Inventory at a contract manufacturer: reconcile stock you never see

Sending material to a contract manufacturer changes where it sits and who can report on it. The business still needs an answer for every unit it owns: what arrived, what was consumed, what became finished goods, what was rejected, and what remains. A supplier invoice for processing cannot answer all those questions.

Create a separate location record for each manufacturer and, where needed, each site. Retain the product, unit of measure, lot or serial reference, owner, and production status. A single balance named inventory with vendor is too broad to explain a shortage or establish whether a delayed order can be completed.

Microsoft's subcontracting documentation treats vendor-site inventory and processing services as connected but distinct flows. That separation is useful even without an ERP: track the goods physically, then match the service performed and its cost to the relevant production activity.

Establish who supplies each component. Some material may be purchased by your business, some by the manufacturer, and some held under a consignment arrangement. An item arriving at the same building can therefore belong in a different company's inventory record. Keep ownership terms, acceptance conditions, and loss responsibilities with the manufacturing agreement.

Microsoft's consignment model explicitly separates vendor-owned quantities from quantities owned by the receiving company. Use that distinction when reviewing a mixed stock report. A manufacturer's statement should identify whose material it is counting, rather than simply reporting everything in the bin.

When an agreement is unclear, resolve the contractual question with the responsible commercial or legal adviser. Accounting should not infer ownership from the party that paid the freight or from the name on an informal spreadsheet. Record the agreed interpretation so purchasing, operations, and finance use the same boundary.

Build a rollforward from the last confirmed quantity. Add receipts at the manufacturer's site and subtract supported consumption, scrap, and returns. Record transfers between manufacturing sites separately. Match your dispatch date to the manufacturer's receipt date so goods in transit do not disappear from both reports or appear twice.

In a hypothetical material record, 1,000 units were confirmed at the beginning of the month. Another 300 arrived; 800 were consumed in production, 20 were separately scrapped before use, and 100 were returned to your warehouse. The expected closing quantity is 380 units. The supplier's count should explain any difference from that result.

The raw-material rollforward stops being sufficient once production begins. Ask for quantities by stage, including material already consumed in unfinished work and completed units awaiting inspection or shipment. A count of loose components can reconcile perfectly while a substantial amount of work in process remains unexplained.

Specify how the manufacturer reports good output, rejects, rework, and partially completed batches. Where one component produces several outputs, retain the conversion or yield basis. Do not compare kilograms issued with finished units received and assume the difference is waste.

Tie status reports to a common cutoff and preserve later corrections. If the manufacturer reports an operation complete before your team accepts the output, identify the acceptance issue and its accounting consequence for review. The manufacturing schedule, inventory record, and payable should tell compatible stories about the same work.

A processing invoice may charge by batch, good output, total output, machine time, or another agreed basis. Recalculate it using that basis. Where your business already owns the inputs, check that the charge represents the agreed service and any supplier-provided materials, rather than a second purchase of your own stock.

IAS 2 describes inventory cost as including purchase, conversion, and other costs needed to bring goods to their present location and condition. Give the accountant a breakdown of processing, transport, storage, abnormal losses, and other charges so the applicable policy can be applied. A total supplier invoice is not enough to classify every component.

Set a reporting schedule with the manufacturer and name a person on each side who can investigate quantity differences. Obtain counts for material items or locations whose value or movement justifies additional review. Keep unresolved differences in an exception record with the quantity, cost exposure, evidence requested, and next action.

Before changing suppliers or ending a production program, confirm the disposition of unused materials, tooling, work in process, rejected goods, and finished stock. Agree return instructions and final service invoices. Close the outside location only after its remaining physical quantities and accounting balances have an explained destination.