Outsourcing in D365: From Estimate to Actual Cost

Subcontracting in D365 Production Control · Part 2 of 2

In Part 1, 300 half-finished speakers went to a paint vendor, and three questions followed: what did we send, what will it cost, and when can the next step start.

Then new question from Finance: why is the painting cost different from the estimate?

Let see overall step by step and the estimated/actual cost that happens in D365 FnO.

The end to end flow

Configuration

Set this up once for each product and vendor. These are the screens behind the flow above.

1. Service item

Subcontract service item (SVC-PAINT) is a Service product. Mark it as a stocked product, so its cost flows into the order’s cost.

Path: 

Inventory management > Setup > Inventory > Item model groups

Product information > Products > Released products

2. Vendor warehouse

A vendor warehouse should be created for each vendor. E.g WH-US104 is linked to vendor US-104. It must be in the same site as the factory, because a route cannot cross sites. 

Path: Inventory management > Setup > Inventory breakdown > Warehouses

3. Vendor resource

A resource of type Vendor, linked to vendor account US-104. It connects the route operation to the vendor.

Path: Production control > Setup > Resources > Resources

4. Route operation

We could create a new operation for oursourcing operation. E.g Operation 30, Painting, uses the vendor resource.

Path: Released products > Item (D0001) > Engineer > Route

5. BOM line

A BOM line of type Vendor holds SVC-PAINT and is tied to operation 30. 

Path: Released products > item (D0001) > Engineer > BOM versions

Step by step transactions

1. Create the production order

Create the order for D0001, quantity 300. D365 picks up the BOM and route from the item.

Path: Production control > Production orders > All production orders > New production order

2. Estimate

Run Estimate. D365 calculates the estimated cost and creates the purchase order for the vendor.

Path: Select the production order > Action Pane Production order > Estimate

Cost view after Estimate

Result: D0001 is planned at $100.22 per speaker. Painting is $4.50 of it, taken from the cost price of SVC-PAINT.

Path: Production order >Manage costs > View calculation details > Overview estimation

3. Purchase order is created

The purchase order for US-104 appears: 300 SVC-PAINT at $5.00 (from the trade agreement), $1,500 in total. The PO line is linked to Production order via Reference number field. 

Path: Procurement and sourcing > Purchase orders > All purchase orders

4. Schedule

Run Schedule operations. Here for simple example, I switch off finite capacity and finite material.

Path: Select the production order > Action Pane Schedule > Schedule operations

5. Release

Release the order. It is ready for the shop floor.

Path: Select the production order > Action Pane Production order > Release

6. Start

Start the order for 300. D365 posts a picking list for M0001 and M0002 as pre-defined of Flushing principle in Item/BOM, and a route card for the operations.

Path: Select the order > Action Pane Production order > Start

Cost view after Start

Realized cost is $28,265.01 against $30,065.01 planned. The gap of $1,800 is painting ($1,350) and machine depreciation ($450, the cost of using the machines). Neither is realized yet.

Path: Manage costs > View calculation details > Overview costing

7. Send the materials to the vendor

Done outside D365 in this series. With MRP, the system generated planned transfer order to transfer material to the vendor warehouse. Then, we can track on-hand that sent to vendor in vendor warehouse.

8. The vendor paints the speakers

No action in D365. 

9. Post the product receipt and the vendor invoice

When the speakers are back, post the product receipt on purchase orde. Then post the vendor invoice. It matches the purchase order: 300 at $5.00.

Path: Purchase order > Action Pane Receive > Product receipt/ Invoice

10. Painting is marked finished

After posting PO product receipt, the operation 30 is marked as completed automatically

Path:
Production order > Action Pane View > Route card
Or Production order > Action Pane Production order > View progress

11. Picking list for the service

A picking list consumes item service SVC-PAINT: 300 from warehouse WH-US104 automatically.

Path: Production order > Action Pane View > Picking list

12. Report as finished and end

After testing, report the order as finished (300, End job), then End it. Painting is now realized at the vendor’s price.

Path: Action Pane Production order > Report as finished, then End

Conclusion

Subcontracting in D365 keeps outsourced work inside the production order. Once the service item, vendor warehouse, vendor resource, route operation and vendor BOM line are set up, Estimate generates the purchase order, and the vendor's operation is scheduled, tracked and costed alongside materials and internal labor. One order, one cost view, no parallel process.

Sources: Microsoft Learn – Manage subcontracting work in production; Microsoft Learn – End a production order.