Not every production process needs to happen in-house. For many retail businesses with manufacturing operations, certain steps — specialised processing, finishing, packaging, or assembly — are more efficiently handled by a third-party supplier. This is outward subcontracting: you supply the raw materials, the supplier performs the work, and you receive the finished or semi-finished goods back.
iVendNext also supports the reverse scenario: a customer outsources their manufacturing process to you. You receive their raw materials, manufacture on their behalf, and deliver the finished goods back. This is subcontracting inward, or contract manufacturing.
Both flows are supported within iVendNext's Manufacturing module, with full material tracking, cost visibility, stock reservation, and billing — in both directions.
Outward subcontracting in iVendNext follows the standard purchasing cycle, with the addition of raw material supply tracking and a dedicated subcontracting receipt.
The process begins with the item setup. The finished good to be received from the subcontractor must have the "Supply Raw Materials for Purchase" flag enabled in the item master. A BOM is created for the subcontracted item, listing the raw materials that will be sent to the supplier — notably without any operations, since the production work itself happens at the supplier's facility, not yours.
A Purchase Order is raised for the subcontracted item, with the supplier's service cost as the item rate. The purchase order includes a raw materials table that shows which materials need to be transferred to the supplier and from which warehouse. This table tracks how much has been supplied, how much has been consumed, and how much remains outstanding — giving procurement a live view of the subcontracting obligation.
When materials are ready to send, a Stock Entry of type "Send to Subcontractor" transfers the raw materials from your warehouse to the supplier's virtual warehouse in iVendNext. This maintains stock accuracy — the materials leave your usable inventory but remain tracked in the system as committed to the subcontract.
When the finished or semi-finished goods are received back from the supplier, a Purchase Receipt is created against the purchase order. The received goods are posted to your finished goods or WIP warehouse, raw materials are consumed from the supplier's virtual warehouse, and the purchase is ready to be invoiced through the standard accounts payable workflow.
Landed cost allocation applies in the same way as for any purchase — freight, duties, and handling charges can be distributed across the received items to ensure the finished good's valuation reflects the true cost of subcontracting.
Subcontracting Inward is the commercial inverse of outward subcontracting. A customer contracts you to manufacture finished goods on their behalf, supplying the raw materials. You perform the production and deliver the finished goods back. You bill the customer for the service and for any additional materials you sourced.
This model is common in food processing, garment manufacturing, specialty packaging, and any retail context where a brand owner wants product manufactured to their specification at a third-party facility — which in this case is yours.
Before the first subcontracting inward order can be processed, a small amount of master data configuration is needed:
Each customer needs a dedicated warehouse in iVendNext — a virtual location that represents the stock the customer has placed in your custody. Raw materials received from the customer are posted to this warehouse, keeping them separate from your own inventory and ensuring they cannot be accidentally consumed in another production run.
The raw materials provided by the customer must be flagged as Customer Provided Items in the item master. These items cannot be purchased (the customer supplies them), so the "Allow Purchase" flag must be unchecked.
The finished good to be produced must be marked as a Subcontracted Item in the item master, and a standard BOM must exist for it, including at least one customer-provided item.
A Subcontracting BOM links the service item that will be billed to the customer with the finished good to be produced, defining the conversion factor between the service quantity and the output quantity.
The process begins with a Sales Order where the "Is Subcontracted" checkbox is enabled. The sales order line references the service item rather than the finished good — reflecting that you are selling a manufacturing service, not a product. The finished good and its quantity are determined automatically from the Subcontracting BOM.
From the sales order, a Subcontracting Inward Order is created. This document holds the full picture of the engagement: finished goods to be produced, raw materials required, service items to be billed, and any scrap or by-products that may arise. The delivery warehouse for each finished good is confirmed at this stage.
Raw materials are received from the customer using a Stock Entry that posts the materials to the customer's dedicated warehouse. Importantly, this transaction has no accounting impact on your books — the customer's materials remain their property and are tracked as a custody obligation, not as your inventory asset. Multiple raw material receipts can be created against the same subcontracting inward order if materials arrive in batches.
Stock Reservation is created automatically for customer-provided raw materials. This ring-fencing ensures that materials committed to one customer's order cannot be consumed in another production run — even accidentally. If materials received from one customer go unused, they must be formally returned to that customer before being reused in a different order.
Once raw materials are received, a standard Work Order is created from the Subcontracting Inward Order for each finished good. Production proceeds through the normal job card and shop floor execution workflow. Any additional raw materials sourced by you and consumed during production are automatically added to the required items table in the Subcontracting Inward Order, where they can be billed to the customer.
Production rarely yields exactly what was planned. iVendNext handles both common variances in the subcontracting context:
Scrap generated during a subcontracting inward job can either be retained by you or returned to the customer. If the customer wants their scrap back — as is common when the materials are valuable — enabling the "Deliver Scrap Items" setting in Selling Settings causes the subcontracting delivery entry to include scrap items automatically.
Overproduction — producing more than the quantity specified in the sales order — is handled by the "Allow Delivery of Overproduced Qty" setting. When enabled, the excess quantity can be included in the subcontracting delivery. When disabled, only the agreed quantity can be delivered, and the overproduced stock is held pending further instruction.
Once the finished goods have been produced and delivered, the billing step closes the commercial cycle. From the original Sales Order, a Delivery Note is created for the service item and any raw materials you sourced on the customer's behalf. A Sales Invoice is then raised against the Sales Order.
iVendNext pre-populates the invoice with the raw materials you procured — those not provided by the customer — so there is no need to manually reconstruct the cost breakdown. The customer is billed for the service fee plus their material consumption, and the transaction is recorded cleanly in your accounts receivable.
Note that customer-provided raw materials are not billed — they were the customer's property throughout the process and are simply accounted for as consumed.
A few important points for businesses running subcontracting inward operations:
Stock Reservation Entries are used extensively throughout the subcontracting inward process, even if stock reservation is not enabled for other transaction types in your system. Do not cancel reservation entries related to subcontracting inward orders, as this will cause material tracking inconsistencies.
If the same batch of customer raw materials needs to be used in a new subcontracting inward order after going unused in a previous one, the correct approach is to formally return the materials to the customer and receive them again against the new order. No physical movement is required — this is a purely documentary transaction — but it maintains the integrity of the material tracking.
For serial or batch-tracked finished goods, the serial numbers or batch IDs assigned during production are carried through to the subcontracting delivery, ensuring that the customer receives items with the exact traceability identifiers that were generated against their order.
Subcontracting in iVendNext supports both directions of the relationship — outsourcing your production to suppliers and accepting production contracts from customers. Both flows are fully integrated with inventory, procurement, sales, and finance, with material tracking, stock reservation, and billing handled systematically. For retailers operating in industries where contract manufacturing is common — food, apparel, cosmetics, specialty goods — these capabilities provide the operational framework to manage subcontracting relationships with confidence and accuracy.