What Is Outside Processing (Subcontracting)?
Also known as: subcontracting, outside operation, OSP, outsourced operation, toll processing
Definition
Outside processing, or subcontracting, is when a routing operation such as plating, heat treat or machining is performed by an outside vendor. The ERP raises a purchase order for the service and tracks the parts sent out and returned.
Outside Processing (Subcontracting) Explained
An outside operation sits in the routing like any other step, but its work center is flagged as external. When the work order reaches that operation, the ERP creates or releases a purchase order for the service, and the parts move to the vendor and back. The service is priced per piece, per lot or per hour, and the cost rolls into the job.
The material flow has two common patterns. In one, the buyer sends its own parts or components to the vendor, so inventory is still owned by the buyer while at the supplier. In the other, the vendor buys and supplies material as part of the service. SAP has a subcontracting purchase order with components provided to the vendor, NetSuite and Odoo have subcontracting features, and Infor SyteLine supports outside operations on job routings with a linked PO. Infor LN has subcontracting with components supplied to the subcontractor.
Planning must allow for transit and vendor lead time on both legs. If the routing only shows the vendor's processing time, the schedule will understate the real elapsed time and promise dates will slip.
Special processes such as heat treat, plating or NDT also carry certification requirements. The receipt should capture certificates of conformance, and the vendor should be approved for the specific process.
Why It Matters
- It keeps routings, costs and schedules complete when part of the process is done off site.
- Tracking material at the vendor prevents lost stock and wrong inventory values.
- Realistic outside lead time is a frequent cause of missed customer dates when it is left out.
- Certificates tied to the receipt provide the evidence for special process control.
In Practice
A job of 200 shafts needs black oxide after machining. The routing has an outside operation with a 5 day vendor time and 2 days transit each way. The ERP creates a PO at 0.85 per piece for 170, the cost of the service is added to the job, and 200 pieces return with a certificate, with 30 held for rework at the vendor.
Frequently Asked Questions
What is the difference between outside processing and subcontracting?
They are often used interchangeably. Outside processing usually means a single operation on the buyer's own parts, while subcontracting can also mean the vendor makes a whole component.
Who owns the material while it is at the vendor?
Normally the buyer, who tracks it as stock at a subcontractor location. Ownership terms are set in the purchase agreement.
How is outside processing cost added to the job?
The PO receipt or invoice posts the service cost against the work order operation, so the actual job cost includes the vendor charge.
Related Terms
Routing
A routing is the ERP record that defines the ordered sequence of operations required to manufacture an item, specifying for each step the work center or machine, setup time, run time per unit, move and queue time, and any outside processing.
Work Order
A work order is the ERP document that authorizes production of a defined quantity of an item by a due date. It snapshots the bill of materials and routing, drives material issues and labor reporting, and collects actual cost for the job.
Lead Time
Lead time is the elapsed time between initiating an order and having the material available for use. In ERP it is the offset MRP applies when back-scheduling a planned order from its due date to its release date.
Approved Vendor List (AVL)
An approved vendor list (AVL) is a controlled record of suppliers qualified to provide specific items, services or processes. Buyers may order only from listed sources, and changes require quality approval.
WIP (Work in Process)
WIP (Work in Process) is inventory that has been released to production and has begun conversion but is not yet a finished good. It includes partially machined parts, subassemblies, and material sitting in queue between operations.
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