Overview of subcontracting and production flow costing
The basic principle of a production flow does not change when activities are subcontracted by using Dynamics 365 Supply Chain Management; material still flows between locations, process activities convert material to products, and transfer activities move material or products from one location to another.
Subcontracting
Subcontracting, or outsourced manufacturing, for a company can combine many components into multiple steps. Some of these steps will occur within one or more in-house manufacturing facilities, while other steps will be completed outside by one or more vendors. This type of work can result in complexities regarding the tracking of components and estimated completion dates.
Production flows, as with in-house manufacturing, are the controlling part of the subcontracting process, defining the various activities of the flow. A kanban that is processed through the production flow activities will create purchase orders for vendor services; accordingly, the kanban will update after completion of the vendor services. A production flow that contains a service item, where the resource group has a vendor as a resource, causes the system to create purchase orders.
Supply Chain Management has two approaches for subcontracting: production orders and lean manufacturing.
The first approach models the subcontracting work as a service that is related to an activity of a production flow. A cost group type, direct outsourcing, is required to be configured so that the subcontracting services are not part of a BOM.
Cost accounting of subcontracted work is integrated in the costing for manufacturing in Supply Chain Management.
Subcontracting activities and manufacturing kanbans
Subcontracting activities are modeled as activities of a production flow and use manufacturing kanbans for the processing that occurs at the vendor. Locations and work cells can be modeled as vendors that are managed by assigning the vendor account to a warehouse or to a resource of a resource group.
Transfer activities can also be used in conjunction with subcontracting and can even be configured where the payment for the shipment is third party, the recipient, or the shipper. Transfers to and from the subcontractor are modeled as explicit transfer activities to support the picking and shipment process. If an explicit registration is not needed to support the physical transport, transfer activities can be left out.
A service purchase order is created in the background for payment of the subcontracting service that is performed against the kanban. Supply Chain Management supports the ability to choose alternate activities to facilitate level loading. Processes that are normally done internally can be subcontracted when overloads occur. The ability to select from multiple subcontractors for an activity is also supported.
Production flow costing
In Supply Chain Management, costing for lean manufacturing operations uses the cost accumulation method of backflush costing. Backflush costing is used to simplify and, in some cases, eliminate the need for systematic and sequential reporting of resource usage (material and operation resources) for a production flow.
Under the backflush costing method, direct and indirect materials at standard cost for supplied items are accumulated in the production flow's work in progress.
Conversion costs (direct and indirect manufacturing costs) are absorbed at standard cost upon the crediting of production flow work in progress for completed quantities.