This chapter covers the following topics:
Outsourced manufacturing, interchangeably referred to as 'Collaborative' or 'Contract' manufacturing or 'Subcontracting' in some industries, is a common business practice where a brand-owner or an Original Equipment Manufacturer (OEM) outsources its entire manufacturing operations or a portion of it by entering into a contractual agreement with a manufacturing service provider commonly known as a Manufacturing Partner (MP). The terms outsourced manufacturing or subcontracting are used to refer to this common business practice in this guide.
There are different ways in which enterprises outsource their manufacturing activities. These variations are driven by the strategic decisions that are made on some of the following factors:
Extent of Outsourcing:
Enterprises can opt to outsource the entire manufacturing process or a portion of it by collaborating with a MP.
Nature of Component Supply:
Enterprises can either own and manage the components for consumption at the MP's facility, or engage a supplier to either own and consign inventory, or drop ship the components at the MP's facility. In other situations, the OEM may charge the MP by registering a sale of the components resulting in a complete transfer of ownership
Shipment of Finished Goods:
Enterprises can decide to either supply finished goods directly to the customer or enter into a contractual agreement with the MP to drop ship the finished goods to the customer's facility.
Manufacturing Partner Type
Manufacturing Partners can be either external or internal.
External Manufacturing Partner Organization:
Enterprises can outsource the manufacturing of standard or configured assemblies to an external entity. In such cases the manufacturing partner is defined as an external MP organization. This organization is defined only for simulation purpose with Transfer to GL flag set as No.
Internal Manufacturing Partner Organization:
Enterprises can outsource the manufacturing of standard or configured assemblies to affiliated companies belonging to the same organization. In such cases manufacturing partner is defined as internal MP organization. This organization is defined as any other organization with Transfer to GL flag set to Yes.
Oracle supports the following types of subcontracting business practices that involve complete outsourcing of assemblies and most importantly, component sale by an OEM to a MP:
Chargeable (Shikyu) Subcontracting (Japan, Taiwan and Korea)
Buy/Sell Subcontracting
Full (Non-Chargeable) Outsourcing
Note: Buy/Sell and Full Outsourcing types of subcontracting works with both internal MP organizations and external MP organizations. Chargeable subcontracting works only with external MP organization.
Chargeable Subcontracting is a practice where the OEM completely outsources the manufacturing of an assembly to an MP and makes a provisional sale of components by invoicing the MP. These components are used to build the assembly at the MP's facility. In this practice, although the OEM registers a sale of components to the MP, the OEM still retains the ownership of the components and the inventory is reported under OEM's inventory valuation. When the OEM receives the assemblies, the MP invoices the OEM for the gross price of the assembly.
In a chargeable subcontracting relationship, the MP does not pay the OEM for purchasing the subcontracting components. The OEM pays the MP only for the value added portion in the outsourcing process, making it mandatory to net receivables invoices for components, and payables invoices for assemblies.
Chargeable Subcontracting Process
The Chargeable Subcontracting Process diagram describes the chargeable subcontracting business flow where an OEM outsources an assembly A to a MP and makes a provisional sale of components B and C to MP that are consumed at the latter's premises to manufacture assembly A. Assembly A's bill of material constitutes of 2 Ea of B and 1 Ea of C. Although there can be different modes of component supply, in this specific example, the OEM buys components B and C from a RMS (Raw Material Supplier) and sells them to the MP. In this example:
OEM periodically buys Components B and C from the RMS at the rate of $2 per each unit of B and $3 per each unit of C..
RMS ships components and invoices OEM for supplying B and C at the rate of $2 per B and $3 per C.
OEM outsources the manufacturing of assembly A by raising a purchase order or a blanket release on the MP at the rate of $19 per each unit of A.
Note: The purchase price of the assembly is determined considering the components' sales price and the value added in the manufacturing process.
MP orders components B and C from OEM at the rate of $4 per each unit of B and $6 per each unit of C.
Note: Although the OEM buys components at a certain price, the OEM may sell the components to the MP at a different price to prevent visibility of the actual purchase costs. In this example, OEM procures B and C at $2 per each unit of B and $3 per each unit of C from RMS and sales B and C at $4 per each unit of B and $6 per each unit of C from MP.
