Average costing method: inventory costing for drop-ship products

Sterling Order Management System Software processes drop-ship orders.

Drop-ship orders are processed as follows:

Order Create

  1. Sterling Order Management System Software determines the unit cost as described in Average costing method: inventory costing for stocked products.
  2. Sterling Order Management System Software transfers the unit cost on the parent sales order line to the unit price of the chained purchase order.

    If the unit cost is not overridden on the sales order line, the standard cost factors are subtracted from the unit cost before Sterling Order Management System Software transfers it to the unit price of the chained purchase order.

  3. Sterling Order Management System Software publishes the newly created chained PO for the financial application. This can also be used for vendor invoice reconciliation.
  4. The unit price is locked for the chained PO.

    Order change

  5. Sterling Order Management System Software transfers any update to the unit cost on the parent sales order line to the corresponding chained PO line.
  6. Sterling Order Management System Software does not propagate any update to the unit price on the chained PO unit price back to the unit cost on the parent sales order line.

    Ship confirmation

  7. When Sterling Order Management System Software receives a shipment confirmation notice, an "on success" event is published. This event can be used to simulate a receipt in the financial application. Also, the same event can be used to post entries into A/P and COGS. This is only done for shipments that are direct shipped.

    Invoice creation

  8. Sterling Order Management System Software creates an invoice for the sales order and this invoice is posted to A/R and sales as usual. All transactions have a shipment number reference that is used to tie them together.

Drop-ship order scenarios

The following illustrates how Sterling Order Management System Software processes drop-ship orders.

Drop-ship order scenario

A customer places an order for a quantity of 2 pieces of item DEF. The order is priced according to pricing rules for the customer. The product is sourced from Supplier1 and shipped directly to the customer. The expected cost, based on the primary supplier of DEF is retrieved from the replacement cost for DEF. The order is scheduled and released. This generates a "chained" PO for Supplier1 to ship 2 pieces of DEF to the customer. Supplier1 ships DEF to the customer and sends an invoice to the Enterprise. The recording of the invoice triggers a shipment confirmation against the "chained" PO which in turn propagates a shipment confirmation against the original sales order.

When the shipment confirmation event is issued against the chained order, a receipt is simulated in the financial application. Also, A/P and COGS general ledger entries are made at this point. These entries are made based on information on the chained PO line. An invoice is created for the original sales order and is published for the financial applications. This is posted into A/R and Sales.

  1. Order Creation
    1. The Order is priced according to the price list defined by the seller
    2. The unit cost is stamped on the order line
  2. Chained PO Creation

    If the unit cost has been overridden (specifically set on the sales order line), the unit cost from the sales order line becomes the unit price on the chained PO. At this point, the unit price is locked for the chained PO. If the unit cost has not been overridden, the Order is priced according to the price list defined by the seller. For logical kit items, the unit cost from the sales order is not propagated to the PO. From this point until shipment confirmation of the PO, the PO unit price can be maintained either:

    • On the PO, which does not propagate back to the Sales Order unit cost
    • On the sales order maintenance of the unit cost. This propagates to the PO unit price.
  3. Shipment Confirmation
    1. On receipt of shipment confirmation from the financial application (triggered by receipt of A/P invoice from supplier), Sterling Order Management System Software records the transaction against the chained PO.
    2. The chained PO pipeline has no invoice transaction in it. It is not required in this scenario.
    3. Shipment confirmation against the chained PO triggers, through internal Sterling Order Management System Software mechanisms, a shipment confirmation event against the original sales order.
  4. Receipt Interface

    Though no inventory has been received at the enterprise, a receipt is used to match against the supplier invoice. It contains the PO line detail to satisfy financial application integration.

  5. Invoice Creation

    For the sales order line, Sterling Order Management System Software creates an invoice line that is used for creating A/R entries

    Figure 1. Drop-ship scenario
    DS_scenario_a