Manage Subcontracting In ERPNext
The term “Subcontracting” refers to the process when an Organization hires an external party/ third party to perform a specific activity/task that cannot be completed within the organization. Subcontracting is mostly seen in the Manufacturing industry.
However, it is a constantly growing practice and is now being adopted by multiple industries to increase their productivity and efficiency.
Manufacturers who manufacture hundreds of complex products using multiple components on a daily basis use subcontracting for the process while the final procedures like packing and shipping happen at the organization itself.
What happens is that the organization provides the subcontractor with all the raw materials or semi-finished products that may be required to complete the subcontracted task, it could be assembling, production, labour work, etc.
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How can you manage Subcontracting with ERPNext?
To know how subcontracting works in ERPNext, we'll take a situation where a Manufacturer of Cupboards provides raw materials to the third party for the assembly and gets the final product, i.e., Cupboard at its warehouse.
Now let us take you through step by step to explain how you can manage your Subcontracting Orders using ERPNext!
1. Since the assembly is a service, we would first have to create a Service Item (make sure you check the “Non-Stock Item”) in the item master in order to place the Purchase Order to an external party.
2. Now, you have to create separate items for sub-items and the final product. In the given scenario, the manufacturer provides the raw materials (planks, nails, aluminium, rod and plywood) to the subcontractor and it provides them with the finished Cupboard in return.
Hence, you have to create the sub-items that you send to the subcontractor in order to receive the final item accordingly ( “Cupboard”).
Similarly, you would create other sub-items too as shown in the image above. Ensure to check the “Maintain Stock” option since these are stockable items.
3. Now, create the final item in the name of our final product “Cupboard”. And we will also check the “Maintain Stock” option since this is a stockable item.
4. Make sure you check/enable the “Supply Raw Materials for Purchase” option in “Cupboard” item master as this is the processed item or subcontracted item.
5. Make a BOM (Bill of Material) for the processed/finished Item (Cupboard in our case) and include the raw materials that you send to the subcontractor in order to receive the finished/semi-finished product.
* Please note there will be no operations in this BOM as the actions/operations are not being performed at the manufacturer's end. Hence, BOM without Operations needs to be created.
6. Now, make a Purchase Order for the Service Item (CBRD Assembly in our scenario) and select the Finished Good Item (Cupboard), the one for which you've created a BOM. Ensure that you check the option "Is Subcontracted" in Purchase Order and select the Supplier warehouse.
*Note that this can also be a virtual warehouse just to stand as a placeholder for making the Stock Entry when transferring materials to the vendor). You can also select the Warehouse in which the raw materials would be reserved for subcontracting under Reserve Warehouse.
7. Specify the value in the Rate field you have agreed with the external party or the Supplier for the service item. Below is the Purchase Order as per our example:
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Creating Subcontracting Order
1. On submission of the Purchase Order the "Create" button will appear. Make Subcontracting orders using drop-down.
2. Once you save and submit the Subcontracting order, all the sub-items (unprocessed items) based on BOM get added in “Raw Materials Supplied '' section.
3. The Raw material quantity gets reserved based on BOM, same can be viewed from the item dashboard as well.
4. Now, transfer/deliver the reserved raw materials to the supplier, make a Stock entry. In the Subcontracting Order, click on Transfer > Material to Supplier. Set the Source and Target Warehouses. The Stock Entry will be of type 'Send to Subcontractor' where you transfer from one Warehouse to another.
Subcontracting Receipt to receive the finished items.
Create Subcontracting Receipt to receive the finished Item from your Supplier using Subcontracting Receipt Button. Set the Accepted and Supplier Warehouses.
The finished goods will be received in the Accepted Warehouse. When you save this document, it will show a section “Raw Material Consumed’ and all the sub-items/Raw material used/supplied to supplier for manufacturing will show up here.
And on submission, you can check the stock ledger showing Finished items in the Accepted warehouse.
Purchase Receipt against Purchase Order.
On completion of Subcontracting Receipt of finished item, it is required to create Purchase receipt against the Purchase Order created for Service item (CBRD Assembly in our case).
Hence, back to Purchase Order, click on Create > Purchase Receipt. It won't affect the Stock Ledger and Accounting Ledger as both Stock and Accounting Ledger are already updated on submission of the Subcontracting Receipt.
When you submit the Purchase receipt the status of Purchase order gets updated as "To Bill".
Thereafter, Purchase Invoice can be created for the payment process and Purchase Order status will change as "Completed".
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