4Contract Manufacturing

This chapter contains the following:

Overview of Contract Manufacturing

Contract manufacturing is a business process in which an organization, known as the original equipment manufacturer (OEM), outsources manufacturing to another organization, known as the Contract Manufacturer, to manufacture a specific part or a full product. The contract manufacturer manufactures the product to exact specifications of the original equipment manufacturer's label. The original equipment manufacturer may supply some or all components to the contract manufacturer. Contract manufacturing enables the original equipment manufacturer to completely outsource their manufacturing process to the contract manufacturer.

Note: The contract manufacturing flow is currently supported for only discrete manufacturing.

The following figure illustrates the solution overview of contract manufacturing:

In the following image, the business flow for contract manufacturing is explained. Manufacturing, Logistics, Procurement, Order Management, Supply Chain Planning, and Supply Chain Orchestration all form different parts of a single enterprise which deal with the various aspects of fulfilling a business flow for production of a work order which is used to complete a sales order for a customer. The contract manufacturer is an entity outside the enterprise who manufactures only a part of the production and returns it to the enterprise.

Solution overview of contract manufacturing

The solution supports outsourcing of manufacturing jobs in a build to plan or build to order manufacturing strategies. The OEMs can track and monitor the manufacturing process in the contract manufacturer's facility in real time, and also track the inventories at the contract manufacturer's facility that are owned by them, whether they're components or finished goods.

Contract Manufacturing Lifecycle and Features

Contract manufacturing is set into motion either when a customer places an order for manufacturing a product with the original equipment manufacturer (OEM) for back-to-back flow, or from Planning for plan-to-produce flow. The OEM in turn outsources the customer order to the contract manufacturer. The contract manufacturer manufactures the product and reports progress. Once the product is manufactured, the contract manufacturer stocks the finished goods and ships them on request. This completes the life cycle of contract manufacturing.

The following figure illustrates the life cycle of contract manufacturing from start to completion:

The following image describes how a contract manufacturing flow works. The customer places a sales order or there is a planned order in place. The manufacturing is outsourced partially to a contract manufacturer. The contract manufacturer manufactures and reports progress to the original equipment manufacturer. The original equipment manufacturer completes the rest of the manufacturing and reports stock to the inventory. The final product is then shipped on the customer's request.

Features overview of contract manufacturing

Contract manufacturing consists of the following five features:

  • Planning and Promising Contract Manufacturing Orders: Enables automatic scheduling and promising a customer order for a back-to-back contract manufactured item and generates planned orders to a forecast for a plan-to-produce contract manufactured item. Generates replenishment orders for the OEM supplied components which are already positioned at the contract manufacturers' facility, and planned orders for the OEM supplied components which are supplied to the contract manufacturer per order.

  • Automatic Supply Creation and Fulfillment: Creates supplies automatically for the OEM supplied components based on the contract manufacturing finished good item demand. It also creates supply for the finished good item and fulfills a customer demand or a planned order demand for a contract manufactured item automatically.

  • Track Production Progress: Enables OEMs to track the manufacturing progress in real time and provide visibility to the inventory that they own.

  • Automatic Change Management: Manages automatically any change requests coming from the demand side, and exceptions from the supply side.

  • Plan and Account Costs: Enables users to compare the costs between outsourced and in-house manufacturing. Cost Accounting enables users to monitor costs at a summary or detail level for each work order using the Review Work Order Costs user interface. This user interface enables users to review costs for in-house manufactured and contract manufactured items.

How Modeling of Entities Work Together in Contract Manufacturing

For contract manufacturing to work in Oracle Fusion Manufacturing, some of the entities within contract manufacturing are modeled as explained in the following section:

  • Contract manufacturer: Modeled as a regular supplier and supplier site within the Original Equipment Manufacturer's enterprise. Also modeled as an inventory organization within the original equipment manufacturer's enterprise.

  • Contract manufacturing finished good item: Item type is set to Make. The contract manufacturing check box is set to Yes.

  • Contract manufacturing service item: Item type is set to Buy. The contract manufacturing check box is set to Yes.

  • Contract manufacturing finished good item Bill of Material (BOM): Components supplied by the original equipment manufacturer are included in the BOM. The Supply Type of the components supplied by the contract manufacturer is marked as Supplier.The Supply Type for the components that are supplied by the original equipment manufacturer is marked as Push. The contract manufacturing service item is also included as a component in the BOM.

