Outsourced Manufacturing
When vendors manufacture products for you - either completely or as part of your production process.
Outsourcing Overview
OUTSOURCED MANUFACTURING OPTIONS
─────────────────────────────────────────────────────────────────
Option 1: COMPLETE OUTSOURCE (Special Order)
┌─────────────────────────────────────────────────────────────┐
│ Customer Order │
│ │ │
│ ▼ │
│ PO to Vendor ──▶ Vendor Builds ──▶ Receive ──▶ Ship │
│ (You don't provide components) │
└─────────────────────────────────────────────────────────────┘
Option 2: PARTIAL OUTSOURCE (Subcontract)
┌─────────────────────────────────────────────────────────────┐
│ You Provide Components │
│ │ │
│ ▼ │
│ Ship to Vendor ──▶ Vendor Builds ──▶ Receive Assembly │
│ (You supply materials, vendor supplies labor) │
└─────────────────────────────────────────────────────────────┘
Complete Outsource (Special Order)
Vendor manufactures the entire product - you don't provide components.
Flow Diagram
SPECIAL ORDER FLOW
─────────────────────────────────────────────────────────────────
Customer places order
│
▼
┌──────────────────────┐
│ SALES ORDER │ ← Special Order item
│ (Drop Ship or │
│ Special Order) │
│ GL: None │
│ Inv: None │
└──────────┬───────────┘
│
│ Auto-creates PO
▼
┌──────────────────────┐
│ PURCHASE ORDER │ ← To manufacturing vendor
│ (Created from SO) │
│ GL: None │
│ Inv: None │
└──────────┬───────────┘
│
│ Vendor manufactures
▼
┌──────────────────────┐
│ ITEM RECEIPT │ ← Receive finished product
│ │
│ GL: Inventory + IRNB │
│ Inv: Increases │
└──────────┬───────────┘
│
▼
┌──────────────────────┐
│ ITEM FULFILLMENT │ ← Ship to customer
│ (from SO) │
└──────────────────────┘
When to Use
| Scenario | Example |
|---|---|
| Contract manufacturing | Vendor makes your branded product |
| White label products | Vendor's product with your label |
| Complex manufacturing | You lack equipment/expertise |
| Overflow capacity | Your production is at capacity |
GL Impact
Same as standard purchase flow:
| Transaction | GL Impact |
|---|---|
| Purchase Order | None |
| Item Receipt | Inventory ↑, IRNB ↑ |
| Vendor Bill | IRNB cleared, A/P ↑ |
| Fulfillment to Customer | COGS ↑, Inventory ↓ |
| Customer Invoice | A/R ↑, Revenue ↑ |
Subcontract Manufacturing
You provide components to vendor; vendor provides labor/equipment.
Flow Diagram
SUBCONTRACT MANUFACTURING FLOW
─────────────────────────────────────────────────────────────────
You have components
│
▼
┌──────────────────────┐
│ WORK ORDER │ ← For subcontract assembly
│ (Subcontract type) │
│ GL: None │
│ Inv: Commits │
└──────────┬───────────┘
│
│ Ship components to vendor
▼
┌──────────────────────┐
│ TRANSFER ORDER │ ← Move to "Vendor Location"
│ (or Inventory │
│ Adjustment) │
│ GL: Location transfer│
│ Inv: Location change │
└──────────┬───────────┘
│
│ Vendor manufactures
▼
┌──────────────────────┐
│ PURCHASE ORDER │ ← For labor/overhead only
│ (Service charge) │ OR for finished assembly
│ GL: None │
│ Inv: None │
└──────────┬───────────┘
│
│ Receive finished product
▼
┌──────────────────────┐
│ ITEM RECEIPT │ ← Finished assembly
│ (or Assembly Build) │
│ GL: Assembly + Labor │
│ Inv: Assembly up │
└──────────────────────┘
Component Tracking
TRACKING COMPONENTS AT VENDOR
─────────────────────────────────────────────────────────────────
Method 1: Vendor Location
Components transferred to virtual "Vendor" location
Still on your books, but tracked separately
Before:
Warehouse A: 100 units
Transfer to Vendor:
Warehouse A: 80 units
Vendor Location: 20 units (at vendor premises)
Method 2: Consignment Tracking
Use custom fields/lists to track components at vendor
Inventory stays at original location
Manual tracking of what's at vendor
Method 3: Inventory Adjustment
Adjust out when shipped
Receive assembly with component cost
(Less preferred - loses visibility)
GL Impact
SUBCONTRACT GL FLOW
─────────────────────────────────────────────────────────────────
Step 1: Transfer components to vendor location
Inventory (Vendor Loc) $500 Dr ← At vendor
Inventory (Warehouse) $500 Cr ← Shipped out
Step 2: Receive finished assembly + vendor labor charge
Assembly Inventory $700 Dr ← Finished goods
Inventory (Vendor Loc) $500 Cr ← Components used
A/P (Labor) $200 Cr ← Vendor charge
Net Result:
Components at vendor: consumed
Assembly: received
Vendor owed: labor charge
Drop Ship Manufacturing
Vendor manufactures and ships directly to your customer.
