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30 September 2022

External processing in S/4HANA: an overview

Often, individual manufacturing steps have to be outsourced to external service providers. In this process, SAP distinguishes between subcontracting and external processing. In this blog post, we will discuss external processing.

In external processing - also known as extended workbench - certain production steps are carried out by an external service provider for which the customer provides the part to be processed. Particularly in connection with the S/4HANA transformation, the user is always confronted with the same questions: What is important in external processing? Which master data is required for process handling? What transaction data is generated in the course? What does the process look like in detail? Are there best practices from SAP? In the following, we would like to clarify this and describe the process using an example.

Every process begins with master data

To produce a T-shirt, the following material masters are created at T-Shirt GmbH:

  • Smiley T-shirt
  • Fabric
  • Yarn

The core competence of T-Shirt GmbH is the sewing of T-shirts, the necessary components are bought in. Due to the lack of know-how, the flocking of the T-shirts is carried out by an external service provider, hereinafter referred to as an external processor.

In order for T-Shirt GmbH to know which components are used to produce a T-shirt, it links them to a bill of materials.

The required manufacturing process is recorded in a routing. The BOM and routing elements are then combined in a manufacturing version.

For automatic source determination, a valid source of supply must exist for the "flocking" service and the external processor. This requires that the external processor is created as a business partner and a source of supply in the form of an outline agreement or as a purchasing info record.

A customer order gets the ball rolling

T-Shirt GmbH receives a customer order of 100 smiley t-shirts. As there are not enough in stock, they have to be produced subsequently. The required quantity of 100 pieces is covered with a planned order in the amount of 100 pieces.

The planned order is an internal document that requests production planning to replenish 100 smiley T-shirts. Material requirements planning, also called MRP, takes place at several MRP levels, so that the requirements are inherited at all BOM levels.

The quantity required depends on the input quantity stored in the BOM. For 100 smiley T-shirts, 110 meters of fabric and 400 meters of yarn are required. The input quantity of the component per finished T-shirt is 1.10 meters of fabric and 4 meters of yarn. All this information can be traced in the planned order and is automatically calculated in the MRP.

When the planned order is converted into a production order, production of the 100 smiley T-shirts is triggered. In parallel, the system automatically creates a purchase requisition for the externally processed operation. The production order is a binding element within the production of T-Shirt GmbH. The purchase requisition, also known as BANF, is an internal document that requests Purchasing to order the flocking of the T-shirts from the external processor.

The purchase order of the service contains only one text item

As soon as the work process is completed before the external processing process, the flocking of the T-shirts is ordered. For this purpose, the purchase requisition is converted into a purchase order. The purchase order item is a text purchase order, since only a service is procured here. The WIP part leaves the production of T-Shirt GmbH and is transported to the goods issue zone, from where it is shipped to the third-party processor.

It is the turn of the external processor

Now the external processor can fulfill his order from T-Shirt GmbH and flocks the T-shirts with the smiley patches. After the external processor has flocked all 100 T-shirts, he returns them to T-Shirt GmbH. The service is invoiced to T-Shirt GmbH.

At T-Shirt GmbH the 100 smiley T-shirts are received and checked. The goods receipt is posted in relation to the purchase order, which is assigned to the production order. A material document and an accounting document are created. The invoice receipt is also recorded in relation to the purchase order.

Parallel to the goods receipt posting, the status in the production order is updated during the external processing operation, so that the scheduler can see at any time whether the goods are back in house and available for further processing.

After the goods receipt posting, the flocked T-shirt flows back into production according to the production order and is processed further there. After completion of the last operation, the production order is confirmed for the production of 100 smiley T-shirts. When the production order is completed, the inventory of smiley T-shirts increases by 100 pieces and the inventory at the component level decreases by 110 m for fabric and 400 m for yarn.

For SAP best practices, please visit SAP's solution page: External Processing (BJK).

 

Good to know: External processing vs. subcontracting. The most important functions

With the help of SAP External Processing, companies can map individual production steps that they outsource to external service providers transparently and clearly in the system.

Kerstin Mihleisen, SCM Solution Consultant CONSILIO GmbH Contact the expert

Further Informations:

Learn the second type of external processing