Consignment Process in SAP MM | Item Category "K" | End to End Cycle in SAP | FI entries explained

SAP MM Learning Hub

7 chapters7 takeaways11 key terms5 questions

Overview

This video explains the vendor consignment process in SAP S/4HANA MM, a method for managing inventory where a vendor supplies materials but retains ownership until they are withdrawn for use. It contrasts this with traditional purchasing, highlighting how consignment reduces upfront capital expenditure and inventory holding burdens. The tutorial details the end-to-end cycle in SAP, including configuration, creating consignment purchase orders, goods receipt, stock withdrawal for warehouse or consumption, and the settlement process using transaction MRKO. It also explains the relevant financial accounting entries at each stage.

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Chapters

Traditional purchasing requires upfront payment and holding large inventory, tying up capital.
Consignment allows a company to receive materials from a vendor but only pay for what is actually used.
In consignment, the vendor retains ownership of the stock until it's withdrawn from the consignment warehouse.
This process significantly reduces the company's capital tied up in inventory and simplifies inventory management.

This chapter clarifies the core business problem that consignment solves, emphasizing its financial benefits by reducing capital outlay and inventory risk.

A bicycle manufacturer needing bearings can avoid paying for a large stock upfront by using consignment, only paying the vendor for the exact number of bearings used in production.

Assign a standard purchase organization to the relevant plant in SAP.
Create a consignment info record (using transaction ME11) for the specific vendor-material combination, defining the agreed-upon price.
This info record is crucial as it holds the pricing that will be used during withdrawal and settlement.

Proper configuration and setup are foundational for the consignment process to function correctly within SAP, ensuring accurate pricing and tracking.

Setting up a consignment info record with a price of 10 Rupees per bearing for a specific vendor and material.

Create a purchase order using transaction ME21N.
Crucially, assign the item category 'K' to the PO line item to designate it as a consignment PO.
No price or value is entered in the PO itself; these details are pulled from the consignment info record.
The PO specifies the material, quantity, vendor, and plant.

The item category 'K' is the system's trigger to treat the PO as a consignment order, bypassing standard valuation at the time of PO creation.

Creating a PO for 1000 bearings with item category 'K', without entering a price per bearing.

Perform the goods receipt using transaction MIGO against the consignment PO.
This GR posts the material into the company's warehouse but into a special 'consignment stock' category.
Importantly, this GR does NOT trigger any financial accounting entries or vendor payment.
The stock can be verified using transaction MB54 or MMBE, showing it under 'Vendor Consignment'.

The GR process in consignment is unique because it acknowledges the physical receipt of goods without creating a liability or impacting financial accounts until the material is consumed.

Receiving 1000 bearings via MIGO against the consignment PO, which appears in MB54 as vendor consignment stock.

Withdrawal can be done either to the company's own warehouse stock or directly for consumption.
Withdrawal to own warehouse uses movement type 411K in MIGO (Transfer Posting).
Withdrawal for consumption uses movement type 201K in MIGO (Goods Issue).
These withdrawal actions are when financial accounting entries are generated.

This is the critical step where ownership effectively transfers to the company, triggering financial postings and creating a payable liability.

Using movement type 411K to move 10 bearings from vendor consignment to the company's own storage location, creating an inventory value and crediting GR/IR.

When withdrawing to own warehouse (411K), GR/IR (Goods Receipt/Invoice Receipt) account is credited, and Inventory account is debited.
When withdrawing for consumption (201K), GR/IR account is credited, and the Consumption account (e.g., Cost Center) is debited.
The value used for these postings is based on the price defined in the consignment info record.

Understanding these entries clarifies how the system tracks the value of consumed materials and builds the liability for vendor payment.

A 10-bearing withdrawal at 10 Rupees each results in a 100 Rupee credit to GR/IR and a 100 Rupee debit to Inventory or Consumption.

Vendor settlement is performed periodically using transaction MRKO.
This transaction identifies all withdrawals from consignment stock that need to be settled.
MRKO generates accounting entries: it debits the GR/IR account and creates a vendor liability.
This liability is then cleared through regular payment runs (e.g., F-53 or automatic payment programs).

MRKO is the mechanism that formalizes the payment to the vendor based on actual consumption, completing the financial cycle of the consignment process.

Running MRKO for a specific vendor shows accumulated withdrawals, and after execution, a vendor liability is created for payment.

Key takeaways

1Vendor consignment in SAP MM allows businesses to hold inventory without immediate payment, deferring costs until materials are consumed.
2The process hinges on the item category 'K' in purchase orders and the consignment info record for pricing.
3Goods receipt for consignment stock does not create financial liability; payment is triggered only upon stock withdrawal.
4Withdrawal movement types (411K for warehouse, 201K for consumption) are key to initiating financial postings.
5The GR/IR account acts as a clearing account, accumulating the value of withdrawn goods before settlement.
6Transaction MRKO is essential for periodic settlement, converting accumulated GR/IR postings into a formal vendor liability.
7Consignment significantly improves cash flow and reduces the financial burden of carrying large inventories.

Key terms

Vendor ConsignmentItem Category KConsignment Info RecordPurchase Order (PO)Goods Receipt (GR)Consignment StockTransfer Posting (411K)Goods Issue for Consumption (201K)Consignment Settlement (MRKO)GR/IR AccountVendor Liability

Test your understanding

1What is the primary financial advantage of using the vendor consignment process compared to traditional purchasing?
2How does the system differentiate a consignment purchase order from a standard purchase order in SAP?
3Explain why no financial accounting document is generated during the goods receipt of consignment stock.
4What are the two main movement types used for withdrawing consignment stock, and what is the purpose of each?
5How does the transaction MRKO finalize the consignment process from a financial perspective?