Flow Diagram
DROP SHIP MANUFACTURING FLOW
─────────────────────────────────────────────────────────────────
Customer Order
│
▼
┌──────────────────────┐
│ SALES ORDER │ ← Drop ship item
│ (Drop Ship) │
│ GL: None │
│ Inv: None │
└──────────┬───────────┘
│
│ Auto-creates PO
▼
┌──────────────────────┐
│ PURCHASE ORDER │ ← Ship-to: Customer address
│ (Drop Ship) │
│ GL: None │
│ Inv: None │
└──────────┬───────────┘
│
│ Vendor ships to customer
▼
┌──────────────────────┐
│ FULFILLMENT │ ← Auto-created when PO received
│ (Virtual) │
│ GL: COGS + Revenue │
│ Inv: Virtual flow │
└──────────────────────┘
Key Characteristics
| Aspect | Drop Ship Manufacturing |
|---|---|
| Inventory in warehouse | No |
| Components at vendor | Vendor's materials |
| Shipping | Vendor → Customer direct |
| Your margin | Sales price - Purchase cost |
Choosing the Right Approach
WHICH OUTSOURCE METHOD?
─────────────────────────────────────────────────────────────────
Do you provide components to the vendor?
│
├── NO ──▶ Complete Outsource (Special Order or Drop Ship)
│ │
│ ├── Need to stock inventory? → Special Order
│ └── Ship direct to customer? → Drop Ship
│
└── YES ──▶ Subcontract Manufacturing
│
├── Track components at vendor? → Vendor Location
└── Simple tracking? → Adjustment method
Cost Tracking
Complete Outsource
COST TRACKING - COMPLETE OUTSOURCE
─────────────────────────────────────────────────────────────────
Purchase from Vendor:
Item Cost: $100 (vendor's full price)
Your Sale:
Sale Price: $150
COGS: $100 (vendor cost)
Margin: $50 (your profit)
Subcontract
COST TRACKING - SUBCONTRACT
─────────────────────────────────────────────────────────────────
Components Provided:
Part-A: 2 units × $20 = $40
Part-B: 1 unit × $30 = $30
Total Components: $70
Vendor Charge:
Labor: $25
Overhead: $10
Total Charge: $35
Assembly Cost:
Components: $70
Vendor charge: $35
Total Assembly Cost: $105
Quick Reference
Comparison Table
| Aspect | Complete Outsource | Subcontract | Drop Ship |
|---|---|---|---|
| You provide components | No | Yes | No |
| Inventory passes through you | Yes | Yes | No |
| Control over materials | Low | High | Low |
| Visibility | Medium | High | Low |
| Best for | Finished goods | Specialized labor | Direct ship |
Transaction Summary
| Method | Key Transactions |
|---|---|
| Complete Outsource | PO → Item Receipt → Vendor Bill |
| Subcontract | WO → Transfer → PO → Assembly Build |
| Drop Ship | SO → PO → Virtual Receipt/Fulfill |
Common Issues
| Issue | Cause | Solution |
|---|---|---|
| Component not at vendor | Transfer not done | Create transfer order |
| Wrong assembly cost | Labor not included | Add PO for vendor charge |
| Inventory stuck at vendor location | Receipt not created | Create receipt or adjustment |
| Drop ship not linking | Item setup incorrect | Check drop ship flag |
Next Steps
- Work Orders - In-house work orders
- Assembly Build - Completing production