Subcontractor Manufacturing (composite)

In some cases your production process consists of stages some of which are carried out at your factory and the others at the factory of an external partner. For this you need to transfer raw materials or semi finished products to the location of the Subcontractor and then back to your warehouse, track stock at this location, record invoices from the Subcontractor for his services and pay them. 

NOTE: If you use different job workers for different stages and want to track by whom/when each stage for each Production Order was completed, but don’t need to transfer materials, use another approach: assign stages in one PO to different job workers.

Before reading this article we recommend you to get familiar with the basic process for Subcontractor Manufacturing.

The differences in a composite process

• You create 2 Production Orders: main Production Order _1 to produce finished product + related Production Orders_2,3, etc to supply your Production Order_1 with semi finished Products.
• You start to produce from the end: first you produce PO_2 (or even 3,4 if you have a multilevel process), and then when semi finished products are ready and transferred you start previous PO_1.

Let’s consider the process when raw materials are sent to the Subcontractor location, then you receive back semi finished products and complete the production process at your place.

In short in Kladana this process can be organised in the following way

1. First you create Production Order_1, related Production Order_2 and if required Purchase Orders to supply raw materials. Below it is described in detail.
2. Raw materials are sent to the Warehouse of Subcontractor via Transfer from your warehouse or direct Purchase Order + Receiving from your Supplier.
3. Production Order_2 is completed by the Subcontractor.
4. Cost of subcontractor jobs should be recorded in Operation Costs in this Production Order_2 for correct calculation of Unit Cost/amount cost of finished goods.
5. Service card is created for Subcontractor service. Purchase Order + Receiving + Invoice + Outgoing payments are used to record and track mutual settlements with the Subcontractor.
6. Semi finished Products are sent back to your Warehouse via Transfer transaction.
7. Production Order_1 is completed by your company.
8. Current state of Stock for both your and Subcontractors locations is shown in Stock report (filter by Warehouse to choose locations).
9. Current status of specific Production Order can be tracked via Statuses.
10. Settlements with Subcontractors are tracked in Financials > Statement of accounts report and list of Invoices to be paid can be tracked in Supplier Invoices (filter by supplier name or Payment status)

Let’s see in detail how it works in Kladana

You can find below step by step instruction with screenshots and useful hints.

Let’s imagine that we produce T-shirts with applications:

• We buy raw materials,
• send them to the Subcontractor,
• he produces simple T-shirts,
• he sends them back to our warehouse along with an invoice for his jobs,
• we put applications on the T-shirts, pack them in boxes.  

We want:

• Calculate the necessary quantity of raw materials, analyze how we can supply them, purchase them and track mutual settlements with the Supplier.
• Record transfer of materials to the Subcontractor Warehouse and transfer of semi finished goods to our warehouse.
• Track what is happening with each Production Order.
• Calculate properly cost of finished products on the basis of raw material cost + cost of subcontractor services + some potential extra costs. 
• Track Stock level both for our warehouse and Subcontractor location.
• Track mutual settlements with the Subcontractor (record incoming invoices and outgoing payments, see the statement of accounts).

Some general hints

1. Don’t forget to reserve finished goods for Sales Order and raw materials for Production order (tick ‘Allocate order to committed stock’ in transactions). If not reserved - both goods and materials will look like ‘available’ for other orders and can be unintentionally sold or used for other orders.
2. Prohibit ‘negative stock’ for accurate stock counting process. For this in Settings >> Account Settings choose ‘Disallow records that reduce Stock below zero’

What we do to maintain the process

1. We prepare our Kladana account to support this process, for that we create:
1. Product cards both for Semi Finished products, Finished products  and Raw materials
2. Routing_1 and Routing 2, BOM_1 and BOM_2 for the production of Finished products and Semi Finished products (Routing, BOM articles)
   
   Pay attention that in BOM_1 to produce finished T-shirts with application we should use T-shirt simple as raw material:
3. Warehouse and Counterparty (for the Subcontractor)
4. Service card with the name of job (for the Subcontractor services)
5. Statuses for the Production Order.
   
   NOTE It is more convenient to create all this in advance, especially if you are starting to maintain the process. However, in the future all this can be created along with the process, not necessarily in advance.
2. Then we create a Production Order_1 for a finished T-shirt with application. In our case we produce to stock, so we go to Production >> (+) Production Order.
   NOTE: also you can create a Production Order as related to a Sales Order. For more information on how to maintain it read "Make to order" manufacturing process.
3. We choose our Main Warehouse for Materials Warehouse for our Production Order_1. We analyze if we have enough components and materials to produce using the ‘Available’ column. If not — we need to supply them, for that we press the ’Supply’ button and create a Purchase Order. More information on how Supply works.
4. In our case we have enough packing boxes, but we need to supply applications and produce simple T-shirts by the Subcontractor. We go to the Supply interface to do that.
5. In the Supply window we choose the way we supply: for applications it will be Purchase Order and for simple T-shirts it will be Production Order. As BOM_2 for production simple T-shirts was created before at Step 1, it is substituted in the field. After pressing ‘Create’ button:
1. Purchase Order_1 with applications is created (we can find it in Purchase section)
2. Production Order_2 to produce simple T-shirts is created (we can find it in Production section)
6. We go to Production Order_2 and analyse if we have enough raw materials to send them to the Subcontractor Warehouse. In PO_2 we choose our Main Warehouse for Materials Warehouse at that step (it is necessary to evaluate if we have enough raw materials in stock or we need to purchase them too; we shall change Materials Warehouse to Subcontractor Warehouse after we analyse raw materials). We can see that we don’t have fabric and threads, so we need to Supply them too. We press the ‘Supply’ button again and repeat the process.
7. After this
• we put Subcontractor Whs as both Materials and Product Whs for the Production Order_2 (because Subcontractor will use materials from his warehouse and issue simple T-shirts to his warehouse)
• we set ‘waiting for supply’ status for Production Orders 1,2
• and then we followed to the Purchase section.
8. We place Purchase Orders_1, 2 to our Suppliers and wait till materials will arrive at our warehouse. After arrival and physical counting we have to create Receivings_1, 2 against Purchase Orders _1, 2 to record received materials.
9.  When we receive fabric for PO_2 - we can start transfer raw materials to the Subcontractor and after this start production of PO_2. All processes on how to transfer, produce, get semi finished products back and record Subcontractor services are described in Subcontractor Manufacturing (basic). For more traceability we use Statuses or Notes for Production Order_2.
10. After receiving reverse Transfer from the Subcontractor Warehouse we have simple T-shirts in stock at our Main warehouse. If till this moment we already received applications, we are ready to start production of PO_1. Let’s produce it.
11. Let’s see the structure of all related transactions in the initial Production Order_1. For now we cannot see as related: Transfers (both to Subcontractor Warehouse and reverse transfer to our Main Warehouse), Purchase Order for Subcontractor Services and all related with this order transactions. Our team is working on this issue.