Co-manufacturing is an outsourced production model where a business retains ownership of the product, inventory, and financial outcome, while a third-party partner performs part or all of the production process.

At a strategic level, this is straightforward. Operationally, inside Cin7 Core, it introduces a different kind of system complexity.

Inventory is no longer held in a single location. Costs are no longer captured in a single transaction. Workflow steps no longer operate independently. Instead, costing, inventory tracking, and financial reporting become dependent on how the system is configured and how workflows are executed.

In many Cin7 environments, co-manufacturing is implemented as if it were a linear process. The system, however, behaves as a multi-stage model.

The issue is not outsourcing. It is how the system is configured to handle it.

TL;DR

• Co-manufacturing introduces multi-stage costing, inventory tracking, and workflow dependencies in Cin7

• Most environments fail because they are configured as linear workflows

• This shows up as incorrect margins, inventory discrepancies, and reconciliation gaps

• Cin7 reflects system configuration; it does not correct it

• Resolving this requires validating workflow sequence, cost allocation, and reconciliation

What Co-Manufacturing Changes in Cin7

Cost Structure Becomes Multi-Layered

In co-manufacturing environments, product cost is not derived from a single supplier transaction. It is built across multiple stages:

• Raw material purchases

• Co-manufacturer service charges

• Freight, duties, and clearing

• Post-production logistics

In Cin7, these costs must be explicitly allocated through landed cost mechanisms and production flows (BOMs and production orders). If not allocated, they remain separate and are not reflected in inventory value.

When this is not configured correctly, service costs and secondary logistics are often excluded from inventory value. This typically shows up as understated cost of goods sold and inflated margins in Xero.

Cost layering only occurs when these components are explicitly allocated. Cin7 does not automatically combine cost elements across stages.

Inventory Exists Across Multiple Locations

Co-manufacturing distributes inventory across locations that are often outside the business’s physical control:

• Internal warehouse

• Co-manufacturer

• In-transit between locations

• Third-party logistics providers

Ownership of inventory persists financially, but is only reflected in Cin7 when stock is recorded within defined locations and supported by transactions.

When co-manufacturers are not configured as locations, or when in-transit movements are not tracked, the system cannot reflect where stock actually exists. This typically shows up as missing stock, duplicated quantities, or discrepancies between expected and available inventory.

Workflow Becomes Sequence-Dependent

Co-manufacturing introduces strict dependencies between operational steps. In Cin7, the correct sequence is:

Purchase Order → Stock Receiving → Invoice → Sync

Each step updates a different part of the system:

• Purchase Orders define expected inventory and cost

• Stock Receiving validates physical inventory in the system

• Invoices update financial value

• Sync transfers financial impact into Xero

When this sequence is not followed, the system becomes misaligned.

A common failure is recording the invoice before stock is received. In this case, financial value is recognized before inventory exists in the system. This typically shows up as mismatches in reports such as “Financial Transactions vs Stock on Hand.”

Receiving in Cin7 is not a warehouse activity. It is a system requirement. If stock is not received, its value does not move from the Purchase Order into inventory or the balance sheet.

What Causes Incorrect Margins in Cin7?

Incorrect margins typically occur when service costs, logistics, or landed costs are not fully allocated to inventory. This results in understated product cost and distorted cost of goods sold.

The Co-Manufacturing Misalignment Model

Co-manufacturing environments typically fail across four interconnected layers.

Layer 1: Cost Layering Failure

Costs are captured across different stages but not fully allocated to the finished product. Service fees, freight, or secondary logistics are excluded.

Signal: Incorrect unit costs and distorted margins.

Layer 2: Inventory Ownership Breakdown

Inventory is not correctly represented across all locations, particularly at co-manufacturers or in transit.

Signal: Missing, duplicated, or inconsistent stock levels.

Layer 3: Workflow Timing Misalignment

Operational steps are executed out of sequence, or without validation.

Signal: Financial data does not match inventory data.

Layer 4: Financial Reconciliation Drift

Xero reflects incorrect upstream data from Cin7 through sync.

Signal: Inventory values do not reconcile with the balance sheet.

These layers compound. What begins as a small costing or workflow issue develops into a broader loss of trust in financial and operational data.

Real-World Co-Manufacturing Structures

If you are experiencing inventory discrepancies, margin inconsistencies, or reconciliation gaps, your system is likely operating within one of these structures without full alignment.

Hybrid Production

Part of the production process is handled internally, while specific stages are outsourced.

This creates multiple transitions in both cost and inventory, increasing the risk of incomplete allocation and tracking.

The “Ghost Workflow”

Supplier → Co-manufacturer → 3PL

In this model, the business never physically handles the stock. Despite this, inventory is still owned and must be represented in the system.

A common failure occurs when businesses skip the Stock Receiving step because they do not have physical visibility of the goods.

In Cin7, if inventory is not received, it does not exist in the system. The value remains tied to the Purchase Order and does not move into inventory or the balance sheet. This misalignment is then reflected in Xero through sync.

