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.”
- Supply Chain Collaboration In Transformative Vertical Industries – DiCentral
- Drop Shippers Name Inventory Management and EDI as Best Investments for New Retail Channel – SPS Commerce
- ‘Drop Shipping’ Looks Set to Go Mainstream as More Retailers Get on Board – The Wall Street Journal
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?