Paid Supply and Free Supply to Subcontractors in Indonesia

Paid supply involves selling materials to a subcontractor and purchasing the processed work-in-progress (WIP) afterward, whereas free supply involves issuing a purchase order (P/O) for subcontracted WIP, recording material allocation and issuance based on issuance instructions, logging usage performance of supplied materials at the subcontractor, and recording the receipt performance of the WIP.

Dropshipping and Direct Supplier Shipping

From 2001 to 2007, while running a furniture export business in Bali, I frequently received inquiries from people in Japan looking to start an online business:

Back then, I felt repulsed by the idea of opening an online shop with zero risk and no inventory, but now dropshipping has matured into a solid affiliate business model.
In business systems, dropshipping corresponds to the direct supplier shipping function. Registering an order from Customer A automatically generates a purchase order to Supplier B, with receipt performance recorded at Customer A’s location, not the company’s warehouse.
Imagine a scenario where Japan HQ receives an order from its U.S. branch, Japan HQ places an order with the Indonesia factory, and the Indonesia factory ships directly to the U.S. branch—a trilateral transaction makes it easier to understand.
In an ERP system where order management and accounting are integrated, registering a direct supplier shipment after order and purchase registration triggers:

These four processes are executed together. If a return occurs from the customer, you must perform:

If only a sales return is processed, inventory remains in the virtual warehouse for direct shipping, which should have no residual stock.

Supplying from Your Own Warehouse

The process flow for paid supply and free supply is the same, but the P/O price issued to the subcontractor includes material costs + processing fees for paid supply, and only processing fees for free supply.

For revenue recognition in paid supply, upon receiving a material order from the subcontractor, a purchase order for materials is registered with the supplier. The materials may either arrive at your warehouse or be shipped directly to the subcontractor.

When materials arrive at your warehouse, the flow—issuing a subcontract P/O, reserving materials and issuing them to the subcontractor, and recording receipt after processing—is identical for both paid and free supply:

From a receipt-and-issue perspective, the difference between in-house production and subcontracting is:

Paid Supply

In Indonesia, free supply often leads to vague revenue management, so tax authorities require paid supply with a profit margin.
However, with paid supply, you must avoid double-counting sales (a “double slap”)—recording sales when supplying materials and again when selling the processed product to the customer.

Thus, at the supply stage (material sale), record it as accrued revenue (receivables) rather than Sales (revenue plus), deducting materials. When buying back the processed item, transfer the accrued revenue to subcontracting costs:

Free Supply

Subcontracting like plating or pressing is a service purchase (toll processing), and a subcontract purchase order (P/O) is issued to the subcontractor for the service: