Subcontracting

Subcontracting allows you to send raw materials to a supplier (subcontractor) who processes them and returns finished or semi-finished goods. This is common in manufacturing businesses.

How Subcontracting Works

1. You define a Bill of Materials (BOM) for the subcontracted item.
2. You create a Purchase Order with the item and check Is Subcontracting.
3. You transfer raw materials to the subcontractor via Stock Entry (Material Transfer).
4. The subcontractor processes the materials and returns finished goods.
5. You create a Purchase Receipt to receive the finished goods.
6. The raw materials consumed are deducted from the subcontractor's stock.

Setting Up Subcontracting

1. Define BOM for Subcontracted Item

• Create a Bill of Materials for the item.
• Specify the raw materials required.

2. Create Subcontracting Purchase Order

1. Go to Buying > Purchase Order and click New.
2. Select the Supplier (subcontractor).
3. Check Is Subcontracting.
4. Select the Item (finished goods to be produced).
5. Select the BOM (the raw materials required).
6. Enter the Quantity.
7. Submit.

3. Transfer Raw Materials

• Create a Stock Entry (Material Transfer) to send raw materials to the subcontractor's warehouse (virtual location).

4. Receive Finished Goods

• Create a Purchase Receipt against the subcontracting Purchase Order.
• The receipt consumes the raw materials and brings the finished goods into your warehouse.

Accounting

The subcontractor's service charge (processing fee) is the difference between:

• Purchase Order item rate (what you pay the subcontractor)
• Raw material cost (what you already own)

Related Topics

• Purchase Order
• Bill of Materials
• Stock Entry