Your best-selling mid-range speaker needs a painted finish. You do not have a paint shop, so a vendor in another part of the city does the painting.
On Monday morning, 300 half-finished speakers leave your factory. In the afternoon, someone asks three questions:
What did we send to the vendor?
What will this batch really cost?
When can the next operation start?
If the answers are in a spreadsheet or in one person's memory, nobody controls the outsourced work. You cannot see what the vendor holds. You cannot plan the cost. You cannot tell when the next step can start.
Companies outsource work to vendors for good reasons. Sometimes demand is higher than your own capacity. Sometimes a vendor has a process that is too expensive for you to buy, like a paint shop. Sometimes the vendor is simply cheaper.
The problems start after the truck leaves. Without a system link between your factory and the vendor, three teams often have trouble:
Finance estimates the batch cost without the vendor's real price. A $4.50 painting job on 300 speakers is $1,350 missing from the estimate.
Operations cannot promise a delivery date, because the next step depends on goods nobody can see.
Purchasing creates the vendor's order by hand. Nothing connects it to the batch it belongs to.
Each gap looks small. Together, they mean you outsource to save money, but then you do not know how much you saved.
Think of the vendor as one more machine on your route.
A route is the list of operations a product goes through, in order. A resource is what does an operation. It can be a machine, a work cell, or, in this case, your painting vendor. A production order is the instruction to make a quantity of a product by following the route. This series covers standard production orders.
Estimating a production order calculates its expected cost. For outsourced work, it also creates the purchase order for the vendor.
The difference is in how the work is costed, tracked and closed:
You need to set up five things:
A service item. This is the painting job. It is set up as a purchased product with a price.
A vendor resource. It connects the operation to the vendor's account.
A route operation that uses this resource.
A line on the bill of materials (BOM). The BOM is the list of what goes into the product. This line connects the service item to the operation.
A vendor warehouse (recommended). Put it in the same site as the factory. (A site is a group of warehouses at one location.) It shows which materials are at the vendor.
You do this setup once for each product and vendor. After that, when you estimate a production order for the speaker, the system creates the vendor purchase order automatically. If one order has operations at several vendors, each vendor gets its own purchase order.
Sending material to the vendor is a separate step. If you run MRP (the planning run that suggests what to buy, make and move), the system plans the transfer to the vendor warehouse for you. In traditional production control without MRP, it does not. Someone must record the transfer by hand. This series follows that second case. Part 2 shows how.
A manufacturer makes mid-range speakers in four operations: wiring (10), assembly (20), painting (30) and testing (40). A vendor does the painting. The case uses the Contoso demo company (USMF), so you can build it yourself. The quantity and the price are examples only.
When you estimate the production order, the system creates a purchase order for US-104: 300 painting services, $1,350 in total. This amount is now part of the estimated batch cost. The purchase order shows the production order number as its reference, so you can trace one from the other. The actual cost comes later, after the receipt and the vendor's invoice.
Now the Monday questions have answers:
What did we send to the vendor? The materials you moved show in the vendor warehouse, once someone records the transfer. The open purchase order shows 300 painting services not yet received.
What will this batch really cost? The internal operations plus an estimated $1,350 for painting. The real cost comes after the vendor's invoice.
When can the next operation start? The confirmed delivery date on the purchase order is your planning date. When the vendor delivers and you post the receipt, the system marks painting as finished, and testing can start.
In Part 2, you record the shipment to the vendor, follow the order from estimate to receipt, and see when the vendor's cost reaches your books.