The following figure illustrates how the entities work together in contract manufacturing:

The following figure explains how various entities work together to complete the contract manufacturing flow. It is explained in detail in the topic.

Working of Entities in Contract Manufacturing

Explanation of how these entities work together in contract manufacturing:

  1. The original equipment manufacturer (OEM) receives supply creation requests for a contract manufactured item.

  2. After the supply creation request is received, the OEM creates a work order on the contract manufacturing finished good item in the contract manufacturing organization to monitor the manufacturing process in the contract manufacturer's facility. The contract manufacturing organization is a virtual organization that was created in the OEM enterprise representing the contract manufacturer to whom the manufacturing is outsourced.

  3. The OEM sends a purchase order on the contract manufacturing service time to the contract manufacturer as part of outsourcing the manufacturing.

  4. On receiving the Purchase Order (PO) on the contract manufacturing service item, the contract manufacturer understands that the PO is to manufacture the contract manufacturing finished good item. The contract manufacturer understands this because that person would have mapped the contract manufacturing service item to the contract manufacturing finished good item within their enterprise, based on the agreement with the OEM. This is achieved either by item cross referencing or any other means within their enterprise which is outside the purview of contract manufacturing.

  5. After the contract manufacturer completes manufacturing, the contract manufacturing finished good item is stocked in their premises and the contract manufacturer notifies the OEM that production is complete.

  6. The OEM initiates a receipt transaction on the PO placed on the contract manufacturer and receives the contract manufacturing service item into the contract manufacturing virtual organization, and completes the tracking work order that was created in the contract manufacturing organization. Because the contract manufacturing service item is one of the components in the Bill of Material (BOM) for the contract manufacturing finished good item, and the contract manufacturing service item is set for backflush or assembly pull, the contract manufacturing service item is auto-consumed into the work order. In addition, the inventory for the contract manufacturing finished good item is created in the contract manufacturing organization and the contract manufacturing service item inventory is decremented from the contract manufacturing organization.

Overview of the Contract Manufacturing Business Flow

After reviewing how each of the entities is modeled and how these entities work together in this solution, you can understand the overall business flow for contract manufacturing. The following figure shows a typical contract manufacturing business flow fulfilling a customer order. The parties involved in this business flow are the customer, the original equipment manufacturer (OEM), and the contract manufacturer.

The following image shows a contract manufacturing business flow fulfilling a customer order. The topic explains it in further details.

A contract manufacturing business flow fulfilling
a customer order.

Explanation of the business flow sequence:

  1. A customer places an order for an item with the OEM.

  2. The OEM receives the customer order and identifies that the ordered item is a contract manufacturing-enabled item.

  3. The OEM sends a purchase order to the contract manufacturer and outsources the manufacturing process for that item to the contract manufacturer as well.

  4. The OEM also creates a work order within their enterprise to track the manufacturing process at the contract manufacturing facility.

  5. The contract manufacturer reports production progress to the OEM on every milestone operation completion in the manufacturing process. The contract manufacturer also reports any component consumption that's being supplied by the OEM.

  6. The OEM receives the production report from the contract manufacturer, and in turn updates the work order that was created internally within the OEM's enterprise. The OEM also records any OEM-supplied component consumption.

  7. After the manufacturing is complete at the contract manufacturer's facility, the contract manufacturer stocks the finished goods in their facility and sends a production completion report to the OEM. The finished good stock at the contract manufacturer's facility is owned by the OEM. The OEM can track the components supplied by them and the finished good stock that's lying in the contract manufacturer's facility by reviewing the inventory levels in the contract manufacturing organization that the OEM has created within their enterprise.

  8. The contract manufacturer ships the finished goods to the OEM's customer on the OEM's request. After the finished goods are shipped and then received by the customer, the OEM updates the inventories in the contract manufacturing organization that the OEM has created within their enterprise.

Planning and Promising Contract Manufacturing Orders

The Planning and Promising Contract Manufacturing Orders feature in contract manufacturing, helps in planning the requirement of all the components that are supplied by the original equipment manufacturer (OEM) to the contract manufacturer.

