Controls for Shipping (#10)
/In this episode, we discuss the controls associated with shipping. This process begins with a verification that customer credit has been approved, proceeds to picking from stock, and ends with packages being prepared for delivery to customers. Key points made in the podcast are noted below.
The primary goals of the shipping function are that you ship exactly what customers ordered – and nothing else, and that you absolutely, positively make sure that you bill them for whatever was delivered. Our controls need to support these two goals.
Controls Over Deliveries
There’re several controls that can help us with the delivery goal that I just mentioned. First, let’s make sure that nothing is shipped that should not be shipped. An obvious control is to verify that the sales order has been stamped or flagged by the credit manager, which signifies that the credit department is OK with the order. If the shipping department uses a common database with the credit department, then simply printing the daily shipping list should automatically exclude any orders for which credit has not been approved. And, you could back this up with a standard policy which states that no orders are released without the prior approval of the credit manager. If properly enforced, that policy is sometimes useful for putting the fear of God into the shipping manager.
There can also be an occasional audit to compare credit authorizations to what was actually shipped, just to make sure that this control works.
A second control is that, as soon as the picked items arrive in the shipping area, compare the sales order to the picked items to make sure that they match. If some items were not in stock, then you complete a three-part backorder request form for the missing items.
One copy goes to the order entry staff for follow-up with the customer, while another copy goes to either the purchasing department or production scheduling department to either order or create the missing items, and the shipping manager retains the final copy, along with the sales order.
A third control to support this goal is to investigate the reasons for product returns from customers, since these returns may include items that were incorrectly shipped.
Controls Over Billing of Shipped Goods
Now, we turn to the goal of making sure that all shipped items are billed. This goal is near and dear to the heart of every accountant, since it’s highly embarrassing to not issue an invoice for a shipment. The main control for this goal is the proper use of a bill of lading. When an order is shipped, the shipping staff prepares a three-part bill of lading. One copy goes with the shipment, one stays in the shipping department, and one copy – this is the important one—goes to the accounting staff. The accounting staff uses this bill of lading as a trigger to create an invoice, which we’ll get to in the next podcast.
Another control is to complete a daily shipping log that contains a summary of every shipment sent out. The accounting staff can compare this log to what they actually invoiced to see if any shipments were missed. If the shipping department is fully computerized, then the shipping software should create this log automatically.
A special situation arises when a company is not actually shipping anything itself – instead, a supplier is sending the goods straight to the customer -- this is called drop shipping. The company sends a copy of the sales order to the supplier, who sends a copy of its bill of lading to the company when it delivers a shipment to the customer. In short, this is like having a long-range shipping dock. The primary dangers are that the supplier never receives the customer’s order (and so never ships it), or that it ships the order but never sends a proof of shipment to the company’s accounting staff. We guard against both the first and second risk by investigating old open customer orders for which we’ve never issued an invoice to the customer.
These are an excellent indicator of problems somewhere in the drop shipping process, though of course they could just mean that the supplier has not gotten around to making a shipment yet. Another control is to match the supplier’s billings to the company to the company’s invoices to the customer. If the supplier’s invoices contain items not in the company’s invoices, then the company has missed an invoicing opportunity somewhere.
Another special situation is when a customer uses an evaluated receipts system. This is when they pay their suppliers based on what they receive, not what they’re invoiced for. In fact, they don’t want to receive an invoice at all. Instead, these customers usually want to have a special label printed and attached to any deliveries sent to them.
These labels always include the customer’s authorizing purchase order number, and probably some additional information about the contents of the shipment. If the label is not attached, then the company isn’t paid. Consequently, a double check of the label before these shipments are sent out is a very useful control. Also, if each label contains a unique identifying number, then the shipping manager can run a report from the computer system that shows which unique label was attached to each delivery. If there’s no unique number listed on the report, then you know that a label was not printed.
Here’s my view of shipping controls: it’s best to use an integrated computer system to the greatest extent possible, since this area will otherwise be overloaded with paperwork, and that interferes with the efficiency of the department. By using computers, the shipping staff can easily verify credit approvals, print labels and bills of lading, and electronically issue shipping notifications to the billing department. Without computers, the process is much slower and more likely to suffer from errors.