Appropriate units of components B and C are allocated to the respective purchase order for A for the purpose of planning and tracking. The OEM then ships Components B and C, and invoices MP at the rate of $4 per each unit of B and $6 per each unit of C. The MP receives components B and C and manufactures A.
Note: The OEM registers a sale, but retains the ownership of the components. MP ships assembly A and invoices OEM at the rate of $19 per each unit of A.
OEM receives Assembly A and nets accounts receivable invoices for selling B and C and account payable invoices for purchasing assembly. The OEM pays only for the net value added in the manufacturing of A. In this example, the added value for each unit of A is calculated as:
Purchase Price per unit of A = $19
Selling Price per unit of B = $4
Selling Price per unit of C = $6
Component usage per unit of A = 2 units of B, 1 unit of C
Net Value Add per unit of A = [$19 – (2 * $4 + 1* $6)] = $5
Note: In a chargeable subcontracting relation, the MP does not pay the OEM for buying the components, making it mandatory to net subcontracting account receivables and payables.
Buy/Sell Subcontracting is a business practice where an Original Equipment Manufacturer (OEM) completely outsources the manufacturing of an assembly to an external or internal Manufacturing Partner (MP) by buying the assembly from the MP and most importantly, selling the components to the MP that are consumed in the manufacturing of the assembly at the MP's premises. The ownership of the components is transferred to the MP immediately after the OEM ships the components to the MP unlike Chargeable Subcontracting where the OEM retains the ownership of the components throughout the subcontracting process.
In a Buy/Sell scenario, the sale of subcontracting components and purchase of outsourced assemblies are treated as independent business transactions. Receivables and Payables are generally not netted – OEM pays the MP for purchasing the outsourced assemblies and the MP pays for buying the subcontracting components from the OEM.
Buy/Sell Subcontracting Process
The Buy/Sell Subcontracting process diagram describes a buy/sell subcontracting business flow, where the OEM outsources assembly A to an MP, buys components B and C from the RMS and sells them to the MP for manufacturing A at the latter's premises. Assembly A's bill of material constitutes of 2 Ea of B and 1 Ea of C. In this example:
OEM periodically buys Components B and C from the RMS at the rate of $2 per each unit of B and $3 per each unit of C.
The RMS ships components and invoices the OEM for supplying B and C at the rate of $2 per B and $3 per C.
The OEM outsources the manufacturing of assembly A by raising a purchase order or a blanket release on the MP at the rate of $19 per each unit of A.
Note: The purchase price of the assembly includes the components' sales price and the value added in the manufacturing process.
The MP orders components B and C from the OEM at the rate of $4 per each unit of B and $6 per each unit of C.
Note: Like chargeable subcontracting, the OEM may sell the components to the MP at a different price to prevent visibility of the actual purchase costs. In this example, OEM procures B and C at $2 per each unit of B and $3 per each unit of C from RMS and sales B and C at $4 per each unit of B and $6 per each unit of C from MP.
Appropriate units of components B and C are allocated to the respective purchase order for A for the purpose of planning and tracking. The OEM ships Components B and C, and invoices MP at the rate of $4 per each unit of B and $6 per each unit of C. MP receives components B and C and manufactures A.
Note: In a buy/sell subcontracting relationship, the shipment of the components to the MP results in a complete transfer of ownership of the components from the OEM to the MP.
The MP ships assembly A and invoices OEM at the rate of $19 per each unit of A.
As the sale of subcontracting components and purchase of outsourced assemblies are treated as independent business transactions, the OEM pays the MP for buying assembly A at the rate of $19 per unit of A, and the MP pays the OEM at the rate of $4 per each unit of B and $6 per each unit of C.
Note: Unlike chargeable subcontracting, netting of subcontracting account receivables and payables is optional for Buy/Sell subcontracting.
Full Outsourcing is a business practice where an Original Equipment Manufacturer (OEM) completely outsources the manufacturing of an assembly to an external Manufacturing Partner (MP) and provides components to the MP but retains ownership of the components.
In a full outsourcing relationship, components are shipped to MP on consigned basis. The OEM receives completed assemblies in return and makes a payment to the MP for the assembly added value only.
Full Outsourcing where an OEM outsources the manufacturing of an assembly to an external MP applies to both discrete and process manufacturing enabled organizations.
Also, note that only standard costing is supported for full outsourcing for both discrete and process manufacturing with external MPs.
