Everything You Need to Know About Intercompany Inventory Dropshipping

What is Intercompany Inventory Dropshipping?

Intercompany inventory dropshipping is a specialized logistics and accounting process that involves the transfer of inventory between subsidiaries or divisions within the same parent company structure. This method is distinct from traditional dropshipping as it focuses on internal transactions rather than external sales.

Here we will explore the concept in detail, highlighting its key aspects and differences from the regular inventory processes.

The key differences are:

1. Intercompany inventory transfers occur between related entities within the same corporate group, not between unrelated parties.

2. For intercompany inventory transfers, the selling subsidiary generates an intercompany sales order, while the purchasing subsidiary creates an intercompany purchase order. This allows the transactions to be tracked and accounted for properly.

3. Intercompany inventory transfers must be recorded at the base currency of the purchasing subsidiary, not the selling subsidiary. This ensures consistent accounting across the group.

4. Intercompany inventory transfers are managed and tracked differently than regular customer sales, with specialized accounting and reporting requirements. Companies use dedicated intercompany management systems to handle these transactions.

Intercompany Inventory Dropshipping refers to a fulfillment method where one subsidiary fulfills a sales order for another subsidiary by directly shipping the inventory from its own location to the customer, without the inventory physically passing through the purchasing subsidiary.

Here’s How it Works:

Customer Order

• Customer A, in the EU, places an order for a product with the EU subsidiary.

Sales Order and Invoice Creation (EU Subsidiary)

• The EU subsidiary creates a Sales Order to record the customer’s purchase.
• An invoice is generated by the EU subsidiary and sent to Customer A, confirming the purchase and payment terms.

Purchase Order with Third-Party Supplier (US Subsidiary)

• To fulfill the order, the EU subsidiary coordinates with the US subsidiary.
• The US subsidiary creates a Purchase Order with the sales subsidiary located in the US, requesting the product needed to fulfill Customer A’s order.

Sales Subsidiary Ships the Product

• The sales subsidiary ships the product directly to Customer A in the EU.

Intercompany Billing (US Subsidiary to EU Subsidiary)

• After shipping, the intercompany shipments are recorded in the system to maintain visibility across all involved subsidiaries
• This intercompany transaction is recorded to maintain accurate financial records and ensure proper accounting between subsidiaries.
• The process ensures that intercompany sales of inventory are tracked accurately as products are transferred directly to the customer, avoiding the need for physical storage by the purchasing subsidiary.

Challenges Companies Face When Managing Intercompany Inventory Dropshipping

Operational Complexity, Inventory Visibility and Control

The sales subsidiary manages external customer orders while coordinating with the warehouse subsidiary for fulfillment. This process requires precise data synchronization of activities, from creating sales orders and intercompany purchase orders to generating intercompany sales orders and managing physical shipments.

One major challenge with intercompany shipments is maintaining real-time inventory visibility across subsidiaries, crucial for accurate sales commitments and efficient order fulfillment processing. Each subsidiary must accurately update and share information in real-time to ensure the workflow progresses smoothly.

Failure to provide timely updates or misalignment in information can result in inventory mismatches, delayed shipments, and dissatisfied customers.

Financial Reconciliation and Intercompany Transactions

The intercompany dropshipping process involves a series of financial transactions between subsidiaries that must be carefully managed and reconciled.

There are multiple intercompany invoices, purchases, and sales that need to be recorded accurately.

Financial reconciliation also involves aligning the records for intercompany sales of inventory between subsidiaries, ensuring accuracy across accounts receivable, payable, and other financial records. The challenge is ensuring all these transactions are properly documented, aligned, and reconciled across different subsidiaries.

This becomes even more complex when dealing with different currencies. Accurate financial reconciliation is crucial for maintaining proper books, ensuring compliance, and providing a clear financial picture of the intercompany dropship operations.

How Flxpoint Can Help You Overcome These Challenges

Flxpoint can help overcome the key challenges in operational coordination between subsidiaries in the following ways:

1. Streamlined Order Management

• Flxpoint’s centralized order management system allows seamless communication of customer order details from the sales subsidiary to the warehouse subsidiary responsible for fulfillment.
• Automated workflows and notifications ensure timely and accurate transfer of order information to prevent delays or errors in order fulfillment.

2. Financial Accuracy and Reporting

• Flxpoint’s advanced inventory management capabilities accurately track costs, revenues, and inventory movements for intercompany dropship orders.
• The system can automatically allocate COGS to the correct subsidiary that fulfilled the order, eliminating the need for manual adjustments.

3. Transaction Consistency

• Flxpoint enforces quantity validation and automatic updates to linked transactions like sales orders, purchase orders, and invoices.
• This ensures quantities, prices, and amounts are consistent across all vendors, maintaining financial reporting accuracy.

4. Fulfillment and Billing Processes

• Flxpoint’s workflow automation features streamline the fulfillment and billing processes between subsidiaries.
• The system can automatically mark external sales orders as shipped, create intercompany sales invoices, and bill the sales subsidiary, ensuring a smooth and error-free process.

5. Comprehensive Reporting and Analysis

• Flxpoint provides robust reporting and analytics capabilities to generate accurate reports on intercompany transactions and inventory movements.
• These data-driven insights support better decision-making and strategic planning across the organization.

By leveraging Flxpoint’s comprehensive order management, inventory control, and workflow automation features, businesses can overcome key challenges in operational coordination between subsidiaries and achieve greater efficiency, accuracy, and visibility in their multi-subsidiary operations.

Detailed Workflow of Intercompany Inventory Dropshipping with Flxpoint

Order Placement on Sales Channel (External Customer)

• A customer places an order on a platform like Shopify or Amazon.
• This order is automatically pulled into Flxpoint.

Generation and Routing of Flxpoint Sales Orders

• Flxpoint automatically generates separate Fufilment Request (FRs)sfor each dropship vendor, warehouse subsidiary, 3PL involved in fulfilling the order based on customized order routing logic.

Dropship Fulfillment by Vendors

• Dropship Vendors/Warehouse subsidiary receives the FRs from Flxpoint and proceeds to fulfill the order.
• They ship the ordered items directly to the customer’s specified address.

Intercompany Fulfillment

• Flxpoint manages and processes Transfer Orders to replenish internal stock betwween Company Subsidiaries.
• Flxpoint Manages and Processes Transfer orders to replenish internal stock from dropship vendors.

Shipment Tracking and Integration with Flxpoint

• Upon shipment, Vendors/Warehouse subsidiary updates shipment details in Flxpoint automatically, using various methods like a Shipstation integration, or a pre-built Dropship Integration.
• This step ensures that Flxpoint has accurate information about the shipment status.

Synchronization with Accounting or ERP

• Flxpoint synchronizes the order, shipment and invoice details with a connected Accounting or ERP system, like NetSuite or QuickBooks.
• Key information needed for finaical reconcilliation is synced with the Accounting/ERP system.

Customer Communication and Order Tracking

• Flxpoint posts the shipment tracking information back to the original sales channel.
• This integration keeps the customer informed about their order status directly through their Shopping platform.

Final Words

To manage intercompany inventory dropshipping smoothly, you need to leverage a platform like Flxpoint, which offers robust order management, inventory visibility, and workflow automation. Also, by integrating with other best-of-breed platforms, Flxpoint enhances accuracy, visibility, and efficiency in your operations, helping achieve smooth coordination between subsidiaries.

Book a demo today to learn more about how Flxpoint can streamline your intercompany dropshipping processes.