How to Configure Settings for Customer Billing in a Drop-Ship Scenario

  • by Alok Gupta, Senior Consultant, Deloitte Consulting LLP
  • April 17, 2014
Learn the requirements, process design steps, and configuration settings needed for customer billing in a drop-ship scenario. This process is managed in sales and distribution (SD); however, it is also supported by materials management (MM), FI, accounts receivable, and accounts payable.
Learning Objectives

Reading this article, you will learn how to:

  • Configure settings for billing in a drop-ship scenario
  • Design a solution for a drop-ship scenario in which the credit days for a customer are fewer than the credit days provided by the vendor
  • Manage the process flow of a drop-ship scenario
  • Maintain accounting entries at every process step
Key Concept

Delivery of goods or merchandise from the original supplier directly to the customer or buyer without passing through the warehouse of the trader or distributor is commonly known as a drop shipment. SAP calls this delivery method third-party order processing.

Two significant benefits of drop shipping are the elimination of up-front inventory and a positive cash-flow cycle. A positive cash-flow cycle occurs because the trader or distributor is paid when the sale is made. However the distributor usually pays the wholesaler or manufacturer using longer credit terms. Therefore, there is a period of time in which the distributor received the cash from the customer, but has not yet paid the wholesaler or manufacturer.  

Drop shipping also eliminates some duplication of effort, as only one warehouse picks, packs, and ships the product. This approach can reduce total inventory management and shipping costs. These cost reductions can subsequently reduce the price to the consumer.

I explain the process flow, configuration settings, and output in terms of accounting entry for a drop-ship scenario. This knowledge enables you to set up a distribution business using a drop-ship scenario in which the credit days on a sale to a customer are fewer than the credit days received from the vendors on purchases. In this drop-ship scenario you can bill customers for the goods sold before receiving the vendor invoice. Configuring this expertise requires the use of sales and distribution (SD), materials management (MM), and FI.

The Drop-Shipment Process

Drop shipping is a supply chain management technique in which the trader or distributor does not keep the stock. Instead, the trader or distributor asks the manufacturer or wholesaler to ship the product directly to the customer.

The standard sales order automatically creates a purchase requisition for the materials to be delivered by the third-party vendor to the customer. For a standard drop-ship process in an SAP system, there would be no goods receipt in the books of the trader or distributor because no stock is received. The vendor sends an invoice based on the purchase order (PO) and delivery of materials made to the customer.

Because there is no delivery in a drop shipment, the invoice from the vendor updates the billing quantity, and the customer invoice is created only after the vendor invoice is posted. Figure 1 outlines the standard drop-shipment process.

Alok Gupta

Alok Gupta is a senior consultant at Deloitte Consulting LLP. He is a qualified chartered accountant and an SAP FI/CO consultant with more than seven years of experience. He has worked across all modules of FI/CO and integration with other modules.

 

See more by this author


Comments

No comments have been submitted on this article. 


Please log in to post a comment.

To learn more about subscription access to premium content, click here.