Contract Manufacturing Setup White Paper R11

Contract Manufacturing
A Guide to Key Application Setups

ORACLE WHITE PAPER | APRIL 2017
Disclaimer
The following is intended to outline our general product direction. It is intended for information
purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any
material, code, or functionality, and should not be relied upon in making purchasing decisions. The
development, release, and timing of any features or functionality described for Oracle’s products
remains at the sole discretion of Oracle.
CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Table of Contents
Introduction to Contract Manufacturing 1
Modeling of Entities in Contract Manufacturing 1
Contract Manufacturing Business Process 3
Contract Manufacturing Process Flow 4
Contract Manufacturing Setups 7
Define a Supplier & Supplier Site 7
Define Inventory Organization Location 8
Define Inventory Organization 9
Define Subinventories and Locators 10
Define Manufacturing Plant Parameters 11
Define Receiving Parameters 12
Define Shipping Parameters 13
Define Charge Accounts for the CM Org 13
Verify Item Access to Users in Contract Manufacturing Org 18
Define Contract Manufacturing Finished Goods Item 19
Define Contract Manufacturing Service Item 21
Define OEM Supplied Pre-Positioned Components 23
Define OEM Supplied Synchronized Components 26
Define Contract Manufacturer Supplied Components 28
Define Item Structure in Contract Manufacturing Organization 30
Define Item Transaction Defaults 31
Define Work Definition for Contract Manufacturing Finished Goods Item 32
Print Work Definition Report 33
CONTRACT MANUFACTURING SETUP AND EXECUTION

Define Blanket Purchase Agreement (BPA) 34
Enable Contract Manufacturing Org for Planning Collections 36
Run Planning Collections 37
Verify CM Org & Supplier / Supplier Site Association 38
Define ATP Rules for CM Finished Goods Item 39
Define Sourcing Rules for CM Finished Goods Item 39
Define Global Sourcing Rule for CM Finished Goods Item (Optional) 40
Define Sourcing Rules for OEM Supplied Synchronized Components 42
Run the Refresh and Start the Order Promising Server 42
Conclusion 43

Introduction to Contract Manufacturing
Oracle Cloud Contract Manufacturing solution will allow you as an Original Equipment Manufacturer (OEM) to
completely outsource your manufacturing process to a contract manufacturer. This solution allows you to outsource
your manufacturing jobs in a build to plan (Make to Stock) or build to order (Make to Order) manufacturing strategies.
The solution supports components that are provided by the contract manufacturer, and it allows the OEM to supply
some or all of the components to the contract manufacturer.
As the OEM, you will be able to track and monitor the manufacturing process in the contract manufacturer’s facility in
real time. You can also track the inventories at the contract manufacturer’s facility that are owned by you – be it
components or the finished goods.
Modeling of Entities in Contract Manufacturing

The following section explains how entities used in the Contract Manufacturing solution need to be modeled within the Supply Chain
Management (SCM) Cloud applications. Please note: instructions on how to set up each of these entities will be provided in later
sections of this document.
Contract Manufacturer
» Define each contract manufacturer and the contract manufacturer’s site or location that you are dealing with as a regular supplier
and supplier site within your (OEM) enterprise.
» Define each contract manufacturer’s site as an inventory organization/warehouse within your (OEM) enterprise. This will allow you
to monitor the manufacturing process that will be carried out in the contract manufacturer’s facility. You will also be able to track
the inventories you own, be it finished goods or the components that are lying in the contract manufacturer’s facility.
Contract Manufacturing Finished Good Item

» Define the contract manufacturing finished good item as a ‘Make’ item and set the ‘Contract Manufacturing’ flag to ‘Yes.' The work
order that will be created in your enterprise to monitor the manufacturing process in the contract manufacturer’s facility will be on
this item.
Contract Manufacturing Service Item

» Define the contract manufacturing service item as a ‘Buy’ item and set the ‘Contract Manufacturing’ flag set to ‘Yes.' This is the
item will go on the purchase order to the contract manufacturer.
Contract Manufacturing Finished Good Item Bill of Material (BOM)
» In the contract manufacturing finished good item bill of material, include the components that are supplied by you and components
that will be supplied by the contract manufacturer. Set the ‘Supply Type’ of the components supplied by the contract manufacturer
as “Supplier” and set the ‘Supply Type’ of the components that will be supplied by you as “Push."
» Also, include the contract manufacturing service item as one of the component in the contact manufacturing finished good bill of
material.
Contract Manufacturing Entity Modeling & How They Work Together
Having reviewed how each entity is modeled, the next section will describe how these entities work together in the overall solution.

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Figure 1. How entities in contract manufacturing work together
As you can see in the above graphic, the OEM will receive supply creation requests for a contract manufactured item from either a
customer sales order or a planning forecast. Once the supply creation request is received, the OEM will create a work order on the
contract manufacturing finished good item in the contract manufacturing org in order to monitor the manufacturing process in the
contract manufacturer’s facility. The contract manufacturing organization is a virtual organization in the OEM’s enterprise representing
the contract manufacturer to whom the manufacturing is outsourced.
The OEM will then send a purchase order for the contract manufacturing service item to the contract manufacturer as part of
outsourcing the manufacturing.
On receiving the PO for the contract manufacturing service item, the contract manufacturer understands that the purchase order is to
manufacture the contract manufacturing finished good item. The contract manufacturer understands this because they will have
mapped the contract manufacturing service item to the contract manufacturing finished good item within their enterprise, based on the
agreement with the OEM. This could be achieved either by item cross referencing or any other means within their enterprise which is
outside the purview of this solution.
Once the contract manufacturer completes the manufacturing, they will stock the contract manufacturing finished good item in their
premises and will notify the OEM of production completion. The OEM will then initiate a receipt transaction on the purchase order
placed against the contract manufacturer, receive the contract manufacturing service item into the contract manufacturing virtual
organization, and complete the tracking work order that was created in the contract manufacturing organization.
Since the contract manufacturing service item is one of the components in the bill of material for the contract manufacturing finished
good item, and the CM service item is set for back flush/Assembly Pull, the CM service item will be auto-consumed into the work order.
In addition, the inventory for the CM finished good item will be created in the contract manufacturing org and the CM service item
inventory will be decremented from the contract manufacturing org.

