How to Use Dynamics 365 Business Central for Flexible Operations (CMO and 3PL)

How to Use Dynamics 365 Business Central for Flexible Operations

I want to show you how you could use Dynamics 365 Business Central for flexible operations where you may have outside contractors doing a lot of the work for you.

I want to show you a business organization that has a product. That product is manufactured and assembled by a contract manufacturer who then sends it to a three PL company that sends that out to the business organizations clients.

Contract Manufacturing, Inventory, and Assembly Process

What we’re going to cover is contract manufacturing. We’ll look at inventory, the assembly process and then recognizing the cost of that contract manufacturer. Then we’ll also look at the third-party logistics company that will receive the items in. They’ll ship them out to the clients. And we’ll also take a quick look at doing a physical count.

If you have a business that has inventory, they own the inventory and it’s not all at their location, maybe at other locations, maybe a customer, maybe a contract manufacturer, maybe a three PL subcontractor. What you need to do is you want to keep track of that inventory because it’s on your balance sheet. You’ll want to make sure you have good control of it. And I’m going to show you how to do that in this scenario.

I’m logged into Business Central as a manufacturing manager and from here I have access to all the system. But let’s take a look at the role center and the activities that have available to me here.

The first thing I want to look at is the item, and the item I’m going to look at is this Airpod. This is a finished good item. Again, I have the contract manufacturing assembling it, and I’ve got the three PL company sending it out to my customers.

Let’s take a further look at this item. It’s a simple item. Let’s take a look at the availability currently in my system. I can take a look at it by location and this is the current inventory for that Airpod in multiple locations. The locations that we’re going to focus on is the three PL right here and also the contract manufacturer. And you can see I’ve got some available at the contract manufacturer. I actually have a planned deficit at the three PL company. So we’ll resolve that.

To make things easier and a little more automated, what I’ve done is I’ve taken this Airpod, this finished good item, and I made stock keeping units for it. The stock keeping units are going to be applied to each location in which this item appears. So let’s take a look at those. Here’s the SKU for the contract manufacturer. We scroll down a little bit, we can see that the replenishment is set to production order, which is what we want. And also we’ve got specific routing and a bill of material for this particular location for this particular item. This is a big advantage of the stock keeping units in Business Central.

This is the stock keeping unit for the 3:00 PM. I’ve got this set up, slightly different. Let’s take a look at it. And the replenishment method is different. This is going to be a transfer. This is an inventory transfer from another location in my system. And you’ll see how items can be transferred from one location to another location.

Running MRP Processes

The first thing I want to do is run a couple of MRP processes. So I’ll pick this default here. This will focus on the manufacturing operations. So let’s run that. It’s easy to do. I’m going to run it for this period of time. I’m also using a demand forecast to make sure that I’m up to date with what my sales organization is telling me they can sell. You can see that right here. I’m going to go ahead and run this and these are the results here.

So what this tells me is a couple of things. First of all, I need to transfer these items over here, the top two lines to my three PL so that they can satisfy the sales orders I’ve got already in the system. And then I’ve got plan production orders for the finished good item at the contract manufacturer. So I’m going to go ahead and accept the first few lines here. I’m going to accept this one here and these two production orders. I’m going to take these five lines and create a transfer orders and production orders. So let’s go ahead and do that.

So let’s take a look at the production orders from my role center as a manufacturing manager. I can drill right down on this tile. I see that I’ve got 2. Let’s look at the first one here. This one is all set up to create 500 finished good items. I can look at the components here and see all the items that are going to go into this finished good item. You can see those listed here. I already have them on site at my contract manufacturer. So all I need to do here is process this production order. It’s going to go through the process, it’s going to relieve components from raw materials, and it’s going to create the finished good item. So I’m going to go ahead and do that for this bill of material and the items.

I have this set up as a forward flush. So the items have already been relieved from inventory and put into finished goods. This has been posted. I’m going to go ahead and hit OK here. This one’s pretty much done. This is the one that we just created. I’m going to go ahead and finish this off and we’re done.

Inventory Updates and Transfer Orders

Let’s go back and look at the item. This is the current availability in my system. You can see it’s been updated based on the MRP run. I’ve got plenty of items in my contract manufacturer. You can see the quantity on hand here. But what I do need to do is transfer those items from that CMO over to three PL. Let’s go ahead and do that. Let’s take a look at the transfer orders. These are the current transfer orders I have in my system. Let’s take a look at this one. This transfer order takes the quantities from my CMO to my three PL. And for this transfer I want to use an in transit location. So what this allows me to do is have the CMO ship the goods, but they will not automatically go into the 3P LS inventory until the three PL receive them in. This gives better control and accountability to all the parties involved in this transaction. So I’m going to go ahead and post this and I’m just going to post a shipment. It’s still showing as an inventory transfer because it has not yet been received by the three PL.

