Subcontracting

The Subcontracting functionality enables placing subcontracting Purchase Orders to manage outsourced services or manufacturing done by subcontractors (vendors).

This functionality provides support for the following types of subcontracting:

1. Some operations in your production process are outsourced to your vendor.
2. A product is wholly produced by the subcontractor(s), while you only issue materials.

There are two alternative approaches that can be used:

1. Using only Purchase Orders.
   • Suitable only if you do not perform any operations.
   • Suitable if there is one subcontractor or a supply chain of several.
2. Using Manufacturing Orders and Purchase Orders combined.
   • Suitable if the vendors perform some operations in your production process.
   • Suitable if there is one subcontractor or a supply chain of several.
     • May be preferred if there is a chain of several subcontractors, even if you do not perform any operations.

Jump to:

1. Demo video: Subcontracting
2. Enabling Subcontracting
3. Method 1: Using Purchase Orders only to order products and ship materials.
   1. Summary.
   2. Use cases.
   3. Setup.
   4. Usage.
   5. Cost of products.
4. Method 2: Assigning operations to vendors inside Manufacturing Orders, and then raising Purchase Orders for these.
   1. Summary
   2. Use cases.
   3. Setup.
   4. Assemblies are sourced from subcontractors in a multi-level MO.
   5. Usage.
   6. Cost of products.

Enabling Subcontracting

The subcontracting functionality can be enabled at Settings -> System settings -> Professional functions -> Subcontracting.

When this is enabled, then:

• In a Purchase Order, it is possible to send materials to the vendor, if the ordered item has a Bill of Materials and an associated Purchase Term.
  A subcontracting BOM can be selected in the Purchase Terms details.
• In a Manufacturing Order, it is possible to issue Purchase Orders to vendors, if they perform some operations.
• It is possible to choose a vendor as a workstation group in the Routing.
• The Subcontracts section is shown in a Manufacturing Order if the order has outsourced operations.
• The Materials and Shipments sections are shown in a Purchase Order if the items have Bills of Materials.

Method 1. Using only Purchase Orders to order products and ship materials.

Summary

• A Purchase Order is created for the product(s).
• Materials are issued from stock by making a Shipment to the vendor.
• The product is received to stock with the receipt of the PO.

Use cases

• The vendor fully makes this product. You do not perform any operations.
• You buy and issue the materials to the vendor.
• Possibly, you track how much of your (consignment) inventory is at a vendor's location.
  • A site is created for the vendor.
• Possibly, you are shipping items from one vendor to another vendor.
  • You use materials from one vendor's site and order the delivery to another vendor's site.
  • Each stage of the product's completion must be a separate item:
    • Each stage's BOM lists the item of the previous stage, plus additional parts you issue only for this stage.

Important considerations:

• If you are managing a supply chain of several subcontractors, there is no one place to see the overall progress of such a project.
  • In contrast, when using Method 2, by placing the sequence of vendors into routing, the progress can easily be tracked inside one MO.
• One MO is for one product only (in any quantity), different products need different MOs.

Setup

1. Save the Subcontractor as a Vendor at Procurement -> Vendors.
2. Set up a procured item.
   • Item setting This is a procured item = Yes.
3. Add a Bill of Materials. 
   • This is the list of materials that you will send to the vendor per product.
4. Create Purchase Terms for this item.
   • Enter the price that you are charged and the lead time.
   • Connect the BOM with the purchase term, by selecting it in the subcontracting BOM field.
     
     

Usage

1. Create a new Purchase Order.
2. Add the products to the purchase order. 
   • If the Multi-Stock functionality is used, you can select which site to book materials from.
3. Save. 
   • The Materials and Shipments sections will appear.
4. In the Materials section, click Book Materials.
   • The available materials are reserved for this PO based on the BOMs of the products.
   • If the Multi-Stock functionality is used, you can select which site to book materials from.
5. In the Shipments section, create a Shipment.
6. Ship the materials. 
   • You can open the Shipment from the PO or from Stock -> Shipments.
   • Click Pick on an individual line, or Pick all items to pick all at once.
7. Report PO receipt as usual.

Cost of products

The inventory cost of the final product will include:

• the purchase price on the Purchase Order,
• plus the cost of the materials that have been shipped.

