Drop Shipment
A drop shipment is a sale in which the seller does not ship from its own stock; instead, a third-party supplier delivers the goods directly to the seller's customer.
Billing
Explanation
In SAP SD, drop shipments are handled as third-party order processing. A sales order item with a third-party item category automatically creates a purchase requisition, which is converted into a purchase order to the supplier. Because the seller never physically handles the goods, there is no outbound delivery from its own warehouse. In the standard setup, customer billing is based on the supplier invoice quantity.
Under ASC 606 and IFRS 15, two questions arise. First, principal vs. agent: the seller must assess whether it controls the goods before they are transferred – indicators include primary responsibility for fulfillment, inventory risk, and pricing discretion. A principal reports revenue gross; an agent reports only its net fee. Second, timing: revenue is recognized when control passes to the customer, which depends on when control actually transfers, for example under the shipping terms, rather than on when the supplier invoice arrives.
Why It Matters
Drop shipment setups often tie billing to supplier documents, so revenue timing can drift from the actual transfer of control. Aligning the billing trigger and RAR fulfillment events avoids period-end cut-off errors.
Related Terms
Principal vs Agent · Performance Obligation · SAP SD · Billing Document · ASC 606
Related Solution:
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