Contract manufacturing solution supports two flavors for the OEM supplied components. The OEM can do one of the following:

  • Supply the components in bulk at the contract manufacturer's facility.

  • Supply components with every order that the OEM places on the contract manufacturer.

In a typical business scenario, the OEM would prefer to supply low-cost components in bulk at the contract manufacturer's facility and ship the high-cost components on a per order basis.

This feature also helps in planning and promising the contract manufactured items and adds to the business value of an organization.

Automatic Supply Creation and Fulfillment

The Automatic Supply Creation and Fulfillment feature in contract manufacturing helps in automating the contract manufacturing process from the supply creation process for the components that are supplied by the original equipment manufacturer (OEM), the contract manufacturing finished good item by the contract manufacturer, until the fulfillment of the customer order or a planned order demand.

The salient points are as follows:

  • This feature helps not only to autocreate the supplies for the components that are supplied by the OEM to the contract manufacturer, but also processes the shipment of the OEM-supplied components to the contract manufacturer.

  • The supply creation requests that come into Supply Chain Orchestration from Inventory Min-Max Planning and the Planning Central for the pre-positioned components and the components that are supplied per order are processed in Supply Chain Orchestration. These supply requests result in a supply order, which is fulfilled by transferring from one of the OEM's warehouses to the contract manufacturer. Supply Chain Orchestration orchestrates the supply creation process through an Internal Material Transfer flow, and ensures that the components are shipped to the contract manufacturer.

  • This feature also automates the supply creation and the fulfillment process of a contract manufactured finished good item using a predefined business process.

  • As part of this predefined business process flow, a work order is created in the contract manufacturing organization in the OEM's enterprise to track the production progress at the contract manufacturer. This work order is reserved against the customer order because the supply is being used to fulfill a customer order. If the supply is being created to fulfill a planned order, the supply isn't tied to any demand, and the predefined business process doesn't have the reservation step.

  • After the reservation is created, a Purchase Order (PO) is created for the contract manufacturing service item and sent to the contract manufacturer. This purchase order has the tracking work order details and the finished good product details stamped on it. This establishes a link between the contract manufacturing work order and the purchase order. This helps the contract manufacturer in identifying the contract manufacturing finished good item and work order details, which in turn helps them while reporting the production progress to the OEM. The purchase order also carries the work definition document as an attachment by which the work instructions and the milestone operations on which the contract manufacturer must report the progress are communicated to the contract manufacturer.

  • On every milestone operation completion, the contract manufacturer sends the production progress to the OEM. This feature enables Manufacturing to receive the production progress from the contract manufacturer.

A contract manufacturer can send the production progress in three ways:

  • Operation and material transaction public web services exposed by the OEM: If the contract manufacturer calls the operation and material transaction public web services that are exposed by the OEM's manufacturing application, this automatically updates the tracking work order and update the OEM-owned inventories in the contract manufacturing organization.

  • Preformatted spreadsheet given by the OEM: If the contract manufacturer sends the progress in a preformatted spreadsheet, the spreadsheet can be manually uploaded into OEM's manufacturing application by a production supervisor, which automatically updates the tracking work order component or finished good inventory levels.

  • E-mail or phone: If for some reason the contract manufacturers can't adapt to the web service technology or spreadsheet, they can always send the production progress by e-mail or by phone, whereby the production supervisor in the OEM's enterprise can manually update the tracking work order and material transactions.

With this, the OEM can monitor the production progress at real time by reviewing the work order or operation status. The OEM owned inventories can always be tracked in the contract manufacturing organization.

After the manufacturing is complete, the contract manufacturer sends the production complete report to the OEM. The manufacturing application in the OEM's enterprise receives the progress, completes the work order, and notifies Supply Chain Orchestration when the supply of the contract manufacturing finished good is created. Supply Chain Orchestration in turn notifies Order Management that the goods are now available for shipping.

How Production Progress is Tracked

The Track Production Progress feature in contract manufacturing enables a 360-degree view of the supply creation process from capturing the customer order till the fulfillment of the order.

This feature works in the following manner:

  • In the original equipment manufacturer (OEM)'s enterprise, Supply Chain Orchestration (SCO) workbench enables the supply chain operations manager to monitor the progress of supply creation process at any given point in time, and also to drill down into the manufacturing application to review the work order and operation statuses in real time. Similarly, a production supervisor can sign in to the manufacturing application at any time and review the work order and operation statuses.

