V8 - Contract manufacturing workflows

Many companies outsource some or all their manufacturing to a third party, often called a contract manufacturer (CM). SOS Inventory supports this configuration.

If your company is working with a contract manufacturer, the workflow depends upon who is responsible for obtaining the raw materials needed for manufacturing.

Workflow when contract manufacturer is responsible for obtaining raw materials

If your contract manufacturer is responsible for obtaining all materials needed for manufacturing the item as well as for executing the entire manufacturing process, you can treat the item produced by the contract manufacturer as you would any other item sold by a vendor.

In this situation, create an item to represent the finished good and choose Inventory in the Type field of the item definition. No bill of materials (BOM) or process template is needed because the contract manufacturer is totally responsible for all aspects of producing the item.

Workflow when your company is responsible for providing raw materials to contract manufacturer

If your company is responsible for providing raw materials or components to your contract manufacturer, the contract manufacturing workflow is a multi-stepped process, as described below. Many complex situations exist in complex manufacturing. For specific questions on your situation, please email Support.

1. Create definitions. 
    

• Create a non-nettable location that represents the contract manufacturer. This allows you to transfer inventory to/from the contract manufacturer, as well as to keep track of that inventory. Be sure to include full address information when you set up the contract manufacturer’s location.
   
• Create all items needed for the BOM/process template.
  • If an assembly item, create an assembly (output) item, as well as the individual component items.
     
• Create an item representing the service fee of the contract manufacturer. Note the following as you create the service fee’s item definition:

  • Name. Distinguish the item as a contract manufacturing (CM) service (e.g., 387450 Flight Jacket - CM).

  • Description. Indicate that it is the contract manufacturing fee for production.

  • Type. Service.

  • Sales Price. Leave at 0, since this is an expense.

  • Income Account. Leave as is, since this is an expense and is therefore irrelevant.

  • Expense Account. Designate the account to which this fee should be assigned.

  • Always Shippable. Yes.

  • Purchase Cost. Enter the fee per unit.
     

• Create the bill of materials (BOM) or process template.

  • The Bill of materials action on the Items list (Operations menu > Inventory > Items) will show only for items that are listed as an assembly.
  • If sometimes you build the assembly in house, and at other times you use a contract manufacturer, include both your in-house labor item as well as the CM fee on the BOM. (When you create a build transaction and pull the BOM up, you can edit/delete the items as needed.)
     

2. Create two purchase orders. One PO is for the items that must be ordered from a vendor, the other for the service to be performed by the contract manufacturer.

• The purchase order for the vendor should list the contract manufacturer’s location as the shipping address. In the Vendor Message, specify that the invoice is to be sent to your company and include the company address and contact information.
   

3. Create two item receipts. Do one when the items ordered from a vendor have been received by the contract manufacturer, the other for the service when the CM delivers the finished product. Adjust the unit pricing or quantity on the item receipts if needed.
    
4. Create a build or process transaction to reflect what the contract manufacturer did.

• Make sure the location is the contract manufacturer’s location.
• In the input items, the BOM or process template will include the contract manufacturer’s fee.
   

5. Create an inventory transfer to move the finished product from the contract manufacturer to your location. The item is now ready to be sold.