Drop Ship Demystified for Manufacturers and Online Retailers
Drop shipping, also known as direct shipping, should be in your lexicon if you are a manufacturer, supplier or sell your products through retailers. If you are a manufacturer or wholesaler who is noticing the trend that retailers want to carry less inventory and order smaller quantities, you will find this blog article to be full of helpful information. If you are a retailer looking to add products to your store; but, don't want to hold inventory, this article may help you decide whether to expand your product catalog with drop ship products.
This blog post will cover the basics of drop shipping, some reasons for the growth in drop shipping and how a manufacture can start drop shipping for retailers. I'm not going to profess to know every way to offer your distribution channel drop ship; but I'll cover the basics of manufacture drop shipping, and I hope readers will comment with thoughts and recommendations to push the conversation further
You may also find value in my earlier post (to which this is a follow-up) on ToyFair 2009, where I outlined drop ship fulfillment as a critical feature routinely requested by retailers and offered by toy inventors and manufactures.
What is Drop Ship and Why Should You Care?
Drop ship fulfillment is the epitome of "just-in-time" inventory. With drop shipping’s model, the retailer does not keep any merchandise in stock. Instead, buyer orders are sent directly to the manufacturer or wholesaler, who then ships the item to the buyer. Drop shipping is common among e-tailers, catalogers or mail order businesses that offer a very large product catalog to retailers that can’t or don’t want to invest in inventory..
Let’s look at a fictional example
Rob the Retailer owns RobsElectronicToys.com and has been successful selling RC cars, model robots and other electronic gizmos. Rob has some bestsellers that he knows he can sell if he buys inventory, but his warehouse is small and he doesn't yet want to outsource order fulfillment to add capacity. Before he invests in a new product he likes to test it. Rob has been looking at stocking some expensive new electronic games like Rock Band™ and some expensive Karaoke machines. He is concerned that these may not fit his target niche; but, he thinks they will sell well. Calling around to manufacturers and wholesale suppliers, he realizes that to make a return he would need to invest a lot of money into inventory to get the best pricing breaks. He's nervous and just wants to test the market for a few months. He doesn't want to join the affiliate program for another electronic toys website because he doesn't want to lose the sale. Rob finds Don's Drop Ship Electronics, who will drop ship orders of the products Rob wants to sell directly to Rob's buyers.
Why using a drop ship supplier may be right for Rob:
- A drop ship supplier will allow Rob to close the sale on his site and pass the order to the supplier for fulfillment to the buyer. On each transaction, Rob is selling retail, buying wholesale and asking the supplier to ship to the buyer. Rob keeps the sale.
- Rob gets to expand his product catalog and test this new market. This way, he can stock it if it sells well.
- Rob doesn't stock inventory or have to ship the product; but, he gets a bit higher margin than an affiliate for the risk of billing and customer support, and he closes the buyer through his own shopping cart.
There are a few things that Rob needs to watch out for
- Investigate the supplier. They must be reputable, ship products from a reputable carrier and not charge excess drop ship fees. Shop around. Remember if the supplier drops the ball on fulfilling the order, Rob has to deal with the customer.
- Hot products can sell out, resulting in a back-order with the supplier and a support call to the buyer. Rob can always buy a small wholesale order or stock just a few products in his warehouse to protect against sell outs.
- Ask about shipping, returns and credit card charge-back policies.
Why does it make sense for a manufacturer, supplier or distributor to offer drop shipping?
- Many retailers don’t want to invest in large quantities of inventory or minimum order amounts. Offering drop ship is a step between an affiliate and a wholesale account.
- Affiliates are often reluctant to buy wholesale, as they likely do not have their own fulfillment or warehouse solutions.
- Many manufacturers or wholesalers, like Don, have a huge product catalog that they want to give retailers access to. Often the 80/20 rule applies; 80% of the sales are generated against 20% of the product catalog. Offering drop ship opens up new sales opportunities to the long tail of his product catalog.
- Don knows that shipping and fulfillment are something that he can do well or outsource to a fulfillment company effectively because he has the largest economies of scale. By controlling the shipping process, Don protects his brand and tightly controls his distribution model.
- Don can charge fees to drop ship. He can now set up exclusive territories and know they are being enforced.
Before Don jumps into drop ship here are some things he should think about:
- Drop ship requires a warehouse to have robust pick-and-pack (direct to consumer) processes. To drop ship a warehouse needs to support 1-Day, 2-Day, ground and overnight shipping (maybe international); boxes and packaging for direct-to-consumer is different than B2B and returns processes need to be thought through.
- If you are used to shipping freight you will need to support parcel carriers like UPS, FedEx, USPS.
- Your product catalog has to be in a dynamic format and will likely need to support electronic feeds. The data can't be a printed wholesale catalog.
- Dynamic inventory updates and real-time inventory numbers must be supplied to your drop shippers and any drop ship marketplaces.
- You have to be committed to pick/pack and drop ship...or you should outsource this. You can always bring it back in-house.
How can a manufacturer, supplier or distributor power drop ship fulfillment?
- Manual. Provide retailers with enough information to post your products on their website. Provide product images, descriptions, wholesale price, MSRP, etc and updates on inventory. Provide them with an e-mail account, phone number or order form to input orders to you. You need to also provide shipping options, returns procedures and charge-back processes. This method allows a manufacture to truly stay in close contact with the retail channel; but, automation is obviously lacking.
- Shopping carts. If you have your products in a shopping cart, look to your cart to see if it can export your product data into an XML format or give your retailers product pages that plug straight into your shopping cart.
