• Reduction of steps involved in the purchasing/receipt/invoice/payment cycle (e.g., three-way match process) and clerical errors
  
  
• Elimination of price and quantity variances in the invoice, blocked invoices, purchase price variance, and goods receipt/invoice receipt (GR/IR) reconciliation
  
  
• Elimination of the steps for receiving invoices from vendors, filing and archiving the invoices, invoice validation process (three-way match), and entering the invoice into the system.
  
  
• Elimination of duplicate payments
  
  
• Freeing up cash flow by paying as you consume rather than as you receive goods

I will help you find the relevant master data and transaction data needed to perform a consignment process. Additionally, you will learn the configuration steps needed for stock determination across SAP ERP Central Component (SAP ECC) 6.0. However, the processes I describe also apply to previous versions, such as SAP R/3 4.5B, SAP R/3 4.6C, and SAP ECC 5.0. I have used a raw material relevant for the beverage industry as the consignment component.

The Vendor Consignment Process

Although 15 steps are needed to perform the consignment process across modules, don’t be fooled. The process is simple.

Step 1. Create the material master data. You can define any material type as a consignment good. The process to create a material in consignment is the same as for a normal material. To define a material in consignment, set the Special procurement value in the MRP 2 view to 10.

I also advise that you maintain the Stock det. grp (stock determination group) field to associate the stock determination rule at the plant and material level. This means that the company can potentially have this material as company-owned stock and vendor-owned stock at the same time. The stock determination should ensure that the company-owned stock is consumed first. Figure 1 shows the values of those fields in the MRP 2 view of the consignment material master.

Figure 1

Define material as consignment relevant (transaction MM01)

Step 2. Create vendor master data. You do not need to apply any special setting to create a vendor in consignment. Note that during the consignment settlement, the system retrieves the payment terms from the vendor’s Company Code data and not from the vendor’s purchasing view (Figure 2). It is crucial to check and correctly maintain the payment terms in the Company Code views of the vendor.

Figure 2

Define payment terms relevant for consignment settlements (transaction XK01)

The system takes those payment terms into consideration during the invoice settlement (via transaction MRKO) and you cannot override them during the invoice generation. To check which vendor’s payment terms are maintained in the system, use transaction S_ALR_87012086 or follow menu path Accounting > Financial Accounting > Accounts Payable > Information System > Reports for Accounts Payable Accounting > Master Data > Vendor List.

Step 3. Create a consignment info record. The consignment info record contains, along with logistics details, the vendor's price for material withdrawals in order from the consignment stock for different validity periods, along with logistic details. The purchasing department should be responsible for creating a consignment info record for the material in consignment and ensuring that the document has the right tax code, price, terms, and conditions. If you order consignment materials from several vendors, the system maintains a consignment stock for each vendor because the individual material quantities can have different prices.

To create a consignment info record, use transaction ME11 or go to Logistics > Materials Management > Purchasing > Master Data > Info Record > Create. Select Consignment in the Info Category after entering the data for Vendor, Material group, Purchasing Org., and Plant. Then, in the Organization Data 1 view of the document, enter the relevant data for tax and price. Click the Conditions button to specify further pricing details (Figure 3). The Info Category is not visible in Figure 3 because it is part of the selection screen.

Figure 3

Maintain price and tax code in the consignment info record (transaction ME11)

For SAP releases prior to 4.X, the purchasing department needs to maintain additional master data to enable a specific vendor in consignment. Use transaction MSK1 or go to Logistics > Materials Management > Materials Master > Special Stock > Vendor Consignment Goods > Create. This transaction is not valid in SAP ECC. If you use this transaction in SAP ECC, you see the error message shown in Figure 4.

Figure 4

Error message from old consignment transaction (transaction MSK1)

The information regarding price, conditions, and tax code stored in the consignment info record is critical to have consistent postings and help streamline the processes across departments. I recommend that you start the consignment process only after the purchasing department has checked and approved the data. To reverse any wrong bookings (generated by wrong information maintained in the consignment info record), I recommend that you read my article “Reverse Wrong Consignment Postings in Your SAP System” which was posted to the SCM Expert knowledgebase in January 2009.

