In subcontracting, you employ an external party to carry out tasks for your organization, especially manufacturing.
Subcontracting is a type of job contract that seeks to outsource certain kinds of work to other companies. It allows work on more than one phase of the project to be done at once, often leading to quicker completion.
Subcontracting is practised by various industries. For example, manufacturers who make several products from complex components subcontract certain components and package them at their facilities.
If your business involves outsourcing certain processes to a third-party Supplier where you supply the raw materials and the third party does the labour/production, you can track this by using the subcontracting feature of ERP Enigma.
How to Set up Subcontracting
- Create a Service Item (Non-stock Item). It represents the service cost of the subcontracted operation.
- Create separate Items for the unprocessed and the processed product. For example, if you supply unpainted X to your Supplier and the Supplier returns you X, you can create two Items: “X-unpainted” and “X”.
- Create a Warehouse for your Supplier so that you can keep track of Items supplied. (You may supply a month's worth of Items in one go).
- For the processed Item, in the Item master, enable “Supply Raw Materials for Purchase”.
Creating a BOM
Make a Bill Of Materials for the processed Item, with the unprocessed Items as sub-items. Let's consider a simple example, where you manufacture a pen. The processed pen will be named under the Bill of Materials(BOM), whereas the nib, plastic, ink, etc. ,will be categorized as sub-items.
This BOM will be without Operations if all of the production work is done by a third party. Let's see with a simple example of a CPU Assembly:
Creating a Subcontracting BOM
While optional, creating a Subcontracting BOM allows you to predefine a relationship between your Service Item and Finished Good Item.
When you create a Subcontracted Purchase Order, if you have created a Subcontracting BOM for your Service Item or Finished Good Item, selecting either one will automatically fill out the other details of the Purchase Order line item. If you create a lot of Subcontracted Purchase Orders for the same Service Item and Finished Good Item combination, you can save some time and effort by creating a Subcontracting BOM for that combination in advance.
Using a Subcontracting BOM, you can:
- Select a default BOM for your Finished Good Item.
- Select a default UOM for your Service Item.
- Specify the conversion factor between your Service Item and Finished Good Item.
In the above image, we have specified that 1 unit of "Painting" will produce 2 units of "Tiles" after the subcontracting process is complete. Upon saving this document, you will see that the conversion factor for this relationship is calculated automatically (0.5 in this case).
Note:
- There can only be 1 Subcontracting BOM for any Finished Good Item.
- If there are multiple Subcontracting BOMs for a single Service Item, upon making a Subcontracted Purchase Order and selecting that Service Item, a dialog box will appear which will ask you to select the Finished Good Item for that specific Service Item. The list of those Finished Good Items will be fetched from the list of Subcontracting BOMs, where the Service Item is the one you have entered.
Creating a Purchase Order
Make a Subcontract Purchase Order for the Service Item and select the Finished Good Item, the one for which you've created a BOM.
- Enable the "Is Subcontracted" since this Purchase Order is for Subcontracting.
- Here the Rate field value of the Items table in the Purchase Order will be the service cost you have agreed with the third party or the Supplier.
- After filling in the details, Save and Submit the Purchase Order .
Creating a Subcontracting Order
Make a Subcontracting Order for the Purchase Order by clicking on Create > Subcontracting Order. When you “Save”, in the “Raw Materials Supplied”, all your un-processed Items will be updated based on your Bill of Materials. You can also select the Warehouse in which the raw materials would be reserved for subcontracting under Reserve Warehouse.