Drop shipping is a term that’s becoming more and more common in the shipping industry, but what does it really mean and what does it entail?
When a retailer wants to avoid additional inventory spending, they can implement a fulfillment business model called drop shipping. Essentially, drop shipping allows retailers to offer more products for sale on their websites or catalogs (such as multiple colors and sizes of the same shirt) without having to keep all of that merchandise in stock. Instead, when a customer orders one of these items, the retailer relies on the supplier (either the manufacturer, another retailer or a wholesaler) to do the shipping for them. Basically, the retailer never actually owns the inventory it is selling.
In order for the items to appear that they are coming from the retailer itself, drop shippers typically use logistics software to print custom collates. For instance, early drop shipping adopters such as Macy’s and Home Depot would request that their drop shipping partner use their company’s branding on custom invoices and shipping labels.
There are many benefits in utilizing drop shipping. The biggest advantage is that retailers can spend less on inventory since they don’t have to purchase a product until the customer has purchased it. Additionally, retailers don’t have to worry about managing or paying for additional warehouses, tracking inventory for accounting purposes and managing stock levels. Retailers can offer a wider selection of products without the pains of managing them.
This sounds like a retailer’s dream come true, right? In reality, there are some major challenges that companies face when taking on drop shipping. The downside is that retailers must give third party vendors control over a major part of their supply chain (and their customer’s experience). Also, if something goes wrong with shipping or tracking, or if there’s an issue with the actual product, the retail company is usually the one to bear the blame since online tracking and packing slips appear to come from the retailer itself.
Also, because a retailer may source from multiple supplier warehouses, they may run into inventory issues. While there are ways that retailers can sync their store inventory with their suppliers’, these solutions don’t always work seamlessly and suppliers don’t always support the technology required. Shipping can also become complex. If a customer makes a purchase for three items, all of which are only available from separate suppliers, the retailer will incur all three shipping charges for sending each item to the customer.
Nonetheless, drop shipping is becoming a way to compete with e-commerce rivals without spending more on inventory, and it’s happening more often than you think. In fact, some analysts predict that drop shipping will become mainstream in 2017 as customers continuously spend more online and less in brick-and-mortar stores. In a retail industry survey by supply chain vendor, SPS Commerce, 40% of respondents said they expect more drop ship vendors in 2017.