You may have heard of Drop Shipping before, but many don’t understand how it works or how it benefits a business and its inventory. Below I’ll explain the fundamentals of Drop Shipping and the many ways it can evolve your Supply Chain Management Process.
So what exactly is Drop Shipping? Drop shipping is a supply chain method in which a retailer does not need to physically stock goods or make any product inventory purchases. All that’s needed is to transfer the customers’ order with the shipment details to a wholesaler who when ships the goods to the customer. The retailer makes a profit from the price difference between retail price and manufacturer or wholesale price. The product can be customized to have the retailer’s information and brand name.
You found a drop ship service provider who offers wholesale running shoes for $70 and you place these running shoes for sale on your storefront for $120.
Your customer visits your website and places an order of $120 for a pair of running shoes.
You purchase the running shoes for $70 from your drop ship provider and give your customer’s shipping information.
The drop ship provider then processes and ships the product directly to your customer.
You received a sale for $120 and purchased the product from your supplier for $70 and earned a profit of $50!
You just drop shipped a sale with no inventory kept onsite or tracked within your business!
What you’ll like about Drop Shipping:
The cost of setting up a drop shipping business model is next to nothing – The majority of business costs go to a physical presence and purchasing inventory. Your business is online and you use the Drop Shipping business model so no inventory is purchased. Your overhead is basically removed altogether.
Reduced risk – There is little loss if your business doesn’t sell any products and there’s no need to liquidate inventory in the event your store shuts down.
Your location is not important – Since you’re not physically shipping products, it doesn’t matter where you are located. You can be in Mexico selling Electronics in Canada with Canadian drop shippers.
Reduced loss on goods – With less steps involved in moving products there is a lower chance of damaged or missing items. Most product suppliers are experts when it comes to packaging and shipping goods so your orders are in good hands.
What you won’t like about Drop Shipping:
Level of competition is high – Since it is easy to drop ship and suppliers offer their services to all, you may find a decent amount of competition selling the same products. You’ll need to outsmart your competition to beat them at their own game.
Managing inventory can be tough – The bigger your product line gets, the harder it is to control. Suppliers often go out-of-stock which can lead to order cancellations and upset customers.
Order complexity can be tricky – Let’s say you have two drop ship suppliers and one of your customers orders one item from each supplier in one sale. You’ll now need to send two packages to your customer from different sources and both are likely to arrive at different times which may create confusion. If the customer decides to return both items they will need separate RMAs adding more confusion.