Glossary
Quick definitions of key terms
Operations
ERPNext job work that reconciles
Job-work-heavy operations live or die on knowing what is lying at which vendor. ERPNext models this properly, but only if the supplied item list and the consumption at receipt are both set up correctly.
How does subcontracting work in ERPNext?
You raise a subcontracting order for the finished item, ERPNext derives the raw material to supply from that item's bill of materials, and you transfer that material to a supplier-linked warehouse. Ownership stays with you throughout. On receipt, the finished quantity is booked in and the supplied material is consumed out in the same transaction, so the ledger and the physical position move together.
Before you start
- A bill of materials for the finished itemThe supplied item list is derived from it, so an inaccurate BOM produces an inaccurate transfer.
- A warehouse per subcontractorWithout one you cannot answer what is lying where, which is the question the whole process exists to answer.
- Supplier records with the subcontractor flag setIt controls which suppliers are selectable on a subcontracting order.
- An agreed treatment for process lossDecide the acceptable percentage per process before you start, because the receipt is where it surfaces.
The cycle
Set the finished item up as subcontracted
Mark the item as supplied by a subcontractor and confirm its default BOM. ERPNext reads that BOM to work out what has to go out with the order.
Where Stock > Item > Manufacturing
Create a warehouse for each subcontractor
Name it for the vendor and link it to the supplier. This warehouse is how ERPNext keeps track of your material on their floor — the stock is still yours, it is just not on your premises.
Where Stock > Warehouse
Raise the subcontracting order
Enter the finished item and quantity. ERPNext expands the supplied item list from the BOM. Check that list against reality before transferring — this is the point where a wrong BOM becomes a wrong physical issue.
Where Subcontracting > Subcontracting Order
Transfer the material out
Issue against the order to the subcontractor warehouse. Because the destination is a warehouse you own, the value stays on your balance sheet and moves between warehouses rather than leaving the business.
If the value leaves your books at this point, the transfer has been done as a sale rather than a transfer.
Track what is outstanding
The stock balance for each subcontractor warehouse is the live answer to what is lying with whom. Review it weekly rather than at month end, because material sitting untouched at a vendor for weeks is usually a problem nobody has reported.
Receive the finished goods with consumption
Book the receipt against the order. The finished quantity comes in and the supplied material is consumed from the subcontractor warehouse in the same document. Enter the quantity actually consumed, not the theoretical figure, or the difference silently accumulates.
Where Subcontracting > Subcontracting Receipt
Account for the job work charge
The vendor's conversion charge is the purchase value on the receipt. It attaches to the finished item's cost, which is why the finished item's valuation is material plus process rather than just material.
Reconcile the vendor position at period end
Compare your subcontractor warehouse balance to the vendor's own statement of what they hold. Differences found monthly are a conversation; differences found annually are a write-off.
What goes wrong in practice
One warehouse for all subcontractors
You keep the total but lose the ability to say which vendor holds what, which is the only reason to model this at all.
Receiving finished goods without consuming input
Finished stock rises, raw material never falls, and the stock ledger drifts further from the floor every cycle.
Theoretical consumption at receipt
Booking the BOM quantity rather than the actual hides process loss until a physical count forces the recognition all at once.
Treating the transfer as a sale
It moves the value off your balance sheet, so material you still own stops appearing in your stock, and it can create a tax event that was never intended.
No agreed loss tolerance
Without a number agreed in advance, every receipt becomes a negotiation and nobody can say whether this vendor is performing.
Checks that catch problems early
- Each subcontractor warehouse shows a balance you can explain, item by item.
- For a completed order, the material consumed on the receipt reconciles to the material transferred, less agreed loss.
- The finished item's valuation includes the job work charge, not only the material.
- No subcontractor warehouse holds stock older than your agreed turnaround without a reason recorded.
- The total across all subcontractor warehouses agrees with the stock-with-third-parties figure in your accounts.
Questions people ask
Yes. It has moved location, not ownership. Modelling the subcontractor as a warehouse you own is what keeps that correct in the ledger.
Agree a tolerance per process in advance, enter actual consumption on the receipt, and let the difference post. Reviewing it by vendor over time tells you whether a rate is normal or whether one vendor is drifting.
Model each vendor's operation as its own order, with the output of one becoming the supplied item of the next. It is more documents, but it is the only way to know where a batch actually is at any moment.
If it has value and returns to you, receive it as a separate item on the receipt so it carries a valuation. If it stays with the vendor, treat it as part of the agreed loss rather than as stock.
Related guides
Job work not reconciling?
The cause is nearly always consumption at receipt or a shared subcontractor warehouse. Tell us how your cycle is set up and we will tell you which one it is.
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