Outsourcing manufacturing processes offers several benefits that can enhance a company’s operational efficiency, cost-effectiveness, and overall competitiveness.

1. Cost Savings:

• Lower Labour Costs: Outsourcing to countries with lower labour costs can significantly reduce production expenses.
  
• Reduced Overhead: Outsourcing eliminates the need for investment in expensive machinery, factory space, and other infrastructure.

2. Focus on Core Competencies:

• Companies can concentrate on their core business activities, such as research and development, marketing, and sales, while leaving the manufacturing to specialized firms.

3. Access to Expertise and Technology:

• Outsourcing partners often have specialized skills, advanced technologies, and industry expertise that can improve product quality and innovation.

4. Scalability and Flexibility:

• Companies can quickly scale production up or down in response to market demand without the constraints of fixed costs associated with owning and operating manufacturing facilities.

5. Risk Mitigation:

• Outsourcing can spread risk by diversifying the supply chain, reducing the impact of localized disruptions.
  
• It also reduces the financial risk of investing in manufacturing facilities and technology that may become obsolete.

6. Faster Time to Market:

• Specialized manufacturers can often produce goods more quickly due to their expertise and streamlined processes, speeding up time-to-market for new products.

7. Access to Global Markets:

• Outsourcing can provide access to international markets, enabling companies to establish a global presence and reach customers more effectively.

8. Regulatory Compliance:

• Outsourcing partners, particularly those with experience in international markets, are often well-versed in regulatory requirements, helping companies comply with local laws and standards.

9. Capital Conservation:

• By avoiding the large capital expenditures associated with building and maintaining manufacturing facilities, companies can conserve capital for other strategic investments.

10. Enhanced Supply Chain Management:

• Outsourcing can lead to more efficient supply chain management by leveraging the expertise of specialized firms in logistics and supply chain optimization.

Multi-tier Collaborative Outsourcing Manufacturing Process with SAP Business Network

Multi-tier Collaborative Outsourcing Manufacturing on SAP Business Network involves coordinated efforts across multiple tiers of suppliers and manufacturers, enhancing visibility, communication, and efficiency throughout the supply chain. This approach leverages the integration of SAP Business Network with SAP S/4HANA to facilitate seamless collaboration and optimize the entire production process.

• Provide CMO’s with near real time visibility into demand forecast.
  
• Enable CMO’s to commit to buyer’s requested forecast quantities to manage constrained planning process.
  
• Visibility for CMOs WIP (Work-in-progress) Inventory data, Component inventory visibility , drop shipment process between Component Supplier and CMO etc.
  
• Management of PO Batch # Assignment for batch genealogy, Earlier visibility into batch quality and results
  
• Enables contract manufacturers to report receipt and consumption of components with relevant batch information or Serial no information as relevant.

Processes Steps

Planning Process

• The Planner of the Buying Organization perform the planning for FG to be produced according to the planning cycle/ horizon. During the planning process, considering the In-house plant capacity and available resources planner take decision on In-house production as well as forecast the allocated Quantities to be manufactured by the by the CMO (Contract Manufacturers) in SAP IBP.
  
• The Contract Manufactures can provide the commitment to the Forecast depending on available capacity. They can also provide upside/downside capacity availability on SAP Business Network.
  
• The Planner of the buying organization can re-plan and adjust the allocation as per CMOs forecast commitments and capacity availabilities in SAP IBP.

Multi-tier Purchase Order for Components Process

• The BOM (Bill of Material) explosions for the forecast committed Contract Manufacturing plan / quantity of FG (Finished Goods) is performed and the Quantity of each components required is derived. Based on availability of Inventory of the components, the multi-tier purchase order for components is released to the component suppliers and copy is shared with CMO for transparency and visibility.
  
• The Component supplier would be directly shipping the components to the CMO location / plant as mentioned in the multi-tier purchase order.
  
