Subcontracting overview

In manufacturing, subcontracting is the process of a company engaging a third-party manufacturer, or subcontractor, to manufacture products that are then sold by the contracting company.

Subcontracting provides a variety of benefits for both the contracting company and the subcontractor.

For the contracting company, subcontracting allows them to sell a wide variety of manufactured products, without having to worry about investing in and maintaining the equipment and labor required to handle the manufacturing themselves.

This helps contracting companies stay flexible throughout economic cycles, as they can easily increase or decrease their engagements with subcontractors, as necessitated by the current moment. It also means they are able to focus on tasks they excel at, while delegating more specialized work to subcontractors.

On the other side of the relationship, subcontracting allows subcontractors to specialize in more niche areas of production, which might not be as profitable outside the bounds of a subcontracting engagement. In certain arrangements, it also provides them with the flexibility to choose which projects they accept or decline, and how many they work on at any given time.

In Odoo, companies can configure their subcontracting workflows based on a variety of different factors, including how components are sourced, and what happens to finished products once they are manufactured.

Configuration

To enable subcontracting in Odoo, navigate to Manufacturing app ‣ Configuration ‣ Settings, and tick the checkbox next to the Subcontracting setting, under the Operations heading. Then, click Save.

The Subcontracting setting in the manufacturing app.

With subcontracting enabled, a few different features become available in Odoo:

  • On bills of materials (BoMs), the BoM Type field now includes a Subcontracting option. Enabling the Subcontracting BoM type designates the BoM’s product as a subcontracted product, which means Odoo knows that it is produced by a subcontractor, and not by the company that owns the Odoo database.

  • Two subcontracting routes become available in the Inventory app, and can be assigned to specific products, on the Inventory tab of their product pages:

    • Resupply Subcontractor on Order

    • Dropship Subcontractor on Order

Subcontracting workflows

In Odoo, there are three subcontracting workflows, the main difference between them being how the subcontractor obtains the necessary components:

  • In the basic subcontracting workflow, the subcontractor is fully responsible for obtaining the components. This workflow is outlined in the Basic subcontracting documentation.

  • In the Resupply Subcontractor on Order workflow, the contracting company sends the components from their warehouse to the subcontractor. This workflow is outlined in the Resupply subcontractor documentation.

  • In the Dropship Subcontractor on Order workflow, the contracting company purchases the components from a vendor, and has them delivered directly to the subcontractor. This workflow is outlined in the Dropship to subcontractor documentation.

In addition to how a subcontractor obtains components, it is also necessary to consider why a product is being subcontracted, as well as what happens to products once they are manufactured by the subcontractor.

In terms of why a product is being subcontracted, the two main reasons are to fulfill a customer order, or to replenish the quantity of stock on-hand.

In terms of what happens to products once they are manufactured, they can either be shipped to the contracting company, or dropshipped directly to an end customer.

Each of the three subcontracting workflows described above can be configured to facilitate any of these possibilities, and the methods for doing so are outlined in their respective documentation.

Subcontracted product valuation

The valuation of a subcontracted product depends upon a few different variables:

  • The cost of the required components, if provided by the contracting company; from here on referred to as C.

  • The price paid to the subcontractor for the service of manufacturing the subcontracted product; from here on referred to as M.

  • The cost of shipping components to the subcontractor, and having them shipped back to the contracting company; from here on referred to as S.

  • The cost of dropshipping, if the components are shipped by the subcontractor to the end customer; from here on referred to as D.

  • Any other associated costs, like import taxes, etc.; from here on referred to as x.

Therefore, the total valuation of a subcontracted product (P) can be represented by the following equation:

\[P = C + M + S + D + x\]

It is important to note that not every subcontracted product valuation will include all of these variables. For example, if the product is not dropshipped to the end customer, then there is no need to factor in the cost of dropshipping.