Retailers offering their customer a full catalogue or e-commerce platforms, both invoke the need of a system where the retailer does not have to physically store the complete range of products being offered in brick and mortar setups, but still satisfies customer demands within a stipulated time frame. This is where drop shipping comes into the picture. Even if it sounds lucrative, it has its own set of considerations before you adopt it in your company.
“The practice, according to The Wall Street Journal, will likely go mainstream this year.
The [supplier] gets the audience, the retailer gets the sales.”
What is Drop Shipping?
In simplest terms, drop shipping can be understood as an order fulfilment service where the retailer doesn’t actually own the product being sold to the customer. The retailer acts as a middleman and the customer places the order through a store visit, a catalogue, or a website. And now a third party, who can either be a drop shipping fulfilment party or the manufacturer, ships the item directly to the customer. The retailer is the point where the customer is placing the order, and the retailer is paying the third party to carry on the shipment for the customer order.
• Simplicity and scale of operations for the retailer: Simplified processes, no inventory headaches and fewer employees and thus lower overheads. All make a good case for drop shipping for the retailer.
• A wide product range offering: without the need for physical storage infrastructure.
• Freedom from geographical boundaries: an internet connection is all it takes to run the store from any location.
• Business scalability: no capital investments needed to increase the size that a retailer can cater to.
Drop Shipping Concerns:
• Lowering of profit margins: the retailer has to pay more to the manufacturer/supplier to ship single or small orders to the customer instead of the usual case of shipping bulk orders to the retailer.
• Loss of control: part of the process has been handed over to the outsider, i.e. the manufacturer or the supplier doing drop shipping.
• The retailer still being the point of contact for the customer has to handle the customer grievances for the item shipped by the supplier. In case the customer isn’t satisfied and want a return or replacement for the product, the retailer has to tend to them and this complicates the logistics.
• The threat of the supplier/manufacturer turning into a competitor by tapping into their capabilities and using forward integration to capture the retailer’s market, as they have the complete customer data at their hands.
• Moutaz Khouja. 10 May 2001. “The Evaluation of Drop Shipping Option for E-Commerce Retailers”. Computers & Industrial Engineering. Volume 41, Issue 2, November 2001, Pages 109–126. doi: 10.1016/S0360-8352(01)00046-8
• Jake Rheude. 0.5/17/2016. Drop Shipping Fulfilment: Complete Guide. www.redstagfulfillment.com
• Šlimas, Tomas. March 23, 2016. “Why You Should Care About Ali Express Dropshipping”. Oberlo. Retrieved November 11, 2016.