This often leads to accumulation in “Goods Invoiced Not Received” and missing stock in inventory reports.

Bulk Production with Internal Customization

Base production is outsourced, with final processing completed internally.

This splits cost attribution across stages and requires precise allocation to avoid incomplete product costing.

Where Costing Breaks

Missing Service Costs

Co-manufacturer charges are often not included in product cost. These should be captured through Service Purchase Orders and capitalised into inventory.

When treated as expenses instead, inventory value is understated and cost of goods sold does not reflect actual production cost.

Missing Secondary Logistics

Costs incurred after production—such as transport from the manufacturer to a warehouse or 3PL—are frequently excluded.

This creates a gap between production cost and true landed cost.

Landed Cost Not Allocated

Even when costs are recorded, they are not always allocated to inventory units.

This typically shows up as inconsistent margins across batches or products.

This results in margin distortion, not margin variability.

Where Inventory Breaks

Location Not Defined

If the co-manufacturer is not set up as a location, inventory held there is not visible in the system.

In-Transit Not Tracked

Stock moving between locations is not accounted for, leading to timing discrepancies.

Ownership Misunderstood

Ownership persists financially, but if not represented through locations and transactions, it is not reflected in the system.

External Stock take Discipline

External locations must be included in stock take processes. When this is not done, materials consumed during production can remain recorded as available inventory.

This leads to phantom stock and inflated inventory values.

Reconciliation Requirement

Inventory must be validated between:

• Inventory Movement Summary (Cin7)

• Balance Sheet (Xero)

Variance above 2% typically indicates systemic workflow or costing errors and often leads to manual journals that obscure root causes.

Why Does Inventory Not Match Xero?

Inventory mismatches occur when workflow steps, cost allocation, or location tracking in Cin7 are misaligned. These discrepancies are then transferred into Xero through sync, resulting in differences between inventory reports and the balance sheet.

Where Workflow Breaks

Invoice Before Receiving

Financial value is recorded before inventory exists.

Result: Financial reports lead operational reality, and this misalignment is reflected in Xero.

The Open PO Trap

Purchase Orders are left open even when no further stock is expected.

Result: “Goods Invoiced Not Received” accumulates, creating ongoing discrepancies between inventory and financial reports.

Lack of Validation

Steps are completed without verifying outcomes at each stage.

Result: Errors propagate through the system and are carried into Xero through sync.

Each step must be validated. Cin7 does not ensure correctness without verification.

Why Financials Don’t Match

Manual Journal Overrides

Adjustments made directly in Xero override system-generated entries and break alignment between systems.

COGS Distortion

Costs are not correctly mapped to inventory movements, leading to incorrect cost of goods sold.

Reconciliation Failure

Inventory values in Cin7 do not match the balance sheet in Xero because upstream workflow and cost allocation issues are reflected through sync.

Financial inaccuracies originate upstream in Cin7 workflows, not in Xero.

Simple vs Advanced Manufacturing

Simple Manufacturing supports linear workflows with limited complexity.

Advanced Manufacturing supports staged production, extended timelines, and cost tracking across multiple steps.

Advanced Manufacturing enables visibility across production stages, but it does not correct incorrect cost allocation, inventory setup, or workflow execution.

Tool selection does not fix misalignment. Configuration does.

Operational Risk

Co-manufacturing introduces risks beyond costing and inventory:

• Quality control issues may only be identified after products reach customers

• Loss of direct control over production processes

• Difficulty enforcing accountability across external partners

These risks increase when system visibility is incomplete.

What Good Looks Like

A correctly aligned co-manufacturing environment in Cin7 shows clear, observable signals:

• All costs are allocated, with no unallocated landed costs

• Inventory is visible across all locations, including external partners

• External stock is reconciled through regular stock takes

• The “Goods Invoiced Not Received” account reflects only active, in-transit stock

• Financial data in Xero aligns with inventory data in Cin7

• Inventory variance remains below 2%

Variance above this level indicates system misalignment.

Case Example: Inventory and Financial Mismatch

A common scenario involves invoices being recorded before stock is received.

In this situation:

• Financial value is recognized in Xero

• Inventory has not been recorded in Cin7

This results in mismatches between:

• “Financial Transactions vs Stock on Hand”

• “Goods Invoiced Not Received”

Once workflow sequence is corrected—receiving before invoicing—and Purchase Orders are properly closed, alignment is restored between inventory and financial reporting.

Restoring Control in Co-Manufacturing Environments

Co-manufacturing does not inherently create inaccurate data. It introduces complexity that must be correctly represented in the system.

When costing is fully allocated, inventory is visible across all locations, and workflow steps are executed and validated in sequence, Cin7 and Xero align.

When they are not, the system reflects that misalignment.

If your numbers are unreliable, the issue is not reporting. It is how your system is structured.

Co-Manufacturing Issues Still Causing Inventory or Costing Drift?

Learn how Fiskal reviews post-go-live Cin7 Core environments to identify inventory inaccuracies, workflow breakdowns, and structural issues affecting system trust.

📞 Or call us directly: (954) 415-7895

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