Drop Shipment

To increase the range of their products without having money locked away in inventory, companies often turn to such procurement approaches as Special Order and Drop Shipment. Since both imply selling the item that you do not possess now of selling, the terms are often confused with one another. Nevertheless, in the sphere of logistics and ERP systems like Business Central, they are distinct operations that must be performed in different cases. Below is the explanation of the difference between these procurement approaches.  Special Order  The special order refers to the customer who wants to buy an item not in your normal inventory. You purchase the item from your vendor. Although it will be done especially for this customer because the inventory will come to your warehouse or facility first.  After the inventory reaches your dock. You receive the item, inspect it if needed, and ship the Sales Order of the customer using your inventory yourself. You own the inventory for some time.  Drop Shipment  In a similar way, the drop shipment refers to selling the item out of stock to a customer. You will buy the item from the vendor as well. The only difference is that the inventory won’t reach your warehouse.  You will make the sales order and purchase order, but you ask the vendor to send the product to your customer’s shipping address. You play the role of an intermediary in this transaction.  Core Differences  Although the customer receives the product in both cases, the backend process differs significantly in the following ways:  1. Physical handling and quality control.  When you place a special order, you get involved in the physical handling of the product. That allows you to do quality control check. Also, to make sure the product does not damage during shipping and that complete order fulfils correctly before the delivery to the customer. In case of drop shipment, you lose the control, the vendor ships the product flawlessly or not.  2. The unboxing experience.  If your business builds around the unique unboxing experience for your customers (special boxes, tissue paper, personal note), then the special order is mandatory. Drop shipment means that you receive the product in the packaging of the vendor and even may include the vendor’s shipping slips and logo.  3. Shipping Fees and Time  Drop ships tend to be quicker since the product takes the direct path from the vendor to the customer instead of making a stop at your facility first. In addition, there is no “double freight”. No paying to ship the item to you and paying again to ship it to the customer.  4. Accounting and Inventory  In an ERP environment, a special order will affect your inventory accounting temporarily and needs to be received. A drop ship order does not affect your inventory; the purchase price goes directly to COGS on receipt of the invoice from the vendor.  How Do You Decide?  Utilize Special Order procedures when the item is of high value, if it requires quality inspection, it requires shipping with other items already in your inventory, or it is of importance from the branding perspective.  Utilize drop shipments when the item is bulky or heavy (e.g. patio furniture, industrial machinery), when you need the product immediately, or when you absolutely want to avoid any warehousing cost whatsoever.  By understanding these different workflows and incorporating them into your business operation in the proper way via your ERP system, you can safely increasing your inventory.