Friday, 24 January 2014

Supply chain concepts: Drop Shipping

The first question comes to your mind is what exactly is drop shipping.  In simple terms, you do not own the inventory, you simply forward the customer purchase request to the wholesaler and take the commission.

From Wikipedia “Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in retail businesses, the majority of retailers make their profit on the difference between the wholesale and retail price but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.”  This concept is very famous because of the following reasons
  • You don’t need to own the inventory. So there is no cost to acquire the products, no question of returning the products to vendors in case of no sale, no inventory transshipment cost, no inventory holding cost, no inventory damage or management costs.
  • No pick, packaging of customer orders, no dealings with courier or logistics companies
  • You can start with very little investment
  • You can scale very fast by adding more and more merchants or wholesalers

Life looks pretty simple, all you have to manage is front end website, branding, promoting, handling the customer queries and collecting the commissions from the Wholesale merchants.
But there are downturns of it as well.
  • The most important thing is it affects your brand name.  You cannot maintain a common standard, or quality.  The kind of packaging, invoice, shipping all these things depends on merchant to merchant.  You cannot establish a brand name due to these asymmetries.
  • Fulfillment errors, mistakes by third parties, logistics mistake affect your customer service and brand name
  • Out of stock items.  When wholesaler cannot fulfill the order because it is out of stock it impacts your customer.
  • Less margins
Because of all these it may not be liable to have drop shipping.  Shoes ecommerce giant that’s why avoided drop shipping.

References:

Wikipedia   Quora   Shopify article

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