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Contract Manufacturing Business Process
Following is the overall business flow for the contract manufacturing solution. The parties involved in this business flow are the
Customer, the OEM and the Contract Manufacturer.
Figure 2. Contract manufacturing business flow fulfilling a customer order
Business Process:
» A customer places an order for an item on the OEM.

» The OEM receives the customer order and identifies that the ordered item is a contract manufacturing-enabled item.
» The OEM sends a purchase order to the contract manufacturer and outsources the manufacturing process for that item to a
contract manufacturer.
» The OEM will also create a work order within their enterprise to track the manufacturing process at the contract manufacturing
facility.
» The contract manufacturer will report production progress to the OEM on every milestone operation completion in the
manufacturing process. The contract manufacturer will also report any component consumption for components that are being
supplied by the OEM.
» The OEM will receive the production report from the contract manufacturer and in turn will update the work order that was created
internally within the OEM’s enterprise. The OEM will also record any OEM-supplied component consumption.
» Once the manufacturing is complete at the contract manufacturer’s facility, the contract manufacturer will stock the finished goods
in their facility and will send a production completion report to the OEM. The OEM will own the finished good stock at the contract
manufacturer’s facility.
» The OEM will be able to track the components supplied by them and the finished good stock that is lying in the contract
manufacturer’s facility by reviewing the inventory levels in the contract manufacturing org that the OEM has created within their
enterprise.
» The contract manufacturer will ship the finished goods to the OEM’s customer on the OEM’s request. Once the finished goods are
shipped and then received by the customer, OEM will update the inventories in the contract manufacturing org that the OEM has
created within their enterprise.

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Contract Manufacturing Process Flow
This is the overall process flow diagram which explains the role and function of each application within Supply Chain Management
cloud in the contract manufacturing flows.
A contract manufacturing flow could be initiated either to fulfill a customer sales order or a planned order generated based on forecast.
Contract manufacturing flow fulfilling a customer sales order is called a Back-to-Back Contract Manufacturing flow and the one fulfilling
a planned order is called as Plan-to-Produce Contract Manufacturing flow.
Figure 3. Contract manufacturing process flow – part 1
Back-to-Back Contract Manufacturing Flow
» The back-to-back contract manufacturing flow starts with an order entry specialist entering a customer sales order in order
management for a back-to-back enabled contract manufactured item.
» Once the sales order is entered, order promising (also known as Global Order Promising) is invoked automatically to schedule the
sales order. Order promising will send the scheduling details like ship from warehouse and scheduled shipment dates to order
management based on the Available to Promise (ATP) rules, sourcing rules and any constraints defined. On the sales order line,
the scheduled ship from warehouse will correspond to the contract manufacturing organization. If the item on the sales order is a
back-to-back enabled item, then order management will send a supply request with the demand picture to Supply Chain
Orchestration (SCO).Order promising will send supply recommendations to Supply Chain Orchestration (SCO) based on the
supply that is pegged against the sales order.
» Once SCO receives the supply recommendations from GOP and the demand picture from order management, SCO identifies that
the supply requested is for a Back-to-Back enabled contract manufacturing item based on the item attributes and destination
organization/warehouse which represents a contract manufacturer. SCO creates a supply order and automatically assigns a pre
seeded business process that will execute the back-to-back contract manufacturing flow. SCO also sends supply order details to
order management. This enables the order manager to view the status of supply creation process in real time and take necessary
corrective actions in case of any exceptions.
» When the pre seeded business process assigned to the supply order is launched in SCO, SCO sends a request to Manufacturing
to create a work order for the contract manufacturing finished good item in the contract manufacturing organization. This work
order is used to track the progress of manufacturing at the contract manufacturer’s facility.
» Once the work order is created in manufacturing, SCO will update the work order details in SCO workbench and then send a
request to Inventory to reserve the work order against the customer sales order. After the reservation is created in Inventory, SCO
will record the reservation details in SCO workbench.
» SCO will then send a request to Purchasing for creating a purchase order on the contract manufacturer for the contract
manufacturing service item. SCO will also send the work order details in the purchase request so that the work order details are
stamped on the purchase order that will be sent to the contract manufacturer. This will enable the contract manufacturer to report
the production progress against the work order that is being created in the OEM’s enterprise for tracking the manufacturing
process.

