Handling Customer-Provided Materials in Production

Introduction

Managing customer-provided materials efficiently is crucial for streamlined production and accurate inventory tracking. In this guide, we will explore the best practices for handling customer-supplied components, including material types, movement types, and stock management strategies. 

By optimizing your approach, you can ensure seamless integration of these materials into your production process while maintaining inventory accuracy and compliance. 

Process Overview for Customer-Provided Materials

When customers supply components, the production workflow typically follows these steps: 
  • Material Receipt – The components are received and stored in stock.
  • Goods Receipt (GR) Posting – Materials are entered into the system without valuation.
  • Production Process – The customer-provided materials are used to manufacture the final product.
  • Goods Issue (GI) Posting – The components are issued for production.
  • Finished Product GR Posting – The completed product is received into inventory.
  • Delivery & Invoicing – The final product is shipped, and invoicing is processed as usual.
This approach is similar to subcontracting but requires special handling in material management. 

Key Considerations & Best Practices

1. Choosing the Right Material Type for Customer-Provided Materials

To properly track customer-supplied components, a non-valuated material type should be used. The recommended options include: 
  • UNBW (Non-Valuated Material Type) – This allows inventory tracking without assigning value.
  • Customized Material Type – Modify an existing type to fit specific business requirements.
Using a non-valuated type ensures that financial records remain unaffected while maintaining inventory accuracy. 

2. Standard Movement Types for Goods Receipt (GR) & Goods Issue (GI)

Receiving Customer-Provided Materials

Movement Type 501 (Without Purchase Order) – Brings in materials without valuation.

Issuing Materials for Production

Movement Type 261 (Consumption for Production Order) – Issues the components to production.

3. Understanding the Material Provision Indicator (Type K) in the BOM

The Material Provision Indicator (K) in the Bill of Materials (BOM) specifies that a component is provided by the customer. 
  • It ensures that no procurement is triggered for these materials.
  • Helps in accurate production planning by differentiating customer-supplied stock from owned stock.
  • Maintains clear segregation between internal and external material sources.
If you use SAP or another ERP system, ensuring the correct setup of this indicator is crucial for proper material consumption tracking. 

Stock Management Strategies for Customer-Provided Materials

1. Split Valuation for Customer and Company-Owned Stock

If the same material can be either customer-supplied or company-owned, split valuation is an effective solution. 
  • Own Stock → Valuated using standard/moving average price.
  • Customer Stock → Zero valuation.
Pros: Allows for single material master with clear valuation separation. 
Cons: Requires entering valuation type in every inventory transaction, leading to complexity in CO-PA (Controlling-Profitability Analysis). 

2. Alternative Approach: Separate Material Masters

To avoid split valuation complexities, another option is to create two separate material masters: 
  • One for Valuated Stock (Company-owned inventory).
  • One for Non-Valuated Stock (Customer-provided materials).
Pros: Simplifies transactions and prevents valuation errors. 
Cons: Requires maintaining multiple material masters. 

3. Using a Separate Storage Location for Customer-Provided Materials

For better visibility and inventory management, customer-supplied materials can be stored separately within your warehouse: 
  • Create a dedicated storage location for customer-provided stock.
  • Use system configurations to prevent mixing with company-owned stock.
Pros: Improves tracking and reporting without requiring valuation adjustments. 
Cons: Requires careful warehouse management to ensure correct material flow. 

Tracking Customer-Provided Stock in Inventory Reports

To monitor customer-specific stock levels in MMBE (Stock Overview) or other ERP inventory reports, consider these options: 
  • Customer Consignment Stock Setup – Allows clear tracking of stock assigned to a specific customer.
  • Alternative Storage Strategy – Use separate stock types or batch management to differentiate customer-owned inventory.
These strategies help maintain transparency and facilitate accurate reporting. 

Conclusion

Handling customer-provided materials effectively requires the right material types, movement types, and stock management strategies.
✅ Use non-valuated material types like UNBW.
✅ Apply 501 movement type for receiving and 261 movement type for issuing stock.
✅ Set up Material Provision Indicator (K) in BOM to prevent procurement confusion.
✅ Choose between split valuation or separate material masters based on business needs.
✅ Consider a dedicated storage location for better stock visibility.
By implementing these best practices, companies can streamline production, maintain accurate inventory records, and avoid valuation errors when handling customer-provided components.

FAQs

1. What is the best material type for customer-provided components?

The best option is UNBW (Non-Valuated Material Type), ensuring inventory tracking without financial valuation.

2. Which movement type is used for receiving customer-supplied materials?

Movement Type 501 is commonly used for GR without valuation.

3. How can I differentiate between company-owned and customer-provided stock?

You can use split valuation or separate material masters to maintain clear stock segregation.

4. What does the Material Provision Indicator (K) do in the BOM?

It marks the component as customer-provided, preventing procurement and ensuring accurate production planning.

5. Should I store customer-provided materials separately?

Yes, using a dedicated storage location helps track and manage stock efficiently.

6. How do I track customer-provided stock in SAP MMBE?

You can use customer consignment stock setup or alternative storage strategies to monitor stock levels.

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