Drop shipment Invoice - Meaning, Types and Accounting methodology

Meaning - Drop shipment

Drop shipments are used when a customer orders items that are not stocked by the seller or when an item is required in large quantities. Drop ships are economical for the supplier to ship the required items directly to the customer.

Drop shipments enable a supplier to fulfill a sales order where the seller is not required to handle stock or deliver the items. Drop shipments also help in meeting urgent customers.

Drop shipment occurs when a customer urgently needs an item that is not normally stocked or a customer needs a large quantity of an item that is not available at your warehouse.  You also use drop shipments when it is more economical when the supplier ships the item directly to the customer.

Types – Drop shipment

There are three drop shipments:

Full Drop shipment: - Seller sends the purchase order to the supplier for the item that the customer has ordered.

Normal Shipment Partial Drop shipment: - Seller has only part of the quantity ordered; the seller supplies the available quantity to the customer. Then seller creates a purchase order for the rest of quantity.

Normal shipment and Full drop shipment: - Seller ships some goods from the inventory to the customer. The rest of the goods are shipped from the supplier.

Accounting Methodology – Drop shipment

Drop shipments are created as sales orders in ORDER MANAGEMENT MODULE and are indicated as drop shipments when their source type is entered as External. The purchase release concurrent [program or work flow in ORDER MANAGEMENT MODULE creates rows in the requisition import tables in the purchasing module. The requisition import progress in purchasing creates requisitions. After a requisition is approved, a purchase order is generated and the source type is entered as supplier. Next the purchase order is sent to the supplier and arrange for the delivery of the items to the customer.

The supplier notifies the seller that the items have been shipped to the customer though an invoice or an EDI or and advance shipment notice. The seller then generates an invoice to be sent to the customer. Additionally the seller creates a receipt for the shipped items after receiving the confirmation of the drop shipment. This creates inbound and outbound material transactions in the system for account purpose.