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» Once the purchase order is created, SCO will record the purchase order details in SCO workbench and will then send an update
request to manufacturing to update the work order with the purchase order details. This will establish a link between the contract
manufacturing work order and purchase order.
Process Flow Continued:
» In continuation of the previous process flow in Figure 3 where SCO sent a request to Purchasing to create a purchase order (PO),
Purchasing will create a PO for the contract manufacturing service item and send the PO to the contract manufacturer. The PO will
also contain the work order details and the work definition as an attachment. The work definition will communicate the milestone
operations at which the contract manufacturer will need to report the production progress.
» The contract manufacturer will receive the PO for the contract manufacturing service item from the OEM and will create a work
order internally in their enterprise on the contract manufacturing finished good item based on the item cross referencing that they
have built in their enterprise. Please note that the tasks represented in the last swim lane of Contract Manufacturer marked in a red
dotted box are the tasks performed within the contract manufacturer’s facility or enterprise application. There is no mandate for the
contract manufacturer to use Oracle Cloud Applications for this solution to work.
» The contract manufacturer will start the manufacturing process and will report the production progress on every milestone
operation to the OEM. There are several ways that the contract manufacturer could report the production progress. They can
either directly invoke the Operation Transaction & Material Transaction web services that are being exposed to them as a public
web services by the OEM, pre-formatted spreadsheet or they can report it via email or phone.
» Manufacturing will receive the production progress from the contract manufacturer. If the production progress is reported using
public web services then, the tracking work order in manufacturing is directly updated with the progress. But, if the production
progress is received via other means, then the production supervisor will manually update the tracking work order with the
progress. Based on the work order updates, manufacturing will also record the consumption of any OEM-supplied components in
the manufacturing process thus accounting for the component inventory in the contract manufacturing org.
» Once the contract manufacturer completes the manufacturing process, the contract manufacturing finished good item will only be
stocked in the contract manufacturing premises. The item will be shipped in response to the OEMs request. The contract
manufacturer will send the production completion report to the OEM. Manufacturing will receive the production completion report
from the contract manufacturer.
» When manufacturing receives a production completion report, it will automatically invoke Receiving within Logistics to initiate a
receipt of the contract manufacturing service item against the purchase order created on the contract manufacturer. Once the
receipt is complete, the inventory for the contract manufacturing service item will be incremented in the contract manufacturing
organization. Then, manufacturing will complete the last operation of the tracking work order, and the contract manufacturing
finished good item inventory is created in the contract manufacturing organization. On completion of the last operation, the contract
manufacturing service item is consumed in the work order, and inventory of the same is decremented in the contract
manufacturing organization as the contract manufacturing service item is set to ‘Assembly Pull’ at the last operation in the work
definition.
» Once the tracking work order is complete, SCO will record the work order completion in SCO workbench and will notify order
management that the supply is now available for shipping. The supply availability will be recorded in Order Management.

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» In the Plan-to-Produce contract manufacturing flow, SCO will not notify Order Management of the supply availability, and instead
will close the supply order.
Process Flow Continued:
» In continuation of the previous process flow in Figure 5 where SCO notifies Order Management about the supply availability, order
management will record the supply availability, and will then send a shipment request to logistics. Logistics will receive the
shipment request and transmits the same to the contract manufacturer.
» The contract manufacturer will receive the shipment request from the OEM, ship the goods physically to the OEM’s customer, and
the goods will be received by the customer. The contract manufacturer will then transmit the shipment confirmation to the OEM.
» The Logistics application in the OEM’s enterprise will record the shipment confirmation from the contract manufacturer, which in
turn will decrement the contract manufacturing finished good item inventory in the contract manufacturing organization. Logistics
will then send a shipment confirmation to the order management system.
» Order management will record the shipment confirmation and will notify SCO that shipment is complete. SCO will record the
shipment completions and will close the supply order.
» To enable costing of the contract manufacturing finished good item, all the inventory and manufacturing transactions are
transmitted to costing application. Costing will compute the final costs for the contract manufacturing finished good item.
Plan-to-Produce Contract Manufacturing Flow
» A Plan-to-Produce contract manufacturing flow starts when the planner releases the planned orders to SCO that were generated
based on the forecast.
» Once SCO receives the planned order requests from Planning Central, SCO identifies that the supply requested is for a non back-
to-back enabled contract manufacturing item based on the item attributes and destination org/warehouse which represents a
contract manufacturer. SCO creates a supply order and automatically assigns a pre seeded business to execute a Plan-to-
Prouduce contract manufacturing flow.
» When the pre seeded business process assigned to the supply order is launched in SCO, the process flow will be identical to what
we have discussed so far for the Back-to-Back Contract Manufacturing Process flow except for the reservation step that you see in
the dotted box in red in Figure 3. In a plan-to-produce contract manufacturing flow, the supply is not hard pegged to the planned
order demand and hence there is no reservation of supply done. Also, in Plan-to-Produce Contract Manufacturing flow, once the
manufacturing is complete, the contract manufacturer will stock the goods in their facility and the flow ends here as shown in
Figure 4. The flow mentioned in Figure 5 is not applicable for Plan-to-Produce Contract Manufacturing flow. Except for this, the
remainder of the flow will be identical to the back-to-back contract manufacturing flow.

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Contract Manufacturing Setups
Following are the setups required to execute a contract manufacturing flow. There are two flavors of contract manufacturing flow: Back-
to-Back (Make to Order) and Plan-to-Produce (Make to Stock) contract manufacturing. The below setup steps will distinguish between
the two flows wherever required.
Define a Supplier & Supplier Site

Define each of your contract manufacturers as a supplier and each contract manufacturer’s site/location as a supplier site
Log in as Supplier Manager
Navigate to Procurement > Suppliers > Create Supplier
Key Setup Steps:
» Set the Supplier Type value to ‘Supplier’.

» Set the Business Relationship value to ‘Spend Authorized’.
» Define the Supplier Address
» Define the Supplier Site
» Assign the Supplier Site to the Client BU/Requisition BU
Figure 6. Supplier Definition.
Figure 7. Supplier Address Definition.
Figure 8. Supplier Site Definition.

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Figure 9. Supplier Site Assignment.
Note: The setups steps shown above are the bare minimum steps required to run the contract manufacturing flow. For detailed setup
steps for setting up a supplier and supplier site, please refer to Procurement Cloud Implementation/User guides.
Define Inventory Organization Location

Define each contract manufacturer’s site/location that you are dealing with as an Inventory Organization Location.
Log in as Application Implementation Consultant
Navigate to Setup and Maintenance > Manage Locations / Manage Inventory Organization Locations
Key Setup Steps:
» Define the location name and code.

» Define the location description
» Define the address of the location same as of the contract manufacturer’s site/location (supplier site).

