SAP MM Consignment Procurement Process: A Complete Guide

Effective inventory management is vital to the goals of cost reduction and increased operational flexibility for companies. The consignment process in SAP MM allows effective management of the supplier’s stock by preventing any obstacles to the smooth running of operations. Under the contemporary competitive scenario, a company generally has the difficult task of managing ideal stock quantities by coping with financial pressures. Here is where the consignment process helps win the game.
The consignment process allows vendors to store materials at the company without transferring ownership until consumption, therefore reducing carrying costs and financial liabilities. Moreover, the process provides better vendor relations through the establishment of inventory practices compatible with mutual trust and efficiency. This guide helps understand the specifics of the consignment process and its configuration through a step-by-step workflow toward an overall optimum procurement strategy. Keywords that relate to this guide include the consignment process in SAP MM, consignment SAP MM, and the consignment process in SAP SD.
What is the Consignment Process in SAP MM?
During the consignment process, vendors offer materials and place them on the company’s premises. However, ownership of the material still lies with the vendor until the company withdraws the stock for use. Payment is made only after the withdrawal. Such a unique set-up offers a lot of benefits such as lesser inventory carrying costs and better cash flow. Some important points about the consignment process:
- The company does not generate a purchasing document to obtain the consignment stock.
- The vendor sends the stock directly to the company’s storage location.
- Liability occurs only when the material is drawn from the consignment stock.
- Invoice payment terms generally occur at intervals of months.
This system works best for those businesses that involve selling items with high value or constantly changing rates so that inventory levels can be maintained without exposing the company to any risk of additional finances.
Advantages of Consignment Process in SAP MM
There are several benefits from the process of consignment of SAP MM for the firm. They are as follows.
- Less Liability through Finance: Materials are paid only when they are consumed; the cash is thereby freed to finance other activities carried out by operations.
- Improved Supplier Relationship: Timely liaison with suppliers keeps the supply chain functioning smoothly and enhances the mutual long-term relationship.
- Less Risk: In case of stock that is not used or leftover, liability falls on the vendor, and hence the financial loss due to obsolescence or overstocking is avoided.
- Flexibility: Materials can be withdrawn as and when needed. This ensures the company has only the right amount of stock at any given time.
Businesses will be able to focus on maximizing their inventory without having to bother with the front-end costs and risks of ownership through this consignment process.
How Does the Consignment Process Work?
The process of consignment in SAP MM includes the following steps:
- Create Consignment Info Record: It is used to define material, vendor, pricing, and tax details.
- Create Consignment Purchase Order: Order creation with item category “K” (Consignment).
- Goods Receipt: Update the vendor consignment stock in the system by posting the goods receipt.
- Transfer Posting: Move stock from consignment to company-owned inventory.
- Consignment Settlement: Clear out the liability of stock consumption, and settle liabilities for which a bill was paid during that specific billing cycle with the supplier of stock.
It enables seamless processing from receiving the consigned stock through to its settlement.
Configuration for the Consignment Process in SAP MM
To employ the consignment process in SAP MM, configurations are needed to be done.
Assign Standard Purchase Organization to Plant – T.Code: OMKI
- Go to SPRO > SAP Reference IMG > Enterprise Structure > Assignment > Materials Management > Assign Standard Purchasing Organization to Plant.
- The above step enables the linkages between plants and purchasing organizations to be established in consignment-related transactions.
Activate Consignment Info Record (T. Code: OMEV)
- Go to SPRO > SAP Reference IMG > Materials Management > General Settings for Material Management > Activate Consignment Prices via Info Records.
- Activate the mechanism of consignment pricing so that the prices are fetched automatically during the transactions.
Automatic Account Assignment for Material Posting (T. Code: OBYC):
- Automatic posting settings for:
- KON: Consignment Payable, for liabilities.
- AKO: Expenses/Revenue from Consignment Consumption, for tracking consumption costs.