Step 4. Create a consignment contract. You should already have an agreement in place between the supplier and the company facility to describe the conditions of the consignment process. The major logistic terms and conditions should be agreed on with the vendor for a specific period of time. Usually, if materials remain in consignment for a longer period of time (due to problems such as quality, timing, or price), this penalizes the vendors and could end up in the cancellation of the consignment process or higher prices to offset holding costs.

Creating a consignment contract is the same as for a regular contract. Use transaction ME31K or follow menu path Logistics > Materials Management > Purchasing > Outline agreement > Contract > Create. However, you must enter K (consignment) as the item category for the consignment. Entering K ensures that the system tracks the validity of the contract in terms of quantities and time period, and facilitates the creation of any call-off documents. K also makes the Consignment Info Record the main document for price conditions. Indeed, the price field in the consignment contract is gray-out (not available for input).

Step 5. Create a consignment scheduling agreement. A scheduling agreement is a commercial document adhered to for an entire fiscal year that stores the major logistic terms and agreed upon conditions and receives the goods on a regular basis exploiting material requirements planning (MRP) functionalities. Only with a scheduling agreement (via delivery lines) can you perform goods receipts on an ongoing basis. Creating a consignment scheduling agreement is the same as for a regular contract. Be sure to keep K as the item category. To create a scheduling agreement, use transaction ME31L or go to Logistics > Materials Management > Purchasing > Outline agreement > Scheduling Agreement > Create.

Step 6. Generate the source list. The source list is a critical piece of purchasing master data maintained by the purchasing department. It is used to optimize and streamline the purchasing cycle, especially when you use scheduling agreements. It also defines the regular list of suppliers for contracts or scheduling agreements (such as quantity or value contracts or scheduling agreements).

Enter the validity period, consignment contract, and item number. Mark the contract as a fixed source of supply, and make it relevant for MRP 1 and MRP 2 (when using scheduling agreements) to enable automatic delivery line generation out of the MRP run. To generate a source list, use transaction ME01 or menu path Logistics > Materials Management > Purchasing > Master Data > Source list> Maintain.

Step 7. Create a purchase requisition (PR). Typically the MRP run creates PRs, already released, for consignment. Alternatively, the material planning department can create PRs manually in the same way as for normal materials via transaction ME51N or by following menu path Logistics > Materials Management > Material Management > Purchasing > Purchase Requisition > Create. The main difference is that the item category for a consignment PR must be K.

Step 8. Assign and process PRs. One of a buyer’s most important daily tasks is assigning and processing the unassigned PRs. This process is also valid for consignment. To assign and process a PR, use transaction ME57 or follow menu path Logistics > Materials Management > Purchasing > Purchase Requisition > Follow-On Functions > Assign and Process.

Step 9. Create a consignment purchase order (PO). Next, you need to create a consignment PO to replenish your consignment stores. The procedure for creating the order is the same as for regular POs, via transaction ME21N. However, you must enter the value K as the item category. This ensures that the goods receipt posts to the consignment stores without having any financial impact and that an invoice receipt cannot be generated for the item via Logistics Invoice Verification as it is generated via transaction MRKO.

To create a PO for consignment, use transaction ME21N (Figure 5) or follow the menu path Logistics > Materials Management > Purchasing > Purchase Order > Create > Vendor/Supplying Plant Known.

Figure 5

Enter the value K as item category (transaction ME21N)

Step 10. Perform a goods receipt of consignment materials.  The receiving department performs the goods receipt against the delivery schedules or the PO using transaction MIGO with movement 101 K or follow menu path Logistics > Materials Management > Inventory Management > Goods Movement > Goods Movement (MIGO)  (Figure 6).

Figure 6

Post a goods receipt against a PO (transaction MIGO)

After the warehouse department has posted a goods receipt for consignment material, the consignment stock of the material increases. However, the material's valuated stock does not increase because the consignment stock still belongs to the vendor. The consignment stock is available for MRP and for production use. To display the stock in consignment, you can use the following transactions: MB54 (consignment stocks), MMBE (stock overview), or BMBC (batch information cockpit).

Step 11. Create a process order.  The production planning department creates the process order with reference to the planned order, taking into account the relevant production planning master data details (such as production version, which links the bill of material [BOM] with the recipe). Use transaction COR7 or follow menu path Logistics > Production – Process > Process Order > Process Order > Create > With a Planned Order (Figure 7).