Method 2. Assigning operations in Manufacturing Orders to vendors.

Summary

• A Manufacturing Order is created for the product.
• Some or all operations in the Routing are assigned to vendor(s).
• Materials are used from stock when these are reported consumed in the MO.
• The product is received in stock when the MO is completed.

Use cases

• A subcontractor performs some operations when making a product, e.g. finishing.
• A Purchase Order must be issued to the subcontractor for the services.
• You wish to consolidate all the required services in several MOs to a single PO from one vendor.
• There is variability in inputs (material usage) and outputs (product received), possibly combined with vendor unit conversions.
• There may be materials required, that never were in the BOM initially.
• The product is sent from one vendor to another. 
  • Possibly you don't perform any operations yourself.
  • Inside the MO there is a good overview of the progress of the project.
  • Each stage of the product's completion does not need to be a separate item.

Important considerations:

• It is not possible to create a Shipment (and generate the documents) for sending materials to your vendor. Materials can just be reported as consumed in the MO.
• An MO is only connected to one site.
  • If there is a chain of several vendors, it is not possible to track (consignment) inventory at each vendor's location, if that is necessary.
  • Materials are booked and used from the site of the MO.
  • The product will come into the stock of the site of the MO.

Setup

1. Save the Subcontractor as a Vendor at Procurement -> Vendors.
2. Create a manufactured item.
   • Item setting This is a procured item = No.
3. Add a Bill of Materials. 
   • This is the list of materials that you will use to make the product.
4. Create a Routing for this item. If an operation is performed by a subcontractor, then
   • The Vendor should be selected as the Workstation group of the operation.
   • The dates for the Purchase Order will be calculated using Setup time and Cycle time. For example:
     • If your vendor has a 1-week lead time regardless of ordered quantity, then:
       - if in your system settings, you have configured a 5-day workweek, 8-hours per day,
       - then Setup time = 60min * 8h * 5d = 2400 minutes.
   • The prices for the Purchase Order will be either:
     • Calculated using the fixed cost and variable cost.
     • Or, if defined, taken from Purchase Terms.
5. Optionally, add Purchase Terms for handling some special cases:
   • (For adding purchase terms, temporarily configure the item as This is a procured item = Yes.)
   • Use several purchase terms, if the vendor has tiered pricing, depending on the quantity.
   • Use purchase terms, if there is a unit conversion required for the PO. For example:
     • Your product in your stock is counted in pcs, e.g. a single unit weighing 12 oz approximately due to variability in the filling.
     • The vendor bills you in units of weight, e.g. lbs.
     • The PO must also be in lbs.
     • For every 33 pcs received, the vendor bills you for 25 lbs. (And not 24.75 lbs = 12 oz x 33 pcs.)
     • The vendor unit will be named "25 lbs" and the conversion rate would be 33 pcs = vendor UoM "25 lbs".
     • If you make a MO for 33, and a PO for that vendor, the PO will show 1 x 25lbs.

Using subcontracted services for assemblies in a multi-level MO

In practice, you could have a product, that has an assembly obtained from a subcontractor, while you provide the materials.

1. If the assembly is set as a procured item, then you will see it in the materials list of the MO. But not its materials.
   • The materials need to be booked separately in the PO for the assembly.
   • This is the Method 1 described above.
2. If the assembly is set as a manufactured item, then you will see the subcontracted operations in the MO and its parts booked directly in the MO, for the MO.

Usage

1. Create a new Manufacturing Order.
2. Save.
   • Section Subcontracts will appear in the MO.
   • Each operation that is assigned to a vendor is listed there, in addition to being listed in the Operations section.
3. Create Purchase Orders for the outsourced operations, either from:
   • The Subcontracts section of the MO.
   • Or, from Procurement -> Requirements, which allows you to consolidate services for several MOs into one PO.
4. Report the progress of subcontracted operations.
   • The operation in the MO is started when the PO field Shipped on is filled.
   • The operation in the MO is finished when the PO is received.
5. Report consumption of materials at any time.
6. Finish the Manufacturing Order to get products into stock.

Cost of products

The cost of the subcontracting Purchase Order is added to the manufacturing overhead of the Manufacturing Order.

Read also: Calculation of applied manufacturing overhead, direct labor, and materials costs.