- Manufacturer drop ship software. There is software out there for manufacturers and suppliers that run their own fulfillment. One program I've seen is Order Storm. I can't vouch for the viability of this software; but, perhaps a reader can.
- Outsource. If you are a wholesale manufacturer or supplier and your fulfillment and automation processes today are geared toward B2B/wholesale shipping, consider outsourcing your fulfillment to a pick-and-pack operation that can help you automate the inbound order processing, handle the pick/pack and returns and give you live inventory data. This is exactly what the Shipwire drop ship fulfillment integration with Doba provides. Shipwire and Doba work together to allow you to outsource the fulfillment and supply inventory data feeds to Doba who will syndicate the data to their 20,000+ e-tailers. These etailers source drop ship inventory from the Doba marketplace and sell it on their websites. The Shipwire - Doba connection is free. Now manufacturers can outsource product drop ship fulfillment.
Additional Resources For Drop Ship and Fulfillment
Doba – Doba provides a marketplace to connect e-tailers with drop ship friendly suppliers and the technology platform to manage order flow and product availability. Doba is only available for U.S. orders; however, it is open to international suppliers via the Shipwire-Doba connection.
Shipwire manufacture drop ship fulfillment – Shipwire provides a global warehouse network to store product and automate order fulfillment or drop ship fulfillment.
World Wide Brands – International drop ship education. The team at World Wide Brands has done a great job of providing educational tools for merchants and suppliers entering into drop ship. They provide a directory of drop ship-friendly suppliers. WWB is a great resource to connect with drop ship suppliers and spend less time validating suppliers.
Alibaba – a marketplace to connect buyers and sellers . Alibaba is a great resource to compare product costs and start building your supply chain if you move beyond drop ship.
Please comment in this blog with any tips or tricks or other drop ship services.
Next up for me is an actual customer case study where you will learn how one manufacturer is changing how retailers sell mattresses.
By Nate Gilmore, for Shipwire ecommerce order fulfillment service. Learn more about manufacturer drop ship fulfillment with Doba and Shipwire.
Follow me on http://www.twitter.com/shipwire
This post is filed under Tools, Tips and Suggestions and has the following keyword tags: manufacturer product drop ship, drop ship fulfillment.
7 Comments
PetsRight says:
As I'm about to launch my store... this...
"Hot products can sell out, resulting in a back-order with the supplier and a support call to the buyer. Rob can always buy a small wholesale order or stock just a few products in his warehouse to protect against sell outs."
is the one thing that has me really concerned.
Shipwire eCommerce Order Fulfillment Service says:
Chris,
Thank you for commenting (and reading).
I can think of a couple ways to deal with this; but, the community probably has some other thoughts.
1) Just pay attention to sales and inventory availability as you launch and grow. Don't go on auto pilot.
2) If you have a product that you think may sell out, consider the cost if you have to buy it from a "second source" (assuming you don't carry any inventory yourself) if you get into a bind.
3) Buy a few and have them on hand.
Nate
PetsRight says:
I'm strictly drop shipping but I never thought to "Buy a few and have them on hand.". Something so simple.
Thanks for the advice.
MapleMike says:
My company has successfully dropped shipped for catalog and web retailers for 14 years and I have few comments.
Interested retailers must be as professional as any other retailer. We get to many inquiries from internet wannabees who think selling drop-shipped items will be easy money. Usually this means they'll be high-maintenance / low return for us.
In order to keep the holidays sane, we do not accept new drop ship accounts after Sept. 1 and their website must be loaded shortly after. We need to establish a pattern of business to avoid surprises late in the season.
We do not offer access to our inventory numbers. We physically manufacture here on site, over 1000 products, in a very flexible fashion. At any given moment during the busy season we'll be out of 25% of our SKUs, yet anything that doesn't ship the same day will ship within a few days. This drives some retailers nuts but that is how it works when you pass the buck on stocking inventory. As suggested in the article, keep some on hand, or at least not promise instant shipment (without checking first). It doesn't take automated management, it takes smart management. During the 2007 season, after the toy recalls, our business exploded yet we met every promise.
PetsRight says:
MapleMike, Thanks for the insight.
Dan Walden says:
I am a former Ebayer and looking at possible re-entry, but of course no limitation to solely eBay. After reading this article and the comments submitted, it seems that folks still fail to recognize that the little guy who works hard to establish their web presence, set up wholesale accounts, etc., is still strongly limited to not having ample service from the supplier, or even the third partiers out there.
What do I mean? Photos of your product, product decription, what cross or upselling items work with the main product, in stock or not feed, allowing retailer to "link" to the system of wholesaler in order to help streamline the entire process, price changes, MAP pricing issues, and I am quite sure I could produce several other reasons that are never entirely covered by any one company or person.
I did tons of research on this subject back in 2005 and 2006, so perhaps someone came out of the woodwork and solved these problems since then? If I looked back at how much time it took me to produce just one product on my website, I never made a profit! Is there a company out there that can (honestly) consolidate all of the work into one basket and get the wholesalers and e-tailers to come together as one, but under policy guidance to avoid competition issues?
Shipwire eCommerce Order Fulfillment Service says:
Dan, were you drop shipping 100% of your catalog or only a small % that you used to fill out your product catalog and for cross selling purposes? I'm assuming you stocked a bunch of your own inventory and then sourced a % of product from drop shippers to fill out your catalog.
Check out Doba.com if you want 1 place to get the product, pull it into your site and be able to use it cross-sell. See if that provides some of the tools. Some of the things you ask for seem to be provided by them.
World Wide Brands has done a great job of inventorying suppliers that are friendly to drop shipper retailers.
Thanks for your comments and for keeping this thread active.
