In some situations, a company does not keep a product in stock for deliv­ery to customers. Instead, it routes customer orders directly to its supplier, who in turn ships the goods directly to the customer. As a result, the com­pany never handles the related inventory at all, which reduces its working capital requirements. However, additional controls are needed to ensure that customer orders are sent to and received by the supplier. It is also nec­essary to ensure that notification of delivery is received from the supplier in a timely manner, so the company can issue an invoice to the customer. The additional controls are shown in Exhibit 1. In the exhibit, other controls related to the general process flow have been removed in order to make room for those controls used only for drop-shipped orders.

Exhibit 1 Controls for Drop Shipment Deliveries

The controls noted in the flowchart are described at greater length next, in sequence from the top of the flowchart to the bottom.

• Verify supplier receipt of customer order. The area of greatest risk in the process flow is simply ensuring that the supplier has received a copy of the customer order, which can be confirmed in a number of ways: through an automatic electronic receipt message if EDI is used or through a simple e-mail, fax, or phone call.
• Match supplier bill of lading to customer order. The company needs a method for determining what has shipped, so it can create customer in­voices. When the supplier creates a bill of lading for its own records and that of the customer, it should create an additional copy for the company, which is then matched to the open customer order and sent to the billing staff for invoice creation.
• Investigate old open orders. By default, the preceding matching process leaves all the unmatched orders on file, which the order entry staff uses to create a report of all old open orders. With this report, it follows up with the supplier to determine when remaining orders are expected to be shipped.
• Reconcile backlogged remainder items. Once a customer order is largely completed, there may be a small number of items remaining on backlog. If so, the order entry staff should regularly follow up on these items to see if the supplier is still able to ship them or if the customer wants them. Proper attention to these items keeps small portions of or­ders from lingering in the computer system as open items and ensures that the maximum amount of each order is billed.

The drop-shipping procedure shown in Exhibit 2 incorporates the control points already noted in Exhibit 1. This procedure contains a num­ber of additional processing steps not shown in the flowchart.

In essence, controls in a drop shipment situation revolve around the tracking of the order that has been transferred to the supplier. This is im­portant not only to ensure that shipments are made to customers in a timely manner, but also to ensure that customers are billed immediately after their orders are shipped.

Exhibit 2 Procedure for Drop Shipment Deliveries

[tags]shipment deliveries, procedure for drop[/tags]