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Subcontracting Process in Auto Manufacturing Industry along with CIN process

This document covers the subcontracting process specific to manufacturing process in Auto Industry and also covers the legal requirement as per Indian Excise Law in Indian scenario. Subcontracting is defined as a process of entering into a contractual agreement with an outside person or company to perform a certain amount of work by processing materials either provided by the customer or another source.We will review three variants of the subcontracting process:

1. Provisioned Stock
Company can retain the ownership of the material throughout the supply chain. The components are provided by company to the supplier based on the trigger for the products. Company will ship out the components to the subcontractor and continue to have visibility for the components. Company will receive and do put away of the end item and the components will be automatically relived from inventory. A subsequence inventory adjustment will be made of the subcontractor’s inventory. Any fall out or scrap of the components will be reported back to company to process. The components for maintenance demand would be refurbished tooling for repair or replacement.

2. Drop Ship Stock
In this process, Company continues to retain ownership of the components but the components are provided by another source and delivered to the subcontractor for processing like in ‘Contract Manufacturing’ process. When the components are delivered to the subcontractor, company pays the other source via a purchase order directly upon receipt at the subcontractor once confirmation is made. The process mimics the above process once the components are received at the subcontractor. Payment is made to the subcontractor via a subcontract purchase order once the finished product is received.

3. Vendor Owned Stock
In the process, Company does not retain ownership of the components throughout the supply chain. An external source provides the components based on a forecast from Company and is delivered to the subcontractor. No payment is made to the external vendor when the delivery is made to the subcontractor. Payment is made to both the subcontractor via the subcontract purchase order and the vendor via a standard purchase order once the finished product is received at Company(the auto receive process). The movement and processing of the components mimic the process above once the components are received at the subcontractor.

For any temporary outsource or manual process, the utilization of any of the above processes would suffice.


In our current India implementation for one of the auto major, we have designed a 2 step subcontracting process done by 2 separate vendors: Coating and Painting work. Company will own the subcontracted parts like above in Provisioned Stock. The logistical requirement was all parts will move directly from subcontractor 1 to subcontractor 2 and return to plant finally. However there should be a complete visibility of stock situation in SAP and at the same time meet legal compliance per Indian Excise Law.

Master data requirements:

• The material master must have the subcontracting procurement type identified and must also have a BOM (Bill of material is a complete structured list of components that make up an object.) The BOM structure ensures that requirement for the parent component will allow to issue child components for subcontracting and the child component will be consumed once the Goods Receipt for the parent is posted after subcontracting process is complete.

• The subcontracting purchasing document line item should always have an Item category – L (Subcontracting). In case the subcontracting material is directly moving from subcontractor 1 to subcontractor 2 for further processing, the purchasing document delivery address tab must be updated with second subcontractor as vendor and SC vendor tick should be active.

SC vendor.png

• All excisable materials are identified and maintained in CIN masters(transaction J1iD)  in case if they are prone to excise tax per Indian excise tax laws and identified as subcontracted materials

• Subcontracting vendors are identified in CIN masters(transaction J1iD) under Vendor section with their correct details

High Level View:


Detailed Process Flow and Handling of Rejections in the subcontracting process:

• When a part is produced in the plant, Company will execute an Order Confirmation in SAP, which will trigger an EDI to 3PL with stock transfer to 3PL storage location. 3PL will receive the parts against the Order Confirmation document.

• When the parts have to be supplied to Subcontractor 1 for Coating, company creates

  • A Subcontracting purchase Order/Scheduling Agreement in SAP (Ensure that subcontracting 2 vendor is maintained in the delivery address tab, which will allow the system to move the goods automatically to next subcontractor once parts from subcontractor 1 are received – ME21N / ME31L) and
  • Create outbound delivery against Purchase Order/Scheduling Agreement (ME2O).
  • The creation of Outbound Delivery in SAP will trigger an EDI to 3PL transmitting the delivery information.
  • 3PL will issue parts to Subcontractor 1 for Coating against the Outbound Delivery and confirms goods issue back to SAP through an EDI.
  • The Inbound EDI message will post Outbound Delivery in SAP and stock of the child component will be updated as stock at vendor.

• Financial postings don’t happen during Goods issue of parts to Subcontracting1. Against the Goods Issue material document Company will create a Subcontracting challan (transaction J1IF01). This is a legal document that is issued to track subcontracting work as per section 57FC.  Below two cases may occur when subcontractor1 receives the goods:

  • Original parts are received  Good
  • Transit Rejections may occur(subcontractor1 will tag them separately as Transit Rejections and will not process them)
  • The transit rejections will physically move to subcontractor 2. However to ensure that stock in SAP is in sync with stock at vendor we post reversal of GI (542 movement) from subcontractor 1 and again post issue to subcontractor 2 (541 movement).Thus Only good processed parts from subcontractor 1 will be received via GRN document which means the supplier will be paid only for services of the Good Received parts

• After completing the coating work, Subcontractor 1 will send the goods to Subcontractor 2 for painting work, below three cases will occur:

  • The Good subcontracted1 parts
  • Rejected parts during subcontracting1 process and
  • Transit Rejections of original parts

• There could have been two different ways of handling movement of materials between subcontractors: 

  • Receive all the goods after every subcontracting process and issue only good units to next subcontracting process. This involves additional transportation cost + time in transportation to & froth, however this keeps the process simple if there are multiple subcontracting processes.
  • Physically all goods will move from Subcontractor1 to Subcontractor2 and finally received back in plant. In such a case virtual goods receipt from subcontractor1 and virtual goods issue to subcontractor2 have to be created. This is cost economical from transportation of goods perspective, however process wise all good units, process rejected and in-transit rejections will be tracked separately till they are received back in plant after all the subcontracting processes leading to cumbersome design.

