Drop Shipping: Solution or Sandtrap?

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The dangers of drop shipping without an integrated inventory management system in place. Drop shipping can be the answer to an online retailer’s prayers or the root cause of their worst nightmares. This increasingly popular distribution service is one that places the burden of inventory control, picking, packing and shipping firmly upon the shoulders of the manufacturer or drop shipping wholesaler – sometimes with unforeseen and costly consequences to the retailer.

For a small or medium sized business lacking in the knowledge or resources to purchase, store and distribute their own inventory, drop shipping – at first glance – appears to offer the ideal solution.

Drop shipping as a business model means that retailers are responsible only for the marketing and sales of products via eCommerce platforms, while the actual manufacturer or wholesale distributor is responsible for carrying out order fulfillment; stock picking, packing and shipping to the end consumer.

To the uninitiated retailer, this arrangement makes it seem as though inventory management is a challenge that is effectively outsourced and taken care of by the drop shipper. However, in practice, the effective management of inventory within the context of drop shipping as the operating distribution model requires effective system integration and access to inventory data that is up to date and accurate.

Without an integrated inventory management software system in place, a drop shipping arrangement can lead to a number of problems for the retailer – all of which can have a damaging effect on the ability of the business to remain both reputable as well as profitable.

More often than not, an online retailer will source products from various drop shipping suppliers. This immediately raises a formidable number of obstacles that need to be overcome in order to ensure sales are executed smoothly, customers remain happy and most importantly margins (which are notably lower with drop shipping arrangements) are maintained.

The reality when managing several drop ship supplier relationships is that things can easily become over-complicated, inefficient and costly very quickly. Consider the following situation:

An online retailer offers a relatively vast number of SKUs (Stock Keeping Units) from a number of different brands. Should a customer order three or four different products from separate brands (and therefore separate drop shippers) a range of issues immediately present themselves.

One customer + multiple purchases + multiple suppliers = logistical minefield

The first is the timing of the delivery. Customers who order products from a single online store naturally expect that their order will arrive at the same time. A retailer relying on various drop shippers to carry out their order has no way of ensuring that their customer will receive their products from the same order at the same time.

Inconsistency in terms of delivery times equates to inconsistent service to customers. In today’s interconnected, social media driven marketplace, even a single unhappy customer can wreak havoc on customer service targets.

When the drop shipping process is a problem

Typically, when the order is received, the retailer needs to create a purchase order for each product from brand A, B and C, and then submit that purchase order to the respective drop ship supplier. The retailer then needs to hope that the item being ordered is actually available and ready for immediate shipping to the customer. Then, the tracking numbers of each of the ordered goods need to be received from the drop shipper once goods have been dispatched, and these tracking numbers need to then be relayed on to the customer. Keep in mind that each supplier will likely have different purchase order procedures, different customer-response times and will utilize different shipping companies which equates to different delivery and handling charges.

Nobody likes being the piggy in the middle

Should there be delays or customer queries regarding the status of their order, the retailer needs to be comfortable adopting a ‘piggy in the middle’ approach to communication relay. Not having access to the status of their inventory in real-time often leads to frustrated customers who cannot be told where their order is or when they can expect it, and frustrated retailers who have to constantly hound their suppliers for updates on the tracking of their order.

Without an inventory management software solution in place capable of offering real-time tracking, tracing and accounting for inventory, then the issues could become unmanageable and disastrous to the online retailer who is left with angry customers and a growing collection of poor reviews – which in the online retail world equates to a one-way road to business failure.

The solution? Integrate and automate a powerful inventory management system

Any business considering adopting a drop shipping distribution model for their business needs to carefully evaluate the manufacturers or wholesalers they choose to do business with.

It is essential that a business has visibility into the inventory of their suppliers. Many of the leading inventory management software solutions – particularly the cloud based Software-as-a-Service (SaaS) driven solutions like Unleashed – allow businesses to seamlessly integrate their supply chain software packages with those of their suppliers.

This allows for automation and systems integration between both the online retailer and its drop ship suppliers. It is important to have a system in place that automatically adjusts inventory levels as orders are placed online. This allows the retailer to access data regarding the real-time inventory situation and ensure that available order quantities listed on their sales platforms matches with what is available supply-wise.

Without an integrated inventory management software solution retailers have no way of ensuring that the items they list as ‘in-stock’ on their website are actually available from their suppliers. In the case that orders are placed but cannot be fulfilled due to a disconnect between orders and available inventory the business is forced into damage control mode. This is both costly, stress inducing and time-consuming.

Having an integrated inventory management system in place that fosters cooperation between retailers and drop ship suppliers ensures that customers are always making purchases with the assurance that their orders will be delivered in the right specifications, in the right quantity and within the delivery date promised.

Inventory tracking also ensures that customers are kept informed as to the real-time progress of their order from the warehouse to their door, eliminating the barrage of pestering calls or emails demanding when their order is going to arrive.

While drop shipping can offer a low-cost, easily scalable supply chain solution to businesses looking to retail goods online, it is important to select drop ship manufacturers or wholesale distributors that offer inventory management integration and clear, accessible visibility to inventory levels.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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