How ERP Helps Manufacturers Manage Subcontracting and Outside Processing
Manufacturing Subcontracting ERP
Manufacturing does not always happen entirely inside the factory.
Many manufacturers depend on external suppliers for specific production activities such as machining, coating, heat treatment, painting, fabrication, finishing, assembly, or specialist testing. These activities are often referred to as subcontracting or outside processing
Using external suppliers can help manufacturers access specialist skills, increase production capacity, and avoid investing in expensive equipment for every manufacturing process.
However, managing subcontracted work can become complicated.
The manufacturer still needs to know what materials were sent to the subcontractor, what work needs to be completed, how much the service will cost, when the items are expected back, and whether the outside processing affects the final production schedule.
When these activities are managed through spreadsheets, emails, phone calls, and separate purchasing records, maintaining accurate information becomes difficult.
This is where an ERP system can help.
What Is Subcontracting in Manufacturing?
Subcontracting occurs when a manufacturer sends part of its production process to an external company.
For example, a manufacturer may produce a metal component internally but send it to another company for:
- Heat treatment
- Powder coating
- Painting
- Plating
- CNC machining
- Welding
- Surface finishing
- Specialist inspection
- Assembly
- Packaging
The external company performs the required operation and returns the processed material or component to the manufacturer.
The manufacturer remains responsible for coordinating the overall production process.
Why Outside Processing Can Be Difficult to Manage
Subcontracting adds another layer to an already complex manufacturing process.
Consider a simple production order:
Raw Materials → Manufacturing → Finishing → Quality Check → Finished Product
If finishing is outsourced, the process becomes:
Raw Materials → Manufacturing → External Supplier → Finishing → Return → Quality Check → Finished Product
The manufacturer now has to track an additional supplier, movement of materials, processing requirements, costs, expected return dates, and production status.
Without an integrated system, this information can easily become fragmented.
Common challenges include:
- Difficulty tracking materials sent to subcontractors
- Limited visibility into work currently outside the factory
- Delays in receiving processed materials
- Unclear subcontracting costs
- Manual purchase order management
- Difficulty matching supplier invoices with services received
- Production schedules affected by external delays
- Inaccurate inventory information
These challenges can affect both operational efficiency and customer delivery commitments.
How ERP Helps Manage Subcontracting
An ERP system can connect subcontracting activities with purchasing, inventory, production, and finance.
Instead of treating outside processing as a separate activity, manufacturers can include it as part of the overall production process.
This provides a more complete view of what is happening from the beginning of a production order to the final finished product.
1. Track Materials Sent to Subcontractors
One of the most important requirements in outside processing is knowing which materials have been sent to an external supplier.
For example, a manufacturer may send 1,000 components to a subcontractor for coating.
The business needs to know:
- How many components were sent?
- When were they sent?
- Which supplier received them?
- What operation is being performed?
- How many have been returned?
- How many are still outside the factory?
An ERP system can provide structured records for these movements.
This helps the manufacturer maintain better visibility over materials that are temporarily outside its own facility.
2. Connect Subcontracting With Production Orders
Outside processing should not exist separately from production.
If a production order requires an external operation, that activity should be connected to the overall manufacturing process.
For example:
Production Order → Internal Operation → Subcontracted Operation → Quality Inspection → Finished Product
An integrated ERP system can help teams understand where a production order currently stands.
This is particularly useful when several subcontracted operations are involved in the same manufacturing process.
3. Improve Purchase Order Management
Subcontracted work usually involves an external supplier and a commercial transaction.
The manufacturer needs to communicate:
- Required service
- Quantity
- Expected completion date
- Pricing
- Delivery requirements
- Technical specifications
ERP can connect the subcontracting requirement with purchasing processes.
This reduces the need to maintain separate records for production and purchasing.
4. Monitor Subcontractor Lead Times
The timing of outside processing can directly affect production.
If a subcontractor normally requires five days but takes ten days, the delay may affect the manufacturer’s delivery commitment.
ERP data can help manufacturers monitor expected and actual processing times.
Over time, management can use this information to identify suppliers that consistently meet deadlines and suppliers that frequently cause delays.
