Shipping & Fulfillment

Drop Shipping for Ecommerce, Part 2: The Basics

My article last month, “Drop Shipping for Ecommerce, Part 1: Supply Chain History,” was the first in a series about drop shipping as an ecommerce supply management technique.

What Is Drop Shipping?

Here’s my definition of drop shipping.

“Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead offers a third-party supplier’s — a manufacturer, distributor, wholesaler, or other retailer — inventory for sale. Upon customer order, the retailer transfers that order and shipment details back to the product supplier, which then ships the goods directly to the customer on behalf of the retailer.”

And here’s how it looks drawn out.

Drop shipping originates with a consumer, who places an order with a retailer, which sends it to a supplier, which ships it to the consumer.

Drop shipping originates with a consumer, who places an order with a retailer, which sends it to a supplier, which ships it to the consumer.

Drop Shipping: Hype?

In today’s market, drop shipping is sometimes a polarizing concept. On the one hand, you can find magazines with advertisements that make drop shipping appear easy and lucrative, such as this ad.

Many advertisements, such as this one from a magazine, claim falsely that drop shipping is simple and leads to easy riches.

Many advertisements, such as this one from a magazine, claim falsely that drop shipping is simple and leads to easy riches.

A simple Google search will also find a lot of drop shipping messaging about risk free and easy opportunities.

But, conversely, consider the view of Tony Hsieh, the CEO of Zappos. In his book Delivering Happiness, he writes, “We all knew deep down inside that we would have to give up the drop ship business sooner or later if we were serious about building the Zappos brand to be about the very best customer service.”

He then explains that in March 2003, Zappos removed all the drop-shipped products from its website and that removal was one of the main reasons Zappos turned the corner and was ultimately successful.

So which is it? Is it so easy, you can retire on the beach and drop ship products in your bathing suit and look good doing it? Or, if you want great customer service, and ultimately be successful in selling online, you can’t engage in drop shipping?

The truth is in between.

Drop shipping is easy to oversell. It sort of oversells itself, in fact. Think of the other terms that are used to describe it: “Inventory Free Retail.” “Endless Aisle.” as I mentioned last month, drop shipping strikes to the foundational challenge of a retailer: product inventory and inventory distortion. So it’s hard to cut through the drop shipping hype.

But, it’s also not new. Catalogers have been drop shipping for decades — i.e., “this product may take 4 to 6 weeks for delivery.” Retailers have been drop shipping for decades — i.e., “we can special order this couch that you see here in our showroom directly from the factory.” And in the 11 years since Zappos discontinued drop shipping, a lot of the underlying dynamics in the supply chain have changed such that in today’s ecommerce market, drop shipping as a strategy is fairly common.

How Common Is Drop Shipping?

It is difficult to determine how many ecommerce merchants utilize drop shipping. The answer is elusive. Here is information that can help.

  • In 2013, CommerceHub, a software company that facilitates drop shipping for enterprise retailers, processed 44 million transactions that represented $7 billion in retail sales. That’s almost 3 percent of all of ecommerce ($7 billion out of $263 billion of total ecommerce sales) in the U.S. drop shipped and facilitated from just one technology company. There are many other technology companies that facilitate drop shipping, and even many more companies who have built their own technology directly.
  • Billion dollar plus etailers such as Hayneedle, Wayfair, and Overstock each work with thousands of supply sources and drop ship the majority of all of their consumer sales. Many other top etailers also follow these leaders by drop shipping a substantial piece of their sale.
  • More than one-half of all that Amazon sells is through its third party marketplace, which is similar in concept to drop shipping. So estimates are that even from just Amazon, you’re looking at another nearly $100 billion in drop shipping (marketplace) sales. Many other companies (such as Walmart, Staples, also operate marketplaces.

The best guess I’ve been able to get to, after being involved with drop shipping for over 15 years, is that between 25 to 33 percent of all ecommerce transactions in the United States could be classified as a drop shipped transaction. In emerging markets such as China, where Alibaba runs marketplaces like Taobao, the lion’s share of ecommerce could be characterized as drop shipping.

Routinely Complicated

Drop shipping is routine, but it is not simple. It sounds simple, looks simple; but it’s far from so. It is a significant departure from the typical flow of how product gets to the consumer. Your systems and relationships have to be thought through differently compared to a traditional supply chain. The root challenge is that by attempting a virtual supply chain, retailers and suppliers face system-to-system integrations and automation to share product catalog data, real-time inventory feeds, and a coordinated consumer order lifecycle so that consumer expectations can be met.

Some specific challenges include the following.

  • The need to capture, create and share product information (descriptive text, images, taxonomy, physical characteristics) that is as close to a perfect virtual representation of a physical product as possible
  • Each supplier will be a source of inventory, so you will need up-to-date visibility of potential inventory pools, versus integrating and having visibility with a single repository of inventory.
  • The loss of control as retailers must now rely on their suppliers to ship orders in a timely and expert manner. To ensure good customer service, the suppliers will need to be able to accept electronic orders and provide timely status updates directly to your systems, as well as support specific fulfillment and packaging requirements.
  • Your ecommerce platform will now need to coordinate products from multiple vendors and locations, to start with a consumer order and break it up into multiple vendor orders and, in turn, consolidate order status updates back into a single consumer view.
  • The need for suppliers to pick, pack, and ship consumer orders in a much different process than shipping pallets or case packs to a retailer or distribution center.
  • The likelihood that drop shipping can require updates to a supplier’s warehousing, fulfillment, and invoicing systems, as well as changes to processes and channel policies.
  • The transfer of inventory risk back to the supplier.

Drop Shipping: Worth It

Despite the challenges, one of the most significant trends in the ecommerce supply chain over the last decade has been the shift toward drop shipping and third party distributed inventory. A lot has changed since 2003. With such clear advantages, retailers and suppliers are being compelled to adopt drop shipping to be competitive with product selection and product penetration. Those who fail to overcome the challenges associated with drop shipping and a more virtual supply chain will face far more severe disadvantages as ecommerce inevitably shifts this direction.

See the next installment of “Drop Shipping for Ecommerce” at “Part 3: Suppliers vs. Retailers.”

Jeremy Hanks
Jeremy Hanks
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