Drop-ship patterns in Dynamics 365 Supply Chain Management

Drop shipping — selling an item the distributor never touches, shipped by the supplier straight to the customer — is a margin-preserving way to widen a catalogue without widening a warehouse. In Supply Chain Management it is called direct delivery, and it is a well-worn feature with some sharp edges around invoicing order, cancellations, and returns. This guide covers the single-entity pattern, the intercompany variant, and the operational rules that stop drop-ship from becoming a reconciliation problem. For Business Central, the drop shipments and special orders guide covers the equivalent.

The single-entity pattern

A sales order line is marked for direct delivery. From the sales order, the Direct delivery action creates a purchase order to the chosen vendor for that line, with the customer's delivery address as the PO's delivery address and a link between the two lines. When the vendor ships and the PO is receipted, the linked sales line's packing slip is posted automatically, so the customer's delivery is recorded without a warehouse ever seeing the goods. The customer invoice is then posted from the sales order as normal.

Setup decisions:

• Which items are drop-ship candidates. There is no item-level "always direct deliver" switch in the standard product; the choice is made on the sales line, and many distributors add a small extension or a default from the item's default order settings to pre-mark lines for non-stocked items. Marking a stocked item for direct delivery is allowed and occasionally right.
• Which vendor. The direct delivery form proposes the item's primary vendor and lets the user change it. Distributors with several drop-ship suppliers per item need the vendor selection to be conscious, not defaulted.
• Warehouse. The line still needs a site and warehouse for accounting and planning. A dedicated "direct delivery" warehouse keeps the transactions out of the physical warehouse's on-hand and makes them easy to report on. Do not use the main warehouse.

The invoicing sequence

The PO receipt posts the sales packing slip. It does not post the sales invoice, and the vendor invoice may arrive before, after, or never in the same period. The sequence that keeps margin reporting honest:

1. Vendor ships; vendor's shipping confirmation triggers the PO receipt (see below for how that confirmation arrives).
2. Sales packing slip posts automatically. Revenue is not yet recognised; the packing slip creates the delivered-not-invoiced position.
3. Customer invoice posts, on the distributor's normal invoicing cadence. Revenue recognised, cost of goods sold at the PO price.
4. Vendor invoice matched to the PO when it arrives, with any price difference posting as purchase price variance.

The failure mode is invoicing the customer before the vendor has shipped, because the order looks "done" once the PO exists. Configure the sales order invoicing to require a packing slip, and train the desk that a direct-delivery line is not invoiceable until the vendor confirms.

Getting the vendor's shipment confirmation

This is the operational weak point. The PO receipt is what drives the whole chain, and somebody has to post it when the vendor ships. Options, from weakest to strongest:

• Email from the vendor, keyed by AP or the sales desk. Common, slow, and error-prone. Fine for low volume.
• Vendor collaboration. The vendor sees the PO in the vendor collaboration portal, confirms it, and can update delivery dates; it does not post receipts, but it gives visibility. The vendor collaboration guide covers it.
• EDI advance shipping notice from the vendor, mapped to a product receipt through an EDI ISV. The right answer for high-volume drop-ship with large suppliers.
• A Power Automate flow reading a structured shipping notification (a portal form, a carrier webhook) and posting the receipt via the data entities. Cheaper than EDI for mid-volume, and fragile if the notification format changes.

Whatever the mechanism, tracking numbers should land on the sales order so customer service can answer "where is it" without calling the vendor. The standard packing slip has a field for it; the integration must fill it.

Cancellations and changes

Direct delivery links the sales line and the PO line for quantities and dates, but the link is not a two-way sync of every change. If the customer cancels, the sales line is cancelled and the PO line must be cancelled separately — with the vendor's agreement, which is a commercial conversation the system does not have. If the vendor ships less, the PO is partially receipted, the sales packing slip posts for the shipped quantity, and the remainder stays open on both documents. A daily review of open direct-delivery PO lines against their sales lines is standard housekeeping; a small Power BI page or a periodic report catches the drift.

Returns

A customer return of a drop-shipped item is a return order against the sales order, but the goods should not come back to the distributor. The clean options are return-to-vendor, where the customer ships back to the vendor and the distributor raises a credit note and a purchase return, or a return to the distributor's warehouse followed by a separate purchase return. The product supports both flows; it does not link them automatically, and the return warehouse should again be the dedicated direct-delivery warehouse so that returned drop-ship stock is not accidentally counted as sellable on-hand.

Intercompany direct delivery

Groups that sell in one legal entity and buy in another use intercompany direct delivery: the selling entity's sales order creates an intercompany PO to the supplying entity, which creates an intercompany sales order there, and the supplying entity's shipment to the end customer cascades packing slips back up the chain. It works, and the intercompany trade guide covers the setup. The extra rules for direct delivery: the end customer's address must be carried through the chain, the intercompany parameters must allow direct delivery, and the invoicing sequence has one more step (the intercompany invoice) that must precede the external one for consolidated margin to be right.

Planning and reporting

Master planning ignores direct-delivery lines for warehouse coverage, which is correct — there is no stock to plan — but means demand history from drop-ship sales is not in the forecast base by default. Distributors deciding whether to start stocking a drop-ship item need a report over direct-delivery sales lines, not over inventory transactions. Margin by vendor on drop-ship lines is the other report worth building early, because drop-ship suppliers' prices drift and nobody notices until the quarter closes.