Blog Series – SAP S/4 HANA Supply Chain for Transportation Management – 05 – Integrated MM sub-contracting process and benefits of S/4 HANA master data simplification
Since professional shipping in SAP S/4 HANA Supply Chain for Transportation Management (embedded TM) has additional license cost, it is necessary to understand the benefits it offers, while resolving various business problems/issues in transportation process. Last two blogs (event driven charge calculation and resolution of ‘cubing-out/gross out’ problems) focus mostly on standalone transportation issues. However, with S/4 HANA simplification, we have advantages in designing integrated business process scenarios. This blog focuses on transportation process during the sub-contracting, where S/4 HANA business partner simplification along with professional shipping functionality, plays a major role in consolidation and cost reduction.
Subcontracting is the practice of assigning part of the obligations and tasks under a contract to another party known as a subcontractor. In manufacturing process, rather than manufacturing all the products inside the plant, some of the production are sub-contracted to vendors.
Subcontracting (in manufacturing) involves providing the sub-contractor (Vendor) with components from which finished/semi-finished product is manufactured. The finished/semi-finished goods will be transported back to the manufacturing plant, another plant of the manufacturer, specific storage location/warehouse, end customer, another vendor/sub-contractor etc. Since components are manufactured and sent to the sub-contractor (vendor), its is critical to manage the inventory along with visibility of stock status. Also, transportation of these products is important and there is high potential for consolidation of various orders.
Sub-contracting has some potential disadvantages. OEM (Original Equipment Manufacturer) can lose the managerial control, should be aware of hidden costs, must manage security/confidentiality and tackle product quality problems. Additionally, there is a risk of financial well-being of the subcontractor and a need for back up plans. However, sub-contracting in manufacturing can help in reducing costs, increase productivity, lower internal work/labour incidents, improve flexibility etc… (Refer ‘When Your Contract Manufacturer Becomes Your Competitor’, HBR September 2006 issue, for more details.)
In core SAP S/4 HANA Materials Management (MM) module, we can use standard PO with item category L to create subcontracting purchase orders for buying finished or semi-finished goods from the sub-contracting vendor. ADSUBCON transaction can be used to create outbound deliveries and move components from plant to the sub-contractor site. Once the processing is complete, inbound delivery can be created to receive the products from the sub-contractor. The above processes can be done without delivery document too (using MIGO transaction). Based on the Bill of Materials (BOM), the inventory of components and finished/semi-finished products are updated.
For example, if a furniture company manufactures legs and boards of tables, but assembles and packages these at a sub-contractor site, the process can be as below.
Common transportation scenarios:
From a transportation perspective, there is movement of components from the manufacturing plant to sub-contractor. Also, there is movement of finished/semi-finished goods from sub-contractor back to the manufacturing plant. There can be many variations for such transportation processes.
Additionally, there can be other complex scenarios. For example:
- The product can be shipped directly from sub-contractor to the customer
- Components can be procured from other vendor and supplied to the sub-con vendor
The scenario where shipper owns both inbound and outbound moves is common in automobile and manufacturing industry. To ensure complete control of the product, many complex components are manufactured inside the plant. However, these are assembled with other parts outside, at a sub-contractor site. These processed products are then transported back to the same plant and are used in the final and other sub-assembly lines. In such scenarios, where shipper owns both the outbound and inbound moves, there is a huge scope of consolidation, round-trip planning, and reduction in empty return moves.
SAP TM solution and issues:
Most of the basic ERP/TM products do not have the visibility to plan and consolidate these inbound and outbound movements which can reduce the empty movement of transportation resources (internal/external). However, SAP TM has this functionality for quite a long time.
For scenario 1, in order to utilize the functionalities of SAP TM, we can activate the outbound deliveries (delivery type LB) and inbound deliveries (delivery type EL) using control key configuration. Freight Units created out of these deliveries can be planned in transportation cockpit using optimizer. In a decentralized SAP TM 9.X system, this is not a straightforward solution. Even though physically the sub-contractor location is the same, technically in outbound delivery (LB), subcontractor location refers to customer master data. However, in inbound delivery (EL), subcontractor location refers to vendor master data. If we create both the sub-contractor master data (customer and vendor) as the same number, the decentralized SAP TM 9.X system cannot accept these locations during CIF transfer. Hence, we have to create customer master data and vendor master data for sub-contractor as different numbers. But, this can create a virtual move (subcontractor’s customer master location to vendor master location) while planning a round trip in transportation cockpit. (This issue cannot be resolved by implementing the standard BADI to prefix the master data.)
For example, in below example FF_SUP1 is the vendor master data and FF_SUP1_C is the customer master data for sub-contractor. In outbound delivery (LB), the destination location is FF_SUP1_C and in inbound delivery (EL), the source location is FF_SUP1. When we combine these two deliveries into a Freight Order, it creates 3 stages in which second stage is a virtual move from FF_SUP1_C to FF_SUP1. (Physically both these locations are same)
Work around: If we configure receiving point determination in inbound delivery (EL) as the shipping point of outbound delivery (LB), then optimizer will try to reduce the number of stops and plan the round trip from supplier location rather than the plant/DC.
S/4 HANA simplification and professional shipping:
Compared to SAP ECC, in S/4 HANA, we need not create vendor master and customer master separately. Both are created as a single business partner with different roles. This is one of the major simplification of master data in S/4 HANA which helped the location master simplification in EWM and TM systems.
SAP Note – 2505727: With EWM in S/4HANA release 1709 as well as TM in S/4HANA 1709, the master data was aligned. Only one location is required when a customer is also a vendor. From S/4HANA 1709 onwards, there will be just a location with type 1021, that is linked to the business partner.
In subcontracting process, the subcontractor is acting both as a vendor and customer. With business partner master data representing both, the issue of virtual stage is resolved. This is one of the areas where the master data simplification in S/4 HANA provides benefits in designing integrated solutions with TM and EWM functionalities.
In this example, the outbound and inbound delivery for the subcontracting purchase order are consolidated on to one Freight Order using SAP TM transportation cockpit. The destination location of the outbound delivery and source location of the inbound delivery are both the same location S20VN09 (Type 1021 – Business Partner).
End to end process flow for subcontracting process in S/4 HANA TM professional shipping can be modeled as below:
S/4 HANA master data and other simplifications are helpful in integrated business processes such as sub-contracting. Sub-contracting is being used by customers increasingly and S/4 HANA embedded TM is now well equipped to cater to most of the scenarios.
In SAP LE-TRA or S/4 HANA basic shipping, it is not possible to combine inbound and outbound movements. Planning inbound and outbound FU in FU work list (or transportation cockpit) is considered as professional shipping functionality. Combining and consolidating inbound and outbound movement (using TM optimizer or Cockpit) can reduce the empty moves and improve the vehicle utilization. This can significantly reduce the cost, if the freight volume and spend are high. Hence professional shipping in ‘S/4 HANA Supply Chain for TM (embedded TM)’ can be a compelling business case and is critical to achieve efficient transportation process for many shippers/manufacturers.
Note: This blog focuses on manufacturing subcontracting process and do not confuse this with subcontracting in freight tendering process