  • If there are any exceptions reported by the contract manufacturer, they're recorded in the Supply Chain Orchestration workbench, and the exceptions are notified to the order manager. This enables the order manager to take appropriate corrective actions to mitigate the exceptions.

  • The order manager has supply details such as supply order details, supply availability status and any supply exceptions that are being reported by SCO displayed on the order fulfillment page. The order manager is also able to drill down into the Supply Chain Orchestration workbench to review the supply creation process in detail.

  • The warehouse manager can track the OEM-owned inventories be it the OEM-supplied components or the finished goods at any time in the contract manufacturing organization.

The salient features of the Track Production Progress feature are:

  • Provides 360-degree view of the production progress.

  • Enables you to view any supply exceptions.

  • enables you to take corrective actions to mitigate exceptions.

  • Provides visibility to OEM owned components and finished goods.

  • Enables real time visibility to the contract manufacturing production process.

Automatic Change Management

The Automatic Change Management feature in contract manufacturing helps in keeping the demand and supply in balance.

The key points of this feature are:

  • Automatic change management enables you to handle any changes that originate from the demand side, either from a customer or a planned order. It enables you to take action on quantity, date changes, or demand cancellations, and relay that information to the contract manufacturer appropriately. In this process, the feature ensures that the contract manufacturing work order and purchase order are synchronized. If for any reason the requested demand changes can't be met, the order manager is notified of the exceptions.

  • Automatic change management also enables a response to any exceptions that originate from the contract manufacturer. The feature enables you to react to any increase or decrease in quantity, date exception, or supply cancellation by relaying these exceptions to the order manager. The order manager can initiate corrective action if necessary. Change management always keeps the contract manufacturing work order and purchase order synchronized.

  • The business value of this feature is that, it enables the original equipment manufacturer (OEM) to efficiently handle all customer needs and react appropriately to all the supply exceptions in order to meet the customer demand. Supply chain resilience is increased with this feature to meet with any supply or demand changes.

Plan and Account Costs

The Plan and Account Cost feature helps cost accountants in all phases of the manufacturing cycle. It helps to estimate and set costs for components, resources and overheads. The components issues and product completion transactions are used to calculate the actual costs incurred for each work order.

The work order costs include the cost of the contract manufacturing service item. The service item cost is also included in the contract manufacturing work order, just as any other component. If the item is costed using actual cost method, then the Purchase Order (PO) price is used. However, for average and standard cost method, the current costs are used. The costs are calculated, and then the necessary distributions and accounting entries are created for all the transactions reported against this contract manufacturing work order.

Set Up a Supplier for Contract Manufacturing

In contract manufacturing, the contract manufacturer is modeled as a regular supplier. The original equipment manufacturer (OEM) must define the following to set up the supplier:

  • A contract manufacturer must be defined as a Supplier. To do this, in the Setup and Maintenance work area, use the following:

    • Offering: Manufacturing and Supply Chain Materials Management

    • Functional Area: Manufacturing Master Data

    • Task: Manage Suppliers

  • Each contract manufacturer's manufacturing site must be defined as a supplier site. You must assign a procurement business unit to each site. This is the organization authorized to provide procurement services for the site.

For general details about supplier setup and setup steps common to all SCM offerings, refer to the Implementing Common Features for SCM guide.

Set Up Inventory Organizations for Contract Manufacturing

In Contract Manufacturing, every Contract Manufacturer's manufacturing site is modeled as an inventory organization in the Original Equipment Manufacturer's Oracle Fusion Applications.

For general details about setting up inventory organizations and setup steps common to all SCM offerings, refer to the Implementing Common Features for SCM guide.

The following table displays the values of the inventory organization's attributes:

Attribute Name Attribute Value

Usage

Inventory Management

Location Address

The Location Code or Address created in the earlier step for the Contract Manufacturer

Internal or External

External

Organization or Manufacturing Plant

Yes

External Application Type or Organization which represents a Contract Manufacturer

Yes

Supplier

Select the Contract Manufacturer (defined as a Supplier)

Supplier Site

Select the Contract Manufacturer's Site or Location (defined as a Supplier Site)

You must also specify the following:

  • Supply subinventory

  • Supply locator (if the supply subinventory is locator controlled)

  • Completion subinventory

  • Completion locator (if the completion subinventory is locator controlled)

Note: The parameter in the organization definition Auto Associate Serial Numbers to Work Order must be set to Yes for serial-tracked production, and if the original equipment manufacturer (OEM) supplies serials.

