What is Drop Shipment - An Overview

What is Drop Shipment - An Overview

Companies that do not stock inventory of the products sold use the Drop Ship process.  These companies send orders for products to manufacturers (Suppliers), or major stocking distributors, who in turn drop ship the merchandise direct to the customers ordering the goods. 

Manufacturers providing drop-shipping services can gain additional sales, shift advertising costs and reduce inventory requirements. 

Check the blog posts:

OM Drop Ship process

OM Drop ship cycle in brief

OM Drop Ship Setups and Prerequisites

Drop Shipment Overview

Oracle Drop Ship tables

The company that initiates drop ship orders shifts the risks of stocking inventory to the supply source, including storage, insurance, overhead, and personnel by spending nothing on inventory, until after the product is sold.  All of the costs of warehousing and the personnel needed to pick, pack and ship products are eliminated. 

The term “Drop Ship” is interpreted differently by companies. 

One of three scenarios generally occurs in most companies performing Drop Shipments:

1.    The Customer calls the Order Processing Company, which sends Purchase Orders to the Supplier.  The Supplier ships the order directly to the Customer.  The Order Processing Company handles the invoicing of the Customer after they receive a confirmation of the shipment from the Supplier. 

2.    The Customer calls the Order Processing Company, which sends a pick list to their Supplier, also called a Fulfillment House.  The Fulfillment House picks the items from their inventory and ships directly to the Customer.  The Fulfillment House then sends a Ship Confirm notice back to the Order Processing Company, who updates their orders and sends out invoices to the customers. 

·         The difference here from the 1^st scenario is that the Order Processing company processes these orders or order lines similar to a standard shipping order, whereas in the 1^st scenario the order lines are interfaced to Purchasing to be handled as a Requisition, and follows the Purchase Order flow. 

3.    The Company receiving the orders in this scenario is the Supplier in the previous 2 scenarios.  Hence, any orders will be coming from a customer, but will be going out to another customer ship to site.  The most common way of handling this situation is to relate the customer that the order is being drop shipped to with the customer sending the original order.  The customer sending the order is responsible for the payments. 

Note: Another scenario is common, where a company might have multiple organizations and an Internal Drop Ship Mechanism might be used to enter orders in one Organization, and the shipments are from another Organization.  This scenario is not covered here, since the assumption is that R2i deals with companies with a single organization setup.