Subcontracting

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

This functionality provides support for the following types of subcontracting:

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

Jump to:

  1. Demo video: Subcontracting
  2. Enabling Subcontracting
  3. Alternative approaches to setting up subcontracting.
  4. 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.
  5. Method 2: Assign operations to vendors inside Manufacturing Orders, and then raise 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:

  • If the ordered item has a Bill of Materials and an associated Purchase Term, materials can be sent to the vendor in a purchase order.
    A subcontracting BOM can be selected from the details of the purchase terms.
  • In a Manufacturing Order, it is possible to issue Purchase Orders to vendors if they perform some operations.
  • Choosing a vendor as a workstation group in the Routing is possible.
  • 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.

Alternative approaches to setting up subcontracting

Two alternative setups can be used:

  1. Purchase Orders only.
    • Use if you do not perform any operations.
    • Use if you want to track (consignment) inventory at a vendor's location.
  2. Manufacturing Orders and Purchase Orders combined.
    • Use when vendors perform some operations within your production process.
    • Use when there is a chain of several subcontractors, and you do not track inventory at the vendor's location.
      • The progress of a multi-stage project can be tracked inside one MO by placing the sequence of vendors into the routing.

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.

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 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 they are reported to have been 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 were never initially in the BOM.
  • The product is sent from one vendor to another. 
    • Possibly, you don't perform any operations yourself.
    • Inside the MO 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:

  • One MO is for one product only (in any quantity); different products need different MOs.
  • It is impossible to create a Shipment document to send 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 impossible to track (consignment) inventory at each vendor's location, if necessary.
    • Materials are booked and used from the MO site.
    • The product will come into stock at the MO site.

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 a subcontractor performs an operation, 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 a unit conversion is required for the PO. For example:
      • Your product in your stock is counted in pcs, e.g., a single unit weighing approximately 12 oz 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 pieces received, the vendor bills you for 25 lbs. (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 an MO for 33 and a PO for that vendor, the PO will show 1 x 25 lbs.
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, you will see it in the MO's materials list 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.
    • The Operations section lists each operation assigned to a vendor in addition to 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 MO operation starts when the PO field Shipped is filled out.
    • 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.

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