Processing Trade Manuals in ERP: A Setup Guide for 来料加工 and 进料加工

The bargain behind duty-free imports

Processing trade is a straightforward bargain with an unforgiving enforcement mechanism. You import raw materials and components without paying import duty or import VAT, on the condition that they are processed and re-exported within a defined period, and that you can prove — material by material, unit by unit — that the imported quantity was consumed in the exported goods. What you receive is a customs manual or account book that authorises the import and defines the terms. What you owe in return is a reconciliation at the end of the cycle that matches imports to exports through a declared consumption ratio.

That reconciliation is where ERP projects in Chinese manufacturing quietly fail. Not at go-live, and not in the finance module, but one or two years later when the manual falls due for verification and nobody can reconstruct which imported lot went into which exported shipment. The system has production data, warehouse data and customs data in three places that were never designed to answer a customs question together. This article sets out what the manual actually controls, how the two processing-trade routes differ, and what the ERP must model for the cycle to close cleanly.

来料加工 and 进料加工 are not the same process

The distinction is frequently blurred in vendor documentation and it matters operationally and fiscally. Under processing with supplied materials (来料加工), the overseas party supplies the materials and retains ownership of them; you provide processing services and charge a processing fee. The materials are not your inventory in the commercial sense and you do not pay for them. Under processing with imported materials (进料加工), you buy the materials yourself, own them, and sell the finished goods — usually to your own customer or affiliate — with the duty-free treatment applying because of the processing-trade regime rather than because of ownership.

The consequences differ in three places. The revenue model differs: a fee versus a sale. The tax treatment differs, including how the export rebate interacts with the imported content. And the inventory accounting differs: supplied materials are typically tracked as a memorised or consigned quantity rather than as owned stock, while imported materials under 进料加工 sit in your own inventory at cost. An ERP that models both identically will produce correct-looking reports and a wrong customs reconciliation, because the quantity logic underneath is different.

The manual lifecycle and where the system must intervene

A manual is not a document you file and forget. It has a lifecycle, and every stage has a data consequence that the ERP has to carry.

• Filing (备案) — the manual declares the finished products, the bill of materials, the expected consumption ratios and the validity period. Every later reconciliation is measured against these declared parameters.
• Import — each inbound shipment is booked against the manual, reducing the remaining authorised import quantity for that material.
• Consumption (耗用) — materials are issued to production and consumed against finished goods according to the declared single-consumption ratio, plus declared loss allowance.
• Export — each outbound shipment is booked against the manual, and the finished quantity exported drives the quantity of materials that should have been consumed.
• Verification and closure (核销) — the manual is reconciled: imported minus consumed minus remaining stock must agree, within declared tolerances, or the discrepancy is settled with duty and penalties.

The critical property is that these five stages are one chain, not five reports. The remaining import balance at any moment is a function of what was filed, what came in, and what has been consumed. If the ERP stores the manual as an attribute on purchase orders and a separate reference on sales orders, there is no chain — only three sets of numbers that happen to mention the same manual number.

Single consumption (单耗) is the hard part

Single consumption is the declared quantity of each input material required to produce one unit of the finished product. It is the hinge on which the whole reconciliation turns, and it is where theory and manufacturing reality diverge most. A declared ratio is a planning figure agreed with customs at filing time. Actual consumption is what the shop floor really used, which varies with yield, scrap, machine setup and operator skill. Between the two sits the declared loss allowance, which exists precisely to absorb normal variation without triggering a discrepancy.

ERP systems tend to model consumption one of two ways, and both have a failure mode. Backflushing consumes materials automatically based on the bill of materials at the moment of production reporting: clean, fast, and only as accurate as the BOM. If the BOM is a sales-engineering approximation rather than the manufacturing reality, backflushing generates a beautiful inventory record that has nothing to do with the material actually issued. Explicit issue transactions — the material is scanned or recorded out of stock when it physically leaves — are accurate but depend entirely on shop-floor discipline, and a missed scan at the end of a shift is invisible until reconciliation.

The practical design is neither pure approach. Run consumption against the declared ratio for customs purposes, and separately capture actual issues for cost and variance purposes, then reconcile the two monthly rather than annually. The variance between declared and actual is the number that tells you whether your manual is heading for a problem while there is still time to apply for an adjustment rather than explain a shortfall.

Modelling loss, scrap and by-products

Loss allowance is not a rounding error and it deserves its own model. Customs grants a declared loss rate per product or process; consumption within that allowance is accepted as explained. Consumption beyond it becomes a discrepancy that must be accounted for — either as domestic sale of the residual (with duty and VAT consequences) or as a write-off requiring justification. By-products and scrap complicate the picture further, because material that becomes saleable scrap has not disappeared; it has changed form, and its disposal is itself a controlled event.

An ERP that treats scrap as a generic inventory adjustment destroys the evidence needed to defend a manual. Scrap from processing-trade material should carry the manual and material lot reference through to disposal, with a reason code, so that at reconciliation the system can present not just a total but the composition of the variance. The difference between a defensible reconciliation and a penalty is usually the ability to explain the composition.

