Unpacking: The Advantages of Drop Shipping
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. [caption id="attachment_2310" align="aligncenter" width="498"] Adapted from an image by Schukai/Wikimedia[/caption] 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 ShippingThe 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.
- 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.
Qualities of a Good Drop Ship ProviderBefore 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 drop-shipping 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.