Drop shipping – a
definition
Drop shipping is when your
company acts as the “seller,” but the
inventory is owned and shipped by your supplier. The drop ship items you sell are in your
supplier’s inventory until you get an order.
When you accept an order for an item, you issue a PO to your supplier
who picks and ships the item from his inventory. You invoice the customer at your retail
price, but purchase the item from your supplier at a wholesale price. Typically, you process the payment from your
customer before you have to pay your supplier.
This allows you to offer many items that you may not be willing to hold
in your own inventory.
Good things about drop
shipping
Inventory levels – since
you don’t need to own any inventory of drop ship items, you have more cash
available to invest in the inventory you do want to keep in stock. Items that sell infrequently, or high dollar
value items make sense to drop ship.
Simplicity – Let’s assume that an item you can sell is quite different
from the items you normally sell. Your
drop ship supplier will have the packaging materials and expertise to fulfill
those orders, whereas it might cause bottlenecks and additional expense in your
building.
Insurance – There may be items you can sell, but which have peculiar
insurance requirements (hazardous materials, etc.). By looking at the ancillary products you
might add to your product line, but that present operational or administrative
challenges, you can create a list of items that can potentially add to your
bottom line by finding a supplier who can drop ship them.
Lower risk – Because you don’t have money tied up in the inventory that
you will drop ship, you are not at risk of technological or market changes that
might make that inventory obsolete. This
allows you to test the market on some products that would otherwise be too
risky to explore.
Catalog enhancement – By offering additional products in your online or
printed catalog, you are able to present the impression that your company is
bigger and more diverse that it actually is.
Customers feel more confident buying from you when they feel you are
more substantial than your competition.
Market focus – By taking advantage of the opportunity to drop ship, you
can offer a wide variety of products that appeal to a narrow customer
group. For example, if your target
customers are fishermen, by drop shipping you can offer things as diverse as
boats and motors and exotic, “one-off” fishing flies. You can move closer to being the
one-stop-shop for the enthusiast.
Product Information – A drop ship supplier probably has all the item
information, including photographs and specifications available for
download. This can save lots of time and
money and allow you to get products in front of your customers faster.
Profitability – It is likely that the difference between your wholesale
price for an item and the retail price at which you sell it will contribute to
your bottom line. While your wholesale
price may be a bit higher than the price you would pay if you committed to hold
inventory, the spread is frequently significant. Additionally, the collateral advantage of not
having to pick or ship the item can help you maximize profit from every drop
shipped sale.
Best use of your time and skills – Many companies that take advantage of
drop shipping recognize that their best skills lie in the area of sales and
marketing. Fulfillment may not be an
optimal use of time. By drop shipping,
you can focus on what you do best, leaving your drop ship supplier to handle
the fulfillment responsibilities.
Multiple marketplaces – By using suppliers who drop ship, you can sell
the same product s under a variety of marketplace identities. You can have multiple storefronts under your
name, or create any number of seller’s identities to sell these products on
Amazon, eBay, Sears, New Egg, Rakuten, etc.
3PLs and drop ship consolidators – There are companies that specialize
in warehousing and distribution, but are not manufacturers or
distributors. Frequently, foreign
companies will ship container loads of product to 3PS’s (third party logistics
companies), or consolidators (companies who buy products for redistribution)
and you can have these middle men handle your fulfillment.
What should I be cautious about if I decide to work with suppliers who
will drop ship?
Control – It’s a good idea to get a firm commitment from your drop ship
supplier concerning the time that will elapse between receipt of order and shipment. Their performance will reflect favorably, or
unfavorably on you, so it’s up to you to make sure the drop ship supplier has
excellent fulfillment processes in place.
Quality control - Since you won’t have physical possession of the items,
quality control standards should be addressed and processes explained, so you
know your drop ship supplier is doing the job as well as you would, if you had
the items in your own inventory.
Inventory visibility – It’s critical that you don’t have
stock-outs. These frustrate customers
and lower your rankings on every marketplace.
Insist that your drop ship supplier use a good warehouse management
software system and that you have access to it in real time so that you always
know that inventory is available to fulfill your sales.
Cost – Drop ship suppliers aren’t going to ship for free. Explore the costs associated with having them
ship the products. If you have better
rates from certain carriers, perhaps you can work with the carriers to have
them honor your shipping rates, even where the items are drop shipped from your
supplier.
Pricing – If you only buy single items after you have received an order
from your customer, the drop ship supplier won’t offer you the same level of
wholesale discount as you would receive if you bought large quantities of the
item and held them in your own inventory.
Often, if you have confidence that you can sell a minimum quantity of
certain items, you can offer the drop ship supplier a bulk purchase order, to
be relieved against as you send individual orders.
Returns and exchanges – It is very important to agree with your drop
ship supplier how returns and exchanges will be handled. There are costs involved and inventory
returned may be damaged or otherwise unsaleable. By agreeing, in advance, as to how returns
and exchanges will be handled, you will have certainty as to cost, which is
critical to determining how you will price your items for sale.
The next step?
Your order processing system must anticipate drop shipping. Not every Order Management System (OMS) does
this very well.
Our OMS at Avectous Integrated Software is designed to handle drop
shipping simply and easily.
Give us a call and open up unlimited drop shipping possibilities.
Avectous Integrated Software.
Take Control.
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