Procure to order and Drop shipment – Theory

Procure to order and Drop shipment – Theory

Whenever customers order products which we do not stock as well as manufacture, we place the order for those products, get them shipped to our end and then ship it to the customer. Consider the 2 business scenarios to appreciate the need of Back to back orders

Case 1: Suppose on a Christmas season, Refrigerator Manufacturer Company announces the order that with every refrigerator, mobile phone is free. In this case, company uses the b2b order for the mobile phone when the demand for the refrigerator comes and shipped them together.

Case 2: Company is acting as a wholesale distributor for some products.

In this case, material is shipped from our inventory and this inventory level is affected.

Common Business Terminology: Buyout items

Drop shipment

In drop shipment, billing and ordering takes places as usual. Customer places the order with us and we bill our customer for the order. Also, we place the order with supplier and supplier bills our organization for the order. However, shipment does not happen from our side. Our supplier directly ships the order to customer.

It is used when the customer and supplier locations are near to each other but in this case there is always a risk of direct association between your customer and supplier and thus eating your margin. Also, it is very commonly used by the flipkart, naptol and e bay etc. When we buy refrigerator from flipkar, for example, they ask supplier to drop shipment directly to us but bill flipkar only and flipkar bill us.

Please note that in this case inventory levels are not affected.