Manual or account book: two ways to run the same regime

Processing trade is administered either through a paper-style manual tied to a specific contract and validity period, or through an electronic account book that manages balances more continuously and is typically used by larger or higher-volume operations. The distinction is not merely administrative convenience. A manual is a discrete authorisation with a clear closure date, which makes reconciliation a bounded exercise: everything imported under this manual must be accounted for by the time it closes. An account book maintains running balances across continuing operations, which is more flexible and considerably harder to reconcile if the underlying data is not maintained continuously.

The ERP implication is about granularity of the balance. Manual-based operations can survive with a period-end calculation because the question only becomes urgent at closure. Account-book operations need a live balance per material, because the balance is being drawn against continuously and an overrun is a compliance event rather than a year-end adjustment. If you are selecting a system and your operation uses account books, a vendor whose design assumes periodic reconciliation has not understood the regime — and the gap will appear as a spreadsheet maintained alongside the ERP, which is precisely the outcome the project was meant to eliminate.

Subcontracting and out-processing

Most processing-trade operations do not perform every step in-house. Out-processing — sending materials or semi-finished goods to another domestic processor and receiving them back — is common and is itself a controlled activity with its own declaration requirements. The material leaves your premises but has not been exported, so it remains within the regime, and the quantities must be tracked through the subcontractor and back without being double-counted as consumption or confused with a domestic sale.

This is where a system with a single inventory location model starts to struggle. The material is yours, it is outside your factory, and it is neither in stock nor consumed. An ERP that can only represent in-stock or issued-to-production will book it as consumed, which overstates consumption, breaks the reconciliation, and cannot be corrected without manual adjustment. The requirement is a location or status that means at a subcontractor under the manual, with quantity and expected return date, and with the transfer and return both booked against the same manual reference. It sounds like a small modelling detail; in practice it is the difference between a reconciliation that closes and one that requires an explanatory letter.

Reconciliation and the closure problem

At closure, the arithmetic is deceptively simple: opening balance plus imports minus consumption minus remaining stock should be zero. In practice four things break it. Timing mismatches arise because imports and exports are recorded against different dates and the manual balances are cut at a period boundary. Unit conversions drift, because the material is imported in one unit and consumed in another, and the conversion factor lives in someone's head. Yield assumptions are revised mid-cycle without updating the declared ratio. And residual material exists in the warehouse but has not been declared as remaining.

The system requirement that follows is unglamorous but decisive: a running balance per manual per material, updated by every import, consumption and export movement, with unit conversion held as master data rather than applied manually. If your ERP cannot show the remaining balance for a given manual and material right now, on screen, then closure is an annual project rather than a control. Companies that manage processing trade well treat the balance as an operational dashboard, reviewed monthly, not as a year-end surprise.

Integration with the customs systems

China's single-window platform handles the declaration side, and most mature implementations exchange data rather than re-key it. The realistic integration pattern is an export of the shipment's commercial data in declaration-ready form, and an import of declaration results and manual balances back into the ERP. Re-keying declarations into the single window from an ERP printout is where transcription errors enter, and a transposed quantity on a declaration is considerably more expensive than the same error on an invoice.

The boundary matters too: the ERP is not obliged to file, and vendors who claim deep native integration with customs systems usually mean a data export in a prescribed format. That is fine, and often preferable to a brittle point-to-point link. What is not acceptable is a manual re-entry step that leaves the ERP's manual balance out of step with the customs record, because then two authorities hold two different truths.

Domestic sales out of a processing trade manual

Not every unit produced under a processing trade manual leaves the country. Some are sold domestically — because a customer needs them, because a shipment was cancelled, or because the yield produced more than the export order required. Selling them domestically is permitted but not neutral: the duty and import VAT that were deferred when the materials entered become payable, usually with late-payment interest calculated from the original import date, and the transaction requires its own declaration and approval before the sale is completed.

The reason this belongs in the data model rather than in a procedure manual is that the liability depends on which materials went into the units sold, at what declared value, and how long the duty has been deferred. A company that discovers a domestic sale after the fact cannot easily reconstruct those three facts, and the reconstruction is the expensive part. The ERP should treat a domestic disposition of processing-trade goods as a distinct transaction type with its own approval and its own tax computation, not as a normal sales order against stock that happens to carry a manual reference. Where that distinction is absent, the sale is invoiced normally, the duty obligation is missed, and the discrepancy appears at reconciliation as stock that cannot be accounted for.

The failure modes to check for before you commit

If you are selecting a system for a factory with processing trade, these are the questions that separate a system that can carry the regime from one that will need a permanent spreadsheet alongside it. The same material traceability underpins inventory and warehouse control, and the rebate interaction with imported content is covered in export tax rebate ERP software for China.

• Can a manual hold a running remaining balance per material, visible on demand rather than computed at year end?
• Does the system distinguish supplied materials from owned imported materials, in both quantity and cost accounting?
• Is single consumption stored as a dated, versioned figure per product, with declared loss allowance alongside it?
• Can you revise a declared ratio mid-cycle and see the effect on the running balance immediately?
• Does scrap and by-product disposal carry the manual and lot reference through to the disposal record?
• Can you produce the reconciliation pack — imports, exports, consumption, remaining stock — for a chosen period without manual assembly?

A system that answers these six is not merely compliant; it turns processing trade from an annual audit risk into a monthly operating metric. A system that answers three of them will work until the first closure, and then the spreadsheet appears — and once the spreadsheet appears, the ERP has stopped being the record of truth for the part of the business that carries the most duty exposure.