This article is relevant if you seek to use NetSuite to run a Warehouse operation.

Background

Approximately a year ago, a prospective client came to us to better understand how they could run their distribution company and simultaneously set up a warehouse operation for other customers using NetSuite. Their instinct was to use NetSuite One World.  Still, as they were having conversations with the Warehouse Management System software provider (RF-Smart), mixing inventory between products you own and those owned by third parties in the same warehouse was not making sense. The warehouse management tools had no concept of inventory mixed ownership.

After multiple conversations, it became clearer what the business objectives were:

1. Sales Distribution Company: a conventional sales distribution company would have its own customers; sometimes, they would stock goods and other times, they would use other vendors to drop ship inventory. This is a common pattern we see in the NetSuite community.
2. Warehouse Company: a new warehouse company was formed to develop practices to receive, hold and ship inventory owned by multiple parties. This was a significant opportunity for the business owner giving them greater inventory control and visibility.  Hence, it offered a competitive advantage in the collective multi-entity operation.
3. Consignment Inventory: the Sales Distribution Company had special relationships with its suppliers. One relationship was a consignment arrangement. In this arrangement, the supplier would stock inventory at the Sales Distribution Company — beneficially, the Sales Distribution Company would avoid having any capital tied up in inventory. Instead, the inventory could be used for fulfillment by the Sales Distribution Company when there was order demand — and only when the goods are shipped would the obligation to pay for the inventory consumed be recognized.

As we worked out the business practices, we provided an architectural direction to seamlessly solve their challenge. We produced a very different NetSuite One World implementation that pulled all these operations together. For this article, I will focus primarily on the Warehouse Operation to distinguish it from conventional inventory management. In a subsequent article, I will illustrate the entire connected architecture.

NetSuite for Warehouse Operations and Third Party Logistics (3PL)

In a warehouse operations business, the fundamental consideration is that the inventory held in the warehouse is owned by third parties. In this type of business, the Law of Agency is used so that the warehouse company can act, as an agent, on behalf of third parties or called principals. When you act as an agent, you do not own any of the inventory that you are handling; instead, you invest in capital assets, such as warehouse facilities, distribution equipment, racking systems, packing apparatuses, and people to perform warehouse and logistics work on behalf of the principals. From the perspective of the Warehouse Company, the principals are the customers. And the work that will be done is to take instructions to receive inventory from the Warehouse Company’s customers’ supplier and to ship inventory to the Warehouse Company’s customers’ customers.  Click the image to better see the relationship.

Warehouse Business Model

In the case of the Warehouse Business, it derives revenue from offering agency-based inventory warehouse operations to its customers. Here are some of the common ways that a warehouse operation produces revenues:

1. Receiving Fees: as inventory is received, a fee can be charged for accepting and putting inventory safely away.
2. Shipping Fees: as inventory is being distributed to its customers’ customer, picking, packing and handling fees can be assessed. Furthermore, handling shipping logistics with third-party carriers offers an opportunity to pass through and possibly mark up carrier distribution fees.
3. Storage Fees: inventory held in a warehouse must be taken care of. Overhead costs for facilities, security, capital amortization, and insurance can be recouped and charged to the warehouse company’s customers depending on the inventory quantity in the warehouse at a given time.

Netsuite’s Inventory Distribution Architecture is Not Natively a Warehouse Business Model

The NetSuite business system is fundamentally designed for conventional distributors. Conventional distributors source and sell their own inventory with markup to derive profit. In the warehouse business, we need to think differently. Here are matters that must be contemplated when using NetSuite to drive a Warehouse Company:

1. Inventory Quantity, Not Value: we care about inventory quantity — but we do not care directly about value. Inventory value should not sit on the warehouse company’s balance sheet. However, we absolutely care about the inventory quantity to maintain control.  To accommodate this, inventory-based transactions, from the perspective of the warehouse company, will always be recorded at zero value.
2. Inventory to Customer Identification: Inventory held in the warehouse operation must be distinguished by customer (principal). Hence, identifying inventory requires an associated customer key to uniquely and logically partition inventory between customers. In general, a warehouse operation can physically commingle inventory between customers in the warehouse facility so long as they can properly identify the true inventory owners at any point in time. Reports can be adapted to respect the customer dimension to properly isolate and identify the true inventory owners.
3. Purchase Orders become Advanced Receiving Requests: NetSuite purchase orders can be used to produce anticipated inventory receipts from their customers. These purchase orders will set up the receiver for when the inventory arrives. The native Purchase Order system needs to be adapted to accommodate the identification of the customer. Fortunately, NetSuite’s built-in capacity to have customers also be vendors (via the Relationships construct) allows customers to participate in warehouse operation purchasing transactions.
4. Sales Orders become Shipping Request Instructions: like the purchase orders, the sales order now represents a request to the warehouse to ship goods to the warehouse company’s customers’ customer. Here, we can leverage the native customer record but use the custom ship-to information for where to ship the goods.
5. Inventory Receipts/Shipments have No Balance Sheet Impact: when inventory is received (via item receipt), there is no associated purchase accrual recorded — the value of the receipt is a positive quantity, but the cost is recorded at zero. Likewise, when inventory is shipped (via item fulfillment), the quantity of inventory on hand is reduced, but the cost is zero. Thus, there is no financial impact on these operations.
6. Revenue Earned on Transactional Operations: when an item receipt or item fulfillment transaction is recorded, a separate computational logic system is required to determine the warehouse revenue earned. Depending on how the warehouse charges for revenue, NetSuite can be adapted, through built-in and custom tables, to hold the pricing parameters to generate and record warehouse-earned revenue with the item receipt/fulfillment records as input.  Click on the image to get a better understanding.
7. Revenue Earned on Storage Operations: to recoup overhead costs, inventory parameters, such as volumetrics, can be used to measure how much inventory is on hand during a given period of time. We then can produce computational logic to assess how much revenue will be recognized via NetSuite invoices.
8. Full-Use Warehouse Management Tools: all the third-party warehouse management tools (in our client’s case, RF-Smart) now know nothing different from a standard distribution business. With this kind of configuration, the warehouse logistic tools are ignorant of what is happening in the underlying business. Now, the Warehouse Company can enjoy the full-use add-on technologies to facilitate their warehouse business practices.

Click images to better understand the model.

Consignment Inventory Concept

Once you model the warehouse business properly in NetSuite, it becomes clear that all inventory sitting on the books (quantity with zero cost value) allows for consignment practices. From the warehouse company’s perspective, the consignment concept is between their customer and their customers’ customer. All that needs to be done is to produce the proper notifications that inventory has been received and shipped so that the warehouse company’s customers can properly record obligations under their own consignment deal.

Third-Party Logistics / Warehouse Company on NetSuite

The above narrative is the conceptual mechanism needed to model the warehouse business in the NetSuite ERP system. This can be done in a specific NetSuite One World subsidiary where another operating subsidiary (in our client’s case, a Sales Distribution Company) has conventional sales operations. As the subject for a subsequent article, understand that NetSuite native One World Intercompany Framework and inventory handling will not natively work between these Sales and Warehouse Operating entities — this requires some interesting logic and transactional integration patterns.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you run a true warehouse or third-party logistics (3PL) operation and want NetSuite to work for you, 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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