Say you are a computer company and you produce laptops. You offer another company’s antivirus software installed on these laptops. Consumers can order both of the products from your company’s Web site. Your company obtains the antivirus software via third-party procurement. Note that the service guarantee for the antivirus software remains with the third party. Your company does not sell it under your brand name. This is the major difference between third-party and OEM procurement.

I developed a process to set up the standard third-party procurement process. Within this process are logistics options that you might have to build into the standard solution, depending on your business requirements. For example, if you have a large volume of third-party orders or if you need to fulfill orders in one shipment, you might want to build stock for the third-party items instead of direct ship-to customers when orders drop.

Along with the third-party procurement process, I created a workaround that allows you to cancel third-party orders for vendors willing to accept cancellations. With the standard cancellation process, you can cancel the order before the system sends the purchase order (PO) to the third-party vendor, but not after the third-party vendor receives it. With the workaround, you can create a conditional cancellation that allows you to cancel the order after receipt by the third-party vendor.

Third-Party Procurement Process

First you must configure the standard third-party process in SAP, which includes setting up the master data and configuration linkages to help elucidate the processing logic in SAP. This enables you to appreciate the small nuances that you can change slightly for required modifications to the standard third-party setup. I used an R/3 Enterprise system, but the process also works in mySAP ERP Central Component (ECC).

Step 1. Link the sales order type and the general item category to an item category group (Figure 1). You configure the item category group BANS (third-party item) so that the item category TAS (third-party item) defaults for the sales order type OR (standard order for third-party materials). The default entries are important because they convert sales orders automatically from order entry (via EDI/IDocs) to purchase orders in R/3 Enterprise.

Figure 1

TAS is the default item category

To link sales type OR with item category TAS and item category group BANS, follow IMG path Sales and Distribution>Sales>Sales Document Item>Assign Item Categories. Figure 1 shows the result of this configuration.

Step 2. Set up the material masters for the third-party procurement. Third-party materials should have the item category group BANS maintained in the sales view of the material master. This helps the system determine the relevant item category in the sales order (order type OR) via the configuration discussed in step 1.

Enter transaction code MM03 to view the material master sales org data view (Figure 2). This screen shows the relevant fields you need to maintain so that the system determines the item category as TAS in the sales order. Define the general item category (Gen. Item cat.grp) as BANS Third-party item via transaction MM02. This step along with the configuration discussed in step 1 helps the sales order to automatically assign the item category TAS to third-party items in sales orders.

Figure 2

General item category maintained as BANS

Step 3. Link the sales item category to the schedule item category. The controls set for the schedule line item category determine the subsequent procurement/demand signal, so it is important to pick up the correct schedule line category. In this step, link item category TAS and schedule line category CS (Leg). The CS schedule line category creates a purchase requisition directly from the sales order. I will discuss the configuration for the schedule line category to enable this in step 4.

Follow IMG menu path Sales and Distribution>Sales>Schedule Lines>Assign Schedule line Categories to set up the link between the sales line item category and schedule line category. As you can see in Figure 3, I linked the item category TAS to the schedule line category CS for all material requirements planning (MRP) types (as the Typ field is blank in the configuration).

Figure 3

Assign the schedule line category to the item category

Step 4. Set detailed control factors for the scheduled line item category. Follow menu path IMG>Sales and Distribution>Sales>Sales Documents>Schedule Lines>Define Schedule Line Categories. For third-party procurement, as shown in Figure 4, you configure the schedule line category CS so that it automatically creates a purchase requisition with Order type NB and with Item category as 5 Third-party.

Figure 4

Setup required for schedule line category to determine the purchase requisition parameters

Step 5. Set up the purchase requisition configuration. In step 4 I discussed how to set up the purchase requisition that the system creates automatically in the sales order. In this step you specify the purchase requisition’s details according to your business requirements (e.g., whether you want goods receipt [GR] or account assignment to be mandatory).

Figure 5 shows the PO item category configuration for the Third-party item category. Follow menu path IMG>Materials Management>Purchasing>Define External Representation of Item Categories. The settings you configure in this screen determine the PO controlling parameters, such as whether or not you may post a GR item. If you do not want the third-party items to appear in your books, you can make GR not allowed. Via this setting the third-party item moves directly from the third-party vendor to the customer, and your inventory management is not affected.

Figure 5

PO item category setup

However, some companies may have a procurement requirement in which they must document material movement in their systems by creating a GR for the third-party PO. This prevents the company from making payment before the delivery of goods. In this case, you change the standard configuration for the PO item category. For example, you can make the GR indicator binding by selecting the Binding in PO check box under the Control: goods receipt tab in Figure 5.

Go to transaction ME23N to view the PO that the system created automatically from the purchase requisition in the sales order (Figure 6).

