Subcontracting workflows in Dynamics 365 Supply Chain Management

Subcontracting — sending a partly finished item to an outside vendor for an operation such as plating, machining, or heat treatment, then getting it back — is routine in discrete manufacturing and awkward in most ERPs. Supply Chain Management has a coherent model for it, but it involves more objects than people expect: a service item, a purchase order, a vendor resource, a vendor warehouse, and a production order that all have to line up. This guide walks the model and the operational decisions around it. For Business Central, see subcontracting in BC production; for services businesses, subcontracting in Project Operations.

The model in one paragraph

The subcontracted operation is a route operation whose resource is a vendor-type resource. The cost and purchasing of that operation are carried by a service item placed on the BOM with line type Vendor, which tells the system to create a purchase order to the subcontractor when the production order is estimated. The components the vendor needs are moved to a warehouse that represents the vendor. When the service item's purchase order is received, the operation is reported as finished and the production order continues. Costing flows from the purchase price of the service item into the produced item's cost.

Every piece of that sentence is a configuration decision.

Setting it up

The vendor resource. Create a resource of type Vendor linked to the vendor account, put it in a resource group, and use it on the subcontracted operation of the route. Capacity on a vendor resource is usually set to infinite, because the manufacturer does not schedule the vendor's shop. Lead time lives on the operation as run time or, more commonly, as the service item's purchase lead time.

The service item. An item of product type Service, with a purchase price from the subcontractor's trade agreement. On the BOM of the produced item, add it as a line with line type Vendor, and set the operation number to the subcontracted operation so that the purchase order is tied to the right step. Whether the service item consumes at operation start or finish is a BOM-line flushing decision.

The vendor warehouse. The subcontractor's premises are modelled as a warehouse — one per subcontractor if material is tracked at them, or a single "at subcontractor" warehouse if only the accounting matters. The BOM lines for components consumed at the vendor's operation point to this warehouse. Getting them there is a transfer order or a transfer journal, which is the first of the manual steps.

Line type and purchase order timing. With line type Vendor, estimation of the production order creates the purchase order to the subcontractor. Schedule the production order and the PO's requested delivery date follows the operation's scheduled end. Change the production schedule after the PO exists and the dates do not update automatically — a planner has to.

The operational flow

1. Production order created and estimated. PO to the subcontractor is generated for the service item.
2. Components for the vendor operation are transferred to the vendor warehouse. In a warehouse-management-enabled setup, this is a transfer order with picking work; without it, a transfer journal.
3. Physical shipment of components with a packing slip from the transfer order, which doubles as the paperwork the subcontractor needs.
4. Subcontractor does the work. Nothing happens in the system unless vendor collaboration or a portal is in use for acknowledgement.
5. Finished or semi-finished items come back. The service item PO is received; the receipt reports the operation's quantity as finished. If the route operation is the last one, the production order can be reported as finished from here.
6. Vendor invoice matched to the PO. Cost lands on the production order via the service item's consumption.

Two points trip up first implementations. The PO receipt drives the operation feedback, so receiving the wrong quantity or receiving before the goods arrive corrupts the production order's progress. And the material at the vendor warehouse is consumed by the production order at the vendor operation, so if the transfer was skipped, the consumption journal will show negative stock at the vendor warehouse, which is how many manufacturers discover their process is not being followed.

Costing

The subcontract cost is the purchase price of the service item, which flows into the produced item's cost as a material-type cost by default. Manufacturers that want subcontract cost broken out on the cost roll-up define a dedicated cost group for service items, so that the produced item's standard cost shows material, labour, overhead, and subcontracting separately. Do this at design time; recategorising later means re-rolling every standard cost.

Standard-cost manufacturers also need a policy for subcontract price variance, because the PO price and the standard rarely match. It posts through the normal purchase price variance accounts and is visible per production order.

Warehouse management and subcontracting

With advanced warehouse management, the vendor warehouse is warehouse-management-enabled or not, and that choice has consequences. Enabling it gives proper picking and shipment work for the outbound transfer but makes the receipt of the service item a warehouse process too, which is unnecessary ceremony for a service. The common compromise: outbound transfers under warehouse management from the main warehouse, vendor warehouse not warehouse-management-enabled, receipt of the service item as a plain PO receipt.

What is not in the product

There is no subcontractor portal for the vendor to see what is at their site and report progress. Vendor collaboration gives the subcontractor PO acknowledgement and invoice visibility, which is useful but not shop-floor status. Partners offer subcontractor portals built on Power Pages. There is also no automatic rescheduling of the subcontract PO when the production order moves; the linkage is created at estimation and maintained by people.

Quality inspection on returned items works through the standard quality management module, with a quality order triggered at PO receipt of the service item — set the quality association on the service item, not the produced item, or the trigger never fires.

Deciding how much to model

A manufacturer with three subcontractors and a few operations can run the full model comfortably. One with sixty subcontractors and hundreds of service items needs to think about whether every subcontractor warrants a warehouse and whether transfer orders per shipment are sustainable. The alternative — a single vendor warehouse and periodic transfer journals — loses traceability of what is at which vendor. There is no right answer, but the decision should be made deliberately, because changing it after go-live means changing every BOM.