This article is relevant if you use NetSuite to drive a conventional distribution business and a warehouse third-party logistics operation.
Background
In my recent 2023 article, How To Drive a Warehouse Business Using NetSuite, I outlined the considerations of how to set up NetSuite to account for and operate a business that offers warehousing and third-party logistics (3PL) services. From that business’s point of view, it’s important to state that the conventional methods for using NetSuite only apply partially due to property rights and customer-owned inventory identification. Therefore, I invite readers to get situated with that business model to appreciate the journey we will be on in this article.
In this situation, our multi-divisional organization has two primary businesses:
- Sales Distribution Company: an established 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. They will also work with consignment inventory held but not owned at the warehouse company below.
- Warehouse Company: a division with practices to receive, hold and ship inventory owned by multiple parties.
We will use NetSuite One World, but many built-in capacities, such as Cross-Subsidiary Item Fulfillments, do not work in this model. We need to understand how we can use NetSuite in a fully automated fashion to drive both divisional businesses while maintaining operations, inventory management, and financial control.
Item Management
The first set of concerns relates to item management. We can use a shared item across the entities in conventional NetSuite One World terms. However, in this model, the warehouse business uses different conventions to track items based on their customers (this was done to identify the stock owners). Thus, the built-in NetSuite One World shared item capacities do not apply.
Instead, we create custom item reference linkages. The Sales Distribution company will define its items according to its desires. However, the Warehouse Division will impose its company identification criteria on the item definition to keep track of its operations. To facilitate reporting and controls, we will create a custom linkage between the two divisional items to indicate they are the same item.
Click the image to see item orientation.
Item Stocking Operation
We now need to get inventory that the Sales Distribution company will own to the Warehouse division. Here, product demand forecasts drive purchase order operations. The purchase orders will be sent to the Warehouse division as Receiving Requests, so they are informed of the inventory pending receipt as the supplier ships goods. A Receiving Request is effectively a purchase order at zero cost.
Once the inventory arrives, the warehouse company uses item receipts to increment stock. Since the Receiving Request (PO) is zero cost, the Warehouse Division has no financial impact. At this point, we need to create an automation to inform the Sales Distribution company that inventory has arrived. There, we generate an item receipt against its purchase order.
We effectively have two inventory ledger systems. The Warehouse Division is using its ledger system to maintain quantity control. The Sales Distribution company uses its ledger to maintain quantity and cost control. With our item linkage work in the previous section, we can build a control system to confirm that these two ledger systems are in sync.
Click the image to see inventory stocking architecture.
Conventional Product Sale
Now that we have inventory in the warehouse, we can produce a conventional product sale. Thus, the Sales Distribution company uses a Sales Order in everyday terms. The system thinks they have inventory on hand in its conceptual inventory ledger. We use NetSuite Fulfillment Request records through automation to generate Shipping Request records at the Warehouse Division. A Warehouse Shipping Request is a Sales Order with no price. Because of our item linkage concepts above, we know how to shape the records to get the operations to perform correctly.
The Warehouse Division then performs standard pick, pack and ship with all the goodness afforded by warehouse management tools (in our client’s case, they used RF-Smart). A Warehouse Division’s item fulfillment is then automated to produce a Sales Distribution Company item fulfillment. All the available carrier tracking information is passed between these linked records.
At this point, we have decremented both inventory ledgers. As a result, revenue can now be recognized in both companies according to standard business terms.
Of note, from the Sales Distribution Company’s point of view, they can use this business pattern with a network of 3PL companies — not just the one owned as a division of the parent entity.
Click the image to see the Stock Fulfillment architecture.
Consignment Product Sale
In the Consignment Product sale model, the Sales Distribution company has a relationship with product vendors to hold their inventory at the 3PL Warehouse company. As a result, the Sales Distribution company can take orders from their customers and fulfill them from stock they do not own but are available at the 3PL Warehouse.
In this model, the Sales Distribution company does not have inventory on its books. So it uses a Drop Ship purchase order to set up a request for fulfillment. For proper margin reporting and accruals, we use NetSuite’s Special Order capacities but we follow the pattern we solved for in 2016 as discussed and demonstrated in this article.
Our Sales Distribution Sales Order now has a linked Purchase Order. This Purchase Order becomes a Shipping Request (sales order) at the Warehouse Company through automation. Now the Warehouse Division can fulfill as it would with any other shipping request. The Warehouse Division item fulfillment, with tracking, then, via automation, creates a Sales Distribution item receipt against the Special Drop Ship PO.
The item receipt thus creates the proper accrual obligation to the consignment vendor. On the Sales Distribution company books, we link the item receipt to the sales order item fulfillment to indicate we have shipped, allowing the Sales Distribution company to recognize revenue. Because we have used both item receipts and item fulfillments in the Sales Distribution company, item margin is properly accounted for.
Click the image to see the Consignment Based Stock Fulfillment architecture.
Intercompany Financial Impacts
We finally get to use NetSuite’s Intercompany Framework to account for Warehouse Revenue and Sales Distribution 3PL costs. As the warehouse generates invoices to recognize its earned revenue, we use the One World customer and vendor Representing Subsidiaries references to take advantage of NetSuite’s One World for intercompany eliminations and multi-entity due to obligation/due from receivable-based accounting.
Click the image to see the financial impact architecture.
Total Automation and Proper Accounting Controls
The above example illustrates the power of the NetSuite platform. Of course, take advantage of NetSuite’s built-in capacities everywhere it makes sense. But because of the platform’s extensibility, we can appropriately model each business and then use scripted automation and database enhancements to hold it all together to make it operate seamlessly and at a low cost. With all the database linkages, we can create a controlled environment to verify that all the application assumptions are being adhered to as expected.
Our firm is recognized as the leader in assisting ambitious organizations in realizing their desired NetSuite promised value. The intersection of careful listening, conceptualization, deep understanding of the NetSuite architecture and proper planning with skilled resourcing produces recurrent satisfying client outcomes.
If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If you are setting up a Third Party Logistics company and have an integrated Sales Distribution company, 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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This was a really great implementation marty. It shows the potential of the NetSuite system to adapt to almost any business use case, and also the value that can be added when customers seek out top level experts to architect their systems. This implementation would be transformative for this business compared to a standard implementation of NetSuite or any other ERP.
They will need to put some strong controls in place to ensure that no inventory with cost ever ends up in the 3PL business books, and the staff will need better than normal training and SOPs, as unwinding transactions and trouble shooting will be more difficult with the additional transacting and linkages, but this was definitely the best approach to this particular set of business circumstance.
Thank you Jarrod for the appraisal. Indeed, at this article’s level of analysis, there are nuances that I am choosing to ignore. The control structures are essential. And all the concerns of propagated record change apply just as they would if we were dealing with truly remote entities.
Marty