May 3, 2016      3 min read

Dropshipping is a supply chain management strategy that allows companies to drastically cut their inventory costs by essentially not holding any inventory at all. It is where – rather than holding inventory at a warehouse – a company purchases items straight from a third-party when a customer makes an order, and these items are then shipped directly to the customer. It is a popular method for some furniture and appliance businesses that typically have a showroom of display stock, and then order items once a customer makes a purchase. It is also a popular method for internet businesses, who can use this method to run their entire business through their laptop with minimal overhead cost.

Despite the cost-saving attractiveness of this method, it comes with risks, which are all associated with the fact that the business is essentially being run with no inventory on hand. In order to make this method work, it is critical to have strong inventory management practices. Some key examples are explained below.

Efficiency

In order to be able to reap the benefits of dropshipping rather than selling regular inventory held ‘in stock’, your business is going to have to maximize efficiency when it comes to handling inventory. This is because your shipping costs are likely to rise. Depending on the industry, it is likely that you will need multiple suppliers in order to sell a range of product types and/or brands. If a customer makes an order for products that come from three different suppliers, you will have to pay three times the shipping cost, as you are unlikely to feasibly pass such a large shipping cost onto a customer who has the option of going elsewhere.

Visibility

Inventory visibility is fundamental in dropshipping, as your ability to satisfy your customer’s purchase needs is solely reliant on their items being transported to them from a third-party (i.e. the manufacturer or wholesaler). It is vital that you are aware of how much stock your suppliers have available, so you can relay a realistic delivery time to the customer, and when the product is shipped, that you know exactly where each order is and are notified of any problems as soon as they occur. Inventory management software can assist greatly with these needs by allowing you to view your entire inventory in real-time.

Supplier Relationships

Another key point is that you need to have strong relationships with your suppliers. In order to make dropshipping efficient and therefore profitable in the long run, you’re going to need suppliers that you can consistently rely on, who will communicate with you, and who can work with you to improve your business relationship. Communication is vital here: you need to understand their limitations as a supplier, and to tell them exactly when and how you want your product delivered. This is going to be essential to the success of your dropshipping venture.

Fulfilment by Amazon

Instead of competing with Amazon, why not work with them? Fulfilment by Amazon, otherwise known as FBA, is when sellers place their inventory stock in one of Amazon’s fulfilment centres. Once an order is placed for a product from the your inventory stock, Amazon does the picking, packing and shipping on your behalf. The FBA model means that all the shipping logistics are taken care of by Amazon from their fulfilment centre.