Explaining Subcontracting Collaboration


After completing this lesson, you will be able to:

  • Define Subcontracting
  • Explain the business case for Subcontracting
  • Describe the typical process flow for Subcontracting
  • Explain Purchase Order processing in the context of Subcontracting
  • Compare component consumption in backflush and real-time settings

What is Subcontracting?

Subcontracting is a business model in which part of the manufacturing process is outsourced to a third party. More specifically, it is the outsourcing of certain production activities, that were previously performed by the manufacturer, to a supplier or contract manufacturer. Subcontracting is also referred to as Contract Manufacturing.

A business may outsource the manufacture of certain product components or outsource the assembly of the product.

Many outsourcing businesses have become specialists in a multitude of services for manufacturers, including design, production, assembly, and distribution.

Subcontracting Business Benefits

Financial Benefits

Reducing or eliminating assets improves cash flow and balance sheets.

Outsourcing manufacturing delivers:

  • Cheaper labor and lower asset cost
  • Economies of scale due to pooling
  • Expertise due to the learning curve
  • Lower fixed cost

Strategic Optimization

Resources can be redirected to focus on the business’ core operations, more profitable activities, and new product development.

Better Supply Chain Management

By outsourcing activities or processes to suppliers that are leaders in their categories, businesses can benefit from their competitive advantage.

Capabilities of Subcontracting Collaboration

Subcontracting Collaboration provides the following Capabilities:

  • The Subcontractor is informed about the products ordered and components used.
  • The Buyer can advise the Subcontractor about the Component Supplier’s on-hand inventory and shipment.
  • The Subcontractor can report receipt and consumption of components in real-time, ensuring greater predictability of supply.

Benefits of Subcontracting Collaboration

Subcontracting Collaboration provides the following benefits:

  • The Buyer can reduce production cost while maintaining visibility and control of the Subcontracting process.
  • Visibility into the availability of supply, inventory, and production status is improved.
  • Greater efficiencies between multiple supply chain parties can be achieved.

Subcontracting Business Challenges

Loss of Control

Subcontracting always involves losing an element of visibility and control over the production process:

  • Loss of critical knowledge and production skills
  • Supply chain issues related to poor quality or questionable materials
  • Increased vulnerability to problems at the subcontractor’s facility, which can increase costs and extend production schedules

Quality Issues

Losing control over the quality of finished products is a major consideration in industries such as food processing and pharmaceuticals. In these industries, quality issues can threaten the consumer's health (and ultimately damage the outsourcing business’ reputation).

Intellectual Property Risks

Counterfeiting is a major intellectual property issue. As such, businesses are understandably concerned about sharing their information with contract manufacturers.

Subcontracting Collaboration Process Overview

For an overview of the Subcontracting Collaboration process, watch this video.

Subcontracting Collaboration Process Flow

The Subcontracting Collaboration process flow is shown in the diagram below. The process starts with the creation of the Subcontracting Purchase Order and follows each step as components are shipped and consumed, and then the finished goods are sent back to the Buyer.

Select the number icons to learn more.

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