Where are the pain points for suppliers engaged in drop shipping?
Retailers and suppliers both believe they’re benefiting from the practice of drop shipping online orders, according to a study from Lehigh University. Manufacturers, however, have struggled more at adapting to the needs of the practice due to the costs and complexities involved.
For retailers, linked systems and collaboration were found to help resolve issues such as quality control and returns, according to a study on behalf of DiCentral, a provider of supply chain integration services.
For suppliers, however, challenges include:
- Cost: In most cases, suppliers are asked to incur the expenses for direct-to-consumer fulfillment.
- Single-order fulfillment execution: Suppliers that have traditionally optimized order management and logistics around bulk replenishment to a handful of retailers are finding selling thousands of individual units, each with its own order and parcel post shipment, increases operational overhead without any increase in sales. Suppliers are also tasked with more order management, inventory and fulfillment responsibility.
- Retailers have the upper-hand: Retailers in the study were found to be “still setting the rules” with drop ships, including determining what information is needed, the sequence of events, frequency of transmissions, articles of data needed and treatment of orders. Individual retailers may each have different sets of rules that also add complexities.
On the positive side, the majority of suppliers said drop shipping has led to improved sales, market share and profitability. Suppliers earn a higher margin versus shipping bulk with traditional wholesale orders and have more opportunities to serve new and existing retailers since they are bearing the inventory risk.
Suppliers were seen to improve execution by increasing joint collaboration, unifying order and fulfillment technology solutions and updating information system.
The Lehigh study found that, given the costs and challenges involved, manufacturers that fulfill drop ship orders for 10 percent to 40 percent of retail customers enjoy greater revenue than those fulfilling for more than 40 percent of their retail customers. The study stated, “Manufacturers see a higher return on investment when drop shipping is limited to a more manageable percentage of their total business.”
Discussion Questions
DISCUSSION QUESTIONS: Does it make sense for suppliers to focus their drop shipping business with a limited number of retailers? How do you see technology solutions and executional efficiencies reducing the costs and complexity suppliers face with the process?
Poll
BrainTrust
Ralph Jacobson
Global Retail & CPG Sales Strategist, IBM
Chris Petersen, PhD.
President, Integrated Marketing Solutions
He who owns the relationship with consumers makes the rules. Retailers adept at online don’t just sell, they create and maintain ongoing customer relationships. Suppliers benefit by leveraging drop shipments with retailers who have the best consumer relationships. However, suppliers must choose partners wisely! If the retailer mismanages the drop ship it can create a customer experience which reflects negatively on the supplier and retailer. It is never wise to put all the eggs in one basket. Suppliers need to develop their own routes to market to compliment drop shipments.
If the manufacturer’s task is to pick, pack, and ship the order, then the manufacturer can do business with all retailers and use a third party such as the USPS, UPS, FedEx and others to pick up the product and deliver it to the consumer. If there are more and different demands made on the manufacturer by the retailers, then it may necessary to limit the number of retail clients to those that offer the most cost-effective combination of options (ability to use existing shipping facilities, higher gross margin for the drop ship unit, and least-cost order processing).
The answer to these questions must be directed on a case-by-case basis. One entity may not have the same inherent advantages that another similar one may have. Start with an ecosystem network analysis to determine the overall strategy. From there, employ the great tools in the marketplace today to define your business partners.
The development of drop shipping doesn’t make sense for all supplier-retailer relationships. The costs of having drop ship operations is too high and frankly someone needs to also look at the environmental costs. Retailers have the upper hand as long as they own the customer. We have all seen on these screens over the past few months many articles about brands creating their own go-to-market direct to consumer routes. This is now more possible than before but not as easy as suppliers think. The retailers have a function and it also has a cost to use that route. The balance for drop shipments will be found by both parties over a period of time driven by what is economical and what isn’t. The winners will be the ones that remove cost out of the supply chain rather than simply moving it from one place to another.
The argument that retailers are reducing their cost of inventory presupposes they are higher than the cost of logistics, which is often not the case. Good retailers can be very efficient at managing inventory and making this work for them so drop ship orders do not necessarily make economic sense.
There is most definitely a “right-sizing” necessary when taking on a new drop ship (VDS/SDF) solution. Our teams recently designed and began implementing a solution for a leading retailer on a best-of-breed enablement platform. Vendor scorecarding is a core capability that retailers need to look for to understand the SLAs the vendors are meeting when fulfilling orders directly, and more broadly the shipping cost (which I’ve seen more often than not incurred by the retailer themselves, by way of the supplier charging directly to their account).
Technology solutions play a big part in the ability to scale. Systems that don’t enforce state-changes and data integrity by the suppliers put the onus on the drop ship team to monitor and help to fix issues. Those should be the responsibility of the supplier. What they get in return is the additional business.
Last point, and it’s not being asked here, but margin analysis plays a big part in determining which retailers to proceed with. There are huge impacts in regards to change management with the buyers in addition to change impacts to the broader organization as to which department owns the drop ship solution (I’ve seen e-commerce operations own it, and I’ve seen supply-chain own it.) Returns allowances and chargebacks/policy enforcement as a whole is a huge risk and/or opportunity area that requires a lot of thought and analysis!
Most interesting comment is: “On the positive side, the majority of suppliers said drop shipping has led to improved sales, market share and profitability.” Just goes to show you that the increased logistics cost for DTC is overshadowed by manufacturing operations cost. More sales means more profits for the suppliers.
The growth of online retailing and consumers elevated expectations of fast delivery has forced retailers to explore creative ways to ship products to consumers. Drop shipping from suppliers creates access to more inventory and potentially more distribution points to fulfill orders. As more retailers begin expecting drop ship services, suppliers will be forced into offering this service.
Leveraging leading technologies and optimizing processes will be imperative to manage costs and make this a profitable part of suppliers’ business.
An interesting trend that for retailers makes sense. It’s also yet another point of contention between retailers and suppliers. Productive collaboration remains an admirable objective and the more consumer insight a supplier has about its own products the more it can equally collaborate with retail partners.
The challenge over time with retail/CPG brands is that both are starting to realize the benefits of ruling the consumer relationship. It’s leading companies like Kroger to vertically integrate and offer more of its own private label brands to reduce dependency on suppliers. It’s leading retailers like Walmart and Target to build digital advertising marketplaces to monetize data and sell new digital products to suppliers. It’s leading CPGs to figure out more direct to consumer channels themselves and invest in better analytics and consumer insight.
Drop shipping is just a symptom of a rapid evolution in the retail and consumer goods industries.