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Co-manufacturing operation is the outsourcing of part of the manufacturing process or full production process of a product to a third-party. More specifically, contract manufacturing is an outsourcing of certain production activities that were previously performed by the manufacturer to a third-party. In simple words, co-manufacturing is a process when a manufacturer purchases a finished good or service from another manufacturer.


Co-manufacturing can include:

  1. Full co-manufacturing - when manufacturer outsources the finished good for the full production cycle.
  2. Partial co-manufacturing - when manufacturer outsources part of the production process of a finished good. 


Prerequisites


Table of Contents


Configure co-manufacturing procurement settings

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The first step is to configure your co-manufacturing procurement settings. In Buy/Sell procurement mode, co-manufacturing suppliers also require a customer entry and DEAR will generate the customer entry automatically. It is best to select your procurement setting before continuing with the next co-manufacturing setup steps. 


The procurement for co-manufacturing can be carried out in two ways:

  • Buy/Sell of products: Select when components and semi-finished products listed in a co-manufacturing production operation are sold to co-manufacturer. The finished or semi-finished product is then bought from the co-manufacturer.
  • Transfer products to co-manufacturer: Select when components are transferred to co-manufacturer for production of a finished product.


This setting can be configured from the General Settings → Production Process Customisation page. 


Buy/Sell of products

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Buy/Sell co-manufacturing is a business practice where all components listed in co-manufacturing operations are sold to the co-manufacturer.  

  • Type:Input cannot be added to a co-manufacturing operation. If a component produced in the previous operations should be sold as component in a co-manufacturing operation, the component should be listed as Finished Product in the non co-manufacturing operation.


When a co-manufacturing operation is started, a sales order is automatically generated, the co-manufacturer is the Customer. Sales order is created in authorised status unless there is missing mandatory information (e.g. Sales Rep) in which case it will be created in draft status.

  • The required components for the co-manufacturing operation are added to the sales order. Components sales prices are retrieved from price tiers in DEAR. The price tier for co-manfacturing components is set from the Production BOM of the finished product. 
  • COGS for the product are calculated up until the point where the product is sold to the co-manufacturer. 


A purchase order for the finished or semi-finished product is automatically generated, the co-manufacturer is the Supplier. Any services are added to the purchase order as additional costs. 

  • Received product’s cost base will contain full amounts mentioned on the purchase invoice. Any additional costs from manufacturing will be added as manual journals to the finished product/s sale and distributed accordingly to the finished product. 


NOTE: With this method, costs are calculated for the product at the point where it is sold to the manufacturer. For example, the manufacturer produces butter which is then sent to the co-manufacturer for packaging. All production costs will be assigned to the raw butter, and only the costs associated with packaging are then distributed to packaged butter. 


DEAR will complete the co-manufacturing operation automatically if all expected finished products and outputs have been received. If no other operations require completion in the production run, DEAR will complete the production run and calculate product’s cost base, distributing the amounts accumulated on WIP account.


  • COGS are calculated based on what is spent and allocated to production of this product if this sold product was produced within previous operations. If the product is not produced in the previous operations, then based on purchase costs.


Transfer of components

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Transfer of components is a business practice where any components and inputs for a co-manufacturing production operation are transferred from manufacturer to the co-manufacturer. 


When a co-manufacturing operation is started, an authorised transfer order is automatically generated to the co-manufacturing location. 

  • The required components and inputs are added to the transfer order. Costs are recorded to In Transit account when components are sent, then moved to co-manufacturing inventory when components are received, then moved to WIP account when co-man operation is completed.
  • If a component has Always Dropship, a purchase order will be created from the supplier of this product (set up in Product) to the co-manufacturing location. If a component has Optional Dropship enabled, the purchase order will be created only if there is no stock at the components location connected to shopfloor in logistics path. See Dropship components to co-manufacturer for more information. 


A purchase order for the finished or semi-finished product is automatically generated, the co-manufacturer is the Supplier. Any services are added to the purchase order as additional costs. 

  • Received product's cost base will only contain amounts defined on the purchase invoice for services provided by the co-manufacturer. No component costs will be distributed at this moment.


Add co-manufacturing locations

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Locations can be added and specified as co-manufacturing locations from General Settings → Reference Books → Locations. This location type defines the external location where a co-manufacturing operation should be executed. 


As this type of location is a purely informational, to notify a user during a Production Run where components should be transferred for contract manufacturing, co-manufacturing locations have some special properties:

  • Bins cannot be added to a co-manufacturing location.
  • The Default, Allow Reorder Stock Level, and Shop Floor checkboxes are disabled for co-manufacturing locations.
  • Co-manufacturing locations are not considered in any stock replenishment activities, e.g. Reordering (smart, reorder, backorder). 
  • Co-manufacturing locations cannot be selected in any task that is not connected to co-manufacturing. 
    • When creating sale orders, purchase orders, transfer orders, assembly/disassembly orders, and production order (for top level production location), co-manufacturing will not be available.
    • When a purchase order, sales order or transfer order is generated by a co-manufacturing operation, the location will automatically be set to the co-manufacturing location.


Connect work centre with co-manufacturing location

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Work Centres define the area where a production operation takes place within the business (for example, a specific workshop, room or section of the shop floor). Work Centres are set up from the Settings of the Production module: Production → Settings → Work Centres. Here, you will specify if a work centre is a co-manufacturing location and where the required components should be delivered. 

