Drop Shipment

What does drop shipment mean and when would you use it? Drop shipment refers to a shipment that is shipped to a specified location that is other than the purchasers standard location for receipt of a product. Drop shipment may be used for a number of situations. A buyer may order something to be shipped to their customer’s or a service provides location to meet a requirement to perform service or repair. A buyer may order products or services to be shipped to a customer location for their ultimate use in completing a project for the customer rather than have it shipped to the buyer to then have it shipped to the customer site. Drop ship may also be used when you want the item to be shipped to a third party under a loan of product situation, consignment or bailment. See http://knowledgetonegotiate.blogspot.com/2011/04/bailment-consignment-loan-of-product.html

If the buyer will not be receiving the shipment, when you use drop shipments you need a separate agreement with the third party that establishes their responsibility for the material. Common requirements may be to notify you of its receipt, notify you of any visual damage to the shipment or packaging material and insure the material against all perils while it is under their control. Other responsibilities will vary based upon whether it is a loan, consignment, or bailment situation.

In supply chains, the drop shipment of goods is common when trying to implement vendor managed inventory programs and especially when the ultimate destination is a foreign country. For example, a supplier could contract with a warehouse agent located within a free trade zone and ship them product for them to hold in inventory. When the local buyer wants the product they need to make a pull from that inventory, clear customs and arrange to have it delivered to their point of use. The warehouse agent would notify the supplier that inventory has been pulled and the supplier would then use that to invoice the customer for the items they pulled/purchased. Since the items were never imported into the country,
if the supplier needed that inventory elsewhere or they needed to adjust the inventory level being held there, they could have the warehouse agent ship items to their point of need.

The advantage of drop shipments is that it reduces the number of times a product is shipped, so it reduces the distribution cost, it reduces the number of times it must be handled (reducing that cost and the potential for damage. Eliminating that non-value added product shipping also reduced the product lead-time.