Co-products and by-products in Dynamics 365 Supply Chain

In process manufacturing, a single production run often produces multiple outputs from the same inputs — meat processing yields prime cuts and trimmings; oil refining produces multiple fractions; chemical synthesis generates targeted products and unavoidable side products. Dynamics 365 Supply Chain Management's co-products and by-products capabilities handle this multi-output reality natively, where discrete manufacturing's BOM model would force awkward workarounds.

The distinction.

• Co-product — a deliberately-produced output with significant economic value, planned for and intended. Co-products are why the production runs. In meat processing, prime cuts and trimmings are both co-products of butchery — both are intended commercial outputs.
• By-product — an unavoidable output of the process, typically of lower or marginal value. By-products aren't why the production runs but they're unavoidable. In meat processing, bone meal might be a by-product. In oil refining, sulfur extraction produces sulfur as a by-product (though increasingly commercially valuable, so the line blurs).

The distinction matters for cost accounting — co-products typically share production cost in proportion to their value (or other allocation basis); by-products typically credit production cost (recovery) rather than absorbing it.

Formulas and outputs. A formula in F&O describes a process production run:

• Input lines — ingredients consumed with proportional quantities and yields.
• Output lines — the products produced:
  • Primary product — the main intended output.
  • Co-products — additional intended outputs.
  • By-products — unavoidable secondary outputs.

Each output has a yield (how much is produced per batch), a cost allocation rule, and inventory handling.

Cost allocation.

• Co-products — production cost is allocated across them by one of several rules: by value (relative selling price), by volume, by weight, by fixed percentage, by user-defined formula. The total production cost is split proportionally.
• By-products — typically use cost reduction — the by-product's nominal value reduces the production cost absorbed by the primary product. By-product nominal value is configurable per item.

The choice of allocation rule affects margin reporting per output. For commodity processing (oil refining), the allocation rule materially affects which products appear profitable.

Planned co-products in batch orders. Process batch orders (the process-manufacturing equivalent of production orders in discrete) plan inputs and outputs together. Planning a batch produces all the outputs simultaneously — you can't choose to make just the primary without also making the co-products and by-products.

This has supply-chain implications: planning to make primary product A produces co-product B automatically, increasing B's inventory regardless of whether B is in demand. Master planning has to balance the co-product output against demand for all outputs.

Co-product master planning. The planning engine considers all outputs:

• Demand for primary product A pulls batch orders that also produce co-product B.
• Demand for co-product B is partially or fully covered by the batches running for product A.
• If B has higher demand than A's batches produce, additional batches are planned solely for B (or alternative formulas if available).
• If B has lower demand than is produced, B accumulates in inventory.

The complexity multiplies with multiple co-products; planning configuration deserves careful attention.

Catch weight. Process manufacturing often combines co-product output with catch weight — products priced per unit but inventoried by weight (a cheese wheel = 1 piece but with variable kg per piece). Catch weight tracks both unit and weight; pricing per weight, inventory per piece. Common in dairy, meat, fish.

By-product disposal. Some by-products have zero or negative value (waste streams). Those need accounting for disposal cost, possibly with environmental compliance reporting alongside the operational data.

Yields and shrinkage. A formula's yield is configurable (e.g. 1000 kg input → 950 kg primary + 30 kg by-product + 20 kg shrinkage / waste). Actual yield variance from formula is posted as variance. Operational discipline tracks formula yields vs actual to identify process improvements or formula adjustments.

Common pitfalls.

• Treating co-products as separate production runs — separate orders for each output with manual coordination, fragile and expensive.
• By-product cost-reduction value out of date — by-product's market value changed; the configured value doesn't reflect reality; margin reporting becomes wrong.
• Catch-weight items modelled without catch weight — pricing and inventory go wrong on every transaction.

Operational reality. Process manufacturing in F&O is one of the deepest configuration areas. Engage a partner with proven process-manufacturing experience; pilot carefully; iterate on the formula structure as actual operations reveal what works.