Unpacking: The Advantages of Drop Shipping

March 12, 2015

Our ongoing “Unpacking” series digs into the meaning of commonly used terms and trends in the supply chain world that prompt a lot of questions. You can read all of the previous entries here.  This week we look at drop shipping.

To learn more about how Capacity can help you adopt new fulfillment solutions, contact us here or call (732) 745-7770 and select option 3.

Drop shipping is a fulfillment option that you may have heard of, but perhaps haven’t taken the time to consider whether or not it could benefit your business.

In its most basic form, drop shipping allows retailers to sell a product without having to stock it. Rather than holding this stock and waiting for customer orders to pull it from inventory, you can wait for orders, purchase the amount you need from a third party and have it shipped directly to your customer.

Drop Shipping Order Fulfillment Diagram
Adapted from an image by Schukai/Wikimedia

There are various questions to consider before you dive into drop shipping as your primary order fulfillment process, but the benefits from lower stock holding costs and overheads, flexible operations, and expanded product range are attractive to many forms of business.

Let’s take a look at the positives and negatives of drop shipping to tell if it’s right for you.

 

The Pros and Cons of Drop Shipping

The advantages of drop shipping revolve around the fact that you don’t have to hold the products you sell and ship yourself.

Pros:

  • Less capital expenditure to buy and hold inventory because you don’ t order until the customer does.
  • Easier to run without an office, meaning lower overheads and the ability to scale without this increasing dramatically.
  • A wider product range can be offered to customers, as no inventory holding. The marginal cost of adding new products to your selection is also low for the same reason.
  • Flexible location and expansion. New suppliers can be added when a new market needs to be served and most of the work to scale lies in sourcing and managing an increased number of providers, rather than physically setting up new operations.

But sourcing from third-party providers and relaying orders to them as they come in also has its drawbacks. These tend to revolve around issues of control and the resulting impact on customer service.

Cons:

  • Without the benefits of buying in bulk for your own stock, products are often more expensive and margins lower. This can make it harder to compete on price.
  • Low barriers to entry mean greater competition, potentially exacerbating the price competition issue mentioned above.
  • Removing stock also means the loss of inventory control. With your own stock, you can track and control levels to ensure popular products are available immediately. If third party providers run out customer demand may go unsatisfied, with the potential to damage your reputation and brand.
  • Although easier to scale, managing a wide drop shipping product base can become increasingly complex if a wide range of products is involved. Varied fulfillment agreements, service levels and standards can make it harder to guarantee the kind of uniform customer experience that builds a reliable brand.

If you decide that drop shipping is right for you after balancing the points above, it’s time to look at the structure of your dropship solution and the providers you’ll use to make it happen.
drop shipping diagram
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Qualities of a Good Drop Ship Provider

Before you take on anyone to handle your drop shipping, you’ll need to weigh up the options and understand the qualities you need to see in a provider.

Here’s what to look for:

  • The ability to mesh with your drop shipping initiative via either EDI, CommerceHub, or another form of integration that connects your operations seamlessly.
  • Experience integrating with, and dropshipping to, both major ecommerce brands and independent platforms.
  • The ability to automate the creation of customized retail packing slips and other required documentation.
  • A commitment to comply with your precise service level agreements governing drop shipments.

Last year we also looked at eight questions to ask a potential fulfillment provider. Although these are aimed at broader 3PL partnerships, many of the questions will still be useful in your search for an effective drop shipping solution.

With the right provider and a carefully constructed business plan, drop shipping can be a powerful option for running an online business that gets products into the hands of customers when and where they want them.

Understanding the potential service issues in advance will help to create an effective backup plan to keep orders flowing and maintain brand reputation, which is a crucial part of keeping customers for any online retailer.

Further reading: Check out this great SPS Commerce summary of an excellent in-depth piece on drop shipping from Doba.com

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