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Figure 10. Inventory Organization Location
steps for setting up an Inventory Organization Location, please refer to Inventory Management Cloud Implementation/User guides.
Define Inventory Organization

Define each contract manufacturer’s site/location that you are dealing with as an Inventory Organization. This is essentially modeling
each contract manufacturer’s site as an inventory organization within OEM’s enterprise. This enables OEM’s to monitor the
manufacturing process in the contract manufacturing facility and track the inventory lying in the contract manufacturer’s facility and is
owned by the OEM.
Navigate to Setup and Maintenance > Manage Inventory Organizations
Key Setup Steps:
» Define the organization name and code. You may name the org with contract manufacturer’s name for easy identification.
» Set organization usage as ‘Inventory Management’
» Choose your Management Business Unit and Legal Entity
» Select the Inventory Organization Location that you defined for your contract manufacturer’s site as the Location Address
» Set it as an External organization
» Set the organization as a manufacturing plant
» Set ‘Organization represents a contract manufacturer’ to ‘Yes’
» Select the contract manufacturer and contract manufacturer’s sites that are modeled as a Supplier and supplier site

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Figure 11. Inventory Organization Basic Information
Figure 12. Inventory Organization Manufacturing Information
steps for setting up an Inventory Organization, please refer to Inventory Management Cloud Implementation/User guides.
Define Subinventories and Locators

Define two subinventories within contract manufacturing organization. One subinventory for stocking the contract manufacturing finished
good item and the other subinventory for stocking the components supplied by the OEM to the contract manufacturer. If you wish, you
can define locators too within each of the subinventories.
Navigate to Setup and Maintenance > Manage Subinventories and Locators

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Key Setup Steps:
» Define a finished goods subinventory.

» Define a component subinventory
» Define locators (optional)
Figure 13. Subinventory for stocking OEM owned finished goods
Figure 14. Subinventory for stocking OEM owned components
steps for setting up subinventories and locators, please refer to Inventory Management Cloud Implementation/User guides.
Define Manufacturing Plant Parameters

Setup the manufacturing plant parameters for the contract manufacturing organization that you created.
Navigate to Setup and Maintenance > Manage Plant Parameters

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Key Setup Steps:
» Select the appropriate manufacturing calendar.

» Select the component subinventory that you just created as the ‘Default Supply Subinventory’.
» Select the finished goods subinventory that you just created as the ‘Default Completion Subinventory’.
Figure 14. Manufacturing Plant Parameters
steps for setting up Plant Parameters, please refer to Manufacturing Cloud Implementation/User guides.
Define Receiving Parameters

Setup the receiving parameters for the contract manufacturing organization that you created.
Navigate to Setup and Maintenance > Manage Receiving Parameters
Key Setup Steps:

» Set the ‘Receipt Routing’ to ‘Direct Delivery’ as the receiving of contract manufacturing service item is automated.
Figure 15. Receiving Parameters
steps for setting up Receiving Parameters, please refer to Procurement Cloud Implementation/User guides.

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Define Shipping Parameters
Setup the shipping parameters for the contract manufacturing organization that you created.
Navigate to Setup and Maintenance > Manage Shipping Parameters
Key Setup Steps:

» Set the shipping parameters based on your business need. There is no specific setup required for contract manufacturing flow
Figure 16. Shipping Parameters
Note: For setting up the shipping parameters, please refer to Inventory Management Cloud Implementation/User guides.
Define Charge Accounts for the CM Org

For every new organization defined, it is mandatory to define a valid charge account for the new organization in order to be able to
create a purchase requisition/purchase order. Based on your business need, you may choose have a unique charge account for each
of your contract manufacturing organization or just define a default charge account which will be applicable for all of your contract
manufacturing organizations.
Navigate to Setup and Maintenance > Implementation Projects
Key Setup Steps:
» Search for an existing implementation project which has ‘Manufacturing and Supply Chain Materials Management’ offering
included. If not, create a new implementation project and include ‘Manufacturing and Supply Chain Materials Management’
offering.
» Open the implementation project and expand ‘Manufacturing and Supply Chain Materials Management’ offering.
» Then, expand ‘Define Cost Account’.
» Then expand ‘Define Subledger Accounting Rules.
» Then expand ‘Define Subledger Accounting Methods’.
» Go to ‘Manage Mapping Sets’ click on ‘Go to Task’ and set the scope to ‘Cost Management’.
» Now set the charge accounts for the following accounts:
 Accrual Account – Organization

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 Cost of Sales Account – Organization
 Expense Account – Organization
 Expense Accrual Account – Organization
 Invoice Price Variance Account – Organization
 Material Account – Organization
Figure 17. Define Cost Accounting
Figure 18. Define Subledger Accounting Methods

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Figure 19. Manage Mapping Sets: Cost Management
Figure 20. Define Charge Account for Accrual Account – Organization

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Figure 21. Define Charge Account for Cost of Sales Account - Organization
Figure 22. Define Charge Account for Expense Account - Organization

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Figure 23. Define Charge Account for Expense Accrual Account - Organization
Figure 24. Define Charge Account for Invoice Price Variance Account - Organization

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Figure 25. Define Charge Account for Invoice Material Account - Organization
steps for setting up Charge Accounts, please refer to Procurement Cloud Implementation/User guides.
Verify Item Access to Users in Contract Manufacturing Org

Verify if the users have View / Create / Update access to the items in the contract manufacturing organization that you just created. If
not, grant item View / Create / Update access to the users in the contract manufacturing organization.
Log in as Product Manager
Navigate to Setup and Maintenance > Manage Item Classes
Key Setup Steps:
» Search for your Item Class.

» Verify if the desired user has required privileges on the item in the contract manufacturing organization. If not, add a record with
the desired user and org combination.
» Add the required privileges for the item for the above included record (User & Org combination).