The Full Outsourcing for Discrete Manufacturing process diagram describes a full outsourcing business flow , where the OEM outsources Assembly A to an external MP, buys components B and C from the RMS and ships the components to the MP to manufacture A at the MP's premises while retaining ownership of components B and C:
Full Outsourcing Process for Discrete Manufacturing (External MP Organization)
OEM periodically buys Components B and C from the RMS at the rate of $2 per each unit of B and $3 per each unit of C.
The RMS ships components and invoices the OEM for supplying B and C at the rate of $2 per B and $3 per C.
The OEM outsources the manufacturing of assembly A to the MP, and ship components B and C to MP on a consigned basis.
OEM retains ownership of the materials/components while they are used in the manufacturing of assembly A. The MP makes no payment to buy and pay for the components.
Note: The purchase price of the assembly includes only the value addition and does not include the component value supplied by the OEM.
The MP produces the assembly A from the components B and C and ships the completed assembly A to the OEM.
The OEM receives the completed assembly A, and assumes the components B and C have been brought back from MP.
The OEM pays the MP for the assembly added value only. In Full Outsourcing, the purchase price of the assembly includes only the value addition. The component value supplied by the OEM is not included in the purchase price of the assembly.
Full outsourcing with external MP for process manufacturing is when the OEM completely outsources the manufacturing of a product to an external MP and provides ingredients to the MP while retaining ownership of the ingredients but with the OEM and the MP both setup as process enabled inventory organizations.
The solution currently supports the outsourcing of the main product where the formula is defined with one product in the MP organization and it does not support if the formula contains co-products and by-broducts.
The Full Outsourcing for Process Manufacturing process diagram describes a full outsourcing business flow, where the OEM outsources Product A to an external MP, buys ingredients B and C from the RMS and ships these ingredients to the MP to produce Product A at the MP's premises while retaining ownership of ingredients B and C:
OEM periodically buys ingredients B and C from the RMS at the rate of $2 per pound of B and $3 per pound of C.
The RMS ships ingredients and invoices the OEM for supplying B and C at the rate of $2 per B and $3 per C.
The OEM outsources the production of product A to the MP, and ships ingredients B and C to MP on a consigned basis.
OEM retains ownership of the ingredients while they are used in the production of product A. The MP makes no payment to buy and pay for the ingredients.
Note: The purchase price of the product includes only the value addition and does not include the ingredient value supplied by the OEM.
The MP produces the product A from the ingredients B and C and ships the completed product A to the OEM.
The OEM receives the completed product A from MP where A is produced by consuming the ingredients B and C.
The OEM pays the MP for the product added value only. In Full Outsourcing, the purchase price of the product includes only the value addition. The ingredient value supplied by the OEM is not included in the purchase price of the product.
See the Subcontracting for Process Manufacturing chapter for more details.
Full Outsourcing is also available as a business practice for industries to outsource the manufacturing of standard or configured assemblies to the affiliated companies belonging to the same organization. An existing manufacturing organization can be enabled as an internal MP organization as and when required depending on the business need. The internal MP organization can operate as a normal manufacturing organization catering to other manufacturing needs other than the internal manufacturing operation's needs.
Full Outsourcing with internal MP is applicable for only discrete manufacturing organizations.
The OEM and MP can belong to different operating units in the same or different ledgers/legal entities. All feature functions like Discrete Jobs, Flow Schedules, WMS, EAM, Serial Tagging, and so on are supported. Oracle Process Manufacturing enabled organizations are not supported.
The typical business scenarios in which MPs are defined as Internal are:
Wherein one organization acts as an OEM and another organization an internal MP organization while both belong to the same Legal Entity/Operating Unit.
Wherein one organization acts as a MP for the OEMs within the same or different Legal Entity/Operating Unit.
Wherein due to capacity constraints, the OEM organization sources from an internal MP organization belonging to the same or different Legal Entity/Operating Unit.
To support Full Outsourcing with Internal Organizations, the Full Outsourcing architecture for external organizations is used and all features and functions of any inventory organizations are supported in Internal MP Organizations with the restriction that the costing method should be Standard Costing only.
Note: Subcontracting components at MP organization item master level should be costing disabled at item level. In case Internal MP Organizations have common components e.g. components with same item code, some quantity supplied and owned by OEM and some that the MP procures and owns from external suppliers, such subcontracting components can be defined as costing enabled. However such components should be stored in expense sub-inventory and consumed from the same sub-inventory for proper accounting and tracking purposes.
