NetSuite: Drop Shipments

Published on May 28, 2019

Often, you'll want to have products that you've sold sent directly to a customer. You might want to do this to expedite delivery of an order, to reduce shipping costs, or both. This is a supply chain management method known as drop shipping, and NetSuite provides support for it.

Let's take a look at how NetSuite's drop shipping feature works.

Enabling The Feature

To use NetSuite's drop shipment feature, you'll first need to enable it. To do so, go to Setup > Company > Setup Tasks > Enable Features. Then select the Items & Inventory subtab, and click the "Drop Shipments & Special Orders" checkbox.

Setting Up A Drop Ship Item

To create a drop ship item, start by creating a "Non-inventory Item for Resale." On the Purchasing tab, click the Drop Ship Item checkbox. If you don't see this option, see "Enabling The Feature" above.

At this point, if you try to save the item, you'll likely get an error that reads, "Drop ship/Special order items must have a preferred vendor and purchase price." Here's why. When you sell a drop ship item, and the sales order is approved, NetSuite will automatically generate a purchase order for the item. In order to do that, NetSuite needs to know what vendor it should issue the purchase order to. That vendor is known as the "preferred vendor."

To specify the preferred vendor for a drop ship item, on the Purchasing tab, scroll down to the Vendors sublist. Select the vendor, set a purchase price, and check the "Preferred" checkbox."

The item form should look something like this...

Selling A Drop Ship Item

You add a drop ship item to a Sales Order just as you would any other item. In the Items sublist, you'll see a "Create PO" column, and it will automatically be set to "Drop Shipment." (The column will be disabled for items that are not setup to be drop shipped.)

When you approve a Sales Order that includes one or more drop ship items, NetSuite will automatically generate purchase orders for those items. The purchase orders will be issued to the preferred vendors of those items, and the shipping address will be set to the customer's shipping address. When that process completes, you'll see a response like this...

Fulfilling Drop Ship Items

How you fulfill orders for drop ship items will depend on how your NetSuite instance is configured, and whether or not you are using Advanced Shipping and/or Advanced Receiving. Most of my clients are using both features, so I'll describe fulfillment in that scenario. (If you are not using both the Advanced Shipping and Advanced Receiving features, and have questions about how to fulfill drop ship items, refer to "Fulfilling and Receiving Drop Ship Items" in the NetSuite Help Center.)

First, you need to let NetSuite know that the purchase order has shipped. Do this by pulling up the order and clicking the Mark Shipped button. Here's a screen shot that shows a purchase order that is pending receipt, and the Mark Shipped button.

When you mark a drop ship purchase order as shipped, the Item Fulfillment form will be displayed. Use the form to indicate the items that have been shipped. Here's what that form looks like...

When you save the item fulfillment status of both the purchase order sales order will be set to Pending Billing. And because you are using both the Advanced Shipping and Advanced Receiving features, you will need to manually bill the orders.

GL & Inventory Impact

It's important to understand the impact (or lack thereof) that drop ship items have on in terms of your general ledger accounts and inventory. Because of the special way that drop shipment items are processed, they do not have an impact on your inventory asset accounts, and they have no impact on your stock levels.

It's also important to understand NetSuite's handling of drop shipments in terms of timing. The GL impact of a drop ship purchase order doesn't begin to occur until it is billed. As a result, it's entirely possible that the revenue and associated cost of a drop shipped order will not impact the GL in the same accounting period. For some organizations, this can be problematic.

However, Marty Zigman of Prolecto Resources, Inc has found a solution to this problem. It involves setting up a special location that is used to handle drop shipped items as if they are being received into inventory. It's a very clever solution, and I highly recommend that you explore it. Details can be found here.

Wrapping Up

If your business regularly drop ships items to customers, then I think you'll find NetSuite's support for drop shipping to be very convenient. And as you've just seen, it's also easy to enable, configure, and use.