Subcontracting

Subcontracting

In subcontracting, you hire a third party to perform work for your business, particularly in manufacturing.

A sort of employment agreement called subcontracting aims to outsource particular types of work to other businesses. That makes it possible to work on multiple phases of the project at simultaneously, which frequently results in a quicker turnaround.

Several industries utilize subcontracting. For instance, producers who assemble a variety of products from intricate parts outsource the assembly of some parts and package them at their facility.

You may keep track of this by using the subcontracting feature of ERPNext if your company outsources some of its operations to a third-party Supplier, where you provide the raw materials and the third party handles the labor and manufacturing.

1. How to Set up Subcontracting

1. Establish a Service Item (Non-stock Item). It displays the service expense for the operation that was outsourced.

2. Make distinct Items for the raw and processed products. For instance, if you provide your Supplier unpainted X and the Supplier gives it back to you painted X, you can create two items, "X-unpainted" and "X".

3. To keep track of the items sent, create a warehouse for your supplier. You can provide all the items for a month at once.

4. "Supply Raw Materials for Purchase" must be enabled for the processed item in the item master.

1.1 Creating a BOM

Organize the raw materials into sub-items in the processed item's bill of materials. Consider a straightforward scenario in which you produce pens. The finished pen will have a name on the Bill of Materials (BOM), while the nib, plastic, ink, and other components will be listed as sub-items.

If all production work is done by a third party, this BOM will not have Operations. Let's examine using a straightforward CPU assembly example:

1.2 Creating a Purchase Order

Create a Subcontract Purchase Order for the Service Item and choose the Completed Good Item (for which you have a BOM) as the recipient.

1. Since this purchase order is for subcontracting, enable the "Is Subcontracted" checkbox.
2. Here, the service cost you and the supplier or third party agreed upon will be the Rate field value of the Items table in the Purchase Order.
3. After filling the details, Save and Submit the Purchase Order.

1.3 Creating a Subcontracting Order

By selecting Create > Subcontracting Order, you can create a subcontracting order for the purchase order. The Bill of Materials will be updated for all of your unprocessed Items when you "Save" under the "Raw Materials Provided" section. Under Reserve Warehouse, you can also choose the Warehouse where the raw materials will be held back for subcontracting.

1. The following Subcontracting Order should be used to record the costs associated with the subcontracting procedure in the Rate column of the Items table:
2. The goods shown in the previous picture are what we are giving the subcontractor:

• 8 Motherboards
• 8 Processors
• 16 RAMs
• 8 Hard Disks
• 8 Cabinets*

The price of one CPU, including the cost of raw materials and services, is 1,02,994, and the price of all CPUs, as a result, is 8,23,952.

3. Choose the raw materials to transmit to the subcontractor from a subcontracting order:

4. You can also see the item's reserved amount from the item dashboard after the subcontracting order is submitted.

1.4 Creating Stock Entry to Transfer Raw Materials

Make a stock entry and deliver the raw material items to your supplier now that the raw materials have been reserved.

Click the Transfer > Material to Supplier link in the subcontracting order. Set the warehouses for the source and the target. The stock entry will be of the "Send to Subcontractor" kind, which allows you to move items across warehouses. choose the BOM, check the "From BOM" box, input the desired amount, and press the "Get Items" button.

1.5 Creating a Subcontracting Receipt to receive the finished items

Use a Subcontracting Receipt to take the Items from your Supplier. You must access the Supplier Warehouse, where finished goods are received in the Approved Warehouse and where raw materials are obtained from. Think of it as a subcontracting backflush.

From the Subcontracting Order, select Create > Subcontracting Receipt. The Approved and Supplier Warehouses should be set. To ensure that the proper stock is kept at the Supplier's end, double check the "Consumed Quantity" in the "Raw Materials" table. The supplier's warehouse where you'll receive the finished goods must be chosen.

1.6 Creating a Purchase Receipt

Click Generate > Purchase Receipt to return to the Purchase Order. As the Stock and Accounting Ledgers are changed when you submit the Subcontracting Receipt, there won't be any impact on them. The Accounting Ledger will update if "Purchase Taxes and Charges" are present.

1.7 Supplier Sourced Raw Material

There might be a few raw items, such nuts and bolts, that the Suppliers must buy on their own when preparing a BOM for subcontracting.

These goods can be omitted one by one when establishing a stock entry for "Transfer" from Subcontracting Order, however it is impossible to do so if you have more than 100 items.

If the Supplier directly sources any raw materials, those raw materials must be listed in the BOM.

• In the BOM, it will have no value.
• This raw material will not appear in the supplied items of the subcontracting order because it is not supplied.
• Moreover, such products will not be included in the stock entry when creating a "Transfer."

The Supplier, however, has the option to include the items from the Supplier in the Sales Order they have sent to you.

2. Notes

• Ensure that the processing/service cost is reflected in the processed item's "Rate" (excluding the raw material cost).

• When you receive the finished item in your stock, ERPNext will automatically apply the raw material rate for your valuation purposes.

• The "Reserve Warehouse" in the Subcontracting Order from the BOM will automatically default in ERPNext. If it wasn't in the BOM, the default Warehouse that was established for the item would be used. The "Reserve Warehouse" option in the Raw Materials Provided section allows you to specify the default Reserve Warehouse for each item in the Subcontracting Order.