SUB-CONTRACTING PROCESS

 SUB-CONTRACTING PROCESS

Subcontracting is the work of obtaining the prime manufacture’s requirements, mostly of fabricating parts and components, from outside sources in order to manufacture a certain product in the prime manufacturer plant. Subcontracting is being practiced to so much greater degree nowadays compared to the past.Main reason for  that it affects cost reduction.  A large firm may  like to concentrate on its efforts to support the production of major items and Several minor ones to small manufacturers whose overheads are likely to be low and who will be able to supply the material at competitive rates.

In any Engineering industry, sub-contracting is a common feature.A large number of components are generally off loaded to smaller manufacturers. For an engineering industry these items normally include casting, forging, machined and fabricated components made out of steel, non ferrous metals, rubbers etc. Each of these forms are separate types of materials and the small scale sector usually has a number of people specializing in one or two of these categories of business.The small units, in turn, rely on the big companies for their subcontracting works.

Subcontracting work can be classified into individual areas as follows:

1.  vendor development:

It is one of the most important things when any company is going for a subcontracting. The vendor needs to be developed as per the requirement of the organisation’s requirement. This is the baseline of any sub contracting work. Vendor development can be summarized as:

1. Identification of suitable vendor quality and financial standing. Click on the below link for further understanding of supplier-evaluation-criteria

2. Development of vendor to suit the nature of work to be done at the right delivery price and quality. Negotiation

3. Optimization of the number of vendors based on the volume of work.

4. Maintenance of continuous business relationship with vendors.

5. Appraisal Of vendor performance with regard to quality, quantity, price and delivery.

6. Review of  vendors on a regular basis, deletion of bad vendor and new vendor addition if required. You can find the details on how to find new vendor in the below link.How to find Potential Suppliers

Type of component required may be a simple part,or complicated component or sophisticated  fabricated assembly. The buyer, thus, must be very careful in selecting the supplier. We have to ensure that the supplier is capable of working for the specific drawing supplied. The supplier may also be required  to work to close tolerance machining requirement.  In some instances, it may involve only a part machine because it may be sometimes more economical for the buyer to only part of the machining  component.

The sub-contractor may be expected to work from free issue material and also existing tooling. Or else, the raw material may be supplied to issue and the tooling also is to be supplied by the sub-contractor.

During the selection of the vendor a visit to the vendor premises is very important along with the member of the quality control department and if required the Design Department also. The purpose of visit is to ascertain the management expertise and Technical competencies of the supplier.

2. Routine purchase procedure:

These include floating enquiry,  obtaining quotations,  negotiation,  finalizing order,  components and inspection. You can find the detailed procurement procedure in the link below Procurement Process

3. Systems:

 one method to streamline subcontracting is to standardize the designs of the components which are used regularly. facilitate the standardization quantity requirement and development of specialized skills required to carry out the jobs. The purchase Procedures should also be streamlined. There must be a regular vendor audit by purchasing quality control and Design Department right quality quantity etc are maintained. It is always advisable to have an SOP in place.

Major problems in subcontracting procedure:

In practical scenarios, despite all the efforts to plan and coordinate the subcontracting work, the purchaser has a number of problems regarding the quality, quantity, cost, delivery of materials. These are closely interlinked with one another and hence, the problem has to be looked at in totality. Some of the usual problems are discussed below:

 Work scheduling at vendor's factory:

Most of the small scale vendors are the unorganized or badly organised sector and their work schedules are changed almost daily depending on the pressure exerted by the customer. in such cases, one’s work will get delayed for no reason. a very close liaison with the vendor is often necessary. For distant vendors this daily follow up and communication becomes very difficult. the below precaution helps on better subcontracting procedure:

1.  order properly and give sufficiently lead time to the vendor. avoid Rush orders which often results in bad quality.

2.  ensure that the drawings, design are correct and unambiguous. if not time will be spent on unnecessary discussion and clarification.

3.  if required help the vendor to develop the planning function with the help of your own experts.

Financial constraints of the vendor:

Since most of the vendors operate on a small scale, it is more difficult to establish credit facilities with the bank as in the case of a large organisation. Moreover, due to lack of professional management, their raw material and work in progress inventory is normally high. shortage of working capital along with high inventories becomes a bottleneck, particularly so  when the vendor is up to buy the material and manufacture of the component. The problem generally cannot be solved but just one customer alone so it can be minimized by ensuring regular payment against supplies.

Establishing cost of vendor:

It is a regular practice from a negotiation point of view to make maximum profit or buy the item with minimum price which in turn squeezes the supplier and even sometimes,the supplier may land up in loss.But in a long term scenario, it is bad for the crime organisation as after sometime the vendor may not be able to continue business with the organisation. it is always desirable to make a cost analysis and ensure that the vendor gets a reasonable profit.

 Quality:

quality is the major problem in subcontracting specially when the sub contract is working on the material supplied by the buyer’s company. A typical case is machining. The problem highlights the necessity to pay great attention to the choice of supplier. one way is to provide the technical knowledge, know-how, testing facility etc  and make them conscious of quality requirements.Quality problem in Raw materials arises because the tendency on the part of the vendor to buy his raw material at the lowest price in order to maximize profits. but due to the small size of the Google get discount or credit facility and this increases the price of raw material used for the components manufactured.

In subcontracting,it is therefore, often better to provide raw materials to the supplier requesting them to buy them.

Records:

 records of all raw material sent to the sub contractor and obtained back from him is a very important  factor in subcontracting. It is also very important from an audit point of view. During the annual stock counting audit,  stock available at the vendor's end must be submitted to the auditor. is relevant to the free issue material also supplied to the vendor. This should consist of finished parts that may be awaiting dispatch, work in progress and raw materials. you can be obtained by writing a letter to the buyer requesting for this information. Such a letter should be accompanied with stock taking form with the necessary heading, giving part number or sizes, description and quantity.why should indicate in his letter the date by which the supplier should furnish the required information. 

Tooling:

 It is often advantageous to supply the sub contractor with tools, what could be that due to a bottleneck in the buyer’s plant. provision of tools to the subcontractor would avoid unnecessary duplication of tools, thus reduce cost. it will also allow the sub contractor to commence production at once without wasting time on preparing necessary tools and equipment. 

We have discussed all the possible points regarding the subcontracting process.