5. Improve Cost Visibility
Subcontracting introduces additional production costs.
These may include:
- Processing charges
- Transportation
- Handling
- Additional materials
- Inspection costs
- Expedited delivery charges
When subcontracting costs are tracked separately from the main production process, it can become difficult to understand the actual cost of a product.
ERP can connect outside processing costs with the relevant production activity or product.
This provides management with better information when reviewing manufacturing costs and profitability.
6. Reduce Manual Tracking
Without ERP, employees may use spreadsheets to track materials sent to external suppliers.
Another employee may maintain purchase orders, while production planners use a different system to monitor production.
This creates unnecessary manual work.
An integrated ERP system can bring these activities together.
Instead of asking multiple departments for updates, employees can work from connected business information.
7. Improve Inventory Visibility
A common misconception is that inventory only needs to be tracked while it is inside the warehouse.
For manufacturers using subcontractors, materials may temporarily leave the factory but still belong to the business.
For example:
Warehouse → Subcontractor → Processing → Factory → Finished Goods
The ERP system should help the business understand where materials are within this process.
Better visibility can reduce confusion about available quantities and materials currently being processed externally.
8. Help Manage Subcontractor Performance
Not every subcontractor performs at the same level.
Some may consistently deliver high-quality work on time, while others may experience delays or quality problems.
Manufacturers can use ERP information to monitor supplier performance using measures such as:
- On-time delivery
- Processing lead time
- Rejection rates
- Quality issues
- Cost variations
- Order completion
- Supplier responsiveness
This gives purchasing and management teams better information when reviewing supplier relationships.
9. Support Better Production Scheduling
Outside processing can become a bottleneck if it is not planned properly.
For example, a manufacturer may complete its internal production work on Monday but cannot finish the customer order because a subcontractor will not return the components until the following week.
This means the external operation has become part of the production schedule.
ERP can help manufacturers consider subcontracted activities when planning production and expected completion dates.
This creates a more realistic view of the entire manufacturing process.
10. Connect Subcontracting With Finance
Subcontracting does not only affect production.
It also affects financial records.
The business needs to account for:
- Supplier invoices
- Processing charges
- Transportation expenses
- Material costs
- Production costs
- Purchase commitments
When production, purchasing, inventory, and finance are connected through ERP, information can flow between departments more efficiently.
This can reduce duplicate data entry and improve financial visibility.
A Simple Example of ERP-Based Subcontracting
Consider a manufacturer producing industrial equipment.
A component is manufactured internally and then sent to an external company for heat treatment.
The process may look like this:
1. Production Order Created
The manufacturer creates a production order for the required quantity.
2. Internal Manufacturing
The component is manufactured inside the factory.
3. Subcontracting Requirement
The component requires heat treatment that is performed by an external supplier.
4. Material Sent to Supplier
The required quantity is sent to the subcontractor.
5. Outside Processing
The subcontractor performs the required treatment.
6. Material Returned
The processed components are returned to the manufacturer.
7. Quality Check
The components are inspected.
8. Production Continues
The components move to the next manufacturing stage.
With an integrated ERP system, these activities can be connected rather than managed as separate transactions.
This gives the manufacturer a clearer picture of the production order and the materials involved.
What Manufacturers Should Look for in an ERP System
If subcontracting is an important part of your manufacturing process, it should be considered during ERP selection.
Manufacturers should evaluate whether the ERP can support:
Subcontractor Management
The system should provide useful information about external suppliers and their activities.
Material Tracking
Manufacturers should be able to understand materials sent to and received from subcontractors.
Production Integration
Outside processing should connect with production orders and manufacturing workflows.
Purchasing
The system should support purchase orders and supplier transactions associated with subcontracted services.
Cost Tracking
Manufacturers should be able to identify costs associated with external processing.
Inventory Management
The system should provide visibility into materials moving between the manufacturer and external suppliers.
Supplier Performance
Reports and KPIs can help businesses evaluate subcontractor performance.
Reporting
Management should be able to access useful information about outstanding subcontracting activities, costs, lead times, and supplier performance.