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Figure 26. Item Access to Users in Contract Manufacturing Organization
Define Contract Manufacturing Finished Goods Item

Before item creation, you need to determine if this finished good will be manufactured only after you receive a customer order (Make to
Order / Back-to-Back) or if it will be manufactured based on planning forecast (Make to Stock / Plan to Produce). Also, determine if this
finished good will be manufactured in-house or outsourced to a contract manufacturer. The setups detailed below are for the contract
manufactured scenario. Define the contract manufacturing finished good item using a pre-seeded item template “Contract
Manufacturing Finished Goods”.
Navigate to Product Management > Product Information Management > Create Item
Key Setup Steps:

» While creating an item, select the Item template ‘Contract Manufacturing Finished Goods”.
» Under Manufacturing attribute group, set the ‘Build in WIP’ flag to ‘Yes’ and ‘Contract Manufacturing’ flag to ‘Yes’. Set the ‘Supply
Type’ to ‘Push’.
» Under Sales and Order Management attribute group, set the ‘Back-to-Back Enabled’ flag to ‘Yes’ if this finished goods item is
manufactured only after you receive a customer sales order (Make to Order / Back-to-Back). But, if this finished goods item is
manufactured based on a planning forecast (Make to Stock / Plan to Produce) then, set the ‘Back-to-Back Enabled’ flag to ‘No’.
» Under Planning attribute group, set ‘Make or Buy’ to ‘Make’.and, set the ‘Planning Method’ to ‘MPS Planning’.

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Figure 27. Contract Manufacturing Finished Goods Item Definition – Item Template
Figure 28. Contract Manufacturing Finished Goods Item Definition – Manufacturing Attributes
Figure 29. Contract Manufacturing Finished Goods Item Definition – Sales and Order Management Attributes
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Figure 30. Contract Manufacturing Finished Goods Item Definition – General Planning Attributes
Figure 31. Contract Manufacturing Finished Goods Item Definition – MPS MRP Planning Attributes
Define Contract Manufacturing Service Item

Define the contract manufacturing service item using a pre-seeded item template “Contract Manufacturing Service Component”.
Key Setup Steps:
» While creating an item, select the Item template ‘Contract Manufacturing Service Component”. For easy identification of the service
item, enter the item number/description with the contract manufacturing finished goods item suffixing the contract manufacturer’s
name or initial. Under Manufacturing attribute group, set the ‘Build in WIP’ flag to ‘No’ and ‘Contract Manufacturing’ flag to ‘Yes’.
Set the ‘Supply Type’ to ‘Assembly Pull’.
» Under Sales and Order Management attribute group, set the ‘Back-to-Back Enabled’ flag to ‘No’.
» Under Planning attribute group, set ‘Make or Buy’ to ‘Buy’. In addition, set the ‘Planning Method’ to ‘Not Planned’.
» Under Purchasing attribute group, set ‘Purchased’ & ‘Purchasable’ flags to ‘Yes’. Enter a list price for the contract manufacturing
service item.

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Figure 32. Contract Manufacturing Service Item Definition – Item Template
Figure 33. Contract Manufacturing Service Item Definition – Manufacturing Attributes
Figure 34. Contract Manufacturing Service Item Definition – Sales and Order Management Attributes

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Figure 35. Contract Manufacturing Service Item Definition – General Planning Attributes
Figure 36. Contract Manufacturing Service Item Definition – MPS MRP Attributes
Figure 37. Contract Manufacturing Service Item Definition – Purchasing Attributes
Define OEM Supplied Pre-Positioned Components

Before defining the components, you need to determine which of the components (required for manufacturing the contract
manufacturing finished goods item) will be pre-positioned. Pre-positioned components are those you will supply to the contract
manufacturer and stock it in bulk in the contract manufacturer’s facility. These components will be still owned by you (OEM). Contract
manufacturer will report the consumption of these components as and when they are consumed during the manufacturing process. You

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will replenish these components based on Inventory Min-Max Planning. Pre-Positioned components are transferred to the contract
manufacturer’s facility from one of your internal warehouse through a transfer order.
Key Setup Steps:

» While creating an item, select the Item template ‘Purchasing’.
» Under Manufacturing attribute group, set the ‘Contract Manufacturing’ flag to ‘No’. Set the ‘Supply Type’ to ‘Push’.
» Under Planning attribute group, set the ‘Inventory Planning Method’ to ‘Min-Max Planning’ and set ‘Make or Buy’ to ‘Buy’. Set the
Min-Max Quantity and Order Quantity.
» Set the ‘Replenishment Type’ to ‘Organization’/’Subinventory based on the level (Organization/subinventory) at which you will
perform your Min-Max planning. Select the appropriate organization/subinventory under ‘Organization’/’Subinventory’. In addition,
set the ‘Planning Method’ to ‘Not Planned’. Please note that, for setting up the replenishment Organization/subinventory, you may
have to define the Interorg parameters and transit times between your internal Organization and the contract manufacturing
organization. Please refer to Inventory Min-Max Release trainings for additional information.
Figure 38. OEM Supplied Pre-Positioned Component Definition – Item Template

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Figure 39. OEM Supplied Pre-Positioned Component Definition – Manufacturing Attributes
Figure 40. OEM Supplied Pre-Positioned Component Definition – Sales and Order Management Attributes
Figure 41. OEM Supplied Pre-Positioned Component Definition – General Planning Attributes

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Figure 42. OEM Supplied Pre-Positioned Component Definition – MPS MRP Planning Attributes
Define OEM Supplied Synchronized Components

manufacturing finished goods item) will be synchronized. Synchronized components are those you will supply to the contract
manufacturer only against the purchase order that you place on the contract manufacturer for the manufacturing of the finished goods
item. These components will still be owned by you (OEM). Contract manufacturer will report the consumption of these components as
and when they are consumed during the manufacturing process. You will transfer these components based on Supply Planning run
recommendations. Synchronized components will be transferred to the contract manufacturer’s facility from one of your internal
warehouse through a transfer order.
Key Setup Steps:

» Under Manufacturing attribute group, set the ‘Contract Manufacturing’ flag to ‘No’. Set the ‘Supply Type’ to ‘Push’.
» Under Planning attribute group, set the ‘Inventory Planning Method’ to ‘Not Planned’ and set ‘Make or Buy’ to ‘Buy’. In addition, set
the ‘Planning Method’ to ‘Not Planned’.

