In a garment factory in the Vale do Ave with 80 employees, the controller spends the last three days of each month building in Excel what the ERP should produce automatically: the actual cost of each order, split by customer, with a breakdown of materials and labour. It is not the system being lazy. It is the wrong architecture from day one. And the problem is going to get worse: in 2022, the European Commission published the EU Strategy for Sustainable and Circular Textiles (COM(2022) 141 final), which foresees making the Digital Product Passport mandatory for textiles — traceability of materials from origin to final product, including who manufactured it, where and with what environmental impact. The factory that does not have batch-by-batch traceability implemented in the ERP today will lose the next order, not the contract.
This article takes a concrete position: in production for third parties — CMT (Cut, Make, Trim) or full-package — traceability and costing by order are not advanced features to be implemented "in phase two". They are the foundation. Everything else is cosmetics.
The generic ERP fails here by design, not by accident
Production for third parties is not merely a commercial arrangement. It is a different data architecture. The raw material may belong to the customer, may be purchased by the manufacturer and charged to the order, or may be mixed. The finished product goes out under someone else's brand. Compliance responsibility is shared. And the cost has to be determined order by order, not by internal reference.
An ERP that models the world as "I buy raw material → I manufacture → I sell my product" has no native structure for this. It adapts with workarounds — cost centres by customer, ad hoc projects, parallel Excel spreadsheets. The result is what any controller in the clothing sector recognises: margins calculated 45 days after closing, with no batch detail, with no separation between allocated labour cost and shared overhead.
The most expensive mistake is not having the wrong cost — it is not knowing it is wrong until the customer requests a compliance audit.
For the ERP to support production for third parties rigorously, three structures have to coexist simultaneously — independent but linked to one another.
The first is the customer order as a costing unit: not just as a commercial document, but as a centre for allocating direct costs (raw material, labour, subcontracting) and indirect costs (overhead allocated by a configurable criterion). The second is batch-by-batch traceability by order: each roll of fabric, each batch of accessories, each lot of yarn associated with the specific order in which it was consumed, with quantity and date. The third is the separation of consigned stock from own stock — when the raw material belongs to the customer, the ERP cannot treat that stock as its own asset. The valuation, the obsolescence risk and the accounting responsibility are different, and the SAF-T will reflect it.
The absence of any one of these three structures creates a blind spot. And blind spots in production for third parties have regulatory consequences — not just commercial ones.
The regulatory framework that already exists — and what comes next
Portaria 195/2020 requires the monthly submission of the SAF-T file to the Tax Authority. That file includes stock movements, purchase and sales documents, and production data where integrated into the accounts. A factory that cannot reconstruct the journey of a batch of raw material through to the finished product — and from that through to the service invoice to the customer — has a tax audit problem, not just an operational one.
DL 28/2019 reinforces the obligation for the integrity of accounting records and the use of software certified by the AT. In production for third parties, where invoicing is for a service and not for a product, the line between "provision of a service" and "transfer of goods" can be thin. The ERP has to support both arrangements with correct ATCUD.
The European DPP goes further. For a garment factory in the Vale do Ave that produces for European brands, batch-by-batch traceability ceases to be an internal best practice and becomes a market access requirement. The ERP that does not support it today is a compliance risk tomorrow. Read more about the operational implications in batch-by-batch traceability in Portuguese industry: ERP or paper.
The brand that places orders in Braga will ask for the DPP. The factory whose ERP is not ready will lose the order — not the contract, the next order.
Footwear: complexity multiplied by the variant matrix
In the footwear sector — Felgueiras, Guimarães, S. João da Madeira — production for third parties has an additional layer: the variant matrix. An order of 800 pairs may have 6 sizes, 3 colours and 2 widths. Each combination is a distinct SKU with its own specific material consumption — the leather of a size 46 boot is not the same as that of a size 36, neither in quantity nor in cost. The ERP has to support traceability at variant level, not just at parent-reference level.
Generalist ERPs model variants as attributes of a base product — sufficient for stock management, insufficient for differentiated costing by variant in production for third parties. As detailed in vertical ERP vs. generic ERP: what the footwear industry pays extra, this limit is not configurable — it is structural.
