Best Practice on Shipping Charge Handling in NetSuite Dropships

This article is relevant if you are using NetSuite for purchase orders and you seek to have purchased shipping costs capitalized into inventory landed costs.

Background

For a recent implementation with a client that sought better gross margin reporting for their dropship-based purchasing flows, we worked with them to refine their processing model. The client sought to implement our dropship accrual practice. During the modeling of their business, we discussed how a high degree of the costs related to shipping charges. We thus factored in how shipping costs would affect the margin analysis and developed a best practice.

I have written related articles on this matter that readers can reference:

1. In 2016, Solved: NetSuite Drop Ship Purchase Accruals
2. In 2017, Finally: Capitalize NetSuite Inventory Costs with Item Consumption Landed Costs
3. In 2018, Learn how to Reliably Measure NetSuite Gross Profit and Margin

Reflecting on NetSuite Shipping Costs for Margin Analysis

When thinking about Shipping in the NetSuite model, it is best to consider if Shipping is a profit center or a cost center. In the profit center model, you seek to charge customers shipping and recoup the cost of shipping. If done well, you measure the shipping price and costs at the transaction level and thus can assess margin.

In this discussion, I will primarily assess the shipping costs situation in the dropship model which will reveal the shipping profit or cost center orientation. The review will allow one to consider the factors in a pure inventory warehouse model as well. In the dropship model, the supplier’s purchase order should reflect all the elements needed to deliver the product to the customer. Naturally, a purchase order will contain the materials cost. But there likely are add-on delivery charges to account for.

Hence, we need to consider the following:

1. Shipping Revenue: do we charge for shipping outright? If we do, then we have the opportunity to line up related shipping costs to measure shipping margin. Do we offer free shipping? If we do, then we should ensure that any shipping costs are absorbed into the dropship product costs.
2. Purchased Shipping: is shipping charged in our purchasing cycle? If so, then if we charge for shipping to the customer, we want to line up the purchased shipping costs with the shipping revenue. However, if the customer is charged free shipping, then we need to capitalize the shipping as a landed cost. Finally, if shipping is not charged by the supplier, we assume the delivery cost is already in the materials costs.

Before considering the implementation in a dropship flow, a word about standard inventory operations. Purchasing shipping from a supplier for inbound item receipts is one of many potential categories of landed costs. Thus, the treatment of the shipping should generally be capitalized into the costs of the received items as a matter of due course. Thus, the patterns I will present below are applicable.

Dropship Purchased Shipping

First, to understand this model, it is important to have a background on the challenge of the NetSuite dropship model. It is difficult to properly measure dropship margin in NetSuite’s standard dropship model because you are not offered an item receipt to capture the costs and line this up with the shipment (earned) event. I have solved this in my 2016 article, Solved: NetSuite Drop Ship Purchase Accruals.

In that model, we leverage NetSuite’s Special Order function because it gives us the inbound receipt we need to properly capture costs at the item receipt. The item receipt consequently gives us the tools we need to drive landed costs to further capitalize shipping costs.

The trick in this NetSuite dropship implementation demands the following considerations:

1. Dropship Shipping Costs: we developed tables and logic to help our client model the shipping costs charged by their suppliers. Thus, we automatically add a purchase shipping line to the dropship purchase order with the estimated costs. Naturally, if you know the actual costs the supplier is going to charge, all the better. But for a scalable operation, the estimates were sufficient for hands-free operation.
2. Type of Shipping Cost: we use two different types of items to hold our purchased shipping delivery charges. If we are going to charge the customer shipping (the shipping profit model), then we use an item type that is inventory-based so that we can route the cost of shipping through the item fulfillment to recognize the shipping-based cost of goods sold. Whereas if we do not charge the customer shipping (shipping cost model to be absorbed in the cost of materials), we automatically add a non-inventory for the purchase shipping line to the dropship purchase order with the estimated costs. In both cases, the supplier sees a shipping cost line on their purchase order — which is consistent with their selling model.
3. Item Receipt Landed Cost Operation: during the item receipt, we determine if the sales order is going to charge shipping. If so, we are in the shipping profit center model; we receive the purchased shipping line at item receipt like we do the material lines. However, if we not charging the customer shipping, then we automatically capitalize the cost of the purchased shipping using landed costs. We do this by looking up the shipping cost on the purchase order to plug into the item receipt’s respective landed costs category.

Click on the related image to see an illustration of the flow.

To understand more fully why we choose an item type that is inventory-based versus non-inventory-based will become clearer in the accounting below.

Accounting for the Dropship Purchased Shipping Flows

There are two major models in this flow depending if we are charging customers. Here is how the accounting works:

Charging Customers For Shipping Model

In this model, our purchased shipping item is inventory-based. Note, in the model, we never expect to have actual an “inventory of shipping”.  The balance sheet should never have a value for this element in day-to-day operation.

At Item Receipt
Dr. Purchased Passthrough Shipping Costs (an asset: such as prepaid shipping)
Cr. Inventory Received, Not Billed

At Vendor Bill
Dr. Inventory Received, Not Billed
Cr. Accounts Payable

At Item fulfillment
Dr. Passthrough Shipping Costs of Goods Sold
Cr. Purchased Passthrough Shipping Costs

At Invoice
Dr. Accounts Receiveble
Cr. Passthrough Shipping Revenue

We now can measure shipping margin as we have both shipping revenue and shipping costs of goods sold isolated. There is no shipping on the balance sheet in this operation.

Free Customer Shipping Model

In this model, our purchased shipping item is non-inventory-based. Items that are not inventory-based have no native GL effect on item receipt. But they are handy for this operation.

At Item Receipt
Dr. Inventory (for capitalized shipping charges via NetSuite landed costs)
Cr. Landed Dropship Shipping (via landed cost application category definition)

At Vendor Bill
Dr. Landed Dropship Shipping (via item definition)
Cr. Accounts Payable

We have capitalized the cost of shipping into the items which now provides accurate product margin analysis.

Controlling Costs

Under these models, actual costs may vary from estimates. We assess the reasonableness of transactions by using saved searches to determine if our estimates are falling too far from our actuals. I discuss this in my 2016 article, Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills

Work with NetSuite Experts

One of the major opportunities is to use the NetSuite Platform to deliver on business requirements. With a fundamental understanding of accounting, databases, and technology, we can bring our clients superior solutions to their information systems challenges. Like all the solutions we bring to our clients, we leverage previous client work to offer our algorithms without license charge. Our offer simply is NetSuite expertise and care.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you are ready to tackle your shipping revenue, shipping margin challenges, let’s have a conversation.

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Marty Zigman

Holding all three official certifications, Marty is regarded as the top 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 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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