SAP SD Third party process / Drop shipment process explained at micro level

Third Party process:

1.                 Purpose of the Document

2.                 Introduction

3.                 Step by Step third party order Process flow

4.                 Importance of material type

5.                 Automatic and Manual third party orders

6.                 Processing third party orders in purchasing

7.                 Configuration of third party process in SPRO

8.                 Possible scenarios in third party process

9.                 One cycle of third party process in SAP

10.             Conclusion

                                      

1.  Purpose of the document:

This document details the basics of third party order processing. All the information given in this document is a part of project based and general learning. This document talks about the importance of the third party order processing and the general configuration required in SAP for the successful operation.

2.  Introduction:

Third party sales is a typical scenario in today’s competing global economies, where the “best of breed” products are manufactured for a given company by smaller niche manufacturers or associated business partners. Third party order processing is a special business process in sales, in third party sales scenario company does not deliver the items requested by a customer instead its been delivered by a third party vendor. The third party vendor ships the goods directly to the customer and bills the company. Process flow of the third party order can be understood from the following picture.

3.  Step by step third party sales order process flow:  

1.    The Company creates a sales order and based upon the configuration item category (ZTAS) is determined automatically or has to be entered manually. The system automatically creates a purchase requisition item for each third-party item in the sales order

2.    PO is created with reference to the Purchase Requisition by the company and sent to the vendor.

3.    The vendor delivers the goods to the customer. Delivery will not be displayed in the sales document flow as delivery is not recorded in SAP.

4.    The vendor issues an invoice to the company. The invoice is entered in the system in Invoice Verification. The invoice receipt is necessary (depending upon configuration) before a billing document can be created in SD.

5.    The company issues an invoice to the customer. If relevance for billing indicator is set to B (relevant for order-related billing on the basis of the order quantity), billing can be done immediately after creation of sales order. If the indicator is set to F (relevant to order-related billing on the basis of the invoice quantity), billing can be done only after the invoice from the vendor has been received and processed by purchasing department. In the standard system, item category TAS (third-party order processing) has been given billing-relevance indicator F. 

4.  Importance of Material type:

The processing of third-party orders is controlled via material types. Material types define whether a material is produced only internally can be ordered only from third-party vendors, or whether both are possible. For example, a material that is defined as a trading good can only be ordered from a third-party vendor. In case of trading goods the item category group is BANS in sales: Sales org 2 tab and Procurement type is marked as F (External Procurement) in MRP 2 Tab. However, if you manufacture your own finished products, you may also want, from time to time, to be able to order the same type of product from other vendors. In this scenario the item category group is NORM in sales: Sales org 2 tab and Procurement type is marked as X (Both external and internal procurement). Determination of item category in sales order for both these scenarios is explained below.

5.  Automatic and Manual Third-Party Orders:

Third-party items can be created automatically by the system, depending on the configuration of the system. However, a standard item can also be changed to a third-party item manually during sales order processing

1. Automatic third-party order processing

If a material is always delivered from one or more third-party vendors, one can specify in the material master that the material is a third-party item. During subsequent sales order processing, the system automatically determines the appropriate item category for a third-party item: ZTAS. To specify a material as a third-party item, enter BANS in the Item category group field in the Sales 2 screen of the material master record.

• Manual third-party order processing

In the case of a material that is delivered normally but occasionally need to be ordered from a third-party vendor is controlled by overwriting the item category during sales order processing. For a material that is delivered normally has an item category group NORM in the material master. If, such material has to be processed as a third-party material, item category of the material in the sales order has to be changed from TAN to ZTAS. The item is then processed as third-party item.

6.  Processing Third-Party Orders in Purchasing:

When you save a sales order that contains one or more third-party items, the system automatically creates a purchase requisition in Purchasing. Each third-party item in a sales order automatically generates a corresponding purchase requisition item. During creation of the requisition, the system automatically determines a vendor for each requisition item. If a sales order item has more than one schedule line, the system creates a purchase requisition item for each schedule line.