Four costing models and their real trade-offs
Costing in CMT or full-package has no single correct model. The choice depends on the size of the factory, the number of simultaneous customers and the level of detail required by buyers.
| Costing model | How it works | Main advantage | Main risk | Suitable for |
|---|---|---|---|---|
| Standard cost by operation | Pre-defined times and costs by sewing/assembly operation; charged to the order by quantity produced | Simple to operate; deviations visible quickly | Outdated standard distorts margins; does not capture actual inefficiencies | Factories with a stable mix and repetitive operations |
| Actual cost by production order | Each order accumulates actual costs: recorded hours, materials consumed, actual subcontracting | Actual margin by order; basis for price negotiation | Requires rigorous recording on the shop floor; overhead difficult to allocate | Factories with long orders and customers who audit costs |
| Activity-based costing (ABC) | Indirect costs allocated by activity (preparation, cutting, finishing) with criteria by order | Overhead allocated with operational logic; eliminates cross-subsidies between customers | Configuration complexity; maintenance of cost drivers | Factories with multiple customers and a mix of varying complexity |
| Hybrid costing (standard + actual deviation) | Standard as the budgeting basis; actual deviations determined by order and reconciled at closing | Balance between operability and rigour; facilitates deviation analysis | Two reference systems can create confusion if not well documented | Factories transitioning from Excel to ERP; customers who ask for a budget + actual closing |
Shared overhead: the detail the manuals avoid
In a factory that produces simultaneously for three brands, the costs of energy, equipment depreciation, supervision and quality control are shared. The question is simple and the answer is uncomfortable: how to allocate them to each order? The practical options are by direct labour hours, by machine hours or by production volume. Each criterion produces different results — and none is "correct" in the abstract.
What matters is that the criterion is consistent, documented and accepted by the customer if they audit the costs. But there is a specific standard mistake we see repeatedly: configuring a single global overhead criterion for all customers. A customer who pays a premium price and demands special finishes cannot be treated with the same overhead criterion as a basic-volume customer. The ERP has to allow the allocation criterion to be configured by order or by customer — not just globally. This is not academic sophistication: it is the difference between an 8% margin and a 2% margin on the same order.
Consigned raw material: the asset that is not yours
When the customer sends fabric, yarn or accessories to the factory, that raw material does not enter the factory's assets. It is not valued stock. It does not generate VAT on entry. But it has to be managed — received, checked, stored, consumed and reconciled with the customer at the closing of the order. An ERP that does not distinguish consigned stock from own stock will create accounting and tax problems. The SAF-T will reflect stock movements that the AT may question. And the customer will ask for a materials reconciliation that the factory cannot produce because the ERP has mixed everything together.
Configure a separate logical warehouse in the ERP for consigned stock by customer. Each entry of customer material is a consignment receipt movement — without its own accounting valuation, but with full physical traceability. Consumption is recorded against the order's production order. The consignment balance is reconcilable at any time, without phone calls to the warehouse.
Decision matrix: which ERP architecture for which factory profile
| Factory profile | No. of simultaneous customers | Recommended costing model | Minimum traceability required | Suitable ERP architecture |
|---|---|---|---|---|
| Single-customer garment production, high volume | 1–2 | Standard by operation | Raw material batch → production order | Vertical ERP with CMT production module; simple integration |
| Multi-customer garment production, medium mix | 3–8 | Hybrid (standard + actual deviation) | Batch → order → customer order; consigned stock separated | Vertical ERP with consignment management and costing by order |
| Full-package with partial subcontracting | 3–10 | Actual cost by order + ABC for overhead | Batch → operation → subcontractor → order; future DPP | Vertical ERP with subcontracting module and multi-level traceability |
| Multi-variant footwear, international buyers | 5–15 | Actual cost by variant | Batch → variant (colour/size/width) → order; quality audit by variant | Vertical ERP with native variant axes; integration with the buyer's B2B portal |
| Industrial group with several CMT factories | 10+ | Centralised ABC + actual cost by manufacturing unit | Inter-company traceability; cost consolidation by group | ERP with multi-company module; see multi-company ERP in Portugal |
What works in practice
Production recording as the source of truth
Traceability and actual costing only work if the recording on the shop floor is reliable. In a garment factory with 60 to 100 employees, recording on paper or on shared terminals generates allocation errors that invalidate costing by order. The pattern that works is individual recording by operator, on an industrial terminal or rugged tablet, with barcode scanning of the production order and the material batch.
