If you are a proud business owner, you will know the inventory game all too well. The goal is to ensure inventory receipted into stock is perfectly balanced with inventory sold. Unfortunately, this level of harmonious inventory management is difficult to achieve without the right support. Now imagine how difficult it is to effectively manage stock which you never actually physically possess. Instead, all ‘your’ inventory belongs to your suppliers and you are simply ‘promising’ it to your customers who place an order with you.
This is where drop shipping is used and is proven to be, with the right skills, a very effective way of doing business. Essentially, a customer purchases a product from your extensive online catalogue. You then place the order with your supplier who ships the product directly to your customer. The result is that you can run a business from your laptop with no inventory to speak of and minimal overheads. Sounds like a winning solution, right? It certainly can be. Let us look at a few specific inventory management strategies to consider when setting up a company based on the drop shipping ethos.
Effective communication and efficiency
As you can imagine, a business model that involves drop shipping must also involve extremely effective communication as more than one company is involved in the selling and shipping process. As soon as multiple companies are involved, there is significant room for communication issues and error which can only be mitigated with effective and open communication and processes. One part of this may be sourcing automated and integrated systems.
The other part is outlining your company method and goals to your suppliers from the start so that they understand the repercussions of unfulfilled orders and so that your suppliers can work with you to achieve higher order fulfilment and customer satisfaction rates.
As soon as you introduce a third party to your dealings with your customers, it is a ‘no brainer’ that this could complicate matters and result in miscommunication and unfulfilled orders unless of course is there is a fundamental element of trust. Part of the effectiveness of running a drop shipping business is being able to hand pick suppliers who you deem to be reliable partners.
Essentially, you need to be able to trust your vendors with helping you run your business even if you may be one of their least significant customers. It is vital to select suppliers from the start who you think can be relied upon.
Automation and technology
There needs to a system where the minute a customer places an order in your online store, your system places it with your supplier, reducing the likelihood of mismatch errors from a time lag between the two orders. With integrated inventory software, your suppliers’ inventories are visible to you so that you can approve a customer’s order with confidence, knowing it will be fulfilled.
Drop shipping involves relinquishing a significant degree of control over inventory, order fulfilment and customer service. This all works wonderfully until there is miscommunication or an adverse event that renders your supplier unable to fulfil a customer’s order. When this happens, particularly if the supplier is at fault, it is very easy to blame the supplier. However, blaming the supplier is unlikely to get the product to your customer any sooner. In this instance, a backup supplier is needed to keep the customer happy. Therefore an important part of inventory management is the careful selection of trusted suppliers. You should be able to trust a supplier’s supply chain and inventory management as well as the supplier’s product. As a contingency plan, begin collating a list of backup suppliers which you have had a chance to vet well in advance and who are able to respond with a moment’s notice.
Drop shipping for growing businesses
Although drop shipping is a risky way of doing business, it offers a growing business the opportunity to sell a wide variety of products with little upfront commitment. Notably, financial risk is mitigated from not holding stock which could be at risk of spoiling or damage. Before embarking on the drop shipping retail journey, it is important to consider what risks you want to take (customer satisfaction and stock control or financial risk and inflated set up costs) and the tools available to support you with your decision once made. Effective inventory management software is designed to aid you and ensure you spend less time fretting over inventory and more time enjoying the fruits of your hard labour.
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.