Configuring Drop Shipping Within SAP – All You Need To Know

To be able to understand the configuration behind drop shipment, we need to first understand the relevance of this concept in the backdrop of today’s digitally connected world. Drop shipping relates to a case where the order placed by a customer is transferred to a third party for fulfillment. Thus, the company which received the order only executes order confirmation and invoicing aspects of the transaction. The other steps associated with procurement, warehouse management and logistics execution is done by the third-party which then raises an invoice for its services. Drop shipping is a natural fit for companies dealing in ecommerce or planning to generate sales via the web.

As you would have probably guessed by now, drop shipment scenario saves the organization from production, inventory management, logistics and handling aspects. The product is not only procured or manufactured by a third-party but also shipped directly to the customer as well. We will discuss the business benefits of drop shipping in the subsequent section of the article. Let’s look at how drop shipping can be configured within SAP.

Configuring Drop Shipping Within SAP:

Using the below steps, you can configure the drop shipping within SAP. The steps have relevant screenshots along with them. The steps have been listed in a logical sequence for better understanding.

1. Configuring the Item Category Determination

For SAP to recognize that a line item in Order is a third-party item, you need to set up item category determination. Standard SAP provides TAS as the third-party item. You can view the item category determination in transaction VOV4. In the screen given below the determination happens based on order document type and Item Category group. To know more about item category determination refer to SAP help link.

2. Setting up the Vendor Master:

You must have the third-party set up as a vendor within SAP. This is done with transaction XK01. In our case, we are using a vendor 100 as shown below.

3. Setting up Info Records:

Setting up info records makes SAP understand conditions for the procurement of the goods. As per the info, records are shown below, material R-1000 is procured from vendor 100 and the associated lead times are shown below. You can read more about info records at the below link.

4. Maintaining Material Master:

To trigger the third-party procurement, you must maintain the item category group as per the one maintained in step a (which was for BANS). This needs to be done in Sales Org 2 view of material master.

Once these steps are done, we are ready to see how drop shipping works with the ordering to fulfilment cycle.

Order Processing with Third-Party Shipment:

With the correct configuration discussed above, following is the explanation on how the order processing would happen in case of drop shipping scenario.

1. Order Creation

Once an order is created with the corresponding order document type and material, it would automatically determine the item category as TAS (third party item). Also on going to the schedule line, you will find that on the placement of order, an automatic purchase requisition is created within the system.

2. Purchase Requisition to Purchase Order Conversion:

As mentioned above on creation of order, a purchase requisition (PR) is automatically created within the system to procure the item. This can be seen within a schedule line of the SAP order. The PR can be converted to purchase order using standard SAP transaction ME57.

3. Shipment Notification from Third-Party and Statistical Good Receipts:

Once the vendor notifies that the shipment has been done, a statistical goods receipt will be done within SAP.

4. Invoicing to the Customer

The order will be invoiced to the customer using standard SAP transaction VF01. Point to note is that no invoicing will be sent by the third-party to the customer.

5. Invoice Verification and Vendor Payment

The third-party will be sending an invoice to the company. The same will undergo verification and payment cycle using standard SAP transaction MIRO.

Benefits of Third Party Shipment:

With the correct configuration discussed above, following is the explanation on how the order processing would happen in case of drop shipping scenario.

• Reduction in operation expense – One of the most important benefits of drop shipping is that the company does not require to buy any products. This eliminates the operating risk.
• No cost of carrying inventory – Another important consideration is that there need not be costs associated with warehouse and shipping processes. It also takes care of issues like shrinkage and damage to goods during storage.
• Especially suited for web commerce – Companies dealing in web commerce need not have any physical location. They can virtually sell anything without having to physically have them in storage.

Now, you can easily integrate your SAP ERP with Ecommerce store/CRM to automate the business process!