Setting Up Item Inventory Organization in Contract Manufacturing

In contract manufacturing, you must set up item inventory organization to define the items and components. Negative inventory isn't valid in the Contract Manufacturer Finished Goods Server.

The following table describes the attribute values that must be set up for Contract Manufacturer Finished Goods Server and Contract Manufacturer inventory organization:

Attribute Name Attribute Value

Receipt Date Exception Action

None

Over Receipt Action

None

Note: You must ensure that overreceipt tolerance on the Purchase Order and overproduction tolerances are the same in Purchase Order and Work Order.

For more details about setting up item inventory organizations and setup steps common to all SCM offerings, refer to the Implementing Common Features for SCM guide.

How Items Are Set Up

The items used in contract manufacturing are created in the Product Information Management work area. The following key setup tasks are performed within the Product Information Management work area:

  • Create Items setup is used to create items such as the contract manufacturing finished goods item and the contract manufacturing service item. It is also used to set the attributes as required for the contract manufacturing flow.

  • Create Item Structure setup is used to create the bill of material for the contract manufacturing finished good item.

The following table displays items and the attributes for Finished Goods item, original equipment manufacturer (OEM) supplied components, contract manufacturer supplied components, and contract manufacturing service item (represented as Contract Manufacturer Finished Goods Server):

Attribute Name Attribute Value Attribute Value Attribute Value Attribute Value

Not Applicable

Finished Goods Server

Contract Manufacturer Finished Goods Server

OEM Components

Contract Manufacturer Sourced Components

Item Type

Make

Buy

Transfer

Transfer

Inventoried

Yes

Yes

Yes

Yes

Stockable

Yes

Yes

Yes

Yes

Transactable

Yes

Yes

Yes

Yes

Back-to-Back

Yes

No

No

No

Contract Manufacturing

Yes

Yes

No

No

Inventory Planning Method

Not Planned

Not Planned

Min-Max Planning (for pre-positioned components)

Not Planned

Planning Method

Not Planned (for Back-to-Back) and MPS Planning (for Plan to Produce)

Not Planned

MRP Planning (for components supplied per order)

Not Planned

Supply Type

Push

Assembly Pull

Push

Supplier

For general details about setting up items and setup steps common to all SCM offerings, refer to the Implementing Common Features for SCM guide.

Set Up a Work Definition in Contract Manufacturing

In contract manufacturing, multiple supply scenarios are possible, resulting in a Bill of Materials (BOM) for each of the supply scenarios. The following are a few supply scenarios:

  • Make in-house.

  • Purchase from a supplier.

  • Alternative Contract Manufacturer Suppliers: CM1or CM3.

  • Work definition is set up for each contract manufacturer's manufacturing plant.

  • The following section lists the recommendations for setting up a work definition:

    • Contract Manufacturer Finished Goods Server is defined as one of the components for the last operation and is an example of a contract manufacturing service item. Define only one Contract Manufacturer Finished Goods Server as a component, with a BOM quantity of 1 EA.

    • Set up the supply subinventory and locator (if subinventory is locator controlled).

    • Dummy work centers are required only for lead-time calculation. It is expected that the Contract Manufacturer supplier doesn't report any resource consumption.

    • Work definition need not be limited to only those operations that the OEM is interested in tracking. Work definition can include all the operations, and the operations (milestone operations) on which the OEM needs a progress update from the Contract Manufacturer. Those operations are marked as count point operations.

    • All the milestone operations are count point operations, and auto-transact operations may exist in a contract manufacturing work definition.

Set Up a Blanket Purchase Agreement in Contract Manufacturing

In contract manufacturing, the buyer sets up a blanket purchase agreement with the contract manufacturer supplier. To set up a blanket purchase agreement, you must use the Create Agreements task in the Purchasing work area.

The following table lists the values a buyer must specify in the blanket purchase agreement:

Attribute Name Attribute Value

Group Requisition Headers

No

Group Requisition Lines

No

The buyer must manually attach the work definition .pdf or XML document to the blanket purchase agreement. It is expected that the buyer adds this attachment to the purchase agreement, and communicates to the supplier.