Figure 7

Display consignment line item details (transaction COR7)

Step 12. Confirm the process order. The production planning department confirms the process order to update the components and produced materials inventory and the process order status from a costing point of view. Use transaction CORK or follow menu path Logistics > Production – Process > Process Order > Process Order > Confirmation > Enter for Order. During the confirmation process, you can also display the movements, vendor, and special stock indicator used for postings (Figure 8).

Figure 8

Confirm the process order (Transaction CORK)

Step 13. Share the settlement details with the vendor. Usually the purchasing department runs transaction MRKO in display mode and gets a confirmation for invoice creation. Alternatively, you can follow the menu path Logistics > Materials Management > Logistics Invoice Verification > Automatic Settlement > Consignment and Pipeline Settlement (Figure 9). Figure 10 shows the price and quantity of the consignment material displayed when you run the report.

Figure 9

Selection screen for consignment settlements (transaction MRKO)

Figure 10

Output screen for consignment settlements (transaction MRKO)

Step 14. Settle the consignment. Usually the accounts payable department runs transaction MRKO in posting mode to settle the consignment usage and then generates the corresponding invoice for vendor payment. It can also use menu path Logistics > Materials Management > Logistics Invoice Verification > Automatic Settlement > Consignment and Pipeline Settlement. This transaction collects all consignment postings done within a specific period of time via relevant consignment movements (i.e., 411K-412K-261k-262K).

Step 15. Pay the vendor. The treasury department performs the payment using transaction F110 or menu path Accounting > Financial Accounting > Accounts Payable > Periodic processing > Payments. The service management department usually schedules this transaction in a background job via transaction F110S.

Now that you have finished setting up the vendor consignment, from master data and transaction data point of view, I will help you find the relevant customizing settings needed to perform a consignment process using stock determination. In particular, you need to have the stock determination relevant for Inventory Management (IM), Warehouse Management (WM), and Production Process for Process Industries (PP/PI).

Stock Determination Relevant for IM, WM, and PP/PI

Stock determination is the rules that SAP uses to prioritize where to pull stock from — from a storage location or from a stock type. Now I will explain how to set up customization to use unrestricted (company-owned) stock before using consignment stock.

Step 1. Define strategies for stock determination. The system uses these strategies to determine which stock to use in which situations. You can use the Enterprise IMG transaction OSPX or go to Tools > Customizing > IMG > SPRO - Execute Project > SAP Reference IMG > SAP Customizing Implementation Guide > Materials Management > Inventory Management and Physical Inventory > Stock Determination > Define Strategies for Stock Determination. Create one or more stock determination groups for the plant that needs to use consignment stocks (Figure 11). Create one or more stock determination rules for the stock determination group (Figure 12).

Figure 11

Define the stock determination group (transaction OSPX)

Figure 12

Define the stock determination rule (transaction OSPX)

Create entries in the Stock Determination Header Table, which shows the combination of plant, groups, and rules from the previous two steps. At the detail level of the Stock Determination HeaderTable, prioritize based on Item table entries (Figure 13), pricing, and quantity. Note that if WM is used, then priority should be given to stock determination over WM by changing the value of the WM processing key to 1.

Figure 13

Maintain the Stock Determination Header Table details (transaction OSPX)

For every entry in the Stock Determination Header Table, create corresponding entries. The keys for these entries are the special stock indicator (S) and the Priority indicator. The Storage location (SLoc) field is optional. You must prioritize these combinations. Valid values for the special stock indicatorare F (unrestricted stock) and K (consignment stock) (Figure 14).

Figure 14

Maintain Stock Determination Item Table details (transaction OSPX)

Assign stock determination rules to the appropriate applications in the SAP system. In this case, for Inventory Management (IM), Production Process for Process Industries (PP/PI) and Warehouse Management (WM) modules.

Step 2. Manage Inventory. Assign stock determination rules, as created in the above steps, to IM movement types associated with goods issues for POs and any other movement types associated with transfer of stock from the supplier’s ownership to company ownership, as defined in the consignment agreement. To create a strategy for stock determination in IM, follow menu path Tools > Customizing > IMG > SPRO - Execute Project > SAP Reference IMG > SAP Customizing Implementation Guide > Materials Management > Inventory Management and Physical Inventory > Stock determination > Assign Stock Determination Rule in the Applications > Inventory Management. Figure 15 shows the most important direct movement type used to change the ownership of the consignment good from the vendor to the company.