To define an organization as an internal MP organization select the check box for MP organization and set the MP Type to Internal. Set the costing method in the organization parameter as Standard and the Transfer to GL flag as Yes. All the costing transactions from Internal Organizations can be transferred to GL like any other inventory organizations.
As in Full outsourcing with external MP organizations, the subcontracting Variance account is used for tracking the OEM's material at MP organizations. The same account is used in place of COGS and PPV during shipping of subcontracting components and at the receipt of Outsourced assembly respectively. This account is set up in shipping network and used in the OEM Organization. Select Full in the Shipping Network Subcontracting Type for internal MP organizations. See: Full Outsourcing Accounting Process
Full Outsourcing Process (Internal MP Organizations)
The Full Outsourcing Process: Internal Organizations diagram describes full outsourcing wherein the MP is defined as internal. The OEM and the MP are both setup as inventory organizations. The OEM organization sets up the MP as a supplier and customer. The MP also sets up the OEM as a supplier and customer. The outsourced assembly is represented as Item A and its subcontracting components are B, C.
Subcontracting orders and replenishment purchase orders are created for the prepositioned component item manually or from ASCP.
Interlock Manager is run to create subcontracting sales orders, discrete jobs, replenishment purchase orders for the synchronized component in MP as well as replenishment sales orders for synchronized and prepositioned component items in OEM.
As in full outsourcing with external organizations, the concurrent program Subcontracting: Interlock Manager is run before running ASCP collection. This is primarily for reconciliation. During this run, the program examines all the open subcontracting purchase orders and creates or updates subcontracting sales orders of the outsourced assembly A, and the WIP job or Flow schedule of the corresponding outsourced assembly in the internal MP Organization.
For example, in a WIP job production order, the Subcontracting: Interlock Manager associates the subcontracting sales order and WIP job with the corresponding subcontracting order. If the subcontracting order contains synchronized ship components, replenishment purchase orders are created in the supplier organization and are associated with the subcontracting order. Replenishment sales orders are created in the OEM organization and are associated with the replenishment purchase orders. If Project or Task references are defined in the source purchase order, those references need to be passed to WIP Job and replenishment purchase order and sales order.
The OEM then ships the subcontracting components using the existing shipping process. The MP ship confirms component items against the respective replenishment sales orders manually from OEM.
MP receives respective replenishment purchase orders.
The internal MP organizations receiving clerk receives the subcontracting components manually in the MP organizations. Components are not automatically received in internal MP organization. The purchase order acts as a receiving document as the replenishment purchase order price is always zero and is closed for invoicing, so there is no accrual accounting and invoicing.
Note: Subcontracting: Interlock Manager concurrent program's reconciliation step reconciles date changes and quantity changes made after the previous Interlock Manager run:
If the need by date on the subcontracting order is updated or the schedule ship date on the subcontracting sales order for the subcontracting components are updated, then the corresponding subcontracting sales order, and WIP job needs to be rescheduled. Also, the replenishment purchase order for the subcontracting components needs to be updated.
If the quantity on the subcontracting order is updated, the quantity on the corresponding subcontracting sales order and WIP job at the MP organization needs to be updated. If there are any shipment allocations, the allocations need to be updated.
If the subcontracting order in OEM organization is cancelled then the corresponding subcontracting sales order and WIP job in MP organization will also be cancelled.
Component items are issued and the discrete job is completed in MP,
The Production Supervisor in the MP organization can release the WIP job and execute it like any other order in MP organization. Subcontracting components in MP can be flagged as serial controlled or serial tagged as the business needs. Subcontracting components can be either back-flushed or issued to the WIP job and then the Job can be completed.
Upon completion of the final assembly, the MP ships the Outsourced Assembly A to OEM against the subcontracting order. The OEM ship confirms the assembly item A from MP against the same sales order.
The OEM receives assembly item A against the subcontracting order.
The AP invoice is created in the OEM to pay the MP for the value addition and the ERS program is run to create AP invoices for the subcontracting order of Assembly A. This creates invoices for Pay On Receipt.
AR invoice is created against the ship confirmed subcontracting sales order shipped from MP.