Figure 6

The PO the system created automatically with the third-party item category and delivery address as the customer address

The last part of the standard SAP third-party procurement cycle is to pay the vendor per the vendor invoice. When the vendor invoice arrives (via an 810 EDI), you enter the invoice for the third-party PO in invoice verification in the same way as an invoice for a standard PO. If you posted a statistical GR for the PO, the invoice receipt (IR) results in an offsetting entry on the GR/IR clearing account.

This process might not be the only logistics process that you need to meet third-party procurement requirements at your company. Sometimes to deliver orders in one package or to reduce the cycle time for fulfilling orders, companies build up third-party stock. You can do this using the consignment stock route or by maintaining company-owned inventory, which I will explain in the next section.

Other Logistics Processes for Third-Party Orders

Next, I will discuss briefly the make-to-stock scenarios that you might need to create for third-party orders. When you require a single shipment to meet customer demand, you must use a different logistics process from the drop-ship process. Sometimes the huge volume of sales for a third-party item requires a company to create its own stock to prevent delays from the drop-ship process.

SAP provides the flexibility to determine the logistics process by using the general item category maintained in the sales view of the material master. This helps you set up different logistics processes for the same third-party item in different sales areas.

One logistics option to build up stock is to use the standard SAP solution to build consigned inventory with the third-party vendor for the third-party items. You can plan for the materials based on a forecasting run and feed the requirements as planned orders to R/3. Based on the requirements, the R/3 system creates consignment POs during the MRP run to convert the requirements into demand objects.

Now, how do you get the system to create consignment POs on running MRP for an item? A few values that you maintain in the procurement view of material master (Figure 7) are the key to this. To convert demand elements to purchase requisitions in the MRP run automatically, you need to maintain the Procurement type as F (external procurement only). To create the PO as a consignment PO during the MRP run automatically, you also need to maintain the Special procurement field as 10 (Consignment).

Figure 7

Automatically convert a requirement to a consignment purchase requisition during a master production scheduling run

You cannot consume consignment inventory to meet the sales orders requirements because the stock is not legally yours. You need to bring the consignment stock into your own company stock. This is possible via material movement using transaction MB01 or through a dummy consignment PO. Posting individual movement types by requirement (deliveries created) is not only cumbersome and time-intensive; in many cases, it’s impossible.

A custom utility created by using ABAP can help work around this problem. This utility needs to run at regular intervals to check the difference between the open PO quantities and the open delivery quantities (created against sales orders/stock transport orders) with the available company-owned stock. In the case of a shortfall, the utility pulls stock (by posting material movement documents) from consignment inventory via movement type 411K (consignment stock to own unrestricted stock).

You can base the settlement (payments to third-party vendor) for the consignment stock on the consignment settlement that you run at a frequency agreed on by you and the third-party vendor. The third-party vendor supplies materials as consigned stock. The payment to the third-party vendor happens only for the quantity of the vendor’s consigned stock that you move to your own stock via 411K movements. R/3 and ECC provide standard transaction MRKO to settle at regular intervals for all of the consignment stocks you move into your own stock. Note that for a consignment PO, the vendor does not send invoice documents.

The other method of consuming a consignment PO when required is to set the system to create a dummy PO for delivery quantity when it creates the delivery. This is a standard PO type NB that the system creates via a special program that processes the delivery output. This program creates the PO per the delivery quantity for the vendor holding the consigned stock. In this case, the vendor fulfills the PO against the consigned stock and sends an 856 (advanced shipping notification) signal to the company. An 846 signal triggers the GR for the PO and the consumption of the consigned inventory from the system.

For procurement directly to stock, follow the same process as for consignment stock, only in this case you should not maintain the Special procurement field for the materials in the material master. Note the general item category group in the case of stock consumed from inventory needs to be NORM (standard item) instead of BANS.

Cancellation Process

Finally, let me discuss the cancellation process for third-party orders. Standard R/3 Enterprise functionality allows you to cancel the sales order line item, but does not make any changes to the procurement in case the system has released the PO to the vendor. In this situation, the cancellation process becomes slightly cumbersome.

Some third-party vendors allow you to cancel an order, in the form of a conditional cancellation, after you release the PO to them. To start this process, send an 860 IDoc request for a PO quantity change/cancellation to the third-party vendor. The vendor sends back an 865 IDoc to confirm if it is possible to cancel the order in its system. You then communicate with the customer (via auto email programs) whether the third-party vendor can accept the request to change or cancel the line item.

You can also create a Z table to track the initiation of the request and the present status of the request (e.g., if the system sends the request to the vendor and if the vendor accepts/cancels the request.) The IDoc processing function modules for the different IDocs (860/865) can update the status directly in the Z table with slight code modifications.

Trilokesh Satpathy

Trilokesh Satpathy, PMP, is a consultant with Infosys Technologies Limited with more than six years of SAP consulting experience spanning automobile and computer manufacturing companies. He holds a bachelor’s degree in mechanical engineering and a post-graduate degree in business management.

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