We occasionally get questions about outside processing (OP). There does not seem to be much published on this subject, at least in the APICS literature, so we thought we'd start a dialogue with our readership. We'll summarize what we think we know and readers are invited to contact us with information from their experiences, which we will share in a future column.

So, what is OP? When is it useful? And how should it be represented in planning and control systems?

Outside processing is not the same as a purchased part. It literally means that one or more operations on the routing for an internally produced part is performed by an outside shop. That is, an in-process part takes a trip outside its plant to undergo one or more specific operations. These might be activities like plating or magnafluxing, which cannot or will not be performed inside the home plant. After the outside processing steps have been completed, the part returns to its internal routing.

There are a number of circumstances when it might be necessary or prudent to perform some of the operations on a routing at an outside source. One circumstance could be a temporary overload at a machining operation. Another could be that the level of precision for an operation is beyond the capability of the internal equipment, such as a part requiring an automatic screw machine operation, and it is not feasible to upgrade to this capability. OP could also involve a process which is nonexistent in-house, such as an anodizing or plating operation. On other occasions, there might be a symbiotic situation such as using the facilities of an organization supporting handicapped individuals, say for packaging parts or, in some cases, a sorting operation, picking the suitable parts from an otherwise rejected lot.

How is OP represented in a planning and control system? This issue involves the bill of materials (BOM), and the routing and decisions related thereto — such as work center definitions, alternate operations and alternate routings. It also encompasses related activities in other functions of the business, such as purchasing, accounting, material handling, shipping, receiving and quality control.

Exactly how OP is handled can be quite variable, depending on the specific nature of a company's planning and control software (or manual system), organization size and structure, types of processes and volumes of work involved, whether the OP is temporary or permanent, etc.

Regarding the BOM, if the OP is a one-time requirement, one approach is to pretend it was done in-house. If it is an ongoing need, another method would be to include a pseudo subassembly on the bill of material calling for the original part and treating it as a purchased part. For the situation where OP is conditional, for example on lack of capacity, some companies have two bills of material: one regular BOM calling for the part to be handled internally, the other (alternate BOM) treating the part as a purchased part. Another approach is to create alternate routings or alternate operations for the part, which can be invoked as appropriate.

In order for OP to occur, vendor-supplied services have to be contracted. Landvater & Gray (1989, pp. 148-149) discuss manufacturing orders which are routed outside for some sort of OP. In this case, they note: The shop floor control system includes both a shop order and a routing which encompasses all inside and outside operations. This means a scheduled receipt for the item already exists in the MRP system, too.

The purchasing system should have a way to store/maintain an extra purchase order to record purchase of the outside operation. However, since the scheduled receipt already exists, this type of purchase order should not appear in MRP (to avoid double counting).

The PO for outside processing must exist in the purchase order files for purposes of vendor scheduling, accounting and receiving. Two and three typically are accomplished by ignoring the netting and exception logic of MRP, but treat these kinds of POs as scheduled receipts for vendor scheduling, as purchase commitments for accounts payable, etc.

Unlike normal purchase orders, the PO for outside processing is linked directly to manufacturing orders in the shop floor control system. Because of this link, if manufacturing orders are rescheduled, the operation due dates for all operations (including outside operations) are recalculated. The revised operation schedule dates are compared with the due dates of the POs for outside operations, and differences trigger exception messages.

A material-receiving transaction against these special POs typically is like an "operation complete" transaction in shop scheduling and dispatching rather than a receipt into stock. The receipt marks the operation complete, but does not affect the on-hand balance.

In lieu of a PO for each lot, purchasing may employ blanket orders with multiple releases for routine outside processing. Handling and shipping will need instructions on where and when to send the items, and the parts will subsequently have to be received on the return trip. During the receiving operation, the part counts and quality levels will have to be verified, and accounts payable updated. Material handling will need instructions on where to reinsert the processed parts into the work-in-process stream.

If there are any glitches in quality or quantity, things start to get really complicated, especially if multiple releases are involved on a blanket order. Keeping track of which units to post against which releases can be very difficult.

So, what are the costing implications of outside processing? It depends on the sophistication of the computer system. As noted above by Landvater and Gray, some systems have the ability to cross-reference a purchase order directly into the routing system in the cost roll-up of a job order. Costs incurred against the outside purchase order would be collected right into the order. If this is an ongoing procedure, the operation would have its own standard cost. If it is a repair order or a one-time operation, it could well show up as a process cost variance.

It can be seen that dealing with outside processing calls upon the creativity of a consortium of purchasing, process engineering, production control, quality control and the accounting organization. Where there is a will, there is a way!

References
Landvater, D.; Gray, C., "MRPII: Standard System." Oliver Wight Limited Publications, 1989, pp. 148-149.

Musolf, J.; Bihun, T., "JIT: Planning and Controlling Resources Outside/Inside the Factory," APICS 32nd Annual International Conference Proceedings, 1989, pp. 593-596.

Ridings, J., "Managing the Outside Factory," APICS 35th Annual International Conference Proceedings, 1992, pp. 489-491.

SHOP FEEDBACK: The topic of point-of-use storage was addressed in the October 1997 column. In that column I cited the experience of a Honeywell plant as reported by John MacMillan. Subsequently, I received a follow-up fax from John, providing an update of their situation.

John reports that they are now a 100 percent point-of-use storage factory, "having eliminated our 30,000-sq.-ft. stockroom ... without increasing manufacturing floor space." Also, they "recently moved to a newer, smaller manufacturing location to avoid the costs of 100,000 sq. ft. of unused space."

He indicates that, "work-in-process inventory has been reduced by almost 80 percent, and materials distributors reduced from 25 to 3. An added benefit, not described in the original article, has been a dramatic improvement in inventory accuracy, without non-value-added cycle counting and, as predicted in the article, receiving transactions have been reduced from 6 to 2."

Thank you for the update, John!

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