Consignment Process in SAP MM: Process, Returns & Accounting

How the Consignment Process in SAP MM Works: Process Flow, Returns, and Accounting

If you've ever wondered what companies do with inventory that is owned by vendors and stored in their own warehouses but do not own it until it is used The answer lies in the SAP Material Management's best-practice procurement models: consignment processing of stock. If you are planning to pursue an profession working in SAP Materials Management, understanding the consignment procedure in SAP MM is not a luxury as it is a crucial capability that can be seen in real-world scenarios across the automotive, manufacturing retail, pharma, and other industries.

In this article we will go through the entire SAP consignment procedure flow as well as the underlying configuration for it, the way the returns of consignments are dealt with and, crucially -- the way consignment accounting within SAP actually operates behind the behind the scenes. It doesn't matter if you're an operational consultant, a user or a student who is preparing to take the SAP MM interview, this guide will provide you with an in-depth, comprehensive understanding of the subject.

What Is Consignment Stock in SAP MM?

Consignment stock is a term used to describe material which is stored on the purchaser's (your firm's) premises, but legally remains with the seller. The ownership does not transfer and there is no risk of liability until the item is actually taken away to use for production or consumption.

This model will benefit both participants:

• The purchaser does not have to purchase the stock until it's utilized to increase cash flow, thereby decreasing risk of inventory.
• The seller receives a certain storage space nearer to the client which often results in faster replenishment and more solid business relations.

In SAP terminology this stock is classified as a specific kind of stock "K" (Consignment) and is controlled at the level of the vendor which means that the system tracks precisely the amount of consignment stock that belongs to which vendor in which facility and storage location.

Why Companies Use the Consignment Process

Before diving into transactions and configuration It is helpful to comprehend the reason why businesses decide to use this type of model at all.

• No upfront obligation The ownership of the property remains at the vendor, no accounts payable liability arises when goods are received.
• Reducing inventory investment The company that purchases the stock does not tie up the working capital of stock that isn't being used.
• Better collaboration between vendors Vendors are rewarded to ensure buffer stocks are available which reduces the number of stockouts.
• Simple valuation The only quantities that are consumed are settled, ensuring the cost tracking simple and based on consumption.

This is particularly common in components with high value, such as bulk raw materials and components employed to produce continuous products.

Prerequisites and Master Data Setup

Before the consignment procedure can be executed in SAP MM certain master data elements must be present.

1. Vendor Master Setup

The vendor should be established using the correct purchasing organization details. A special master flag for the vendor is needed specifically to consign, however, the vendor must be assigned to the appropriate purchasing organization and the plant.

2. Info Record for Consignment

The most important setting up step. A Purchase Information Record should be created with the category of information selected as "Consignment". This record holds:

• The price of consignment for the material
• Price unit and currency
• Period of validity
• Code of taxation (if applicable)

If there is no consignment information document, the computer is unable to determine the settlement amount in the liability posting step and the process won't work.

3. Material Master

The material should be maintained using the standard MM views (Purchasing MRP, Accounting, and Purchasing). There is no need for a special indicator on the material master since"K" is the "K" stock type is determined by the type of movement and the special stock indicator that is utilized during transactions.

Step-by-Step: SAP Consignment Process Flow

Let's look at the complete flow of consignment within SAP MM from the procurement phase to the consumption.

Step 1: Create the Consignment Info Record

Utilizing the transaction ME11 in which the information record is created using the category of information "Consignment." This is what defines the price that the vendor is eventually paid after the stock has been consumed.

Step 2: Create a Consignment Purchase Order

A consignment purchase order can be made using ME21N and has the item's category changed to "K" (Consignment). Contrary to standard POs there is no need for the net price to be entered manually because pricing is gathered from the consignment information document at the settlement time and not when the PO is created.

The most important points to consider about the PO for consignment:

• A receipt verification document is not required for the receipt of goods.
• The value posting does not take place when goods are received. acceptance.
• The PO serves primarily as a tracking and planning document.

