In a dynamic supply chain environment, maintaining product quality and compliance is critical. Microsoft Dynamics 365 Finance & Operations (D365 F&O) offers a robust Quarantine Management feature that allows businesses to efficiently handle product inspections, isolations, and quality validations — before items are made available for use or sale.
In this blog, we’ll walk through a real-world scenario where items are received directly into a quarantine warehouse for inspection. Once the inspection is complete, the goods are either released to the main warehouse, returned to the vendor, or scrapped depending on their quality status.
Business scenario: Receiving goods into quarantine warehouse
In this example, items received from a vendor are first placed into a quarantine warehouse for inspection. Only after the quality checks are completed are they transferred into the main warehouse for regular use.
Setup overview
- Warehouse mapping
- Main warehouse: WH 11
- Quarantine warehouse: WH 18
- Both linked to Site 1
A dedicated quarantine warehouse (18) is mapped to the main warehouse (11). Additionally, a separate location is created in the main warehouse to hold items that need to be returned to vendors.
- Item model group configuration
Enable the “Quarantine management” option in the item model group. This ensures that items using this model are automatically routed to the quarantine warehouse upon receipt.
Execution: Receiving and processing quarantine orders
Let’s consider a purchase order from vendor US-101 for six quantities.
Upon product receipt, the system automatically creates a quarantine order (000006) for all six items, received into warehouse 18 for inspection.
Key notes
- Each PO line generates a separate quarantine order.
- The order status is automatically set to “Started.”
- For items tracked by serial number, individual quarantine orders are created per serial item.
The inventory transactions show four records linked to this quarantine order, representing the movement and inspection stages.
Inspection results and order splitting
After inspection, here’s the outcome:
- 2 quantities damaged (to be scrapped)
- 2 quantities failed quality checks (to be returned to vendor)
- 2 quantities passed inspection (ready for sale)
We’ll now split the original quarantine order (000006) into three separate ones for processing:
- 000007 – Scrap 2 quantities
- 000008 – Return 2 quantities to vendor
- 000009 – Accept 2 quantities as passed
A) Scrapping damaged goods
Using the Scrap function, order 000007 is scrapped directly in warehouse 18.
B) Returning failed items to vendor
Items from 000008 cannot be directly returned from the quarantine warehouse. They must first be moved into the main warehouse (11), specifically to a designated vendor return location, via Item Arrival Journal.
C) Accepting passed items
The 000009 quarantine order is processed as PASSED, and the accepted quantities are moved to the main warehouse for use or sale.
Scenario 2: When products fail quality control
Now, let’s explore another example — when a product fails the quality control process and moves into quarantine for further inspection.
We’ll test two products:
- BT-0001 – Exide Car Battery
- BT-0002 – Amarone Car Battery
All setups remain consistent with our previous example, except for a few configuration changes.
New setup details
- Item sampling
Added a sampling plan for 10% of items received (used for Amarone batteries). - Test groups
- “Battery” – Used for BT-0001 (Exide)
- “Amarone Bat Group” – Used for BT-0002, with 10% sampling and 100% acceptable quality level.
- Quality associations
Configured to generate Quality Orders after Product Receipt and to block invoice processing until the quality inspection is complete. Quarantine mapping
Warehouse 18 (quarantine) mapped to main warehouse 11 with defined receipt and issue locations.
Execution: Quality order and quarantine flow
A purchase order is created for:
- BT-0001 – 10 qty
- BT-0002 – 10 qty
- Item 1000 – 10 qty (no quality setup)
Upon product receipt, two quality orders are generated automatically for BT-0001 and BT-0002.
Item 1000 does not generate a quality order, as no quality parameters were defined.
Inventory blocking
Once quality orders are generated, the system automatically blocks inventory for those items.
For instance, even though BT-0002 has a 10% sampling plan, the entire 10 units are blocked due to Full Blocking being enabled — ensuring the entire lot remains on hold until inspection is complete.
Quality order processing and quarantine movement
The test results show:
- BT-0001 – Failed quality test
- BT-0002 – Passed quality test
For BT-0001, a quarantine order (000006) is automatically generated, moving stock to warehouse 18 (A1-L1) for isolation.
The on-hand inventory now shows:
- 10 qty in quarantine (warehouse 18) – unavailable for use
- 10 qty in main warehouse (11) – available
Depending on inspection results, the item can be:
- Repaired and returned to stock,
- Returned to vendor, or
- Scrapped directly from the quarantine warehouse (with proper permissions).
In this case, the items were repaired and marked fit for use. Using the Item Arrival Journal, the 10 repaired quantities were received back into warehouse 11, closing the quarantine order.
Invoice processing and finalization
With the quality order closed, the purchase order invoice can now be processed successfully, even though the quality results indicate that the original batch failed initial tests.
This completes the full quarantine and quality control lifecycle in D365 F&O — from receipt to inspection, segregation, and reintegration.
Advanced Tip: Per updated quantity setup
The “Per updated quantity” setting in Item Sampling defines how quality orders are generated during partial receipts.
- When disabled, a single quality order is created for the entire PO quantity — regardless of how much has been received.
- When enabled, quality orders are generated only for the quantities received in each product receipt.
For example:
- Disabled: 20 PO qty → 10 received → Quality order for 20 qty
- Enabled: 20 PO qty → 10 received → Quality order for 10 qty
This small configuration ensures more accurate and flexible inspection control aligned with real business workflows.
Conclusion
Quarantine management in Dynamics 365 F&O is a vital capability for maintaining quality, compliance, and control in warehouse operations. By integrating quality orders, quarantine warehouses, and sampling configurations, businesses can ensure that only the best products make it to customers — while seamlessly managing rejections, returns, and rework.
From setup to execution, D365 F&O empowers organizations to build a transparent, traceable, and automated quality control process across the supply chain.
