Finally: Capitalize NetSuite Inventory Costs with Item Consumption Landed Costs

This article is relevant if you are seeking to better manage NetSuite driven procurement processes and you wish to fully capitalize the costs of goods as they move between external factory processes through distribution.

Background

In a number of previous articles, I discuss NetSuite based inventory and costing practices to facilitate the tracking and proper inventory capitalization:

  1. Global Logistics Practices for NetSuite Driven Distribution Companies: scalable inventory logistics practice for globally-minded NetSuite distribution companies that use outside manufacturing.
  2. Track NetSuite Inventory In-Transit with Freight Containers and Automated Landed Costs: practice to use freight containers and vessels to track inventory in-transit.
  3. How To: Add Packaging Costs to Standard NetSuite Inventory Items: drive packaging materials costs into finished goods inventory leveraging NetSuite driven purchasing processes.
  4. Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills: practice to account for NetSuite landed costs to streamline your operations and produce superior accounting control.

This discussion is a continuation of the Global Logistics Practices for NetSuite Driven Distribution Companies article. Our client situation may be similar to yours:

  1. Raw Material Consignment Goods: our client purchases raw material from other suppliers and ships them to a finished goods factory; the raw materials are called consignment goods because the finished good factory does not own them but takes possession of them to use as inputs to create the ultimate finished good.
  2. Raw Material Consumption: as finished goods are manufactured, the raw materials need to be decremented from the inventory store as they are not part of the finished good. The finished good needs to absorb (capitalize) the cost of the raw material good.
  3. Landing Costs varies depending on Destination: once goods are produced and begin to move in the distribution process, various types of costs, such as freight, duties and insurance depend on where the goods ultimately land. For example, goods produced in Asia that land in Europe have distinct and usually predictable costs apart from goods that land in Australia.
  4. Effective Costing: the cost to procure goods vary over time; purchasing managers wish to track and maintain purchase history to help keep suppliers accountable and demonstrate their effectiveness to get the best price and value. New purchase orders should reference the effective current cost.
  5. Item Versions: an item or good may have the same market (external) representation, but over time, underlying variations of what constitutes the item need to be tracked and managed. For example, a customer may wish to purchase WhizBank Tablet Computer, but internally, we need to know the manufacturer version was 201607 and currently is 201704 — and thus the underlying configuration may be different yet the end customer does not care.

Item Version with Landed Cost Template and Item Consumption

To solve for our client’s concerns, we enhanced our Freight Container system by expanding for complex landed costs capacities. The key to these innovations is to anchor on a few key concepts which are illustrated in the related diagram:

  1. Item Version: allow for unlimited item versions which allows for different purchase price lookups and effective dating. The item version can be named and used for managing variations in the NetSuite item.
  2. Linkage to Landed Cost Templates by Location: each item version can be linked to a specific landed cost template. However, the landed cost template will only be in play if the item is received in reference target locations.
  3. Landed Cost Cost Allocation Models: each landed cost template can use formulas to automate line-based item cost:
    1. Flat Amount: a cost factor can be applied exactly as specified.
    2. Per Quantity: a cost factor can be determined by the number of items in the line receipt.
    3. Percentage of Value: a cost factor can determine the value of the line receipt and apply a percentage of that value.
    4. Item Consumption Reference: my favorite, a quantity and a pointer to another item can be supplied. Here, when the quantity on the line receipt is gathered, the formula will multiple the quantity of the item consumption reference. We decrement the number of referenced items from inventory, assess the value of that decrement, and capitalize the line item receipt. This is how we automate the consumption of raw material consignment goods as discussed above.
  4. Reference use in Transfer Order Operations: because transfer orders with our freight containers are fundamental for in-transit flows, we can have our landed cost templates participate in item receipt operations not only against purchase orders, but also against transfer orders.

Contrast to NetSuite’s Supply Chain Management Bundle (Bundle ID 47193)

NetSuite offers an add-in bundle that offers close functionality. However, at the time of this writing, the bundle did not meet our client’s requirements in the following key ways:

  1. Destination Location: the template had no concept of application at the destination location.
  2. Transfer Order Item Receipts: the templates did not work against item receipts that are part of the transfer order.
  3. Time Dimension: the templates did not work with effective date concepts.
  4. Item Consumption Model: the landed cost templates had no mechanism to consume another item; important for moving goods between multiple suppliers for assembly to the ultimate destination.

Watch Video Demonstration (8:24 duration)

In order to better understand these concepts, and learn how the software works, I invite you to watch the related video.

Get the Landed Cost Template System

The power of the NetSuite platform allows us to solve all kinds of customer concerns. My hope in this article is to illustrate our capacity to innovate and solve our client’s toughest puzzles. The Landed Cost Template system is part of our Freight Container and Landed Cost bundle. It is available free of charge to all Prolecto clients. As with all of our bundles, we assist our clients in the implementation and, as requested, we enhance as needed to meet their specific situations. If you are a NetSuite end customer and see applicability, let’s have a conversation about your situation.

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Marty Zigman

Holding all three official certifications, Marty is Southern California's NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 25 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to setup a conversation.

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| Tags: , , , | Category: Accounting, NetSuite | 2 Comments

2 Comments

  1. Alien
    Posted April 24, 2017 at 10:07 am | Permalink

    Hey Marty.
    Very good article as usual, in our case we transfer our inventory to the manufacturer and they sell us a FG without the material price include because we own those RAW materials.
    We buy an Inventory Item from them and then we create a WO to build our FG consuming our ROW material at that location. Your bundle could be tune in that way so it do it automatically?

    Kind Regards
    Alien.

  2. Posted April 24, 2017 at 1:07 pm | Permalink

    Yes, this solves for your situation. However, no Work Order (assembly module) is required. Your approach is more conventional and certainly could be automated. Our approach is especially valuable to distributors that do not need work orders and just have some outside assembly through purchase order efforts.

    Marty

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