• The CMO would receive the components against the Multi-tier Component Purchase order on Business Network and corresponding receiving document would be created automatically in Buyer’s SAP S4HANA by giving visibility component inventory present at the CMO premise.

Copy Supplier – Multi-tier Purchase Order in SAP S4HANA

Drop Ship the Components to Directly to CMO

Multi-tier PO Visibility to CMO as well as Components supplier on SAP Business Network

Components Receipt by CMO referencing to ASN created by Componenet Supplier

Component Inventory at CMO Premise on SAP Business Network

Sub-Contracting Purchase Order for FG production to CMO.

• The buyer would create a Sub-Contract Purchase Order (Item Type L) for manufacturing of FG (Finished Good) product to the CMO. The Sub-contract order would have BOM details / components required for production / assembly of FG product.
  
• The CMO would start production process steps / assembly or fabrication process steps. CMO can share the WIP – Work-in-progress Inventory details using Manufacturing visibility functionality of SAP Business Network
  
• The CMO can report the Realtime Component consumption details during the FG production processes. The SAP business network support both real time ( WIP level) consumption posting as well as Backflush scenario ( all Component consumption posting at the end of FG production).
  
• This process provides component consumption tracking , Component inventory & WIP inventory visibility and reconciliation of Components etc.
  
• During this process, batch genealogy or Serial number tracking are maintained as necessary. For perishable items, the self-life can be tracked too.
  
• The Delivery of FG with ASN process as well as digital invoice submission for CMO is supported on SAP Business Network.

Sub-contracting PO on SAP Business Network

Component Consumption Reporting by CMO

Integrations between S4HANA and SAP Business Network for Sub-Contracting Process

Integrating SAP S/4HANA with SAP Business Network for the subcontracting process using the Cloud Integration Gateway (CIG) involves below steps.

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Key Components

1. Data Sharing:

• Sales Data: Customers share sales data with suppliers to provide insights into demand patterns.
  
• Inventory Levels: Real-time inventory levels are communicated to the supplier.
  
• Forecasts: Customers may share their demand forecasts, which suppliers use to plan production and distribution.

2. Automated Replenishment:

• Suppliers use inventory data to trigger replenishment orders automatically when stock levels fall below predefined thresholds.
  
• Algorithms and software systems can optimize order quantities and timing to balance supply with demand.

3. Agreements and Contracts:

• Service level agreements (SLAs) outline the performance metrics, such as fill rates, delivery times, and inventory levels.
  
• Contracts define the responsibilities, processes, and financial terms between the supplier and customer.

4. Technology Integration:

• Advanced IT systems and ERP software facilitate seamless data exchange and processing.

Benefits for Buyer

1. Improved Inventory Management:

• Reduces stockouts and excess inventory, leading to lower holding costs and improved cash flow.
  
• Enhances inventory accuracy and visibility across the supply chain.

2. Cost Savings:

• Reduces administrative costs associated with placing and managing orders.
  
• Economies of scale in transportation and order processing can be achieved.
  
• Improve the working capital with optimized inventory.

3. Increased Service Levels:

• Higher fill rates and improved delivery performance enhance customer satisfaction.
  
• Responsive and flexible supply chain capable of adapting to demand fluctuations.
  
• Improve service levels by having the product at the right time and location.

4. Efficiency Gains:

• Streamlined replenishment processes reduce lead times and improve supply chain responsiveness.
  
• Better alignment of supply and demand reduces waste and inefficiencies.
  
• Reduce planning and ordering costs by shifting the responsibility to the supplier.

Benefits for Supplier

• Visibility of the buyer’s demand and inventory data enables more accurate forecasting and planning.
  
• Reduce buyer ordering errors resulting in a decrease in potential returns.
  
• Visibility of stock levels enables proper prioritization of orders.
  
• Stabilizing the timing of order generation based on a predefined basis improves supply reliability.
  
• A true partnership is formed between the buyer and the supplier. They work closer together and strengthen their ties.

