Bread – Dry milk powder subsitute

I wouldn't replace milk powder with vital wheat gluten. Vital wheat gluten changes the gluten content of your recipe. It's good for, say, turning whole wheat flour with a lower gluten content or AP flour into flour suitable for bread.

When I add vital wheat gluten, I subtract flour as your friend does. I only use it when I am not using a high protein flour.

The dried nonfat milk powder is likely in the recipe for flavor. I would instead use milk in place of water and either up the flour as needed or replace with flour as needed (you can tell this during kneading). I've done this just fine in bread recipes before.

It depends on the type of dry milk—there are several processes for making it, and the density varies.

But a good place to start is to read the package of dry milk for the reconstituting instructions. For example, it if tells you 5 tbsp + 1 cup water to make 1 cup reconstituted milk, then you'd substitute 1 cup (possibly scalded) fresh milk for 5 tbsp dry milk. If you don't have a package of dry milk, ⅓ cup dry milk + 1 cup water is given by the USDA. Other places say ¼ cup. Wikipedia says 10% by weight, citing Wayne Gisslen's Professional Baking.

Keep in mind that you must reduce the amount of water in the recipe to compensate. Within epsilon, reduce the water by the amount of liquid milk you added.

For temperature-sensitive recipes, you may need to warm your milk somewhat, as the recipe probably was designed for room-temperature water, not refrigerator-temperature milk.

Note: According to a random site on teh Interwebs, scalding pasteurized milk apparently slightly improves bread. In pretty much everything else, scalding pasteurized milk has no effect.