Benefits of Managing Outside Processing With ERP
When subcontracting is properly integrated into ERP, manufacturers can achieve several operational benefits.
These can include:
- Better material visibility
- Improved production coordination
- Reduced manual tracking
- More accurate cost information
- Better supplier monitoring
- Improved production scheduling
- Faster access to information
- Better coordination between procurement and production
- Improved inventory accuracy
- Stronger operational control
The exact benefits will depend on the manufacturer’s processes and how effectively the ERP system is implemented.
Common Mistakes Manufacturers Should Avoid
ERP can improve subcontracting management, but the implementation needs to be planned carefully.
Treating Subcontracting as Only a Purchasing Activity
Outside processing affects production, inventory, purchasing, and costs. It should be considered part of the overall manufacturing workflow.
Not Tracking Materials Properly
If materials are sent to external suppliers without accurate records, inventory information can quickly become unreliable.
Ignoring Supplier Lead Times
A subcontractor’s processing time can affect customer delivery dates. Lead times should be included when planning production.
Using Inconsistent Supplier Information
Supplier records, processing services, prices, and lead times should be maintained consistently.
Failing to Monitor Actual Costs
The quoted subcontracting price may not represent the complete cost if transportation, handling, or additional processing expenses are involved.
How ERP Supports a More Connected Manufacturing Process
The main advantage of ERP is not simply automation.
It is the connection between different parts of the business.
For subcontracting, that connection may look like:
Customer Order → Production Order → Material Requirement → Internal Production → Subcontracting → Material Return → Quality Check → Finished Product → Delivery
Each step is connected to the next.
This allows teams to work with a more complete picture of the manufacturing process instead of managing each activity independently.
Is Subcontracting ERP Suitable for Your Manufacturing Business?
Not every manufacturer uses outside processing.
However, if your business regularly sends materials or components to external suppliers for specialist operations, subcontracting should be an important consideration when evaluating ERP software.
You may benefit from stronger subcontracting management if:
- A significant part of your production is outsourced.
- Materials frequently move between your factory and external suppliers.
- Production teams struggle to track outsourced operations.
- Subcontractor delays affect delivery dates.
- It is difficult to calculate the true cost of outsourced processing.
- Employees rely heavily on spreadsheets to track subcontracted work.
- Management lacks visibility into materials held by external suppliers.
The right ERP system should support your actual manufacturing processes rather than forcing your business to work around the software.
How Sage X3 Can Support Manufacturing Processes
For manufacturers evaluating ERP, Sage X3 can be considered as part of a broader approach to connecting manufacturing, inventory, purchasing, and financial processes.
The important consideration is not simply whether an ERP system has a particular feature.
Manufacturers should evaluate how the system can support their complete business workflow—from production requirements and material management through purchasing, outside processing, inventory, and financial reporting.
An experienced ERP implementation partner can also help identify where subcontracting fits into the company’s existing processes and how it should be configured within the ERP environment.
Frequently Asked Questions
What is outside processing in manufacturing?
Outside processing is when a manufacturer sends a product, component, or material to an external supplier for a specific manufacturing operation such as coating, machining, heat treatment, painting, or finishing.
How does ERP help with subcontracting?
ERP can connect subcontracting with production, purchasing, inventory, and finance. This can help manufacturers track materials, suppliers, costs, processing activities, and expected return dates.
Can ERP track materials sent to subcontractors?
ERP systems can provide processes for recording material movements to and from external suppliers, helping manufacturers maintain better visibility of inventory outside their facilities.
Does subcontracting affect production planning?
Yes. The time required by an external supplier can affect the overall production schedule and customer delivery date. Including outside processing in the manufacturing workflow can help planners create more realistic schedules.
How can manufacturers measure subcontractor performance?
Manufacturers can monitor metrics such as on-time delivery, processing lead time, quality performance, rejection rates, cost variations, and order completion.
Why is subcontracting important when selecting manufacturing ERP?
If outside processing is a significant part of your manufacturing operation, the ERP should be able to support the movement of materials, supplier activities, production workflows, purchasing, inventory, and cost tracking associated with subcontracting.