Drop Shipping: How to Manage Invoices

Drop shipping requires three major data integrations between the retailer and the supplier: product catalog, inventory, and orders. The final step in the drop shipping process occurs when the supplier invoices the retailer for the products that were sold and fulfilled to the retailer’s customer. (If you’re new to drop shipping, read my 4-part series on the basics, for ecommerce.)

The final step in the drop shipping process occurs when the supplier invoices the retailer for the products that were sold and fulfilled to the retailer’s customer.

To recap the major data and workflow integrations, managing product catalog data starts with the premise that drop shipping requires the seller-retailer to have a virtual representation (i.e., data) of a physical thing — a physical thing that the retailer will never see, touch, or control. Product catalog is the collection of descriptive data — title, brand, category, attributes, images — of that physical thing.

Managing inventory visibility is the process and data that tells you where the item is, how many there are, and what it costs you as the reseller. Orders from the retailer’s customers are when everything culminates: a consumer has purchased a product that a retailer was selling virtually and now that order and fulfillment information needs to be sent to the supplier that physically has the product to ship to the consumer.

Assuming everything has gone well to this point with the other three data integrations — catalog, inventory, and orders — managing fulfillment is as simple as the supplier (or a third party logistics provider) boxing up an item and shipping it to the consumer. Managing returns is an inevitability when dealing with consumers; it can create challenges if not thought through in advance.

Invoicing Overview

Invoices from manufacturers and distributors for drop shipping transactions are similar, if not identical, to invoicing for traditional inventory purchases. One difference is that most suppliers’ systems are set to generate an invoice per purchase order, so the quantity of invoices generated by suppliers and received by retailers can be significantly higher with drop shipping, when each transaction is a separate purchase order.

Additionally, the addition of a consumer into a traditional business-to-business workflow means certain negotiated business terms — such as returns allowances, promotional discounts, handling and drop shipment fees — can arise that complicate the invoicing process.

From a data perspective, I’ve covered in previous articles nearly all of the information exchanged in a drop-shipped transaction between retailer and supplier — for inventory, orders, and fulfillment. Financial information and payment terms round out the rest.

Here’s a list of the data that could be coordinated between suppliers and retailers for invoicing.