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Figure 43. OEM Supplied Synchronized Component Definition – Item Template
Figure 44. OEM Supplied Synchronized Component Definition – Manufacturing Attributes
Figure 45. OEM Supplied Synchronized Component Definition – Sales and Order Management Attributes

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Figure 46. OEM Supplied Synchronized Component Definition – General Planning Attributes
Figure 47. OEM Supplied Synchronized Component Definition – MPS MRP Attributes
Define Contract Manufacturer Supplied Components

manufacturing finished goods item) your contract manufacturer will supply. The contract manufacturer will own these components and
you will not be tracking the inventory levels of these components at the contract manufacturer’s facility.
Key Setup Steps:

» Under Manufacturing attribute group, set the ‘Contract Manufacturing’ flag to ‘No’. Set the ‘Supply Type’ to ‘Supplier’.
» Under Planning attribute group, set the ‘Inventory Planning Method’ to ‘Not Planned’. In addition, set the ‘Planning Method’ to ‘Not
Planned’.

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Figure 48. Contract Manufacturer Supplied Component Definition – Item Template
Figure 49. Contract Manufacturer Supplied Component Definition – Manufacturing Attributes
Figure 50. Contract Manufacturer Supplied Component Definition – Sales and Order Management Attributes

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Figure 51. Contract Manufacturer Supplied Component Definition – General Planning Attributes
Figure 52. Contract Manufacturer Supplied Component Definition – MPS MRP Attributes
Define Item Structure in Contract Manufacturing Organization

Once the service item and all the components needed for the finished goods item are created, define an item structure using those
components and service item for the contract manufacturing finished goods item in the contract manufacturing organization.
Navigate to Product Management > Product Information Management > Manage Items
Key Setup Steps:
» Search for the contract manufacturing finished goods item.

» Navigate to the ‘Structures’ tab.
» Add a new record and select the desired structure name.
» Navigate to the Edit Item Structure screen.
» Include the OEM supplied Pre-Positioned and Synchronized components.
» Include the contract manufacturer supplied components.
» Include the contract manufacturing service item.

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Figure 53. Define Item Structure for Contract Manufacturing Finished Goods Item
Figure 54. Define Item Structure for Contract Manufacturing Finished Goods Item – Components & CM Service Item Included
Define Item Transaction Defaults

Define the item transaction defaults to ensure that the contract manufacturing service item is always received in the components
subinventory that you defined earlier. This setup is required since the receipt of the contract manufacturing service item is automated in
the contract manufacturing flow. You can also optionally setup the item transaction defaults for the OEM supplied components so that
by default they are received into the component subinventory to facilitate easy tracking.
Navigate to Setup and Maintenance > Manage Item Transaction Defaults
Key Setup Steps:
» Add a new record.

» Select the contract manufacturing service item.
» Select ‘Receiving’ in ‘Default For’ and select the component subinventory that you created under ‘Subinventory.

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Figure 55. Define Item Transaction Defaults for Contract Manufacturing Service Item
Define Work Definition for Contract Manufacturing Finished Goods Item

Define a work definition for the contract manufacturing finished goods item in the contract manufacturing organization. Before creating
the work definition, there are certain pre-requisite tasks that you need to complete like, creating a work area, work center, standard
operations etc.
Log in as Manufacturing Engineer
Navigate to Manufacturing > Work Definition > Manage Work Definitions
Key Setup Steps:
» Go to ‘Manage Work Areas’ task to create a Work Area.

» Go to ‘Manage Work Centers’ task to create a Work Center.
» Go to ‘Manage Standard Operations’ task to add the desired manufacturing operations. Optionally, you can add the operations
manually in the work definition.
» Go to ‘Manage Work Definitions’ task to define the work definition.
» Create a new work definition. Select the contract manufacturing finished goods item under ‘Item’ and select the structure defined
for the contract manufacturing finished goods item under ‘Structure Name’.
» Include the desired standard operations that you defined or optionally manually define the operations in the work definition. While
defining the operations, mark the operation as ‘Count Point’ if you wish the contract manufacturer to report the completion of that
operation else mark the operation as ‘Auto Transact’. If the operation is marked as ‘Auto Transact’, the contract manufacturer will
not report progress on that operation.
» Associate the contract manufacturing service item to the last count point operation in the work definition and ensure that ‘Supply
Type’ is set to ‘Assembly Pull’ and the ‘Supply Subinventory’ is set to the component subinventory that you defined.
Figure 56. Work Definition - Contract Manufacturing Service Item associate to Last Operation

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Figure 57. Work Definition - Contract Manufacturing Service Item Attribute setup at the Last Operation
Print Work Definition Report

Print the work definition report for the contract manufacturing finished goods and generate a .pdf or .xml document as desired. This
document is required to communicate the work definition details to the contract manufacturer to enable them to report the progress on
all the count point operations. This document is attached at the ‘To Supplier’ category in the Blanket Purchase Agreement (BPA).
Log in as Manufacturing Engineer
Navigate to Manufacturing > Work Definition > Print Work Definition Report
Key Setup Steps:

» Go to ‘Print Work Definition Report’ task.
» Enter the contract manufacturing finished goods item in the ‘From & To Item’.
» Set the ‘Count Point Only Operation’ flag to ‘No’ and submit.
» Note down the process number.
» Navigate to the Scheduled Process UI and search by the Process Number.
» Download the .pdf or .xml document on to your desktop from the ‘Output’ section of the scheduled process job.

