Subcontracting
In Subcontracting, you engage an external party to perform tasks on behalf of your organization, particularly in manufacturing.
1. 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”.
1.1 Creating a BOM
1.2 Creating a Purchase Order
Create a Subcontract Purchase Order for the Service Item and choose the Finished Good Item for which you’ve established a BOM.
- Activate the “Is Subcontracted” option, as this Purchase Order pertains to subcontracting.
- In the Items table of the Purchase Order, the Rate field value will reflect the service cost agreed upon with the third party or Supplier.
- Once all details are entered, save and submit the Purchase Order.
1.3 Creating a Subcontracting Order
Create a Subcontracting Order for the Purchase Order by navigating to Create > Subcontracting Order. Upon saving, the “Raw Materials Supplied” section will be updated based on your Bill of Materials. Additionally, you can designate the Warehouse where the raw materials will be reserved for subcontracting under “Reserve Warehouse.”
- The expenses associated with the subcontracting process should be documented in the Rate field of the Items table in the Subcontracting Order, as illustrated below:
- 8 Motherboards
- 8 Processors
- 16 RAMs
- 8 Hard Disks
- 8 Cabinets
- The cost for one CPU, inclusive of Raw Materials and Service Costs, is 1,02,994, with the total cost for all CPUs amounting to 8,23,952.
- From the Subcontracting Order, select the raw materials to transfer to the subcontractor.
- Once the Subcontracting Order is submitted, you can monitor the reserved quantity of the item from the item dashboard.
1.4 Creating Stock Entry to Transfer Raw Materials
Now that the raw materials are reserved, proceed to create a Stock Entry and deliver the raw material Items to your Supplier.
In the Subcontracting Order, navigate to Transfer > Material to Supplier. Specify the Source and Target Warehouses accordingly. The Stock Entry will be categorized as ‘Send to Subcontractor’, facilitating the transfer from one Warehouse to another. Enable ‘From BOM’, select the appropriate BOM, input the quantity, and click the Get Items button.
1.5 Creating a Subcontracting Receipt to receive the Finished and Scrap items
Receive the Items from your Supplier using a Subcontracting Receipt. Specify the Supplier Warehouse from where the raw materials will be sourced, and the Accepted Warehouse where the finished goods will be received. This process is akin to a backflush for subcontracting.
To create a Subcontracting Receipt from the Subcontracting Order, go to Create > Subcontracting Receipt. Define the Accepted and Supplier Warehouses accordingly. Ensure to verify the “Consumed Quantity” in the “Raw Materials” table to accurately maintain the stock at the Supplier’s end. It’s essential to select the Supplier’s Warehouse for receiving the finished goods.
Scrap items are retrieved from the designated Bill of Materials (BOM) for Finished Goods within the Items table. The quantity is calculated based on the Qty of the Finished Good Item, while the Rate is determined by either the Valuation Rate or the Scrap Rate specified in the BOM.
1.6 Creating a Purchase Receipt
Returning to the Purchase Order, navigate to Create > Purchase Receipt. As the Stock Ledger and Accounting Ledger are already updated upon submission of the Subcontracting Receipt, creating a Purchase Receipt will have no impact on them. However, if “Purchase Taxes and Charges” are applicable, the Accounting Ledger will be updated accordingly.
1.7 Supplier Sourced Raw Material
When setting up a Bill of Materials (BOM) for subcontracting, certain raw materials like nuts and bolts may need to be procured by the suppliers themselves.
While creating a Stock Entry for “Transfer” from a Subcontracting Order, these items can be manually excluded one by one. However, this becomes impractical when dealing with a large number of items, especially exceeding 100.
If certain raw materials are directly sourced by the supplier, they must be included in the BOM, albeit with a zero value.
These raw materials will not appear in the Supplied Items section of the Subcontracting Order since they are not supplied by the user.
Similarly, when creating a “Transfer”, such items will be automatically excluded from the Stock Entry.
However, it’s worth noting that the supplier may choose to include these supplier-provided items in their Sales Order sent to the user.
2. Notes
- Ensure that the “Rate” assigned to the processed Item reflects the processing/service cost, excluding the raw material cost.
- When you receive the finished item into your stock in BizCentric, the system will automatically incorporate the raw material rate for valuation purposes.
- The ‘Reserve Warehouse’ field in the Subcontracting Order will be automatically populated by BizCentric, drawing this information from the BOM. If the information is not found in the BOM, the system will default to the reserve warehouse specified in the Item’s settings. Alternatively, you can set a default reserve warehouse for all items in the Subcontracting Order from the ‘Reserve Warehouse’ field in the Raw Materials Supplied section.