Subcontracting

The idea of subcontracting is to outsource production steps. Differing from normal procurement, the subcontractor receives the required components from the customer, processes those and sends the new product back to the customer. Examples for subcontracting are products with irregular demand (e.g. displays resp. kits for promotions in the consumer products industry), production steps which require costly equipment or specialised knowledge (e.g. hardening or electroplating) or production steps with high manual efforts, which can be performed cheaper in countries with a lower wage standard.

Therefore the subcontracting process contains the procurement of an assembled (or otherwise produced) product from the subcontractor and the supply of the required components to the subcontractor. To model this, a purchase requisition resp. purchase order for subcontracting causes a demand for the components.

In some cases the components for the subcontractor are not produced by the customer but externally procured. In this case it might be favourable to send the component immediately from the supplier to the subcontractor. Another variant is a multi-level subcontracting, when the component for the subcontractor is produced by another subcontractor. Figure 21.1 shows the material flow for the normal subcontracting process and the two process variants.

The subcontracting is not supported by all applications in the same way. The limitations are listed at the end of the chapter..