Subcontracting is a critical part of modern manufacturing. Whether you outsource a single operation, a full assembly, or specialized processing, Dynamics 365 Supply Chain Management (D365 SCM) provides a structured and traceable framework to manage subcontract work within the production lifecycle.
This blog explains how subcontracting works in D365 SCM, how it integrates with production orders, and how organizations can maintain visibility and control while working with external vendors.
Subcontract work refers to outsourcing one or more production operations to an external vendor. Instead of performing the operation internally, the vendor completes the work and returns the semi‑finished or finished product.
D365 SCM supports subcontracting by:
Embedding subcontract operations directly into the production route
Automatically generating purchase orders for subcontract services
Tracking material flow to and from the vendor
Managing costs, lead times, and WIP visibility
This ensures subcontracting becomes a seamless part of the production process rather than a disconnected activity.
Subcontracting is driven by route operations. When an operation is marked as subcontracted:
A service item is linked to the operation
A purchase order is automatically created when the production order is released
Materials can be sent to the vendor as consignment or direct delivery
The vendor performs the operation and returns the processed goods
The purchase order is received to complete the subcontracted operation
This creates a fully integrated workflow between production and procurement.
A route operation is flagged as subcontracted and linked to a vendor.
A non‑stocked service item represents the subcontracting cost.
When the production order is released, the system automatically generates a purchase order for the subcontract service.
Materials required for the operation can be:
Picked and shipped to the vendor
Delivered directly from suppliers
Consumed from vendor‑managed inventory
The vendor performs the operation and returns the processed goods.
Receiving the PO updates:
Operation completion
WIP status
Subcontracting cost
Full integration with production orders
Automated purchase order creation
Accurate cost tracking
Visibility into subcontracted WIP
Controlled material flow to vendors
Support for multiple subcontracting models
Mark a route operation as subcontracted and assign a vendor.
Associate a service item with the operation to represent subcontracting cost.
The system automatically creates a purchase order for the subcontract service.
Ship or deliver required materials.
The vendor processes the materials.
Receive the purchase order to complete the operation.
Production proceeds to the next operation or moves to Report as Finished.
Heat treatment, coating, plating, or polishing
Specialized machining or fabrication
Outsourced assembly steps
Capacity overflow to external vendors
Vendor‑managed semi‑finished goods
Subcontracting is a powerful capability in Dynamics 365 Supply Chain Management, enabling manufacturers to extend capacity, leverage specialized vendor skills, and maintain operational flexibility. By integrating subcontract work directly into production orders, D365 SCM ensures full visibility, accurate costing, and seamless coordination between internal and external operations.
graph TD
A[Start] --> B[Define Subcontracted Route Operation]
B --> C[Link Service Item and Vendor]
C --> D[Release Production Order]
D --> E[Auto‑Create Purchase Order]
E --> F[Send Materials to Vendor]
F --> G[Vendor Performs Operation]
G --> H[Receive Purchase Order]
H --> I[Update Operation Completion]
I --> J[Continue Production]
J --> K[End]