Production by external party

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Posted on by Hendo

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Hi. We have a number of products that are manufactured under contract by external parties. Under the contract, we supply the raw material as specified by the manufacturer at not cost. The BOM/Formula has a service item for the cost of manufacturing by the external party. At present we execute a production order in AX that mimics what the external manufacturer is doing. On receipt of the manufactured product we RAF the production order for the qty received. These products must be QC'd ... hence Quarantine management has been setup against the finished item. Our RM and Finished product are all subject to standard cost.

Although this works, it is cumbersome and inefficient particularly when we are dealing with ongoing multiple production orders of this type.

Our preference would be to just raise a PO for the externally manufactured product rather than a service item rather than execute an AX production order but how then would we attribute raw material cost the the finished goods!!

I'm interested to understand how other AX users would deal with this type of manufacturing.

Regards. James.

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Fredrik Sætre 12,644 on at

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As your items are controlled by standard cost you do not have to run through the marking of purchases and Production services and thus do not require the sub supplier handling.

You would need to have a production order, but quite frankly, you do not have to have a purchase order. Just handle it as a costing invoice.

You do need to have the service item in your BOM and direct the costing invoice to the right account.

How about changing to a lean manufacturing concept for the production orders?

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Nagendra Varma K on at

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Hi James,

Approach:1 If you are using MRP system will generate planned orders for the FG.

If your planners are aware prior that this would be contracted you can change the planned order reference as planned purchase order which will create PO. When you issue RM for contractor please post Movement journal with reference PO number and ensure issue accounts are specified while posting. And than post receiving and Invoice.

Approach:2 Formula or Bom Line type as Vendor and ensure each bom and route will have different version so that if it is sub-contract then only version 2 will be selected and PO will be created.

Thanks

Nagendra Varma K

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Weaveriski 23,620 Moderator on at

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Hi James

The issue is the stock control, whilst you just purchase the finished part you have stock that you free issue, you then consume this in your production reflecting this. If you raise a PO for the product you need to then downdate component stock correctly but also presumably track the replenishment of the vendor warehouse (transfer order?). You can do this however but you lose visibility and control, write the stock off using a movement journal when you send it (so no real paperwork) and then order the finished product. The cost is an issue here, you pay $10 but it actually cost $100 here so all of your margins are impacted. If you were standard costing you could post the movement to balance the variance.

The issue for me is the control you currently have is clearly there for a reason, not only stock but financial, and the more you move towards a simpler approach the less accurate your costs and controls would be.

I suppose the first question is - are you standard costed? If you are not then you really have to do this in teh manner you are to get the production costs correct!

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Tim Schofield on at

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I came across a company that managed their subcontract manufacturing by purchasing the finished goods item, but it wasn't really working for them, because they couldn't plan the demand on the components that they were supplying to the subcontractor, (also the costing was all wrong), so we converted them to the standard subcontract process.

However, it's possible to setup the system so that it automatically performs the production order report as finish when you post the purchase order product receipt. See my blog post: timsaxblog.wordpress.com/.../subcontract-purchase-order-receipt-with-route-card-posting

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