Purchase orders are created from purchase requisitions in the usual way. During creation of the purchase order, the system automatically copies the delivery address of your customer from the corresponding sales order. In a sales order, you can enter purchase order texts for each third-party item. When you create the corresponding purchase order, the texts are automatically copied into the purchase order. The number of the purchase order appears in the document flow information of the sales order.

All changes made in the purchase order are automatically made in the sales order as well. For example, if the vendor confirms quantities and delivery dates different from those you request and enters them in the purchase order, the revised data is automatically copied into the sales order.

                                          

7.  Configuration of third party process in SPRO:

The configuration and other settings in SAP for third party processing is a joint activity between MM and SD module. Following are the configuration that has to be performed from sales (SD) side:

1. Sales Document type:

Standard order type OR can be used or a new document type can be created using OR as a reference only for third party scenario.

2. Item category: definition

The Item Category TAS is the standard available in the SAP, TAS can be used or a new item category (example ZTAS) can be created using TAS as a reference. Screen shot of the customized third party item category ZTAS is shown below:

          Things to Note:

1.   Billing Relevance

2.   Relevant for Delivery

The checkbox of item relevant for delivery is not checked but the billing relevance is active, it means the reference document for creation of billing document will be sales order not the delivery

          Importance of billing relevance field:

• If relevant for billing indicator for the item category has been set to B (relevant for order-related billing on the basis of the order quantity) in Customizing, the system includes the order in the billing due list immediately.

• If relevant for billing indicator for the item category has been set to F (relevant to order-related billing on the basis of the invoice quantity), the system does not include the order in the billing due list until an invoice from the vendor has been received and processed by the purchasing department.

3. Item category determination (ZTAS):

This is maintained as shown below in the screenshot:

Combination of Order type (ZOS), Item category group (BANS) has been assigned default item category as ZTAS.

Other option is to manually change the standard item category TAN to ZTAS, provided customization for the manual determination has been done. The following screenshot indicates the same.

4. Schedule line category – Definition:

The standard schedule line category CS is determined or a new item category can be used using CS as a reference for example ZS

The screen shot depicting the important fields:

• As the company doesn’t issue the goods, hence no movement type assigned and is not set as being relevant for delivery.

• Here, Item category field defines whether goods receipt or Invoice receipt is required or not. In this case the entry ‘5’ implies that the goods receipt is not required.

5. Schedule line category determination:

The schedule line gets automatically determined:

1. Using the key combination for item category / MRP type.( MRP type from the material master record)

2. Using the key combination for item category / no MRP type.

Following configuration has to be performed from Purchasing (MM) side:

1. Purchase Requisition type:  NB (assigned in the schedule line category previously)

It is linked to Item category ‘S’ and to purchase order ‘NB’.

As shown in the screenshot, the Item Category “S” should be used.

It’s important to know how the item category “5” that is assigned in schedule line linked to item category “S” in Purchase requisition. Following is the explanation of how is it controlled.

The item category “5” (Third party) assigned in Schedule line category and the item category “S” assigned to Purchase requisition is linked through a table in SPRO

SPROàPurchasingàDefine External representation of Item categories.

The check box “PO item linked “is not checked: It implies that the GR is not compulsory. But the check box “Changeable in PO “is checked which tells it can be changed in PO.

The difference for a standard item scenario can be seen in the details for “standard” where GR and IR both are compulsory as shown below in the screenshot.

8.        Possible Scenarios in third party process

As mentioned in initial part of the document, there are two types of possible scenarios possible in which:

1. Delivery happens without Goods Receipt in the system
2. Delivery happens with Goods Receipt in the system

Both the scenarios are described as follows and explain the important differences in configuration for both scenarios to function in SAP.

Delivery without goods receipt:

The whole process and the activities in SAP system are summarized as below.

