Accounting Best Practices, Fifth Edition

16–37. Drop Ship Inventory

A typical set of inventory transactions involves receiving items, moving them to a quality review area, checking them, moving them again to main storage, picking them for an order, assembling and packaging the order, and shipping it. Not only does this process require a large number of transactions, any of which could be made in error, but it also involves a great many “touches” of the inventory, increasing the odds of product damage.

In situations where a company is purchasing a finished product from a supplier, turning around and selling it to a customer, there is a possibility of using drop shipping. Under this approach, the supplier ships the product directly to the customer, bypassing the company’s warehouse entirely. By doing so, all of the transactions and risks of product damage just noted are eliminated. This is the ultimate approach to storing inventory—there is nothing to store. It is an especially attractive option for large items, which would otherwise require special handling and take up considerable space within the warehouse.

Unfortunately, drop shipping is an option only in the minority of situations. Many suppliers are unwilling to ship directly to customers, especially if shipment sizes are smaller than full pallets; issuing small shipments increases a supplier’s costs, so the company may have to accept a supplier price increase in exchange for this service. Another problem is the need for new procedures to handle drop shipments. The ...