This article is relevant if you need to automatically apply landed costs against NetSuite item receipt operations.

Background

Landed cost is a complex topic to implement on the NetSuite business platform. Earlier in the year (2021), I produced a talk to help others Learn NetSuite Landed Costs Fundamentals. As our clients come to us to learn how they can implement NetSuite landed costs in a scalable fashion, the approach to take is not always obvious. What is clear is that NetSuite’s built-in approach for applying landed costs to item receipts directly when the vendor bill arrives often produces significant breakdowns for accounting organizations that seek to get their books closed so they can lock information on financial statements. Please consider my 2106 article, Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills.

The fundamentals to achieving scalable landed costs applications are to move away from actuals and towards estimates; Accrual accounting, the basis for Generally Accepted Accounting Principles (GAAP) promotes the use of accruals (which can be from estimates) to help better match income and costs in the period for which they were earned and incurred. Landed costs appropriately inflate the cost of inbound inventory so that the costs of those assets, and subsequent cost of goods sold, relative to revenue earned from inventory sales, allow managers to assess profitability.

Therefore, if we contemplate how we are going to plan for future obligations and respective costs, we can reflect that the purchase order is a constructive record in our business system record-keeping arsenal. This article will focus on the purchase order as a means for holding and applying NetSuite landed costs.

Note, NetSuite offers up an add-on Supply Chain Management SuiteApp that supports estimated landed costs via templates. If you can use that tool, by all means, do so. However, I have seen too many situations where this tool does not effectively work especially in a model where there are location dependencies or when estimates vary by transaction. Finally, I make the assumption that you are using NetSuite’s Advanced Receiving functionality as this is universal among the clients we work with that have inventory operations.

Using Purchase Orders to Drive Landed Cost Estimates

In this article, I will review a pattern where we can estimate landed costs using purchase orders. The most typical landed cost is freight. Yet it is possible to see other charges such as insurance, duties, surcharges, and tariffs. It’s important to think carefully about how landed costs can be estimated and the best place to track them. While I will conveniently discuss freight in the model, consider that the inbound shipment record mimics a freight container. This inbound shipment record might be better for estimating freight — and purchase orders are not the right place to track.  Each landed cost category needs to be carefully assessed to develop the estimation and record-keeping model.

Purchase Order Driven Landed Cost Scenarios

In the most simple model, a purchase order is used in two scenarios:

1. Stock PO: an order is placed for stock inventory to be received by a company-owned (or managed) warehouse.
2. Drop-Ship PO: given NetSuite’s roots as a distribution system, a large number of our clients use a drop-ship model for fulfilling their sales orders. Since there is no item receipt on the native NetSuite drop-ship purchase order, the landed costs feature is not available. However, I advocate for the Drop-Ship Accrual method of drop-ship processing to handle proper costing and margin requirements. See this 2016 article, Solved: NetSuite Drop Ship Purchase Accruals. This model effectively turns drop-ships to NetSuite special orders which give us an item receipt. We thus can use NetSuite item receipts and landed costs with drop-ship operations. Accordingly, when I discuss drop-ships in this article, I am technically meaning NetSuite special orders.

Expression of Landed Cost Categories via Items

Since we are going to use Purchase Orders to estimate landed costs, we will do this via the expression of additional purchase order lines. A typical purchase order expresses the products that will be ordered. The freight to deliver the goods may be charged separately (in contrast, if freight is included in the price of the goods — no action is needed). Thus, to purchase freight, we can add a line item with the amount (estimate) we expect to pay for that service. Click on the related image to better understand the model.  Note, NetSuite discusses an “Items as Landed Costs” topic in HELP. We are using their model — except we plan to act with them differently from the way NetSuite prescribes.

We do not want these “other charge” landed cost items to participate in conventional receiving operations. Hence, we do not mark these landed costs as fulfillable. Consequently, we turn off the “Can be Fulfilled/Received” logic (see related image) on the item record. If you turn on receiving, these items will appear on item receipts and produce confusion for entry personnel. See the image for the switch to keep off.

Automatic Landed Costs Application During Item Receipts

Here is where the real innovation begins to demonstrate its value. During an item receipt operation, there should only be product lines expressed. This will be very natural for the receiving operation to manage. Behind the scenes, we will automatically apply the related purchase order freight (and any other landed cost item) to the item receipt. The goal is to apply these purchase line-based landed costs on a weight average basis across all applicable participating items (as dictated by NetSuite’s item “track landed cost” switch). A calculation is done to determine what portion of the item receipt is being received relative to the purchase order. We then can use that factor to apply it against the respective landed cost category, by value, on the header. See respective header.

