Explain the what is subcontracting in SAP Purchasing?

Subcontract is a special stock type item category - L 

You order the end product to vendor, and specify in the purchase order which components you will send to the vendor to manufacture the end product.
   
Here I have explained about the whole process of subcontract in that you can see how to create BOM also.
   
To make you very clear I have explained in details about BOM with example. Just follow below as it is.
   
BOM (Bill of Material) - T.code to create BOM CS01.
   
First create parent material PEN - T.code MM01
   
Material  - PEN (select material type finished product) 
   
Now create child material (to make a pen we need components its called child material)
   
Material   - Refill ( select material type raw material)
Material  -  Lid              "do"
Material -   cap              "do"
   
Now we need child material sufficient stock to send it to vendor to make a pen.
   
Receive stock without PO in MIGO select MVT type 501 (with po also can do GR)
   
Goos Receipt (Child material)
Enter material  - refill, Lid, and cap Qty 1000. (see in MMBE now your stock is 1000 for all child material)
   
Now Create BOM - T.code CS01.
First screen
Enter  material - Pen
Plant - 1000
BOM usage - 1
Valid from and valid to
<ENTER>
   
SECOND SCREEN
   
Here you enter components one by one, to make one pen how many components you need enter in the quantity column. 
   
NOW YOUR BOM IS READY
   
reate PO with item category L - subcontract.
   
Only enter material pen - 100 Qty 
Enter vendor - XXXX
R/3 system automatically trigger the relevant components for pen using BOM explosion. (in item level material tab right corner click on components the BOM components will appear for pen)
   
Now PO is ready to send it to the vendor to make a end product, pen - T.code MB1B
   
Select Mvt type - 541 
See on the top <To purchase order> click on that enter above purchase order number automatically triggers all the information from PO with BOM componets.
   
See your stock position in MMBE now you can clearly understood what happen your stock and were it has been moved.
   
MIGO reference with PO
   
Here click on icon next to material, here can see the consumed material for the finished product pen.
   
View MMBE for material pen you can understand what happened.
   
MIRO - as usual.
   
Note: This subcontract you can do with MRP.

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