Oleksandr - Fotolia
Companies that want to cut production and overhead costs, outsource non-core production processes, or that lack in-house production capacities find subcontracting a viable alternative. Subcontracting is a special form of procurement that entails handing over a company's raw materials to a subcontracting vendor. The subcontracting vendor processes or adds value to the product and returns it. It is possible to maintain complete visibility and control of the subcontracting process -- from a material's issuance, to material available at the vendor's location to any excess or unused material that the vendor returns.
Companies can ensure complete materials planning for the outsourced processes. Further, there's no reason for companies to compromise on the quality of the products produced by subcontracting vendors; the option to integrate quality inspection with outsourced production is also available.
Let's look at the end-to-end subcontracting process:
- The procurement manager creates a subcontracting purchase order containing a list of components the company needs to issue to a vendor for processing. Creating a subcontracting bill of materials beforehand is also an efficient way to ensure that the system only calls for needed components.
- The company issues components to the vendor with reference to the same subcontracting purchase order. In this step, the company takes a component's stock off its inventory and the stock now appears in the vendor's inventory.
- The vendor adds value to the components or the production process and returns the processed components.
- The company's warehouse manager receives the processed products along with any unused components the vendor returns.
- On goods receipt, the quality inspector can inspect the delivered product before it is used in other production processes or sold to customers.
- The vendor bills the company for the subcontracting services rendered.
Subcontracting as a special form of procurement differs from services procurement. During a subcontracting process, a vendor adds value to a company's materials (components); services procurement entails pure services delivery.
Fine-tune SAP procurement processes
How to forecast material consumption
Understand e-procurement software
Dig Deeper on SAP SCM
Related Q&A from Jawad Akhtar
The need for dedicated and completely integrated real estate management software is more important than ever as the drive for urbanization and ... Continue Reading
The S/4HANA digital core is an initiative of SAP to help companies turn big data emanating from various sources, such as sensors, into actionable ... Continue Reading
Companies looking to SAP to help them create great customer experience should understand C/4HANA deployment options and which is best for them. Continue Reading
Have a question for an expert?
Please add a title for your question
Get answers from a TechTarget expert on whatever's puzzling you.