Practical Ecommerce

Inventory Rules Are Changing, Says Dropship.com CEO

Drop shipping is the process of selling an item that is then shipped by a manufacturer or wholesaler. Many ecommerce merchants utilize drop shipping, at least in part, to reduce inventory costs and to expand their product offerings. But drop shipping can be complicated.

We addressed some of these complexities yesterday, at “Drop Shipping: The Good and The Bad.”

For that article, we corresponded with Jeremy Hanks, co-founder and CEO of Dropship.com, a software platform that automates back-office drop-shipping functions between retailers and manufacturers.

We also interviewed Hanks for an “eCommerce Conversations” audio podcast. The text of that interview is below.

Practical eCommerce: Should established merchants offer drop shipped items in addition to inventoried items?

Jeremy Hanks

Jeremy Hanks

Jeremy Hanks: “The answer is 100 percent yes. The reason that I believe that is because when you look at the physical, typical retail physical supply chain, every time you limit inventory, you drastically reduce the available products of the supply side that you’re ultimately trying to match to the consumer demand side.

“As an ecommerce merchant, when you say, ‘I’m only willing to put on my website what I purchase, these niche items and things that I deal with,’ you are also saying, ‘I am reducing the choice to my consumer. I’m reducing my ability to match supply to demand.’ In today’s world, especially looking to the future, I think you should seriously consider how you can use an inventory-free model inside of your retail strategy to add other products.”

PEC: Critics say drop shipping is too complicated. They say a merchant has to communicate with the drop shipping supplier, has to confirm that the drop shipper actually ships the products, has to provide the details to the consumer and so forth. They say the additional amount of administrative work is not worth the trouble. Thoughts on that?

Hanks: “I think those concerns are valid. But I would say they are no more complicated than anything your readers are already dealing with, the online retail-to-consumer transaction.

“Today there are solutions that address some of those [drop shipping] complexities and can make that piece of it actually work. It is complicated, but I would say it’s no more complicated than all of the long list of things that you do as an online retailer. How do I find consumers? How do I market to them? How do I build relationships? How do I handle fulfillment and shipping? Those things are very complicated as well and most of the time people say, ‘Well there are systems that can help me with that.’ And I see the same kind of trends happening more around drop shipping and kind of the strategies around how all of that ties together.”

PEC: Talk to us about the drop shipping process. Let’s say I sell a product — running shoes, hypothetically — and I carry a certain amount of running shoes on my ecommerce store. I want to supplement my inventory with drop shipped items, to fill out my product offering. Walk us through the administrative aspects of that. An order comes through. It’s got items that I have in inventory and an item or two that needs to be drop shipped. How would I handle that on the back end?

Hanks: “That’s a great question. Let’s say that you have 250 running shoe SKUs in stock. You have 25 models of shoe that come in 10 sizes. So the first step of what you’re asking is, ‘Are there are more running shoes than that?” The obvious answer is ‘yes.’ There are more running shoes than that, even from the brand that you sell.

“So the first thing is deciding to sell more product, to take the supply that the companies who make these shoes have and try to match the supply to my consumers’ demand. The first thing in the administrative piece is catalog information, pictures and descriptions. You have to be able to put that on your ecommerce website.

“The next component of that is closely related, which is inventory. If you’re going to work with a distributor for Nike, you need to know all of those other models — you need to know where they are and how many that there are and all of the different sizes. And so that process is about inventory, quantity on hand, and product lifecycle type issues around discontinues and backorders and such.

“The third piece is you’ve got to be able to get orders to the supplier and receive tracking back.

“You can start to move down the road of automation around those administrative processes. That ranges from a manual process to full-blown seamless automation with different tools. A lot of that just depends on who your trading partners are.”

PEC: What do merchants say to their customers, to let customers know what’s happening with drop shipped items?

Hanks: “You want to be transparent and upfront about it. If the customer is going to order two pairs of shoes and one comes from you and one comes from someone else, it’s going to show up in two boxes and so they need to understand that. That’s what Amazon does, for example. At the point of checkout you need to have the functionality that says the things in your cart may come from multiple places. As long as you’re upfront about that, you can then say, when those items are shipped, ‘Item number one just shipped because I shipped it and here’s your tracking number. Item number two just shipped. Here’s your tracking number on that. It’s coming from a vendor.’”

PEC: What about shipping costs? Who pays shipping costs for drop shipped items?

Hanks: “It’s going to cost a merchant more, that’s true. Typically the retailer pays the actual shipping cost to the vendor. Part of that is if I’m the vendor I’m saying, ‘I’m holding the inventory risk on your behalf, Mr. Online Retailer. So you’re going to have to pay the shipping on the product, because I’ve taken some of the costs and risk on my plate for you so you can make the sale.’”

PEC: Large, established retailers utilize drop shipping. Can you name a few?

Hanks: “Costco, Home Depot, Walmart all have massive drop shipping programs. We just got back from a show in Las Vegas last week called ‘The Hardware Show.’ Home Depot had armies of people going around to all of the exhibitors, which at that show are typically manufacturers, basically saying, ‘I’m never going to put your stuff in my stores, but I’d love to drop ship your products online.’”

PEC: Tell us about Dropship.com. You’re the founder of Doba, a pioneering drop shipping reseller. Now you’ve launched DropShip.com. What service does it provide?

Hanks: “Through Doba over the years, we lived the pain ourselves of saying we need to integrate. In our history, we’ve integrated Doba with hundreds of drop shipping vendors. It is a complicated process. There are catalogs and inventory feeds; everyone uses different formats and different business processes. We started DropShip.com to build software to address those problems for small medium-sized businesses and merchants.

“There are companies that make things. There are companies that sell things. Then there are all of us as consumers that buy things. I’m seeing a blurriness happening. It seems to me that more and more companies that make things are also selling things. More and more companies that have been pure resellers or retailers are starting to understand maybe they can start to look at creating their own products.

“The next 15 years of ecommerce will be far more disruptive than previous 15. So in that kind of dynamic, how do I [as a merchant] continue to focus on my uniqueness that I don’t get caught up in a race to the bottom type scenario? How can you continue to be unique and successful as a merchant and how do you look at this changing supply chain dynamics and drop shipping? If a brand can sell direct to the consumer, on one hand it’s competing with you. But on the other hand it means that logistically it can support you as a drop shipping vendor. It’s a good and a bad thing.”

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Practical Ecommerce
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Comment ( 1 )

  1. Rosa Fernández-Velilla May 11, 2012 Reply

    Very interesting article. I´m interested in a solution for dropshipping for merchants. Do you provide this? I´m based in Spain. My company is http://www.gisela.com – Regards

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