Characteristics | Chargeable Subcontracting | Buy/Sell Subcontracting | Full Outsourcing |
Subcontracting Component Ownership | Component sales is provisional and ownership lies with the OEM | Ownership is transferred to MP after the components are shipped | No component sale. Components are shipped to MP on consigned basis, and the ownership of material is with OEM. |
Country Specific Deployability | Applicable to Japan, Korea and Taiwan | Applicable to all countries | Applicable to all countries |
Costing Method | Available for Standard Costs Orgs only | Available for Standard, Average, FIFO and LIFO Orgs | Available for Standard Cost Orgs only |
Payables/Receivables Netting | Mandatory | Optional | Not relevant as there are no sales invoices for components |
Accounting setup | Requires additional setup for accounting Subcontracting components (revenue, receivables, COGS, and PPV) | Not relevant | Requires setup for accounting consigned Subcontracting components (COGS and PPV) |
Costs/Price setup consideration | Assemblies/Components costs/prices need to be setup to avoid unrealized gain/loss | Not relevant | Purchase price of the assembly will be the Value addition |
Subcontracting features include:
Modeling of OEM and MP as inventory organizations to facilitate tracking and simulation of subcontracting processes.
Accounting transactions in the external MP org are not posted to the General Ledger (GL) to avoid any unwanted financial impact.
Chargeable Subcontracting support is only for Standard Costing Orgs and can be deployed in Japan, Taiwan, and Korea. This is applicable for both the Original Equipment Manufacturer (OEM) as well as Manufacturing Partner (MP).
Buy/Sell Subcontracting supports all costing methods and can be deployed in any country.
Full outsourcing for discrete manufacturing for both internal and external MP organizations works only with Standard costing method and can be deployed in any country.
Full outsourcing for process manufacturing for only external MP organizations works only with Standard costing method and can be deployed in any country.
Separate tracking of accounting transactions and variances associated with assembly purchases in OEM organizations by setting up:
Subcontracting COGS, Subcontracting Revenue, Subcontracting receivables and Subcontracting Variance (applicable to Chargeable Subcontracting)
Subcontracting Intransit account (applicable to Full Outsourcing for tracking inventory value at the MP site)
Integrated planning (using ASCP) and subcontracting execution in discrete and project manufacturing environments to manage and control processes throughout the extended supply chain.
Support for different types of component supplies both prepositioned and synchronized, including the ability to drop ship components to partner's site that help in flexibly modelling the subcontracting process in varying business conditions.
Automatic creation of Discrete Jobs or Flow Schedules in the MP Org to simulate assembly production at the MP's facility in response to a purchase order or a blanket release (referred to as Subcontracting Orders in the subcontracting solution) through a concurrent program referred to as Interlock Manager.
Automatic creation of component purchase orders (referred to as Replenishment Purchase Orders in the subcontracting solution) for purchasing components from OEM and creation of corresponding component sales orders (referred to as Replenishment Sales Orders in the subcontracting solution) for shipping components to the MP through the Interlock Manager.
Automatic allocation of the Replenishment Sales Order component supplies to corresponding Subcontracting Orders for outsourced assemblies (for both external and internal MP organizations) through the Interlock Manager.
Automatic receipt of components in the MP Org based on in transit lead times through a concurrent program referred to as Auto Receive Components eliminate any manual effort involved in performing such transactions.
Automatic completion of the discrete job, backflushing of components and appropriate inventory balancing in the MP Org upon receipt of the outsourced assembly in the OEM Org for ensuring accuracy of inventory records that better planning and control through a concurrent program referred to as Process Receiving Transactions.
Dedicated Subcontracting Workbench and Reports providing better tracking and increased visibility throughout the subcontracting life cycle.
Ability to manage subcontracting process exceptions (over or under consumption, component or ingredients, assembly returns, and so on) helps in taking care of process variations and discrepancies.
Option to net subcontracting payables and receivables through the AP/AR Netting feature streamlines the payment process and provides greater flexibility in conducting business with partners.
Support of lot and serial genealogy (Note that with external MP organizations, only lot genealogy is supported).
Enterprises can define and outsource Assemble to Order (ATO) and Configure to Order (CTO) items from external or internal manufacturing partners. For example, pre-configured or configure to order laptops, desktops, automotive components, and so on.
Endeca support for internal MP organizations and configured assemblies.