As a result of the algorithm, the estimated landed cost now gets spread among the items without any additional accounting work. The real work was in estimating the landed cost, to begin with.

Vendor Bill on Landed Item Cost

When the vendor bill arrives, it should contain two major parts:

1. Product Costs: these costs line up perfectly with the products that were purchased and received.
2. Freight Costs: these are the purchased landed costs (freight) from the product supplier.

The accounting books can be closed for item receipt operations that were in previous periods. Our items were previously included in the inventory ledger with the full weight of the purchase order (product and landed cost lines). We design the accounting to work with the line-based landed cost debits and our landed costs category credits to offset each other — this affords us the opportunity to look for material imbalances between our estimates and our actual costs.

Advancing the Purchase Order Landed Cost-Based Theme

With the basic automation algorithm described above, there are other valuable scenarios to consider.

1. Purchasing Landed Costs from Third Party Suppliers: consider that freight, insurance, and other landed costs may be supplied/produced by other parties independent of the product supplier. However, they can be estimated at the time of the product purchase order.
2. Drop-Ship Operations with Respect to Selling Landed Costs: consider that drop-ship operations are generally meant to be a “passthrough cost” operation. We need to contemplate more closely the nature and measurement of landed costs.

Purchasing Landed Costs from Third Party Suppliers

Perhaps the product supplier is not selling freight — you need to organize a truck to deliver the goods and will incur an obligation to do so.  Yet, at the time of the purchase order, you can indeed estimate these costs. We thus go further with our innovation. By setting up the “other charge” landed cost items with a preferred vendor, we can actually see that we want to use a different supplier versus the product supplier. Thus, once the product purchase order is approved (firm), we automatically generate a new purchase order to the third party. We then end up with two purchase orders:

1. Product Supplier: this is the main purchase order for the goods which contained the estimate for the landed costs.
2. Landed Cost Supplier: this is the new purchase order that is automatically generated from the Product Supplier landed cost line and amount.

After generating the landed cost supplier purchase order, we go back and modify the product supplier purchase order and zero out values on the landed costs lines. We then replace the description with logistical information that will inform the product supplier of our intent to buy third-party shipping (or any other landed cost). Click the related image to see the impact on the original product supplier purchase order after it automatically generated the landed cost supplier invoice.

With this algorithm to generate new purchase orders, my 2021 article, Learn How To Automatically Apply NetSuite Landed Costs from Purchased Freight, simply continues the model to automatically apply landed costs appropriately at the time of item receipt.  Meaning, the second purchase order’s costs get applied as landed costs to the first purchase order’s item receipts.

Drop-Ship Operations with Respect to Selling Landed Costs

We continue to refine our model to determine if landed costs should be applied in our drop-ship operation. Continuing to use the concepts here, we can contemplate that shipping can be a revenue center. We have opportunities to charge what we want. See my 2021 article, Learn How To Markup NetSuite Shipping Costs by Percentage. If our shipping costs are also captured separately, we can then assess the shipping margin to determine if this category of landed costs is being properly managed.

Thus contemplate the following refinement to our landed cost algorithm:

1. Free Shipping: if we are not charging for shipping on our sales order (which is linked to the drop-ship PO) as we may charge more for items to cover freight costs, then use the algorithms as discussed. We want our items to be fully burdened with respective landed costs so that we can make good item margin assessments. Freight categorically is absorbed in revenue and costs.
2. Shipping is Charged: if we are charging separately for shipping on our sales order, then do not apply landed costs on this freight. Preserve the built-in nature of debiting freight expense on purchase order lines. The idea is that we want to compare outbound shipping revenue with inbound shipping costs as a small profit center.

The idea here is that business logic should be carefully reviewed to address real-world considerations.

Get Pre-Built Algorithms to Accelerate your NetSuite Landed Costs Challenge

My hope in this article is to demonstrate that NetSuite-based landed costs can be a complex topic. But with careful analysis, it is possible to leverage the platform to streamline the business operation and accounting. Like all the algorithms we have created, we give these to our clients free-of-license charge. The algorithms discussed today are available in our Prolecto Landed Costs Applications Bundle. The real value is the capacity to think about these challenges by bringing the best of what NetSuite has to offer along with our previous accomplishments while standing ready to innovate as needed so we can fully solve our clients’ existing concerns.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you have a challenging NetSuite landed cost endeavor, and you believe that careful planning and automation will make a difference in your accounting and logistics operation, let’s have a conversation.

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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