Best Practice: NetSuite Driven International Drop Ships / Direct Import Flows

This article is relevant if you use NetSuite and need to track the logistics and produce the accounting for international-based drop shipments.

The Direct Import business model involves a company sourcing products from manufacturers or suppliers in other countries and selling and delivering them directly to the local market.  In today’s global economy, it is common to source goods from overseas.  Yet, to source goods from overseas and have them directly shipped to the customer is a highly advanced Drop Ship technique often employed to satisfy demanding requirements to supply large retailer inventory replenishment requirements.

 

The main idea is to avoid taking inventory possession of the goods as they ultimately move to the customer’s receiving location.    Organizations that employ the Direct Import business model have trustworthy supply chain operations.  They must because they need their overseas suppliers to properly produce products and communications quality needed to avoid breaking trust with their end-customers.  The benefits of avoiding taking inventory possession are shorter lead times and, ultimately, lower handling costs.

 

Yet, the model has inherent business risks that mature manufacturing and distribution organizations develop practices to address.  Consider the quality control, communication and language barriers, currency and financial exchange risks, intellectual property protection, supply chain disruptions, and regulatory compliance factors that must be addressed for the development of business practices required to realize tighter supply chain benefits.

 

In the NetSuite space, the primary concern I will address is the logistics and costing dimension, as the business systems can be designed to support superior tracking and accounting practices. Direct Import businesses often have to deal with complex logistics and shipping processes, including customs clearance, documentation, freight forwarding, and transportation. These activities can be time-consuming, costly, and prone to errors.

Like all the challenges in business systems architecture, it’s important to take into account the management’s ambitions.  By listening carefully and thinking fundamentally, we can model the business records to reflect the on-the-ground reality.  Once we have proper record structures, we can craft a user experience that lowers the cost of record management.  I say fit the software to challenge — do not fit the practice to the software.

 

To solve international-based direct-to-customer fulfillment models, it’s important to see that NetSuite’s native capacities do not model the general business problem well.   However, because my firm has solved many advanced logistics and accounting concerns, we have pre-existing algorithms that are building blocks for a direct import business model.

 

The ultimate flow is illustrated in the supporting graphical representation.  Please click the image to see the full view.  This diagram depicts the start of the customer order through invoicing.

The general approach for solving the Direct Import pattern is to use virtual locations.  Two key virtual (not real) locations can drive the solution:

 

In practice, these two inventory locations should not have any inventory quantity on the location ledger.  They instead give us the event markers and control points we need in the solution.  Working with these two virtual locations opens a capacity for modeling important logistics and costing events to drive complete international drop-ship business practice.

 

At first thought, the idea of the customer direct import flow is the frequently used NetSuite drop-ship model.  While NetSuite’s approach for connecting a Sales Order line to a respective supplier Purchase Order is the correct fundamental relationship for establishing a drop-ship flow, the model is inadequate when it comes to the costing and accrual dimensions.

 

I wrote about this costing and accounting concern in my 2016 article, Solved: NetSuite Drop Ship Purchase Accruals.  Significant concerns related to valuation are meaningful for developing item-level margin reports and addressing the proper accounting matching principle between revenue and costs.  The fundamental change in drop-ship business modeling is to automate NetSuite’s Special Order behavior to give us the costing and accrual we need.  We need this same modeling behavior in our Direct Import model discussed here.  Specifically, we want to make sure there is a receiving event as soon as the supplier manufactures and begins goods distribution for the relatively long journey to transport items to the customer.

 

Once the items leave the factory, we need capacities to track the goods.  Typically, we use freight containers to hold goods while they are on vessels such as ships (or, less frequently, cargo planes).

 

Prior to NetSuite’s invention of the Inbound Shipment record, which can model the freight container, my firm crafted a Freight Container model that takes advantage of native NetSuite Transfer Orders and patterns to properly respect in-transit flows.  Please see my 2017 article, Track NetSuite Inventory In-Transit with Freight Containers and Automated Landed Costs.   While I won’t go into the specifics here, as many in the NetSuite community now understand, NetSuite’s Inbound Shipment record has certain inflexibilities that make it a difficult record to work with.  For those contemplating using the Inbound Shipment record, you have been warned.

 

With NetSuite’s highly trusted and proven In-Transit Transfer Order model, we get a natural balance sheet presentation while we also have two important events to control our flows: item fulfillments and item receipts.  Coupling the Transfer Order to a freight container record allows us to build all the logistics tracking demanded in a long-range shipping practice.

 

With the flows discussed here, the general model, as offered by NetSuite, assumes that property rights are being maintained throughout the entire logistics.   In practice, this is a negotiated consideration with the organization’s customer.

 

However, given we are using two virtual locations to drive the business practice, we have plenty of room to produce the financial presentation we need.   Suppose that property rights immediately transfer to the customer as soon as the factory ships.  In this case, at month-end, we can create a reversing reclass entry that marks any inventory in the virtual location (there should be none in the general practice) and goods-in-transit to the following:

 

Dr Unbilled Receivable

  Cr Unbilled Revenue

 

Dr Unbilled Cost of Goods Sold

  Cr Customer Goods In-Transit

 

The point is that we have control to model the logistics, and we can support the requirements for proper accrual accounting.

The other major Direct Import considerations are the capitalization and tracking of all the logistical costs (e.g., freight, duties, etc.)   Here again, our pattern for two virtual locations gives us two opportunities to leverage item receipt events (at the beginning and the conclusion of distribution) to add more costs to the inventory by driving NetSuite’s landed costs pattern.

 

Not to be underestimated, NetSuite’s landed costs, done well, demand planning.  I have written a number of articles about Landed Costs.    In this Direct Import model, the most relevant article is my 2022 discussion on how to Drive Automated NetSuite Transfer Order based Landed Costs.

 

Thus, any well-implemented international drop ship solution should account for logistics-based costs to help ensure that the overall profitability goals can be measured and realized.

 

The article above is a summary of how to solve a NetSuite-driven direct import business model.  The depth of the solution can be appreciated as you contemplate the related supporting articles.  The pattern here is to recognize that well-crafted NetSuite solutions leverage previous work and are fitted for their purpose.

 

Our clients value that we offer leadership in the conceptualization, design, development and implementation of these solutions.  Because we do not charge a license fee for our intellectual property, our clients can see that their concerns are held primary as we focus on service delivery and business practice realization.  Our clients have no ongoing obligations once the solution is in place.  Accordingly, most ambitious NetSuite organizations recognize there are no shortcuts — sophisticated business practices demand superior intellectual capacities and judgment to produce substantive and pragmatic business capabilities.

 

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 international-based logistics in NetSuite, let’s have a conversation.