Frequently Asked Questions About How to manage drop-shipments and vendor inventory

Drop-shipments and vendor-managed inventory (VMI) are powerful tools in the building materials supply chain. They reduce warehouse congestion, lower carrying costs, and allow you to offer a broader product mix without overstocking. But they also come with complexities—tracking, timing, visibility, and accountability are all harder to manage if the right systems aren’t in place.

Here are the most frequently asked questions we get about managing drop-shipments and vendor inventory—along with practical, ERP-focused answers to help you optimize your operations.

• What’s the difference between a drop-shipment and vendor-managed inventory (VMI)?

Drop-Shipping is when your supplier ships the product directly to your customer, bypassing your warehouse entirely. You sell it, but don’t physically handle it.

Vendor-Managed Inventory (VMI) is when the vendor maintains stock inside your warehouse or yard. The vendor owns the inventory until it’s sold, and often monitors and replenishes it for you.

Both models reduce inventory risk and storage costs, but require tight coordination with your ERP system.

• How do I track drop-shipped items if they never enter my warehouse?

Tracking drop-shipments requires a tight integration between your sales orders, purchase orders, and vendor confirmations. Your ERP system should allow you to:

Link the sales order to a corresponding drop-ship purchase order

Monitor vendor shipping confirmation (e.g., tracking number, ship date)

Update delivery status in real-time

Pro Tip: Use status tags like “Drop-Ship Pending” or “Vendor Shipped” so your team can track orders from quote to delivery, even if the inventory never hits your dock.

• What are the biggest risks of drop-shipping, and how can I avoid them?

Common risks include:

Late shipments from vendors

Lack of tracking visibility for your customer service team

Poor packaging or delivery experience (which still reflects on you)

How to avoid them:

Work only with trusted vendors who provide real-time shipping confirmations

Require standard labeling or branded packing slips

Set up alerts in your ERP for delayed shipments

Proactively share tracking updates with your customers

• How does vendor-managed inventory work inside my ERP system?

In a VMI setup, your ERP should support:

Distinct inventory ownership flags (e.g., “Vendor-Owned” vs. “Distributor-Owned”)

Automatic reorder or replenishment triggers based on min/max levels

Visibility into on-hand and allocated stock

Ability to receive against consignment or VMI POs

Once a product is sold, the system shifts the ownership and triggers invoicing or a transfer from the vendor’s account.

• How do I reconcile vendor-managed inventory during audits?

Regular physical counts are still essential. To reconcile VMI:

Run ERP reports showing vendor-owned stock by bin or zone

Conduct physical counts and compare them to system data

Share variance reports with vendors

Schedule formal joint audits quarterly or biannually

A clear VMI agreement should outline responsibility for shrinkage or losses.

• Can I track performance metrics for my drop-ship and VMI vendors?

Absolutely—and you should. Set up KPIs in your ERP to track:

On-time delivery rate

Order accuracy (correct SKUs and quantities)

Lead time from PO to delivery

Fill rate and backorder trends

Return rate or damage claims

Use dashboards to compare vendor performance and support sourcing decisions.

• What should I include in a vendor agreement for drop-ship or VMI programs?

A solid vendor agreement should cover:

Who owns inventory at each stage

Who handles shipping, packaging, and customer communication

Service-level agreements (SLAs) for delivery speed and accuracy

Return policies for unsold or damaged goods

Frequency and format of inventory reporting (especially for VMI)

The more automated the data sharing, the smoother the partnership.

• How does drop-shipping affect my customer experience?

Drop-shipping can be great for customers—if it’s seamless. But if your vendor ships late, packages poorly, or fails to communicate, your customer will still hold you responsible.

Best practices:

Brand your packing slips and shipping labels

Follow up with tracking and delivery updates, even if it’s not your truck

Offer support for returns, exchanges, or delivery issues—even on vendor-shipped orders

• What tools or systems do I need to manage all this effectively?

To handle drop-ship and vendor inventory at scale, you need an ERP that supports:

Real-time PO and SO linking

Vendor-specific fulfillment workflows

Integrated shipping/tracking updates

Ownership-based inventory reporting

Automated alerts for exceptions (delays, shortages, etc.)

Look for ERP modules designed specifically for building materials distribution and multi-yard tracking.

Final Thoughts

Managing drop-shipments and vendor inventory isn’t just about logistics—it’s about creating flexible, cost-efficient systems that don’t compromise service. When done right, these models can unlock growth without the overhead of more warehouse space or inventory investment.

With the right ERP tools, clear vendor agreements, and proactive customer communication, you can make these advanced fulfillment strategies a competitive advantage in your business.