You can search and edit items in the work definition and create attachments using the following steps:

  1. To enable the To Supplier attachment category for the Items entity ITEM_ENTITY In the Setup and Maintenance work area, use the following:

    • Offering: Product Management

    • Functional Area: Items

    • Task: Manage Attachment Categories for Product Management

  2. To add a new attachment category for To Supplier to the Root Item Class or the Item Class in context for the work definition item, in the Setup and Maintenance work area, use the following:

    • Offering: Product Management

    • Functional Area: Items

    • Task: Manage Item Classes

  3. In the Product Information Management work area, click the Manage Items task to search for and select the work definition item.

  4. On the Edit Item page, click the Attachments tab to add a new attachment. Select the Attachment Category created earlier, and select the Work Definition document, as it was printed from work definition.

Set Up Receiving Parameters in Contract Manufacturing

In contract manufacturing, you can use receipt routing to track and move items through a series of operations that make up a receipt route. You must set up the receipt routing controls in such a way that the Contract Manufacturing Finished Goods Server (which is an example of a contract manufacturing service item) has a direct delivery routing.

Set Up ATP Rules in Contract Manufacturing

In contract manufacturing, setting up ATP Rules to support the Back-to-Back contract manufacturing flow is similar to how ATP Rules are set up for standard order promising. However, there are certain points to be noted specifically for Back-to-Back contract manufacturing order promising, and are as follows:

  • The Promising Mode is set as Supply chain availability search.

  • The Search Components and Resources is enabled if Make recommendations are required. This is mandatory for Back-to-Back contract manufacturing Make recommendations.

  • ForSupply Types, all required supply types are selected that must be considered during order promising.

  • For Demand Types, all required supply types are selected that must be considered during order promising.

  • The Infinite Time Fence is set to a large value.

Set Up Sourcing Rules in Contract Manufacturing

In contract manufacturing, you can define sourcing rules that specify how to replenish items in an organization, such as purchased items in plants. Sourcing rules can also specify how to replenish all organizations.

Setting up sourcing rules to support the Back-to-Back contract manufacturing flow is similar to how sourcing rules are set up and assigned for standard order promising. However, there are certain points to be noted specifically for Back-to-Back contract manufacturing order promising and are as follows:

  • The sourcing rule is defined as a Local one.

  • The effective Start Date and End Date for the rule is provided. The end date is optional.

  • Define a sourcing rule of type Make, and select the Contract Manufacturing Organization in the Organization field.

The following table describes how you must set up sourcing rules:

Sourcing Rule for Finished Goods or Component Sourcing Rule

Demand for Finished Goods Server in OEM Organization

Transfer from Contract Manufacturer Organization

Demand for Finished Goods Server in Contract Manufacturer Organization

Make in Contract Manufacturer Organization

Demand for Component (OEM Supplied) in Contract Manufacturer Organization

Transfer from OEM Organization

Guidelines for the Setup and Implementation of Contract Manufacturing

This topic explains certain decision points and some best practices that are crucial for the setup and implementation of contract manufacturing.

Decision Points

The following decisions must be made before you set up your organization as a contract manufacturing organization.

  • The original equipment manufacturer organizations must identify the items for which the manufacturing process is completely outsourced to a contract manufacturer.

  • The original equipment manufacturer organizations must identify which items are outsourced to fulfill a customer order, and which items are outsourced to fulfill a planned order generated against a forecast. This decision has to be made taking into account the readiness of the extended supply chain to support the contract manufacturing flows.

    The items outsourced to fulfill a customer order is a contract manufactured item, and the item outsourced to fulfill a planned order is a back-to-back item.

Best Practices

The following points are some of the best practices that you can keep in mind while setting up your organization as a contract manufacturing organization:

  • Each contract manufacturing site should be modeled as one inventory organization within the original equipment manufacturer's enterprise.

  • For easy identification, name the contract manufacturing organization with the contract manufacturer's name.

  • Define one subinventory for tracking the finished good inventory, and another subinventory for tracking the components supplied by the original equipment manufacturer.

  • For easy identification of the contract manufacturing service item, name the service item by suffixing the contract manufacturer's name or initial to the contract manufacturing finished good item.