How to make drop shipments in BC work if you need to pay the vendor before invoicing the customer (Or you want it to work more like Dynamics GP)

A customer asked how they could make drop ship in Business Central work for them when they can’t invoice the sales order before they need to pay the vendor. When using the Drop Shipment functionality in BC, after the vendor ships the items, we can post the sales order as shipped. We can also post the purchase order, but only with the Receive option until the sales order has been invoiced. Learn.microsoft.com – To post a drop shipment

In most cases, the customer’s receipt of the goods is what triggers invoicing the sales order, so for the most part, the requirement to invoice the sales order before you can invoice the purchase order is a non-issue.

In Dynamics GP, the process is different. The PO is received and invoiced before the sales order is available to invoice. You could say it is the exact opposite of what is needed in BC.

The order scenario

What do you do if you have been using GP, and you are working with customers that have very large sales orders shipped over time, in several shipments, and have agreed to only invoice the customer when the SO has been completely received by them? This is a fairly common scenario with schools, universities and some government contracts. These aren’t blanket orders, nor can they be split into multiple orders. Your vendor, however, needs you to pay their invoices regardless of the fact you can’t invoice your customer. In some cases, it may be weeks before everything is shipped from the PO to the customer.  

How to solve it in Business Central

First of all, I would not use Business Central’s Drop Shipment functionality. Why? Because it won’t work. And, there is another approach that can work almost as well, if not better depending on how you look at it. We need to begin by creating a “Drop Ship” location in BC and set it to Bin mandatory.

Order Processing

Create a sales order for the customer using the Drop Ship location.

Create a bin in the Drop Ship location assigning the SO# as Bin No.

If the items drop shipped are not inventoried, use Order Planning to create the purchase order from the sales demand. This not only saves on data entry, but also the potential errors that may ensue because of it. You can also create the PO manually.

On the PO created,

1. Use Your Reference on the PO header for the related SO#
   
2. Assign “Drop Ship” as the Location, and the Bin with the SO# to all the PO lines
   
3. Select Customer Address for Ship-to

Go to the SO and put the PO# in Your Reference (optional.) I also like to personalize both the SO and the PO so “Your Reference” shows always.

Once items are completely shipped (or received by customer)

1. Receive the items to the PO to place the items into the “Drop Ship” location and SO# bin
2. Ship the items from the sales order using the “Drop Ship” location and SO# bin
3. Post the invoice from the purchase order when received from the vendor – no problem.
4. Repeat this process until everything on the sales order has been received by the customer. At which time, the Drop Ship Location SO# bin will also be empty
5. Since the SO is complete, the customer can be invoiced.

Invoicing the customer

Create a saved view of purchase orders filtered to “Your Reference” for SOs and Completely Invoiced is “Yes.” This filtered list gives the person responsible for invoicing the customer, visibility to purchase orders completed and ready for customer invoicing.

To keep purchase orders on the list, even when fully invoiced, invoice payables by creating Purchase Invoices and using Get Receipts in place of invoicing from the PO. This is a better practice than invoicing directly from purchase orders and may already be in use as it is for many of the customers I work with. This allows the PO to still be on the list even when fully invoiced so the person responsible for invoicing the sales order can use it. At the companies where we have implemented this drop shipment process, the sales invoice processor handles deleting the PO after the customer has been invoiced.

Additional Setup and Maintenance

Consider enabling automatic archiving of purchase orders. Additionally, schedule a task to regularly remove bins for sales orders completely invoiced. Depending on the number of drop ship orders this could be as frequent as monthly or infrequently as annually. Because this task is somewhat “disconnected,” I recommend an extension to automatically delete the bins on completely invoicing the SO. I actually don’t know if anyone has done this or not. But it makes sense to me.

Conclusion

What I have share here is NOT the drop shipment functionality advertised as a feature in Business Central that will work for most companies. It is, however, drop shipment management using Business Central as needed for some companies. And, for the customers that need it, this is their Righter Way^TM.