  1. Click the + button to add a new work centre. 
  2. Enter a unique Work Centre Code
  3. Check the box to show that the work centre is a co-manufacturing location. 
  4. In the Name field, select your co-manufacturing provider. Your co-manufacturing provider will need to be added to DEAR as a supplierin order for it to be shown in the dropdown field. You will then be able to select your co-manufacturing provider and connect it to the work centre. 
    • If the Buy/Sell procurement method is selected, this supplier will then be converted automatically into a customer to be used in Sales Order.
    • If the Transfer procurement method is selected, the supplier will not be automatically converted to a customer (it is not necessary as no sales orders are created with this method). However, if procurement settings are later changed to Buy/Sell, you will need a customer with the exact name as the supplier, or you will receive an error during Production Order execution. You can do this by:
      • Manually creating a customer with the exact same name as the Supplier.
      • Adding a new work centre and connecting a supplier in Buy/Sell mode to create the customer automatically. 
      • Add a new supplier to an existing work centre in Buy/Sell mode to create the customer automatically.
  5. Consumption Bin defines where components should be delivered to execute the production process. Select a co-manufacturing location from the dropdown menu. 
  6. Co-manufacturing locations cannot specify an Output Bin, co-manufacturing outputs will be put away to the shop floor by default. It is possible to manually select any bins from any existing shop floor location when finished product output is received.
  7. Save your changes.


Add a co-manufacturing operation to a production BOM

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When an operation is added to a product's Production BOM, the operation can be specified as Type:Co-manufacturing. A Work Centre for the operation must be selected from your co-manufacturing locations. Finished products can be dropshipped directly to the customer, see Dropship finished product from co-manufacturer to customer for more information. 


A Co-manufacturing operation can contain:

  • Component: A component which is forwarded to the co-manufacturer for production of finished product.
  • Input: A semi-finished product which is forwarded to the co-manufacturer for production of the finished product. The output of a previous production operation for the same Production BOM.
    • NOTE:Type:Input cannot be added to a co-manufacturing operation if procurement type is Buy/Sell. If a component produced in the previous operations should be sold as component in a co-manufacturing operation, the component should be listed as Finished Product in the non co-manufacturing operation.
  • Output: An expected result of the operation which will be used in a later production operation for the same Production BOM. See Using Inputs and Outputs - Intermediate or semi-finished products for more information.
  • Finished product: the expected from co-manufacturer result. Finished product can be Stock and Service product. It is recommended to only use Service product as Finished product when co-man operation is the last operation in the production process.
  • Attachments
  • Notes


NOTE: A co-manufacturing operation MUST contain an output or finished product. Even if the Production BOM is for a single finished product, this finished product must be explicitly defined in the co-manufacturing operation. 


Execution of co-manufacturing operations

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Starting a co-manufacturing operation of a production order or production run will automatically create a purchase order for any finished products or output of that operation. This can be a simple purchase, service purchase or dropship purchase depending on the finished products, outputs and components of the co-manufacturing operation. If the finished products or outputs of the co-manufacturing operation are service products, they will be added as additional charges to the purchase order or a service purchase will be generated (if no stock items are produced). The supplier of the purchase order will be the co-manufacturer that is connected to the work center where co-manufactuing operation will be executed. 


Purchase order will be created in authorised status, unless order approval is enabled in which case it will be created in draft status. The purchase order will appear in the Related Orders tab of the production order. 


When stock is received:

  • Finished products will be stocked at the location indicated on the Stock Received tab. (If Always Dropship is enabled for the finished product, finished product will be delivered directly to customer. See Dropshipping finished product from co-manufacturer to customer)
  • Output products are received to the indicated location with costs for output posted to the WIP account specified for the production order.
  • Service products are not stocked, but additional charges are moved to the WIP account specified for the as manual journals for production order operation from expense to WIP.
  • Actual output of the production run operation will updated with actual quantities of received products.


DEAR will complete the co-manufacturing operation automatically if all expected finished products and outputs have been received. If no other operations require completion in the production run, DEAR will complete the production run and calculate the finished products' cost base, distributing the amounts that have accumulated on the WIP account.  


Dropshipping

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With DEAR co-manufacturing, it is possible to have components dropshipped directly from the supplier to the co-manufacturer and also have finished products dropshipped from the co-manufacturer to the customer. 


Dropship components to co-manufacturer

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Dropship of components supposes the scenario when components are purchased but delivered to the co-man location directly without delivery to shop floor or warehouse.


If a component has Always Dropship or Optional Dropship enabled (go to DEAR Inventory → Inventory → Products → [selected product] to change a component's dropship settings), it can be delivered directly to the co-manufacturer from the supplier. 

  • Optional Drop Ship: A purchase order with drop ship will be created automatically only when there are no components available in warehouse, connected to the co-manufacturing location.
  • Always Drop Ship: A dropship purchase order will be created automatically even if there are components available.


The dropship purchase order will be generated automatically when a co-manufacturing operation is started. If components are purchased from multiple suppliers, dropship purchase orders are generated for each supplier. 


Dropship finished product from co-manufacturer to customer

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Dropship of finished products supposes the scenario when products are delivered to the customer directly from co-manufacturer. Dropshipping of a co-manufactured finished product can be specified from that product's Production BOM (DEAR Inventory → Inventory → Products → [selected product] → Production BOM). The dropshipping option can only be enabled if the Production BOM product is specified as a finished product in the co-manufacturing operation. 


When this flag is enabled, the Dropship option on the General tab of the product page displays the read-only value Co-manufacturer Drop Ship


When a sales order is created for this product, and there are no available products in stock, the product will be marked as non-inventory in the sale and a production order generated for the product. 


When the co-manufacturing operation starts, a dropship purchase order is created for the co-manufacturer. This dropship purchase is connected to the sales order for the finished product. Once the invoice for this Drop Ship Purchase is Authorised, the co-manufacturing operation in the Production Run is considered completed.


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