Replenishment based Supplier Managed Inventory Collaboration with SAP Business Network

SMI – Supplier Managed Inventory provides foundational capability for Supply Chain Collaboration between Buyers and Suppliers by sharing inventory, demand information and replenishment of inventory based on established Min/Max levels.

There are two variation of Supplier Managed Inventory Collaboration process as shown below

SMI Process Flow (Planned Shipment) with Scheduling Agreement

SMI Process Flow (Replenishment Order)

SMI Process Flow (Planned Shipment) with Scheduling Agreement process explanation

Step 1 –> The Material master is configured for SMI process in the MRP Area as shown below.

Step 2 –>Creation of Scheduling Agreement Release with pricing details.

Step 3 –> Extract SMI relevant data by executing T-code ARBCIG_PROA_SMI_EXTRACT in SAP S4HANA and send them to SAP Business Network.

Step 4 –> SMI key figure configurations and formula. Custom key figures can be added and associated formula can configure as necessary.

Step 5 –> Supplier View of SMI Relevant data and Key Figures including (Stock on hand , Min / Max, projected stock , Lead times , gross demand , stock out situations etc.

Supplier can get the insights with respect to Inventory situations over the time series in a graphical manner.

SAP Business network can calculate using formulas and provide insights with respect to Projected stock situations , Days of Inventory etc.

Based on information available and supplier side situation, supplier can create planned shipment from SAP Business Network as shown below.

Step 5 –> Once the supplier submit the Planned Shipment, with integration the Planned shipment quantity would be added as Delivery schedule line of the Scheduling Agreement. The rest of the process of ASN and GR and Invoice would continue as per the normal scenarios.

Key figure Descriptions

• ASN Received: The total Goods Received quantity is an AN Calculated based on the ASN that was received against the ASN Delivery Date referencing the time bucket.
  
• Firmed Orders: The total Purchase Order or Scheduling Agreement quantity is an AN Calculated where the delivery date matches the time bucket.
  
• Gross Demand: The total gross requirements in the buyer’s system that was transferred to AN via cXML element Gross Demand.
  
• In-Transit: The In-transit quantity is an AN Calculated value based on the ASN created by Supplier where the delivery date matches the time bucket. The In-transit will not include ASN’s that are Goods Receipted.
  
• Maximum Proposal: The Maximum Proposal is AN Calculated formula driven Key figure where Maximum Proposal Stock is the quantity needed to attain the Maximum Stock level. The formula that is represented is “Projected Stock – Max Stock”
  
• Minimum Proposal: The Minimum Proposal is AN Calculated formula driven Key figure where Minimum Proposal Stock is the quantity needed to attain the Minimum Stock level. The formula that is represented is “Projected Stock – Minimum Stock”.
  
• Net Requirement: The Total Net Requirement in the buyers system that was transferred to AN via cXML element Net Requirement.
  
• Order Received: The total Order Received quantity is an AN Calculated based on the Goods Received against the PO in the AN based on the PO delivery Date.
  
• Planned Shipment: The Planned Shipment is the Supplier entered value based on Supplier production schedule.
  
• Target Stock: The Total Target Stock maintained in the buyers system that was transferred to AN via cXML element Target Stock.
  
• Total Shipment: AN Calculated Key figure that represents the total Shipment(In-transit or Received) for each time period based on the Delivery Date of the ASN.
  
• Projected Stock: The projected stock is a key figure that is critical for Inventory visibility. AN calculates the projected stock from demands, receipts, and stocks. The projected stock provides information about the demand/stock balance of a location product in a period. The projected stock is the stock of a product that is expected to be available at the location at the end of a period. A Buyer or Supplier can ascertain from this key figure how the demand/stock balance develops over time and whether critical stock situations occur.
  
• Current time period projected stock: Today’s projected stock = Stock + all receipts with delivery date today – all demands with demand date today.
  
• Projected stock on any later day: Projected stock of this day = projected stock of the previous day + receipts with delivery date on this day − demands with demand date on this day.

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