In our project, since the physical goods are not received in plant and only its stock is updated in SAP, virtual return of goods from subcontractor1 need to be captured, in order to track the stock in SAP.

• Subcontractor 1 will send an E-mail communication to Company on the Goods Issue to Subcontractor 2.  This communication will state the quantity of Good coated parts, Transit rejections and subcontracting1 process rejections. Based on this company will execute a Goods Receipt for the Good coated parts in SAP. When company does a GR the respective subcontracting challan is linked during GR process, the stock of parts sent to subcontractor 1 will be consumed (543 O movement), stock of coated parts will be automatically transferred to Subcontractor 2 for painting work in SAP, which can be viewed in Stock Overview. In order to ensure that the subcontracting process works as desired to follow excise related legal requirements, following configuration of movement types related to CIN subcontracting process is required in SAP.

mvt grps.png

(0001 is issues and 0002 group is for receipts. O is special stock indicator that allows auto transfer of goods to next subcontractor)

• In order to reconcile the subcontracting challan for materials given to Subcontractor 1 all receipts from Subcontractor 1 will be treated as follows in SAP :

  • In transit to Subcontractor 1 rejections – Post manual 542 movement type with specific reason code defined for this type of rejection after receipt of email from Subcontractor 1. The respective material document will be used for reconciliation of subcontracting challan for subcontractor 1

  • Subcon 1 Process rejections– Post manual 542 movement type with specific reason code defined for this type of rejection after receipt of email from Subcontractor 1. The respective material document will be used for reconciliation of subcontracting challan for subcontractor 1

  • Good Coated Parts – GRN material document posted for good parts with movement type 101 will be used to reconcile the complete quantity sent against the subcontracting challan. Since this document is for GR of good coated parts as well as goods issue of these coated parts to subcontractor 2, this will be used to create the subcontracting challan for subcontractor 2.

• Thus complete quantity sent to subcontractor 1 will be received in SAP, which creates one financial document together for both Goods receipt(101+, special  stock indicator O) & original Goods issue as consumption(543- with special stock indicator O).

Dr Subcontracted Finished Inventory 1000

Cr Subcontract change in stock 1000

Dr Subcontract services 150

Cr GR/IR 150

Dr Subcontract material consumption  850

Cr Subcontract semifinished Inventory 850

• The subcontracting challan 1 created for subcontractor 1 will be reconciled (transaction J1iFQ) and completed (transaction J1iF13) for all quantity. This helps to keep clear all the open and closed challans in the system.

• Manual transfer posting of Goods Issue to Subcontractor 2 with movement 541 will be posted by company in SAP for all rejected parts received from subcontractor 1.

• 2 separate Subcontracting challans will be created in SAP for Subcontractor 2 as follows, as subcontractor2 is physically holding all the good and rejected units, legally it should have Subcontracting Challans projecting these parts with the correct quantity:

  • One Challan for the good subcontracted1 parts for which stock was received and posted against subcontractor 2 against the GR/GI document posted.
  • Another Challan against the rejected parts for which stock was received with manual 542 movement type.

• The copies of these 2 subcontracting challans will be mailed to Subcontractor2 by the company staff as per legal requirements.

• Subcontractor2 will process the goods and passes on to next subcontractor in the same way like how subcontractor1 moved the parts to subcontractor2.

Reason codes are introduced during different movement types to identify the different types of rejections and for management reporting

• After every process the complete quantity is posted in SAP and all the subcontracting challans created for Subcontractor 2 will be reconciled (transaction J1iFQ) and completed (transaction J1IF13 by referring goods receipt material document).

• Execute Subcontracting Challan report (transaction J1IFR) with Annexure IV option to track different open and closed Subcontracting Challans.


• Once all the stocks are available in SAP, normal rejection process will be followed to clear these entries. And subsequent settlement in the invoice booking (transaction MIRO for processed goods units which shows up automatically) will bemade to subcontract vendor

• The print output for subcontracting challan (transaction J1IF11) is designed as per Excise Legal Requirements that shows the details of all excisable goods with their chapter ids and assessable values(which are maintained in J1iD transaction -> Material assessable value) as per section 57FC. These subcontracted goods are subject to return back to excisable plant within 180 days, otherwise excise tax is levied as per the excise regulations.

• The associated output type for Subcontracting challan is J1IF, under application ME in NACE transaction. Customize the form/program to meet the client requirements.

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      Author's profile photo Deepak Phopase
      Deepak Phopase

      Very Informative and efficient summarization of a complex process.

      Author's profile photo Srinivas Salpala
      Srinivas Salpala


      Very good initiation.... Nice presentation and keep up the best effort!!!

      BR, Srinivas Salpala

      Author's profile photo Former Member
      Former Member

      Hi Sekhar,

      Nice presentation and truly Informative document.

      Nishikant Nibandhe

      Author's profile photo Former Member
      Former Member

      thanks for sharing