Setup subcontracting in manufacturing process (Dropship Material)

Most manufacturing companies outsource some part of the job contracting work to other manufacturing companies to get the best expertise methodology and resource to produce the world class product (i.e Most reputed companies smart phones are assembled in China is the best example of the subcontracting)

In this document we will show you steps to setup the subcontracting business flow, Issue some raw material to your contractor from your warehouse and some raw material ask your vendor to make the direct delivery to contractor location.

Contractor will produce the semi-finished product which will be consumed later to prepare the final product in our factory.

Let’s take an example of Table, to produce the table we need 1 table top and table frame, 4 lags and some consumable like bracket and bolt, assumed that table is laminated by third party contractor where we supply wood sheet and lamination sheet will be supplied by our vendor directly to prepare the laminated table top.



Install manufacturing, purchase, inventory applications in order to create the full subcontracting flow.

Create location

By default production is the location where all the manufacturing order processed, all the material issued from stock location to Production location, and once production completed the final product pushed back to the stock location.

We need seperate location which is not part of our warehouse, we will called it subcontracting. It will be easy to track the material issued to the subcontractor, also we can define reorder level on that location.


You can enable the multi location from Inventory / Configuration / Settings, select Storage Locations and apply the setting.

To create the location go to Inventory / Configuration / Location, create an internal location named as Contractor under the WH.


Enable routes

Inventory route plays a key role to create the subcontracting flow, using routes we are able make the custom flow for the inventory, like Issue material to contractor and receive finished material form contractor.

To create the custom route go to Inventory / Configuration / Settings and select Multi-Step Routes, Storage Locations will be selected automatically.


Let’s create a two different routes, which can be selectable on the product routes

  • Material - select this route on the product which can be issued to the contractor
  • Subcontracting - select this route when you want contractor to be product and send it to our warehouse (stock location)

Material Route (Buy and Deliver)

Material route, select Product and Product Category under the Applicable On options.


Create a Procurement that applied on the Contractor location and ask our Stock location to fulfill the requirement by stock transfer.



Material Route (Buy and Deliver) route first check the material at WH/Stock location and buy when enought stock is not availale.

Material Route (Dropship)

Material route, select Product and Product Category under the Applicable On options.


Create a Procurement that perform the Buy opertion when stock or product is not available at WH/Contractor location.



Material Route (Dropship) route first check the material at WH/Stock location and buy when enought stock is not availale.

Subcontracting Route

Same way create second route “Subcontracting” that create a manufacturing order at contractor location when we need that semi-finished material in our stock.


Create a procurement rules that applied on WH/Stock location and ask WH/Contractor location to fulfil by creating a manufacturing order. This configuration will create the manufacturing order at Contractor location and looking for the material at WH/Contractor location and once Tabletop produced it will be pushed to WH/Stock location.


To separate the contractor’s manufacturing orders form the normal manufacturing orders you should create a new operation type which will be appeared on the warehouse dashboard.



Let’s create the Tabletop product and select the correct route on this product, select Subcontracting as this product is manufactured but at contractor location, we just need to supply them wooden and lamination sheet.


When you create a Wooden sheet select the Material (Buy -> Deliver) and Buy routes.


When you create a Lamination sheet select the Material (Dropship) route.


Depanding on the product routes will be applied, delivery and purchase order will be create for the Wooden sheet while Lamination sheet will create the purchase order and direct delivery form vendor location.


Define the vendor under the purchase tab and define the re-order level for location WH/Stock and WH/Contractor depending on the needs.

Define the other raw material such as lags, table frame, bracket and bolt as stockable and define respective vendors and re-order level for each products. The bolt can be defined as consumable with the minimum stock level.

Bill of Material

Define two different bill or material one for Tabletop and second for the Table (final product).


Once you define the bill of material for Table it will be looking as below, print the BOM Structure form Print manu on the Table’s bill of material.


Cost Structure

Make sure that you have configure the correct cost on each product to compute the cost of the finished and semi-finished raw material.


Let’s add a new consumable product on the Table top bill of material to include the cost of contractor, I have considered that to produce each table top contractor will charge us $5 as a service and delivery charges.

I have added that cost to the my Table top bill of material, and cost computed based on the components and service is not $80.



You can also install the Product extension to track sales and purchases app to compute the cost of the product based on the cost of material consumed.


Reorder Rules

Make sure that you defined the reorder rules for each product respectively to the locations. The reorder rules have to be defined for both WH/Stock and WH/Contractor location.


Run the Scheduler from Inventory application, you should get the first request for quotation under the Purchase application as below.


Confirm the purchase and receive the raw material to have the seamless test for the subcontracting business flow.

Manufacturing order

Everything is setup and now we are ready to test our first manufacturing order that triggers subcontracting flow. Create the manufacturing order for 1 Table, save and check on Check Availability button.


All the material except Tabletop will be marked as available.

Go to Inventory application and run the scheduler 2 times, you will notice after each scheduler run you will see the updates on the dashboard. First time it will create the manufacturing order at Subcontracting options and then delivery order on the Delivery operation.


Open the delivery order and process it, as soon as you process the manufacturing order at Contractor location will be ready to process.


Process and manufacturing the set it mask as done. When contractor’s manufacturing order processed and mark as done, the Tabletop will be marked as received in our warehouse and we are ready to process the order for the Table in our factory.


Finally produce the table and set this manufacturing order as done by clicking on the Mark as Done button. Check the inventory level it has be looking as below.


Contractor Bill

Receive the vendor bill and create it manully.


If you have any question about this page, do not hesitate to drop your question in below comment box.