Do not confuse this with an Industry 4.0 project. It is a project of operational discipline supported by simple technology. A typical Vale do Ave textile factory that implements individual recording can, within a few months, have the actual labour cost by order with a deviation from the standard that is manageable and auditable. KORA Productivity was designed exactly for this context — industrial terminals, real-time recording, direct integration with the ERP.
Materials reconciliation as a closing ritual
At the end of each order — or of each month, for long orders — the factory should automatically produce a materials reconciliation report: quantity received (own and consigned) versus quantity consumed versus quantity in stock. The difference is waste or shrinkage. This report has three users: the controller (to validate the costing), the customer (to reconcile the consignment) and the quality manager (to identify shrinkage patterns by material or by operator).
If you need Excel to build it, traceability is not implemented — it is simulated. The ERP has to generate this report without manual intervention. This is the simplest and most honest test of a well-executed implementation.
B2B portal as a transparency interface with the customer
International buyers — Inditex, Decathlon, Mango, Tom Tailor — increasingly ask for visibility over the status of their orders in real time. A factory that can give the buyer access to a portal where they see the production status, the consumption of consigned materials and the compliance documents has a concrete competitive advantage over one that sends a weekly email with a PDF. This visibility is not just commercial: it is the basis for future DPP compliance.
KORA B2B allows this portal to be structured in an integrated way with the ERP, without duplicating data. Also read B2B collaboration with suppliers: traceability and quality without email to understand how this integration works in both directions — with customers and with subcontractors.
The factory that gives the buyer a real-time traceability portal is not doing a favour — it is making itself harder to replace.
The step-by-step procedure
- Configure the customer order as a costing unit in the ERP — with a unique code, customer, product references, quantities by variant and the overhead allocation criterion defined before production begins.
- Create the logical consignment warehouse by customer — receive the customer's materials into this warehouse, with a quantity and quality check, and record the balance available for the order.
- Generate the production order linked to the customer order — with the specific bill of materials (BOM) for the order, including the origin of each component (own or consigned) and the traceability batch.
- Implement individual recording by operator — with barcode scanning of the order and of the material batch consumed; the ERP accumulates actual labour and material costs in real time.
- Carry out the materials reconciliation at the closing of the order — the ERP compares actual consumption against the planned BOM; the deviations are recorded with a cause (shrinkage, rejection, leftovers) and charged to the order or to a waste cost centre.
- Calculate the actual margin by order — with the cost of materials (own and consigned valued at reference cost), actual labour, actual subcontracting and overhead allocated by the configured criterion. Compare with the initial budget.
- Produce the traceability report for the customer — raw material batch → production order → finished product → dispatch document. This report is the basis for the future DPP and the current compliance audit.
Correct costing accelerates payment
There is a financial consequence of costing by order that is rarely mentioned: the impact on the average collection period. When the factory can issue the service invoice with the costing detail that the customer requires — materials consumed, labour hours, subcontracting — the buyer's approval process is faster. Fewer requests for clarification, fewer payment holds due to incomplete documentation.
In a sector where the payment terms of large international buyers are frequently longer than 60 days, reducing the invoice approval time by 10 to 15 days has a direct impact on cash flow. Correct costing is not just a management control issue — it is a liquidity issue. To go deeper into industrial costing with margin detail by reference, read industrial costing in the ERP: from the cost centre to the actual margin by reference.
Planning and capacity: the link that closes the cycle
Traceability and costing are retrospective — they record what happened. Capacity planning is prospective — it decides what is going to happen. In production for third parties, the two have to be linked in the same ERP. A factory that accepts an order without checking the available capacity in the coming weeks will have to choose between delaying the customer or subcontracting at an urgent cost — which destroys the margin that the costing calculated so carefully. Production capacity planning: what the ERP calculates and what it fails at details exactly where ERPs fail on this link.
ERP MULTI was designed for Portuguese industry with this native link — customer order → capacity planning → production order → actual costing → service invoicing. Not as independent modules that integrate with effort, but as a continuous flow where each step feeds the next.
The mistake the next implementation will repeat
There is a pattern we see repeatedly in Portuguese garment and footwear factories implementing an ERP for the first time: they define costing for the reality they have today, not for the reality they will have two years from now.