Step 3: Goods Receipt Against the Consignment PO

The receipt of goods is issued by using MIGO with the movement type 101 (with the special indicator for stock "K" triggered automatically because of the item's category). This stage:

• The quantity of stock increases with consignment stocks (special stocks "K").
• There is no accounting document made since the item is the property of the vendor.
• Only a material document can be created and not a financial document.

This is the main distinction from conventional procurement, in which a GR/IR clearance entry is made immediately.

Step 4: Stock Monitoring

At this point, consignment inventory is stored in the inventory of your plant, but remains owned by the vendor. It is possible to monitor consignment stock levels with traditional stock reports, such as or MB52 and MMBE which shows consignment stock appears in a separate report from your own restricted stock.

The stock is available to be consumed in order of production, sale orders or direct supply to cost centers however, ownership transfer takes place at the point of purchase or consumption.

Step 5: Consumption of Consignment Stock

Consumption can occur in a variety of ways based on the business context:

• Goods issued to an expense center using the movement form of 201 K
• Consumption of production orders with motion type 261K
• Direct consumption during goods receipt for production

Once consignment stock has been consumed, two events occur simultaneously:

• Ownership transfer directly from your vendor business.
• An obligation is defined in Financial Accounting since the asset is now legally yours, and due directly to the seller.

This is when the accounting for consignments in SAP actually becomes important -- not at the time of goods receiving, but rather at consumption.

Step 6: Consignment Settlement

Since no invoices are due when consumption is consumed by MIGO, SAP uses a separate settlement process to combine all consumption posts and create the obligation. This is done by using the transactions called MRKO (Consignment or Pipeline Settlement).

In settlement:

• The system records all postings on consumption (K stock changes) from the previous settlement run.
• It determines their value according to the cost from the consignment information record.
• It produces a settlement document that's essentially self-billing since the vendor does not send an invoice per consumption.
• The accounting entries for the same are subsequently posted.

Settlement typically happens on a regular basis (either weekly or monthly) according to corporate policy, although certain organizations conduct it every day for consignment with high volumes scenarios.

Consignment Accounting in SAP: The Complete Picture

Knowing Consignment Accounting using SAP requires you to separate this process in two separate financial events because this is the area that most people find difficult.

At Goods Receipt (No Accounting Entry)

If consignment stock is received:

• Debit Nothing (no posting from FI)
• Credit Credit: Nothing (no post from FI)
• It is the only time one paper and a quantity update are required.

The reason for this is that the stock is not a part of or to your company at this point -so there is no assets to be recorded and no obligation to record.

At Consumption (Accounting Entry Triggered)

When the consignment stock has been used:

• Debit Account for Consumption (raw material cost center or consumption expense)
• Credit Clearing account GR/IR to pay consignment debts

The system will automatically identify the appropriate G/L accounts using an auto-determination of accounts configuration that is used in transactions OBYC using transactions keys like:

• GBB (Offsetting entry for inventory postings) for the consumption account.
• KON (Consignment liabilities) for the account for liability

At Settlement (Vendor Liability Finalized)

If MRKO runs: running:

• Debit A consignment account (clearing off this KON posting)
• Credit: Vendor account (Accounts Payable)

The last step transforms this internal debt into a real due to the seller and that's what is incorporated into the payment run.

Consignment Returns in SAP MM

Like traditional procurement, consignment inventory may require return to the vendor because of problems with quality, overstocked inventory, or an expiring shelf life. The returns for consignments procedure within SAP MM follows a particular process based on the date when the return occurs.

Returning Unconsumed Consignment Stock

When the inventory has never been used (still stored in a storage in a special box "K"), it can be returned to vendor through move of type the number 122 with reference to the consignment order PO that was originally issued. Since the stock was not owned by your business, this return is:

• Reduces the quantity of consignment stock
• It creates an accounting error in the financials as no obligation existed in the first place.

This is the most frequent return of consignments and is usually straightforward since it is essentially a reverse of a quantity-only transaction.

Returning Already-Consumed (Settled) Stock

If the item has been used and paid for (meaning the liability was already or perhaps transferred towards the vendor) the return process can be more complicated. If this is the case:

• Return delivery or credit memo process is commonly used. Return of delivery also known as a credit memo procedure is often utilized, just like regular PO returns.
• The type of movement of 122 (without an indicator K since it's not consignment stock) can be applied, based on the configuration
• A financial reverse is necessary, as the debt that has been transferred to the vendor account must be returned to the vendor account

A lot of organizations deal with this issue cautiously, utilizing FI/MM coordination because a poor handling could result in mismatched balances between vendors or liabilities that are duplicate.

Best Practices for Consignment Returns

• Be sure to check if the return happens prior to or after settlement because the procedure and the impact on accounting differ completely.
• Make sure that you have clear approval workflows in place for returns that involve stock already settled as they affect the payment of vendors.
• Reconcile consignment reports (MB52) frequently against physical inventory to avoid errors before processing returns.

Common Movement Types Used in the Consignment Process

To make it easy to reference Here are the most important kinds of movement SAP consultants and end users need to be aware of:

• 101 K - Goods receipt into consignment stock
• 1 K - Consumption to cost center
• 261 K - Consumption for the production order
• 122 K - Return of non-consumed consignment stock back to vendor
• 411 K Transfer postings from consignment to stock owned (without consumption)

4. 411K movement is particularly beneficial when a business is looking to convert consignment stock into owned stock, without using it. For instance, if it contracts to take the ownership of consignment inventory that is aging.

Reports and Transactions Useful for Managing Consignment Stock

Transaction	Purpose
ME11	Record the information about consignment
ME21N	Create consignment purchase order
MIGO	Post Goods Receipt/issued for consignment
MB52	Show warehouse stock (including consignment)
MMBE	Material overview of stock
MRKO	Settlement of pipelines and consignments
ME2M	List of purchase orders sorted by material (useful to track consignment POs)

Regularly using these transactions aids MM advisors and inventories managers maintain consignment inventory reconciled and ready for settlement.

Common Challenges in SAP Consignment Processing

Even the most experienced teams face some common issues in consignment stock management

• Information that is missing or has expired records In the event that the price information for consignments has expired or expires, the settlement may fail or be unable to recognize incorrect pricing.
• Settlement runs delayed The process of running MRKO often can lead to huge amounts of unresolved liabilities, which makes reconciliation with vendors more difficult.
• Confusion between consignment stock and subcontracting stock Both are based on vendor relations and other special stock types, however consignment (K) and subcontracting (O) serve completely different objectives and should not be used interchangeably.
• Incorrect use of movement types Use of regular movement types instead the "K" variants can cause the system to update the incorrect category of stock completely.

Be aware of the pitfalls is often the difference between the smooth SAP consignment management implementation from one that causes constant reconcile-related headaches.

Conclusion

The consignment process of SAP MM is a highly effective method to manage inventory owned by vendors without the need to tie up capital until the product is utilized. Through understanding the complete consignment flow starting with information record creation, and the setting of POs through receipt of goods consumption, settlement, and goods receipt experts can manage this process with confidence within real world SAP environments.

It is equally important to get consignment accounting done in SAP correct, as the liability is only brought to existence at the time that the consumer consumes, and not the point of receipt of goods. In the case of return of consignments knowing whether the stock is already settled is crucial when it comes to choosing the right reverse process.

The ability to master this flow from beginning to end is an essential ability for anyone who is pursuing an employment in SAP MM regardless of whether you're preparing for SAP MM interviews, helping the live implementation or simply trying to learn the way modern supply chains can manage vendor relationships more effectively.

Are you looking to learn SAP MM concepts such as subcontracting, consignment processing and inventory management from professionals in the field? Explore our SAP S/4HANA MM Training course designed for the real-world and practical learning.