Figure 15

Maintain stock determination rule per movement type (transaction SPRO)

Step 3. Process Orders. Assign stock determination rules to process order types, Plants and Operation types, as appropriate. Uncheck the No Stock Determination flag and check the BD (Automatic Batch Determination) check box. Then, create the entries for the Plant and each Process Order type (i.e., PI01) specifying the relevant Operation valid for each Plant/Process Order type combination.

To do so, you can also use the IMG transaction OPJ2 or follow menu path Tools > Customizing > IMG > SPRO - Execute Project > SAP Reference IMG > SAP Customizing Implementation Guide > Materials Management > Inventory Management and Physical Inventory > Stock determination > Assign Stock Determination Rule in the Applications > Production Order (Figure 16).

Figure 16

Maintain process order batch determination details (transaction OPJ2)

During the process order confirmation, you get a screen that allows you to choose which materials to consume, based on the stock determination strategy defined for your plant and order type. If you do not choose anything, the system automatically consumes the materials via backflush in the order described via these stock determination rules.

Step 4. Assign stock determination rules. In case of WM module in place, be sure to assign the stock determination rules to warehouse number, WM movement type, storage type, requirement type, and any other movement types associated with the transfer of stock from the supplier to the company, as defined in the consignment agreement. To assign stock determination rules, follow menu path Tools > Customizing > IMG > SPRO - Execute Project > SAP Reference IMG > SAP Customizing Implementation Guide > Materials Management > Inventory Management and Physical Inventory > Stock determination > Assign Stock Determination Rule in the Applications > Warehouse Management. For my example, I reported just the combination related to the movement 261 (Figure 17). However, you should also add the rest of the movements relevant for the consignment processes (e.g., 411).

Figure 17

Maintain stock determination rule for warehouse and movement type (transaction SPRO)

Limitations of Stock Determination

Through stock determination, you can set up stock determination strategies for plants and storage locations. The system determines the priority of IM storage locations for material usage in this process. To implement stock determination, assign the component material to a stock determination group in the material master. If you want to use stock determination for that material movement, you also need to assign a stock determination rule to the movement type. Then, through the IMG, you can set up the stock determination strategy for plant and storage location. Use transaction OSPX. Once you have set up the stock determination strategy properly, the system automatically allocates material according to stock strategy.

• If negative stock is allowed in customizing in an IM location, stock determination doesn’t work. The system only attempts to use materials out of the primary storage location.
  
  
• Stock determination does not support the staging of a material into multiple locations (for multiple resources) because it assigns materials to a process order from one location list. Different process orders can pull a component from different storage locations – as defined in the BOM/material list. You could also have multiple line items of the same material with different storage locations, but this is a manual process that you cannot automate without customization.
  
  
• I also advise that you consider implementing user exits for process orders creation/change to update the process order material list with the appropriate vendor, special stock indicator, and batches. You should specify the combination of material, vendor, and batch relevant for the automatic allocation for consignment in a custom table.

Gaetano Altavilla

Dr. Gaetano Altavilla is a senior SAP practice manager. His focus is on pre-sales, delivery of SAP application solutions for large international corporations, and SAP knowledge management in Europe, the Middle East, and Africa (EMEA).

In his 18 years of SAP application experience working for many multinational companies, such as Procter & Gamble and Hewlett-Packard, he has covered a wide range of ERP logistic areas, focusing on the MM, WM, SD, LES, PP, PP-PI, PLM (QM, PM, PS) modules, as welll as CRM (TFM), SRM (EBP), SCM (SAP APO), and MES (ME) components.

Dr. Altavilla holds a degree with first-class honors in mathematics from the University of Naples and is certified in many SAP modules: SAP Logistics Bootcamp, SAP MM, SD, LE (SHP/WM/LE), PP, PLM (PM, QM, PS), SRM, CRM, SCM (APO), SCM (TM), FI, CO, and Solution Manager. He also has experience in ABAP/4 and application link enabling (ALE) and IDocs. He has participated in numerous industry conferences, such as the SAP Skills Conference in Walldorf at SAP SE.

You may contact the author at Gaetano_altavilla@hotmail.com.

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