables the components of a product that is to be manufactured by a subcontractor to be provided by an external supplier instead of your own plant.

The subcontracting process involves sending components to a vendor for specific manufacturing processes and receiving the value-added finished material back into inventory. For example, a manufacturing plant builds products in the US. A few products, however, are not built in-house by the plant, but are outsourced to a subcontractor in India. Now components to manufacture this product are procured from an external supplier (a third-party vendor) also located in India.

In the normal form of subcontracting, the Indian supplier would deliver the components to the plant in the US. The US plant would then send them back to India—to the subcontractor. To avoid this unnecessary diversion, the component supplier can send the components directly to the subcontractor in India.

I explain how the mapping of this business process of subcontracting with a third party can be done in SAP Advanced Planning and Optimization (SAP APO) Production Planning/Detailed Scheduling (PP/DS) with integration to SAP ERP Central Component (ECC).

A Case Study Overview

Consider this case study simulation. A company has a manufacturing plant PLANT-A that has demand for product FG-A. A bill of material (BOM) for FG-A is shown in Figure 1.


Figure 1
A BOM of product FG-A at PLANT-A

FG-A is the subcontracted part that the plant would receive from the subcontractor. The BOM in Figure 1 shows that the plant has two bulk materials that are used for FG-A. Bulk materials are directly available at a work center (low-cost items such as washers). Also dependent requirements of bulk materials are not relevant for materials planning, which means they are not taken into account for net requirements calculation. Figure 1 also shows that that plant has a child part, RM-A1, which is the drop-ship component (i.e., it would be supplied by the third-party vendor to a subcontractor that will send it to PLANT-A). Figure 2 shows how the procurement process is set up.


Figure 2
The subcontracting process of FG-A

During the process of subcontracting, components are delivered directly to subcontractors from third-party external vendors. Figure 2 shows that third-party VENDOR-Y will ship components to the subcontractor (VENDOR-X), which in turn will be responsible for sending it to the manufacturing plant (PLANT-A).

Master Data Setup in ECC

Before running the subcontracting process, you need to have master data configured in the system for the following objects in ECC:

  • Material master
  • BOM and production version
  • Vendors
  • Schedule agreement
  • Purchasing info record
Note
I assume readers know how master data is set up and configured in ECC. For this article I cover only the important master data configuration.

Alok Jaiswal

Alok Jaiswal is a consultant at Infosys Limited.

He has more than six years of experience in IT and ERP consulting and in supply chain management (SCM). He has worked on various SAP Advanced Planning and Optimization (APO) modules such as Demand Planning (DP), Production Planning/Detailed Scheduling (PP/DS), Supply Network Planning (SNP), and Core Interface (CIF) at various stages of the project life cycle.

He is also an APICS-certified CSCP (Certified Supply Chain Planner) consultant, with exposure in functional areas of demand planning, lean management, value stream mapping, and inventory management across manufacturing, healthcare, and textile sectors.


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