Although the drop shipment concept has existed for quite some time, a growing trend toward outsourced manufacturing, specifically in the high-tech industry, has sparked a recent increase in its practice. Drop shipment is facilitated by all versions of R/3, beginning with 3.1I. In the SAP ERP Central Component, drop shipment is available in a preconfigured business scenario as "third party with shipping notification" and "third party without shipping notification." Many companies, therefore, have had the systems resources in place, but they are inexperienced at putting them to work. I offer a simplified approach to implementing drop shipment processes and show you how to take advantage of the standard features provided by SAP.

Getting Started

The first step for implementing drop shipment is to identify a manufacturer or wholesale vendor that complements your product offerings. Some important deciding factors could be the range of merchandise offered, systems capability for EDI interfacing, market spread and reach, and stability of the vendor. Once you've chosen the vendors, the next step is to select the merchandise list each vendor will offer as drop shipment. For example, a computer manufacturer can offer printers, digital cameras, and other relevant hardware.

You also need to determine the message standard for the EDI communication and integration software for an enterprise-to-enterprise EDI interchange. Examples of EDI message standards are ANSI X12, which is widely used in the US, and UN/EDIFACT, which is used in Europe and other regions. Examples of EDI integration tools are GENTRAN and Web Methods.

System Settings

Step 1. Maintain the drop-shipment vendor. Create the vendor master details. To define the vendor master centrally, use transaction XK01. Use the SAP standard R/3 account group LIEF and choose the company code and purchasing organization to which the vendor belongs. The key fields here are Reconciliation account, Payment terms, and Control data in the purchasing data subscreen — for example, XWHOLESALE as the drop-shipment vendor. Alternatively, use transaction MK01 to define the purchasing data and transaction FK01 to define the company code data for the vendor.

To automate conversion of vendor-assigned purchase requisitions to purchase orders (POs), check the Automatic purchase order box in Control data (Figure 1). Additionally, check the Automatic purchase order box in the material master purchasing view.

Figure 1

Vendor master settings

Step 2. Create a partner profile for EDI communication with the vendor. In transaction WE20, enter the vendor number for the partner number and set the partner type as LI (vendor). You should also set the agent and position for workflow notifications. The agent notifies the user of any processing errors in the document. Position is a possible agent authorized to process the workflow documents. Use transaction PPOM to define the agents.

Once the partner profile is set, the inbound and outbound parameters should be set for communicating the various message types. Before getting into the details of setting up these parameters, I will discuss the main EDI message types involved (Figure 2). The 832 PRICAT message type, for pricing catalog, synchronizes the pricing and material data between your (the trader's) and the wholesaler's systems.

Figure 2

EDI message types

For setting up message type 850 ORDERS (PO outbound message), use the output condition type NEU. The condition type and the EDI message type are tied together in the Partner profiles> Outbound parameter>Message Control settings (Figure 3). The standard processing code for outbound POs is ME10 (Figure 4). Type 850 messages are SAP-standard for the exchange of documents between vendors and suppliers in SAP and can be transmitted real-time or can be processed collectively by setting the outbound mode accordingly in the outbound options. The trader can choose to collect the IDocs over a period and then send them to the wholesaler by running the standard R/3 program RSEOUT00 in the background.

Figure 3

Partner profile and Message type settings

Figure 4

Message Control settings tab

The standard R/3 processing codes for processing the inbound parameters are:

Similar to the outbound messages, the inbound messages can also be processed immediately or collectively, based on the settings in the inbound options. The program used to process them in the background is RBDAPP01.

Step 3. Maintain the trading material. The next logical step is to create the trading materials that the trader will sell. The standard R/3 material type for defining trading materials is HAWA. Use transaction MMH1 to create trading materials. Set the Item category group in the sales organization data as BANS (Figure 5 ).

Figure 5

Set Item category group to BANS

Step 4. Tie the vendor and material together. Once you have defined the material and vendor masters, link them by maintaining the Source list and Info Record. They tie together the vendor, material, purchasing organization, and the plant.

The transaction for maintaining the source list is ME01. Select the Fix check box to automatically assign the vendor in the purchase requisition created (Figure 6), which in turn can be automatically converted into a PO. Use transaction ME05 to automatically generate source lists for a range of materials and plants.

Figure 6

The Fix indicator automatically assigns a vendor to a purchase requisition

The transaction for maintaining the purchasing info records is ME11. The key data maintained here are the confirmation control key, planned delivery time, and net price (Figure 7).

Figure 7

Purchasing information record settings

The confirmation key determines which confirmation categories are intended for the PO line item. Type in confirmation control key 0001 for receiving order acknowledgement (AB confirmation category) and shipping notification (LA confirmation category) from the wholesaler.

The planned delivery time indicates the number of days required to procure the material from the wholesaler. This value is used in calculating the delivery date on the sales order. The Net price is the price at which the trader buys the material from the wholesaler. Use transaction MEMASSIN to mass-change specific values of a range of purchasing information records.

SAP Process Flow

After setting the master data, the next step is to understand the process flow and the data flow between your company and the wholesalers. Once you receive the order from the end customer, the item category is defaulted in the sales order line item as TAS, which automatically creates a purchasing requisition assigned to the vendor, XWHOLESALE in my example. Use transaction ME59 to convert the purchase requisition into a PO, running the transaction either in the foreground or periodically in the background to create the POs. Use the release date to ensure that once purchase requisitions are due, they are converted into POs.

Once the PO is created, the 850 message is sent to the wholesaler. The wholesaler receives the 850 message and sends the order acknowledgement, 855 ORDRSP, back to you. The system then processes the order acknowledgement message that creates an AB confirmation on the PO, shown in Figure 8 in the Confirmations sub screen.

Figure 8

PO Confirmations sub screen

The wholesaler prepares the shipment, ships it to the end customer, and sends the shipment notification. This creates an inbound delivery step (LA) confirmation and creates an inbound delivery.

You then create a receivable invoice and receive the payment from the customer. The wholesaler sends an 810 INVOIC message with the value payable, which creates a Logistics Invoice Verification (LIV) in the your system. You then pay the wholesaler based on the LIV, thereby completing the supply chain cycle.

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Ganesh Sundaramoorthy

Ganesh Sundaramoorthy is a logistics consultant with more than seven years of consulting experience. He holds a bachelor’s degree in chemical engineering and a master’s degree in business administration. He has worked in high-tech manufacturing, the watch industry, and retail.

You may contact the author at ganesh_s01@infosys.com.

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