Does IFS consider Expiration date in the issuing hierarchy in Manufacturing?

No, shop order backflush logic can be controlled depending on what locations that should be evaluated, where user can define separate reserve and backflush hierarchies.  But this logic focus on which locations to evaluate in which order. Within each of the 5 step hierarchy levels, the expiration dates not considered, and there is no way to automatically backflush from the location where the oldest batch are located.

If we can incorporate the existing site level Reservation logic may help us to improve this in  our backflush logic. Altimately this should overwrite our existing 5 step hierarchy.

I did another test and realized that the current logic in the shop order reserve and backflush, uses the rules from the Automatic Reservation, on each level of the hierarchy. I.e. if you set the rule to prioritize earliest expiration date, then shop order logic will reserve and issue the batch with earliest expiration date on that level in the hierarchy!

I think the current behavior works as expected and still think we need to keep the separate hierarchy within the shop order.    

Yes, it works for reservation but not for issuing logic and to be considered with SO hierarchy for both the cases. I believe this could be easy to incorporate in core.