A factory that today works for two customers with simple orders configures the ERP with basic standard costing. Two years later, it has five customers, two of which require batch traceability for compliance with European regulation, and a third that wants access to the real-time traceability portal. The ERP does not support it — and the reconfiguration costs more than it would have cost to do it right the first time, because there is now historical data without traceability that cannot be reconstructed.
The correct decision is to activate batch-by-batch traceability from day one, even if today you do not need it for every customer. The incremental cost of activating it is marginal. The cost of implementing it after the fact is high and, in some cases, unfeasible. For operations with multiple entities or structural subcontracting, QAD Adaptive ERP offers the flexibility to model complex production flows for third parties without the limits of a rigidly configured ERP.
The two-minute test
The success of an ERP in production for third parties is not measured at go-live. It is measured six months later, when the controller can answer three questions without opening Excel: what was the actual margin of order X for customer Y, with a breakdown of materials, labour and overhead? Which batch of fabric went into the garments of order Z, and where are the associated compliance documents? What is the balance of consigned stock for customer W, reconciled with the closed production orders?
If the three answers come out of the ERP in less than two minutes, the implementation was well done. If they require Excel, phone calls to the warehouse or waiting until the end of the month, there is work to be done — and that work gets more expensive with each order that passes. The European DPP is going to make this test mandatory. The difference is that, when it becomes mandatory, there will no longer be time to redo the architecture.
Sources
- INE — Estatísticas do Comércio 2024, Statistics Portugal, Portugal, 2024. Available at: ine.pt
- European Commission — EU Strategy for Sustainable and Circular Textiles, COM(2022) 141 final, Brussels, 30 March 2022. Available at: ec.europa.eu
- Tax and Customs Authority — Portaria n.º 195/2020, de 13 de agosto (monthly SAF-T submission). Available at: dre.pt
- Tax and Customs Authority — Decreto-Lei n.º 28/2019, de 15 de fevereiro (electronic invoicing and ATCUD). Available at: dre.pt
- APICCAPS — Footwear Monitor 2023, Portuguese Association of Footwear, Components, Leather Goods Manufacturers, Porto, 2023. Available at: apiccaps.pt
Frequently asked questions
What is production for third parties and why is it different for the ERP?
Production for third parties (CMT or full-package) is not merely a commercial arrangement — it is a different data architecture. The raw material may belong to the customer, the manufacturer or be mixed. The finished product goes out under someone else's brand and responsibility is shared. The cost has to be determined order by order, not by internal reference. A generic ERP has no native structure for this.
What are the three structures an ERP must have to support production for third parties?
First: the customer order as a costing unit, allocating direct and indirect costs. Second: batch-by-batch traceability by order, associating each material consumed with the specific order. Third: separation of consigned stock from own stock, with distinct valuation and accounting responsibility. The absence of any one creates a blind spot with regulatory consequences.
What is the impact of the European Digital Product Passport on Portuguese factories?
The EU Strategy for Sustainable and Circular Textiles foresees making the Digital Product Passport mandatory for textiles, requiring traceability of materials from origin to final product, including who manufactured it, where and with what environmental impact. A factory without batch-by-batch traceability implemented in the ERP today will lose the next order, not the contract.
Why is Excel still used in factories with an ERP implemented?
Because the generic ERP fails by design. It adapts with workarounds — cost centres by customer, ad hoc projects, parallel Excel spreadsheets. The result is margins calculated 45 days after closing, with no batch detail, with no separation between allocated labour cost and shared overhead. Costing by order is not an advanced feature — it is the foundation.
What regulatory obligations exist in Portugal for traceability in production for third parties?
Portaria 195/2020 requires the monthly submission of the SAF-T file to the Tax Authority, including stock movements and production data. DL 28/2019 reinforces the integrity of accounting records. A factory that cannot reconstruct the journey of a batch through to the finished product has a tax audit problem, not just an operational one.
How does the footwear sector differ in terms of ERP complexity?
In footwear, production for third parties has an additional layer: the variant matrix. An order of 800 pairs may have 6 sizes, 3 colours and 2 widths. Each combination is a distinct SKU with specific material consumption. The ERP has to support traceability at variant level, not just at parent-reference level — this limit is structural in generalist ERPs.
What is the most expensive mistake in production for third parties?
It is not having the wrong cost — it is not knowing it is wrong until the customer requests a compliance audit. Blind spots in production for third parties have regulatory consequences, not just commercial ones. Compliance with European and national requirements depends on correct traceability and costing from day one.