• po_number. The unique order identifier generated by the retailer’s ordering system.
• invoice_id. The unique invoice identifier generated by the supplier’s account system.
• invoice_amount. The total amount of the invoice to be paid: (invoice_sub_total_excluding_line_items + line_item_sub_total).
• invoice_sub_total_excluding_line_items. The total charges on the invoice not related to line item SKUs (invoice handling cost + invoice_sales_tax_amount + invoice_charge_amount).
• invoice_date. The date of the invoice.
• invoice_due_date. The date the invoice is due.
• invoice_terms. The terms of the invoice, such as “net 30.”
• invoice_discount_amount. The discount of the invoice if paid early, such as “2%.”
• invoice_discount_due_date. The due date on the invoice, to receive the discount.
• invoice_handling_cost. The handling cost for the invoice, if different than handling costs for line item SKUs.
• invoice_sales_tax_amount. The sales tax amount of the invoice, if different than a line item level.
• invoice_buyer_id. The unique identifier of the retailer in the supplier’s accounting system.
• invoice_charge_title. Description of a miscellaneous charge being added to the invoice.
• invoice_charge_amount. Amount of a miscellaneous charge being added to the invoice.
• line_item_sku. The SKU being invoiced.
• line_item_title. The title of the SKU being invoiced.
• line_item_cost. The wholesale cost of the SKU being invoiced.
• line_item_quantity. The quantity of the line item SKU being invoiced.
• line_item_extended_cost. The total cost of a line item SKUs times quantity.
• line_item_handling_cost. The handling costs or fees to fulfill the SKU.
• line_item_ship_date. The date that the given SKU shipped.
• line_item_tracking_number. The tracking number of the package as assigned by the carrier.
• line_item_ship_cost. The cost to ship the package.
• line_item_carrier. The carrier that is shipping the package.
• line_item_method. The shipment method that the package was shipped.
• line_item_promotion_reference. The reference for the promotion offered, if any, on this SKU by the supplier.
• line_item_tax_amount. The tax amount being charged, if any, for this line item SKU. This can also be totaled across the invoice in invoice_sales_tax_amount if not specific tax rate for SKU(s).
• line_item_sub_total. Total of all line_item costs
• ship_from_first_name. First name of the supplier’s employee from whom this invoiced order was shipped.
• ship_from_last_name. Last name of the supplier’s employee from whom this invoiced order was shipped.
• ship_from_company. The company name of the supplier from whom this invoiced order was shipped.
• ship_from_address_1. Address 1 line of the supplier from whom this invoiced order was shipped.
• ship_from_address_2. Address 2 line of the supplier from whom this invoiced order was shipped.
• ship_from_city. City of the supplier from whom this invoiced order was shipped.
• ship_from_region. Shipping region of the supplier from whom this invoiced order was shipped.
• ship_from_postal. Shipping postal code of the supplier from whom this invoiced order was shipped.
• ship_from_country. Shipping country of the supplier from whom this invoiced order was shipped using the two-character ISO country code.
• ship_to_first_name. First name of the customer to whom this invoiced order was shipped.
• ship_to_last_name. Last name of the customer to whom this invoiced order was shipped.
• ship_to_company. The company name of the customer to whom this invoiced order was shipped.
• ship_to_address_1. Address 1 line of the customer to whom this invoiced order was shipped.
• ship_to_address_2. Address 2 line of the customer to whom this invoiced order was shipped.
• ship_to_city. City of the customer to whom this invoiced order was shipped.
• ship_to_region. Region of the customer to whom this invoiced order was shipped.
• ship_to_postal. Postal code of the customer to whom this invoiced order was shipped.
• ship_to_country. Country of the customer to whom this invoiced order was shipped using the two-character ISO country code.
• invoice_batch_id. The unique identifier of the batch that this invoice is part of.
• invoice_batch_total. The total amount of all invoices in a given batch.
• invoice_status. The status of the this invoice, such as “outstanding” or “paid.”

Invoicing Considerations

All of the factors around the invoicing process are driven by the relationship of the retailer and supplier. These factors should be identified, discussed, and coordinated at the onset, rather than at an item or order level once data is moving between the partners.

Here are some things to consider and to make part of the vendor-dealer on-boarding process.

• Single item orders. The nature of single-item orders and invoices directly from a wholesale supplier to a consumer through the retailer adds complexity. A systematic method should be in place to handle and reconcile the transient and complex nature of the negotiated promotions, discounts, and advertising co-op dollars that suppliers are willing or sometimes required to offer for given product SKUs.
• Invoicing frequency. Most suppliers will generate an invoice per purchase order. Most retailers do not want to pay each drop-shipping invoice separately. There can be some conflict between expectations and systems if the retailers need or want suppliers to batch invoices together.
• Shipping costs can create errors and inefficiencies. Larger ecommerce retailers will generally require that suppliers use the retailer’s shipping accounts and therefore no shipping charges will be added to the invoices. It’s an area to make certain there’s agreement, and then to audit.
• Handing and drop shipment fees are another area to discuss up front so that invoicing becomes a formality.
• Returns should be agreed upon, to address whether they are credited back individually (via credit memos) or at a macro level with a returns allowance that will not be invoiced.
• Accuracy and delay. Suppliers struggle to invoice accurately and on time for smaller orders. When suppliers get a wholesale order for thousands of dollars, they typically invoice quickly. But when they have the same volume spread out over hundreds of invoices, it’s a much more intimidating process. Suppliers and retailers that embark on drop shipping need to monitor this closely.

Invoicing Success

The retailers and suppliers that have the most success in drop shipping have solid processes and understanding around invoicing. This final step of the drop shipping process culminates when the money from the consumer who bought the product makes it way through the retailer who sold the product back to the supplier who made or sourced the product. Invoicing is often a challenge for suppliers.