Step-by-Step Guide to How to manage drop-shipments and vendor inventory

Drop-shipments and vendor-managed inventory (VMI) are key strategies in the building materials industry to reduce overhead, expand product offerings, and streamline fulfillment. But while these models offer major efficiency gains, managing them well requires structure, visibility, and seamless ERP integration.

If mishandled, drop-shipments can create confusion, delays, and customer dissatisfaction. Meanwhile, unmanaged vendor inventory can cause financial inaccuracies and overstock.

This guide walks you through the step-by-step process of managing drop-shipments and vendor inventory, ensuring accuracy, control, and smooth operations across your business.

🚛 What Is a Drop-Shipment?

A drop-shipment is when a vendor ships product directly to your customer, bypassing your warehouse. You sell it, but you never physically touch the inventory.

📦 What Is Vendor-Managed Inventory (VMI)?

VMI means that a vendor stocks and manages inventory at your warehouse or yard, but ownership remains with the vendor until the item is used, picked, or sold.

🔄 Step-by-Step: Managing Drop-Shipments

✅ Step 1: Link the Sales Order to a Drop-Ship PO in the ERP

Create a drop-ship purchase order that is directly tied to your customer’s sales order. Ensure the system:

Tags the PO as “drop-ship”

Auto-fills customer delivery address

Links inventory and financial flows correctly

Why it matters: Avoids mismatches and allows clean reporting.

✅ Step 2: Confirm Vendor Lead Times and Availability

Before finalizing the PO, validate:

Product availability

Lead time

Freight responsibilities

Required delivery dates

Build in a buffer for long-lead specialty materials or regional shipping delays.

✅ Step 3: Monitor Shipment and Fulfillment Status

Request vendor tracking updates and enter them into your ERP system. Ideally, the vendor confirms:

Ship date

Carrier

Tracking number

Estimated arrival

This allows your team to communicate proactively with the customer and monitor on-time delivery.

✅ Step 4: Keep the Customer Informed

Drop-shipping can lead to poor visibility if you don’t manage expectations. Send customers:

Tracking information

Estimated arrival windows

Contact info in case of delivery issues

Bonus: Brand your packing slips or documentation so it still feels like your delivery.

✅ Step 5: Record the Transaction in Your System

Once the product is confirmed delivered:

Mark the order as “fulfilled”

Record vendor invoice and reconcile cost

Generate your customer invoice

Important: Be sure your ERP tracks inventory vs. non-inventory items correctly for financial accuracy.

🏢 Step-by-Step: Managing Vendor-Managed Inventory (VMI)

✅ Step 1: Define VMI Stock Zones in Your Warehouse

Designate storage areas specifically for vendor-owned inventory. Tag them as vendor-owned in your ERP.

Restrict access to authorized staff

Visually label zones and bins

Separate from your regular inventory

✅ Step 2: Track All Receipts and Stock Movements

Even though you don’t own the inventory (yet), you must:

Log all incoming shipments

Scan into VMI bin locations

Track movement between bins or returns

Helps with usage reporting, replenishment, and audit trails.

✅ Step 3: Set Reorder Thresholds and Reporting Cadence

Coordinate with vendors on:

Minimum/maximum quantities

Replenishment triggers

Weekly/monthly usage reports

Vendor responsibilities for restocking

Many ERP systems allow automated alerts when stock reaches reorder levels.

✅ Step 4: Assign Ownership at the Point of Use or Sale

Once a VMI item is:

Picked for an order

Loaded onto a truck

Invoiced to a customer

…the ERP should shift ownership from the vendor to your books.

This avoids premature liability and keeps financials clean.

✅ Step 5: Handle Reconciliation and Invoicing

At the end of each cycle, reconcile:

VMI usage

Remaining on-hand quantities

Any damaged or returned goods

Vendor credits or purchase obligations

Use ERP reports to streamline these reviews with your suppliers.

🧠 Pro Tips for Both Models

Assign clear internal ownership for each workflow (sales, receiving, finance)

Use mobile tools to update status in real-time

Always log return reasons and material conditions

Monitor KPIs: on-time delivery, fulfillment accuracy, and VMI turnover

Final Thoughts

Drop-shipments and vendor-managed inventory offer powerful ways to optimize stock, cut storage costs, and expand your product catalog. But they require tight processes, real-time visibility, and clear communication between you, your vendors, and your customers.

With the right ERP structure and team training, these models become low-effort, high-reward solutions that scale with your business.