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

October 18 2017

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 a manual subcontract Purchase order for this vendor.

What is different about a vendor production order? As far as functionality, nothing is different. The type = "vendor" so I can filter on them (and give them their own tile in a workspace).

The vendor production order has indeed the same functionality as any production order but two things are very different in the process:

  1. We will transact this order in the fewest possible steps possible. Because we don't do anything ourselves, we are receiving a completed assembly. There is no need to "Schedule", "Release", or "Start". No need to collect actual labor. The receiving step will come down to Reporting as finished with this vendor production order, skipping all other steps, maybe even skipping "Report as Finished".  We will discuss this in detail.
  2. Our materials are sent to the vendor. This is an actual shipment that we can and should do in the system. Because the materials remain ours, we would transfer them to a vendor warehouse that we set up especially for this scenario. Warehouses can have a vendor account.

No functionality is triggered by this. But we have visibility of our materials at the vendor.

When the completed assembly arrives, we will have to backflush these materials from this warehouse.

The Bill of Material of this assembly is the same, whether we make it in-house or whether the vendor makes it. We will have a different routing for our vendor production order that contains a vendor resource and resource group with this warehouse as the “input warehouse”.

NOTE: There would only be one location in this warehouse that should be the default receipt and issue location. This prevents any unnecessary location problems when backflushing these materials later in the vendor production order process.

Using a routing step with this Resource group in the vendor production order, where we have the vendor warehouse as the input warehouse, we will have the right warehouse populating the BOM lines in the Production Bill of Materials.

NOTE: it will not be possible to have this Vendor routing appear automatically in the vendor production order unless I make it the active routing version. For permanent outsourcing, we would do this. For ad hoc situations, we can't do this, so the user will have to change the routing manually when the vendor production order is created automatically or choose this routing when the order is created manually. 

NOTE: This flow does not contain the subcontract Purchase order process, but that process is certainly part of the total picture and runs in parallel with it. It is assumed that this process is well known to the reader and does not need to be repeated.

Parameter settings in production

In order to process a production order with the minimal number of steps, we could just "end" it right away. Because there are parameters that kick in when I skip "Start" and when I skip "Report as finished" I have to doublecheck these settings to make sure to avoid double-backflushing. (many of the readers may be very familiar with that risk!).

In the process flow, I suggest to "start" the vendor production order to reserve our materials in the vendor warehouse. This is not strictly necessary, so let's assume we skip "Start" and "Report as Finished".

 

The production parameters shown above are not relevant for regular production orders but are critical for our vendor production order process.

I know of no customer who skips "start" and/or skips "report as finished" for regular production orders But it makes a lot of sense to skip both of these statuses in our vendor production process!

We are essentially receiving something with no production personnel involved in this production order at all. We need one simple transaction to train our warehouse personnel in. This could be, surprisingly, the "ending" of the production order. (You need to change the warehouse security role to allow this)

The setting in the screenshot above ensures nothing happens when I skip Start. When I skip "report as finished" I will flush the materials and the labor (which would be zero hours and a zero dollar rate).

NOTE: Those of you who worked with the lean module of EBECS in AX 2009  or 2012 will remember that these parameters had a similar importance there because a Manufacturing Kanban was a production order created in an instance and immediately Reported as finished

Conclusion

D365FOE, as well as AX 2012 and earlier versions, deftly handles the outsourcing scenario of my materials going to a vendor and coming back as an assembly. Not much extra set up is required and with some extra training of our personnel in the warehouse this scenario should work fine in your business. I see no need for any customization in this scenario. 

Let's not forget to create a filtered tile for this type of production orders and add it to the warehousing workspace used for receiving of PO's. this assembly is the same, whether we make it in-house or whether the vendor makes it. We will have a different routing for our vendor production order that contains a vendor resource and resource group with this warehouse as the "input warehouse".

NOTE: There would only be one location in this warehouse that should be the default receipt and issue location. This prevents any unnecessary location problems when backflushing these materials later in the vendor production order process.

Using a routing step with this Resource group in the vendor production order, where we have the vendor warehouse as the input warehouse, we will have the right warehouse populating the BOM lines in the Production Bill of Materials.

NOTE: it will not be possible to have this Vendor routing appear automatically in the vendor production order unless I make it the active routing version. For permanent outsourcing, we would do this. For ad hoc situations, we can't do this, so the user will have to change the routing manually when the vendor production order is created automatically or choose this routing when the order is created manually.

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About Evert Bos

I am Evert J Bos, ERP consultant since 1986. I started in Europe with IMS7 (A Honeywell Bull Mainframe ERP system) and the BaaN ERP system. Since 1995 I have worked in the USA and since 2004 I have been working with Dynamics AX.  I work for Sikich and focus mostly on manufacturing companies that make complex, engineered products.

More about Evert Bos

Comments

alex000x's picture

So there is no functionality differences between standard and vendor production orders? Just a reporting/sorting field.

ej34bos's picture

Yes, I have not found anything different in the behavior and it is hard to imagine what that other behavior should be. I am just mimicking what the vendor did, material-wise. Routing is irrelevant because that was the vendor's labor. Sorting is all it does

Moribund's picture

Hi Evert,
If there is no purchase order (as per your example) how does the supplier (subcontractor) bill us for the subcontract service? Is this done manually?