Reporting and Receipts

Let’s take a look at some reporting. This is a handy report because it shows the three PLS incoming receipts that have not yet been received. Let’s go back to this transfer and you can see that the quantity has been shipped over here and the quantity has not yet been received. So what we can do here is receive into the three PL only the quantity that they actually received and that they indicated that they received. So in this case, there were actually 10 short. We’ll put that in there and then we’ll post a receipt. They’ll take that 790 into the inventory in the three PL. And the value here is that this discrepancy of 10 needs to be resolved between the CMO and the three PL and that ten will stay out here as an unreceived amount until one of the parties decides how to fix it.

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Billing and Landed Costs

Next, let’s take a look at how the contract manufacturer can bill for their services. They’re doing a lot here. They’re receiving in the component items into their warehouse, they’re scheduling production, they’re actually doing the assembly and then they’re sending it out to the 3:00 PM. So they’re going to charge for that based on a contract they have with a business organization. And this is just one way that we can record that charge. So what I’m going to do here is I’ve got a purchase invoice. I’m going to record this as a landed cost. You can see I’ve got the invoice going here. We can look at the line items and see the item charge. I’ve already assigned it to a receipt that I have for 500, so let’s go ahead and just close that. I’m going to accept that and then post this. This will show up as an accounts payable invoice, but we’ll also increase the cost of that inventory on that particular receipt. This was an inventory transfer. The cost of this will be added to that layer in inventory. So I’m going to go ahead and post this.

Sales Orders and Invoicing

Now let’s take a look at sales orders. These are my current sales orders being fulfilled by the Three PL. Let’s take a look at it. Here’s one that’s ready to go. So what’s going to happen is I’m going to post this. It’s going to relieve the inventory at the Three PL. It’s going to create an accounts receivable invoice in my receivables and I’m going to track it from there. You may have a different type of relationship with your Three PL where they do all the billing and the receiving and they just send you cash periodically. That is handy. You can handle that in Business Central as well, but in this case, I’m going to create the invoice, I’m going to send the invoice, and I’m going to collect the money at a later time. So let’s just go ahead. This is exactly what I wanted. This is what the customer ordered. It’s on time in this case, so I can go ahead and post that. I’m going to ship an invoice at the same time, and I’m done with that order. The inventory has been updated for that shipment from the three PL and it’s also created an invoice in my accounts receivable.

Availability and Physical Counts

Let’s take another look at the availability of the finished good item Airpod. You can see here that I’ve got availability at my 3 PL that’s good down here. This is an in-transit amount of 10 quantities that were not received by the three PL and remains a disputed item that the three PL and the CMO must resolve. And then down here, I’ve got the inventory at the CMO, which reflects the fact that they just made a number of these in a production run.

If you own inventory at a third-party location, you may want to keep track of that inventory and you may want to physically count it from time to time. So you can do that in Business Central. This is the physical inventory order. I’m going to set this up to account for one particular item, the Airpod. We can see that it’s at the three PL location and I currently show 490 in inventory. So let’s go ahead and count that.

Recording Physical Inventory Counts

What we’re going to do is start a new recording. So I created a new recording. Let’s take a look at it. This is what I’m going to use to record the actual count when I go and observe the inventory. So let’s enter the amount. Here’s the item here. Let’s say that we completed the count and the quantity we have here is 500. The physical count has been recorded. I’m done, so I can finish this line, finish the recording and we can see the results of this count.

The inventory for the three PL location indicated that there were 490 there. I went out and counted them. They’re actually 500. I have a positive adjustment of 10. So this may resolve the discrepancy between the CMO and the three PL as far as that one shipment. But we’re finished with this. We can go ahead and post it and then we’re done.


So we looked at one way that a company might use Dynamics 365 Business Central to control their operations when they have third parties that are handling the inventory, performing assembly, and performing shipping. This is a flexible process. You can use the pieces that you want for your organization, but this is one way that you can do everything within Dynamics 365 Business Central.

We looked at contract manufacturing and inventory at that location. How we can use SKUs to better control the process and automate the process. We looked at a simple assembly and production entry, and we also looked at how the CMO might record their cost and include that in the inventory cost of those particular items. And we looked at three PL and how three PLs can control what’s coming into their system and make sure that people are accountable within their organization and with other contractors in the process. We looked at how sales orders can easily be processed from that location, and we took a brief glimpse at how you can record physical counts.

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