- GBB-VBR: Offsetting Entry for Inventory Posting, balancing entries in the stock movement.
Completing these configurations will ensure the proper execution of consignment processes in SAP MM.
Step-by-Step Workflow of the Consignment Process
1. Consignment Info Record. T. Code: ME11
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Under “Info Type” select “Consignment” to enter data such as:
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Material description and details
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Supplier information
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Price
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Tax codes applicable
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Be sure that the price and tax values are correct since both are required to generate a purchase order as well as for settlement for consignment orders.
2. Consignment Purchase Order. T. Code: ME21N
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Purchase order creation using the “K” item category of Consignment.
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The price data is automatically obtained from the consignment info record, so it will automatically be consistent.
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Note: Conditions and invoice tabs are not available at the item level for the consignment purchase orders.
3. Post Goods Receipt (T. Code: MIGO)
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Use Movement type 101 K to post the receipt of goods.
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Stock will appear at the vendor’s consignment level which can be checked by T. Code MMBE.
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Since ownership is of the vendor, so far no accounting entries have been generated.
4. Transfer Posting (T. Code: MB1B or MIGO)
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Use movement type 411 K to transfer stock from vendor consignment to company-owned inventory.
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This movement officially marks the consumption of consignment stock by the company.
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Accounting entries for this transaction are as follows:
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Inventory Account (Dr.)
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Consignment Liability (Cr.)
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5. Consignment Settlement (T. Code: MRKO)
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Use transaction MRKO to settle liabilities for consumed stock.
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Steps:
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Select “Withdrawals Not Settled” to view pending settlements.
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Execute settlement to generate an invoice document.
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Settle the withdrawals with the system.m
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Accounting entry for settlement consists of:
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Consigned Liability Dr.
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Vendor’s Account Cr.
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Special Features of the Consignment Process
- Stock Visibility: Use T. Code MB 54 for viewing Consignment stock by supplier. This will ensure transparency.
- First-Time Stock Updates: Initial stock updates can be done by using movement type 561+K through transaction MB1C/MIGO for repulsion in stock.
- Consumption by Production Order: Use type 261 K is to be used for direct consumption of consignment stock linked directly with the production order.
- Cash Discounts: Include cash discounts in the consignment price to avoid accounting reconciliation at settlement time.
Integrating Consignment Process with SAP SD
SAP SD complements the consignment process in SAP MM by integrating sales and distribution into the managing process of the consignment stock. The integration provides benefits such as: Streamline movements of inventory to sales.
- Auto-invoice upon generation of the consignment order sales.
- Optimization of tracking visibility of levels of consignee stock against their consumption rate.
- This consolidation allows for adequate management of stock at consignee across business functions.
Advantages of Using the Consignment Process
- Optimized Inventory Management: It will manage the stock levels without having ownership costs.
- Improved Cash Flow: Payment is made only on stock consumed, thereby improving financial planning.
- Streamlined Operations: SAP MM automated processes eliminate errors and improve efficiency.
- Increased Vendor Collaboration: Promote closer relationships through transparent agreements and timely settlements.
Common Challenges and Solutions
- Challenge: Accurate tracking of consignment stock.
Solution: Use T. Codes like MB5toto to provide detailed reports of the amount of stocks versus a particular vendor.
- Challenge: Duplicate settlements.
Solution: Attach responsibility clearly and track the settlement process using MRKO
- Challenge: Complex pricing structures
Solution: Maintain consignment info records with the latest pricing and tax information
Conclusion
One of the most efficient ways to deal with vendor-owned inventory is in the consignment process of SAP MM. Its use can help businesses lower their costs, boost cash flow, and strengthen relationships with vendors. As such, its flexibility and capability to integrate different processes make it suitable for very dynamic industry needs. Whether you are trying to optimize your inventory management or streamline procurement strategies, understanding the consignment process in SAP MM, consignment in SAP MM, and how it integrates with the consignment process in SAP SD is of utmost importance. Start exploring its full potential today!
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