This article is relevant if you need to support NetSuite landed costs on transfer orders, or you need automation to generate landed cost-based purchase orders.

Background

In 2021, I wrote an article, Drive Automated Estimated NetSuite Landed Costs from Purchase Orders. Shortly after that, a client wishing to get more control and visibility over its transfer order driven landed costs came to us seeking better information on inventory warehouse transfers. As logistics timing and costs have become an ongoing worry in a post-pandemic world, the need to understand what freight, duties, and other costs are doing to inventory handling drives better margin analysis.

Enhanced Landed Cost Estimates and Purchase Order Accruals

I discuss the importance of understanding landed costs in NetSuite in this article. This discussion can help center a reader on this complex topic. 

In contemplation of our client’s requirements, we approached solving their challenge with a more flexible model. We thus considered the following pattern to produce more capacities to get in front of many landed costs situations:

1. Estimates: We are a firm believer in using estimates to get in front of landed costs (see related article, Learn NetSuite Landed Costs Fundamentals).
2. Purchase or Transfer Orders: we should be able to use estimates against purchase orders (PO) and transfer orders (TO). These inventory-based transactions are fundamental for planning the related logistical costs.
3. Describe Landed Costs: the respective logistics parties should be outlined alongside their various estimated landed cost types right against our inventory (e.g., Purchase or Transfer order) transactions. 
4. Auto Generate Landed Costs Purchase Orders: once we commit the inventory transaction (e.g., Purchase or Transfer Order), the system should automatically create respective landed costs purchase orders for each logistics party. The purchase order helps set up the landed cost party accrual and provides a place for our vendor bills.
5. Heal with Better Information: so long as the accounting books are open, we have a chance to update our estimates using available and known actual costs. Updates to estimates will help us minimize our variance reconciliation between actual costs versus our planned estimate.

Click the image to see a full-screen of the architecture and pattern.

Moving from Landed Costs Actuals in Favor of Estimates

NetSuite’s landed costs system is driven based on costs on the item receipts. The platform leads you to link vendor bills to the respective item receipts to apply its costs. While this works well — it suffers a significant design consideration. Mature organizations want to close their accounting books quickly so they can rely on and distribute financial reports. Recording a vendor bill related to landed costs on an item receipt in a closed accounting period will not work. The system is locked.

One sign of a mature organization is its ability to plan. Hence, planning for logistics-related costs signifies an attribute of a well-run inventory practice. Using estimates, we can close the accounting books without waiting for bills to arrive and deal with the differences between actual and estimates separately — as a function of improving our planning.

Ensure Landed Costs act on NetSuite Transfer Orders

Moving goods from warehouse to warehouse should be done with a transfer order. Related inventory items should be burdened (capitalized) with the additional distribution costs imposed in the move. While NetSuite offers a Landed Costs Template add-in system, it does not work with Transfer Orders.  We fixed that.

Note, in general, US GAAP rules are to expense inventory transfer costs as they are not related to the acquisition.  Yet, there are exceptions.   Should an organization wish to capitalize transfer order-based costs as a matter or company policy, then this article can show you how.

Finally, in our Prolecto Freight Container model (a more flexible alternative to NetSuite-based Inbound Shipment records), we use transfer orders to create in-transit situations.  Think about shipping goods from Asia to North America as in transit. The in-transit situation really is an inbound cost.  So we do indeed need to capitalize transfer order costs.

Outline Landed Cost Narrative on Inventory Planning Transactions

It was essential to describe the anticipated landed costs as a sublist against either the purchase order or the transfer order. The sublist gave the planners maximum ability to express the logistics narrative. While there, we can describe the vendors that will impose a logistics cost.

Click on the related image to see it full screen.

Create Landed Costs Purchase Orders from Sublist

Now that you have your estimated landed costs outlined, the system can automatically generate a purchase order for those costs. It may not be required to distribute the purchase order document physically. Two key points emerge under this model:

1. Accrual Basis: with the purchase order in place, we can anticipate our obligation — even if we have not received the bill. If the inventory items have been received (implying that we received our landed cost service) but the landed cost bill has not arrived, we know we must recognize a liability in the form of an accrual.  We now have the data to do so.
2. Set up Vendor Bill: when the bill arrives for the landed costs, it may be for many logistics operations across many purchase orders or transfer orders. No worries. With the proper referencing, we can use NetSuite’s Bill Purchase Order tool to create a single vendor bill against all the landed costs purchase orders. 

Improve Landed Costs with Better Information

So long as the books are open, we have a chance to improve our landed costs information. Perhaps we have better estimates with information later in the process — or the actual costs have arrived. We can modify the landed cost purchase orders and ask the system to recalculate. The recalculate feature will bring better information to the balance sheet — and if the goods have already been sold, it will roll those revised costs into Cost of Goods of Sold.  That’s how to better calculate margin (note, readers interested in NetSuite margin challenges will be interested in my 2018 article, Learn how to Reliably Measure NetSuite Gross Profit and Margin)

Landed Cost Application Algorithm

The algorithm to apply costs is described most fully in my article, Learn How To Automatically Apply NetSuite Landed Costs from Purchased Freight. What is essential is that we expanded the algorithm scope to hit all the different logistics-based costs.

We further enhanced it so that a ratio for applying landed costs against item receipts uses either a quantity or dollar (or other currency) value. Partial item receipts and/or landed cost purchase orders that reference multiple goods-based POs or TOs demand a weighting factor to determine how much to capitalize.

Getting NetSuite Landed Cost Library

Since 2008, we have been helping our clients with NetSuite leadership. Over time, we have packaged several landed costs algorithms into a free-of-license charge accelerator bundle to help our clients in their robust landed cost implementation. Indeed, planning sourcing and supply chain logistics in NetSuite deserves careful planning. In addition, it’s essential to model the information flow, address accounting questions, and address the change over from old practices to new ones. We produce recurring success in our client organizations due to our capacity to listen carefully, model challenges well, and leverage previous work and experience.

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 application, and you are ready to tackle it correctly, 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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