When the customer orders a third party item in the order in SAP, the item category ZTAS is determined. In turn the schedule line category ZS is determined. The purchase requisition NB is automatically created. During creation of the requisition, the system automatically determines a vendor for each requisition item. If a sales order item has more than one schedule line, the system creates a purchase requisition item for each schedule line.

Purchase orders are created from purchase requisitions in the usual way (Use tcode ME21n, create purchase order in reference to Purchase requisition). During creation of the purchase order, the system automatically copies the delivery address of the customer from the corresponding sales order. In a sales order, also it’s possible to enter purchase order texts for each third-party item. When the corresponding purchase order is created, the texts are automatically copied into the purchase order.

The number of the purchase order appears in the document flow information of the sales order.

The changes that are done in Purchase order, depending on confirmation of vendor on quantity and date, are automatically copied into the sales orders.

However if any changes are performed in the sales order, then these changes have to be manually executed in the purchase order since this is not updated automatically.

Once the vendor sends the invoice, the purchase department does an invoice receipt.

Note: Here the purchase department doesn’t perform any goods receipt (GR).

Then the sales order appears in billing due list as “no delivery” indicator was set for third party order. If Indicator had been set as ‘F’ then the system included the sales order in billing due list only after Invoice receipt from vendor and the Quantity copied into the billing document will be from Invoice receipt and not from Sales order.

Delivery with Goods Receipt

The Process Diagram for delivery with ‘GR On’ is as follows:

	6. Invoice

 

 

Since a third-party order involves a movement from the vendor direct to the customer, Inventory Management is not in any way affected. Even if you wish to document the movement in the system, however, you can create a goods receipt for the third-party order. The goods receipt has the same effect as a goods receipt for a purchase order with account assignment. No stock update is made, as the goods receipt is posted to consumption. The value of the purchase order is posted to a GR/IR clearing account for the purposes of Invoice verification. The goods receipt can be tracked in the PO history.

1. Sales order:  The Company enters a third-party item in a sales order. The system automatically creates a purchase requisition item for each third-party item in the sales order. The sales order may consist of partially of third-party items or all items are third party.

2. Purchase order to vendor: Company enters a purchase order with a third-party item with reference to the purchase requisition created previously.

3. Shipping to customer: The vendor supplies the goods to the customer.

4. Goods Receipt: This is entered in the system and a document is generated. This is done only for a value update.

5. Vendor invoice: The vendor XYZ issues an invoice. The invoice is entered in the system in Invoice Verification only after the goods receipt has been made in the system. The invoice receipt is necessary before a billing document can be created in SD.

6. Invoice the customer: A billing document for the sales order is created in SD. Depending on the Configuration settings (whether or not the billing-relevant indicator is set for the item category in SD), the billing document is drawn up on the basis of the order quantity or on the basis of the quantity specified in the vendor invoice. If the customer is billed based on the order quantity, the billing document can be created immediately after the sales order is entered. If the customer is billed on the basis of the quantity specified in the vendor invoice, the billing document can only be created after the vendor invoice has been entered in Invoice Verification.

9.      One Full cycle of Third Party Order flow with good receipt:

Sales order is created by the company (Item category ZTAS is automatically determined)

Schedule line category ZS is determined and Purchase Requisition number in automatically generated

        While displaying the purchase requisition (ME53N) we can see the PO which is     created (ME21N) using purchase requisition as reference.

          In purchase order history we can see the follow on documents like Goods receipt and Invoice receipt

           The address of the customer (Ship to party) is automatically determined in the PO. It can be seen in the delivery tab (Item detail) of the PO

        Creating billing document with reference to the sales order. This invoice is sent to the customer. 

10. Conclusion:

Third Party Order Processing is a special business process in sales in SAP and an important process in global business environment. Companies across the globe are using third party sales to get competitive advantage. This document has described the Third Party processing from Business process as well as SAP perspective. Understanding of this process is important and various routines in SAP can be used to meet any specific business/project requirement other than what is mentioned in this document.