33
Figure 58. Print Work Definition Report Parameters
Figure 59. Print Work Definition Output
Define Blanket Purchase Agreement (BPA)

Define a blanket purchase agreement on the contract manufacturer for the contract manufacturing service item. This will enable to
automate the purchase requisition/purchase order creation and approval.
Log in as Procurement Manager
Navigate to Procurement > Purchasing > Create Agreement
Key Setup Steps:

» Select the ‘Style’ as ‘Blanket Purchase Agreement’.
» Select the desired Procurement Business Unit.

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» Select the desired contract manufacturer and contract manufacturer’s site under Supplier and Supplier Site.
» Include contract manufacturing service item under the BPA lines.
» In the ‘Controls’ tab, under ‘Order Creation Options’, set ‘Automatically generate orders’ and ‘Automatically submit of approval’
flags to ‘Yes’.
» Under the Notes and Attachments section, attach the work definition .pdf / .xml document that you generated at the ‘To Supplier’
category. This attachment will be sent to the contract manufacturer along with the purchase order.
Figure 60. Blanket Purchase Agreement (BPA) with BPA Lines
Figure 61. Blanket Purchase Agreement (BPA) – PO Auto Creation & Approval Controls

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Figure 62. Blanket Purchase Agreement (BPA) – Work Definition Doc Attachment
Enable Contract Manufacturing Org for Planning Collections

Enable the contract manufacturing organization for planning collection in order to be able to collect all the items, item structures, work
definitions, on-hand etc into planning repository. Before enabling for collections, first run the planning collections to collect the contract
manufacturing organization into planning repository.
Log in as Materials Planner
Navigate to Value Chain Planning > Planning Central > Manage Planning Source Systems
Key Setup Steps:
» Go to ‘Collect Planning Data’

» Run the collections to collect the contract manufacturing organization.
» Go to ‘Manage Planning Source Systems’.
» Select your Source System.
» Go to Manage Organization List.
» Search for your contract manufacturing organization.
» Enable the contract manufacturing organization for collections.

36
Figure 63. Enabling Contract Manufacturing Organization for Planning Collections
Run Planning Collections

Once the contract manufacturing org is collected and enabled for collections, run collections to collect all the items, item structures,
work definitions, on-hand etc into planning repository.
Navigate to Value Chain Planning > Planning Central > Collect Planning Data
Key Setup Steps:

» Select your source system and desired collection type
» Select all the required entities reference entities that need to be collected. At a minimum, following are the reference entities that
need to be collected.
 Items
 Item Structures
 Work Definitions
 Subinventories
 Suppliers
» Submit the collections job and note the process number
» Navigate to the Scheduled Processes and search by the process number and verify the collections are run successfully.
» Verify the collected data by going to “Plan Inputs”

37
Figure 64. Run Planning Collections
Verify CM Org & Supplier / Supplier Site Association

Verify that the contract manufacturing organization is correctly associated with the supplier and supplier site in supply network model. If
the setups are followed in the right sequence, this association should be created automatically. If it is not created, you can manually
associate the supplier and supplier site to the contract manufacturing organization. This is mandatory setup because the supplier and
supplier site for the purchase order is determined from this setup.
Navigate to Value Chain Planning > Planning Central > Maintain Supply Network Model
Key Setup Steps:

» Search by the contract manufacturing organization
» Verify if a record is retrieved where the desired supplier and site are associated with the contract manufacturing organization.
» If a record is retrieved with just the contract manufacturing organization and no supplier and supplier site associated then,
manually associate the desired supplier and supplier site and save.
Figure 65. Supply Network Model

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Define ATP Rules for CM Finished Goods Item
ATP Rules setup in Order Promising is required to promise and schedule a sales order. Hence, this setup is required only for Make to
Stock / Back-to-Back Contract Manufacturing flow. Setting up of ATP Rules to support the Back-to-Back Contract Manufacturing flow is
similar to how ATP Rules are set up for standard order promising. However, there are certain points to be noted specifically for Back-to-
Back contract manufacturing order promising.
Navigate to Value Chain Planning > Order Promising > Manage ATP Rules
Key Setup Steps:

» Select the Promising Mode as “Supply chain availability search”
» Enable “Search Components and Resources” (Mandatory)
» Under Supply Types select Standard work orders and any other supply types that must be considered during order promising
» Under Demand Types select Fulfillment lines and any other required demand types that must be considered during order
promising
» Set the Infinite Time Fence to a large value
» Assign the ATP Rule either to a Category, Item, Organization or Item/Organization (Assignment Basis)
Figure 66. Available To Promise (ATP) Rule Setup
Figure 67. Available To Promise (ATP) Rule Assignment
Define Sourcing Rules for CM Finished Goods Item

39
Setup Sourcing Rules so that the CM Finished Good Item is always sourced as ‘Make At’ in the contract manufacturing organization.
Navigate to Value Chain Planning > Order Promising/Planning Central > Manage Sourcing Rules
Key Setup Steps:
» Define a Local Sourcing Rule. Set the ‘Organization Assignment Type’ to ‘Local’ and under ‘Organization’ select the contract
manufacturing organization.
» Select the effective dates.
» Under Sources, select ‘Make At’ for ‘Type and select the contract manufacturing organization for ‘Organization’.
» Go to Manage Assignment Sets task
» Search for your default Assignment Set, select and click on Edit icon
» Assign the Sourcing Rule to the default Assignment Set Level in the Assignment Set.
» Select the desired Assignment Level and choose ‘Sourcing Type’ as Sourcing rule and assign the sourcing rule that you just
created.
Figure 68. Local Sourcing Rule Definition for CM FG Item
Figure 69. Local Sourcing Rule Assignment for CM FG Item
Define Global Sourcing Rule for CM Finished Goods Item (Optional)

Setup a Global Sourcing Rule for the contract manufacturing finished goods item if you wish Order Promising to recommend the
Contract Manufacturing Organization/Warehouse as the default ship from Organization/warehouse for the contract manufacturing
finished goods item when no warehouse is specified in the sales order. This is an optional setup.

