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, for example). By looking at the ancillary products you might add to your product line, but 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 products under a variety of marketplace identities. You can have multiple storefronts under your name, or create any number of seller 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 3PLs (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 lapse 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!
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