How to use the vendor production order in Dynamics 365 for Finance & Operations, Enterprise

The following business scenario is common: I send my materials to a subcontractor, he assembles, tests, paints, etc. and returns a completed assembly to me. The emphasis is on "My materials" and "Vendor labor". This scenario can be called a form of contract manufacturing. It is more than likely that this assembly is my design, so the vendor gets a drawing and work instructions.  This could be a permanent situation or it could be triggered by an overloaded shop floor that needs to outsource some of the work.

How would we handle this scenario in Microsoft Dynamics 365 for Ops (D365FOE) or any older AX version? I think the basic setup is described in the 2012 and older production manuals. It is not hard, although it seems unusual doing it the first time. Two versions of the scenario exist.

Automated creation of a vendor production order.

In this case this outsourced assembly should be one that which normally goes into a higher level assembly. In the BOM of this higher level assembly, I do not only add a service item to my BOM with line type "vendor", but I switch the line type of my outsourced assembly, which normally sits in this BOM,  to "vendor" also, mentioning the same vendor as for the service item.

When I estimate a production order for this higher level assembly, I get my familiar subcontract PO but I also get an automatically created vendor production order!

Manual creation of a vendor production order

If the outsourced assembly is sold directly or as a spare part, I will have to create a manual vendor production order. In this case, we would also have to create ...