40
Key Setup Steps:
» Define a Global Sourcing Rule for the contract manufacturing finished goods item. Set the ‘Organization Assignment Type’ to
‘Global’.
» Under Sources, select ‘Transfer From’ for ‘Type and select the contract manufacturing organization for ‘Organization’.
created.
Figure 70. Global Sourcing Rule Definition for CM FG Item
Figure 71. Global Sourcing Rule Assignment for CM FG Item

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Define Sourcing Rules for OEM Supplied Synchronized Components
Setup Sourcing Rule to enable Planning Central to determine how the supply needs to be created for the OEM supplied synchronized
components. In the contract manufacturing flow, it is always ‘Transfer From’ an internal organization/warehouse to the contract
manufacturer’s organization/warehouse.
Key Setup Steps:
» Define a Local Sourcing Rule. Set the ‘Organization Assignment Type’ to ‘Local’ and under ‘Organization’ select the contract
manufacturing organization.
» Under Sources, select ‘Transfer From’ for ‘Type and select the desired OEM’s internal Organization for ‘Organization’.
created.
» Please note that, for Planning Central to recommend a transfer order to transfer the OEM supplied synchronized components to
the contract manufactuer, you may have to define the Interorg parameters and transit times between your internal Organization
and the contract manufacturing organization. Please refer to Inventory Min-Max Release trainings for additional information.
Figure 72. Local Sourcing Rule Definition for OEM Supplied Synchronized Components
Run the Refresh and Start the Order Promising Server

Execute the ‘Refresh and Start the Order Promising Server’ to refresh the Order Promising data store with the latest Planning collected
data
Navigate to Tools > Scheduled Processes > Schedule New Process
Key Setup Steps:
» Search for “Refresh and Start the Order Promising Server’.

» Select the desired parameters for which the order promising data store need to be refreshed and submit.
» Note down the Process Number and verify if the job has run successfully.

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Figure 73. Refresh and Start Order Promising Server Parameters
Conclusion
That concludes all the required setups for contract manufacturing solution. This solution will allow you as an Original Equipment
Manufacturer (OEM) to completely outsource your manufacturing process to a contract manufacturer. This solution supports
outsourcing of manufacturing jobs in a build to plan or build to order manufacturing strategies.
Apart from getting some of the components from the contract manufacturer, it also allows you to supply some or all the components to
the contract manufacturer.
You will also be able to track and monitor the manufacturing process in the contract manufacturer’s facility at real time.
It also enables you to track the inventories that you own at the contract manufacturer’s facility– be it components or the finished goods.

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Contract Manufacturing: A Guide to Key Application Setups

April 2017
Author: Venkata Ramana Malluri
Contributing Authors: Megan Kirkham

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Contract Manufacturing

A Guide to Key Application Setups

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Introduction to Contract Manufacturing 1

Modeling of Entities in Contract Manufacturing 1

Contract Manufacturing Business Process 3

Contract Manufacturing Process Flow 4

Contract Manufacturing Setups 7

Define a Supplier & Supplier Site 7

Define Inventory Organization Location 8

Define Inventory Organization 9

Define Subinventories and Locators 10

Define Manufacturing Plant Parameters 11

Define Receiving Parameters 12

Define Shipping Parameters 13

Define Charge Accounts for the CM Org 13

Verify Item Access to Users in Contract Manufacturing Org 18

Define Contract Manufacturing Finished Goods Item 19

Define Contract Manufacturing Service Item 21

Define OEM Supplied Pre-Positioned Components 23

Define OEM Supplied Synchronized Components 26

Define Contract Manufacturer Supplied Components 28

Define Item Structure in Contract Manufacturing Organization 30

Define Item Transaction Defaults 31

Define Work Definition for Contract Manufacturing Finished Goods Item 32

Print Work Definition Report 33

CONTRACT MANUFACTURING SETUP AND EXECUTION

Enable Contract Manufacturing Org for Planning Collections 36

Run Planning Collections 37

Verify CM Org & Supplier / Supplier Site Association 38

Define ATP Rules for CM Finished Goods Item 39

Define Sourcing Rules for CM Finished Goods Item 39

Define Global Sourcing Rule for CM Finished Goods Item (Optional) 40

Define Sourcing Rules for OEM Supplied Synchronized Components 42

Run the Refresh and Start the Order Promising Server 42

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Modeling of Entities in Contract Manufacturing

Contract Manufacturing Finished Good Item

Contract Manufacturing Service Item

Contract Manufacturing Finished Good Item Bill of Material (BOM)

Contract Manufacturing Entity Modeling & How They Work Together

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Figure 2. Contract manufacturing business flow fulfilling a customer order

» A customer places an order for an item on the OEM.

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Figure 3. Contract manufacturing process flow – part 1

Back-to-Back Contract Manufacturing Flow

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Process Flow Continued:

Figure 4. Contract manufacturing process flow – part 2

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Process Flow Continued:

Figure 5. Contract manufacturing process flow – part 3

Plan-to-Produce Contract Manufacturing Flow

CONTRACT MANUFACTURING: A GUIDE TO KEY APPLICATION SETUPS

Define a Supplier & Supplier Site

Log in as Supplier Manager

Navigate to Procurement > Suppliers > Create Supplier

Key Setup Steps:

» Set the Supplier Type value to ‘Supplier’.

Figure 6. Supplier Definition.

Figure 7. Supplier Address Definition.

Figure 8. Supplier Site Definition.