During the 1920s, mass production and assembly lines laid the groundwork for supply chain production and distribution. Back then, it was pretty straightforward: A customer purchased a product, and the seller shipped the product straight from their inventory.
However, with the advent of eCommerce and changes in consumer behavior, even supply chains that are run at maximum capacity are struggling to meet consumer demands. That’s why many manufacturers, wholesalers, and retailers are implementing a supply chain management method called drop shipping to mitigate inventory risk and increase profits.
Whether you’re familiar with a dropshipping business or not, it helps to know how the drop ship supply chain works. In this article, we’ll provide an overview of the drop ship supply chain and how it can benefit your business.
Drop Ship Supply Chain: The Basics
Let’s dive into the basics: what does drop ship mean and how does the supply chain work? In short, a drop shipping supply chain refers to a logistical model in which the seller doesn’t keep their inventory in stock.
Instead, product orders and shipment details are handled by a third-party distributor. These distributors include:
- Third-party warehouses or wholesalers
- Other retailers
- The product’s manufacturer
- Fulfillment centers
These third-party distributors are thus in charge of fulfilling the order and shipping the product to the customer.
How Drop Shipping Works
To better understand how drop shipping works, let’s look at a typical drop ship scenario.
Suppose a customer purchases a new laptop from a Boston-based eCommerce retailer. In a traditional supply chain, the order is fulfilled and shipped through the retailer’s inventory.
However, in a drop ship supply chain, the retailer never handles the product. Instead, the supply chain operates via three distinct stages:
- The customer purchases the laptop through a Boston-based eCommerce retailer.
- The order is sent from the retailer to a fulfillment center in Yonkers.
- The fulfillment center processes the order, packs it, and ships it to the customer.
The eCommerce retailer’s drop shipping partner—in this case, the fulfillment center—will then charge the retailer for the service. And in turn, the retailer will charge the customer. So, in a dropshipping business model, the retailer will not store inventory nor conduct order fulfillment as this is taken care of by the drop shipper.
However, dropshipping poses its own challenges. It’s important to look at the factors that impact the business, which can include dropshipping costs, customer experience, keeping up with consumer demand and inventory, etc. Like any logistical model, drop shipping comes with its share of advantages and disadvantages. Let’s look at the advantages first.
Drop Shipping Advantages
While drop shipping involves more moving parts, it’s especially beneficial to eCommerce companies looking to mitigate the risk of selling inventory they don’t have on hand. We’ve broken down several additional advantages below.2
1. Ease
If you’ve ever worked in a warehouse, you know the numerous products you have to keep track of. Depending on the business, a typical warehouse might have thousands of products arranged on an army of pallets from floor to ceiling.
Needless to say, keeping track of all of your inventory can be quite a hassle.
Drop shipping means kissing this inventory-management nightmare goodbye.
When you drop ship, you’re handing over your inventory management duties to a logistical expert, whether that’s another retailer, a wholesaler, or a fulfillment center.
2. Cost
Let’s face it: maintaining your inventory costs a pretty penny. Not only must you finance the cost of the warehouse itself, but you must also train staff to run your warehouse and manage your inventory.
All these expenses can quickly add up.
Drop shipping helps eliminate many of these expenses. In addition to negating the need for a brick-and-mortar location to house your inventory, drop shipping can decrease costs in the following ways:
- Cuts initial capital costs – As stated above, maintaining your own inventory can be expensive, but so is purchasing your products to even begin stockpiling your inventory. Drop shipping means you don’t have to invest in your inventory upfront. This can greatly save you money during your eCommerce business’s infancy and improve your profits as you grow.
- Low overhead – Even the smallest eCommerce operations sometimes have significant overhead, like rent, insurance, and utilities. With drop shipping, you’re eliminating the source of much of this overhead—the warehouse itself. Drop shipping means you don’t have to hire a team to handle your inventory needs. Nor do you have to maintain costly office space. Instead, you can operate your business from anywhere in the world—just as long as you have an internet connection.
Even though drop shipping can cut costs and increase the flexibility of your business operations, sometimes you need customized supply chain solutions that can cut costs even more.
Drop Shipping Disadvantages
Although drop shipping can cut costs, there are a few drawbacks to this logistics solution when it comes to your fulfillment model. These disadvantages include:1
- Less control over customer service – When you hand fulfillment and shipping duties over to a third-party distributor, you’re also relinquishing some control over customer service. That’s because unless you know exactly when a customer’s order is fulfilled, shipped, and received, you won’t be able to accurately track a customer’s order. This opens the door to potential customer service issues.
- Quality control and stock shortages – Because you’re never actually seeing your products, you can’t engage in effective quality control. Instead, you’re trusting a third party to handle your inventory with care. What’s more, sometimes your product outsells the drop ship suppliers’ ability to keep it stocked. A stock shortage can greatly put a damper on sales.
These downsides can be hedged against by leveraging a trusted drop shipping solution.
Ship Smartly With Drop Ship Supply Chains
A drop ship supply chain can simplify your eCommerce business and significantly improve logistics. For starters, you don’t have to worry about raising a ton of capital upfront, and drop shipping helps keep your monthly overhead low. Ship smarter, today.
Sources:
- APS Fulfillment, Inc. What Are the Disadvantages of Drop Shipping?
- https://www.apsfulfillment.com/shipping-fulfillment/what-are-the-disadvantages-of-drop-shipping/
- Shopify. Dropshipping Fulfillment: Guide to Supply Chain and Order Fulfillment. https://www.shopify.com/blog/dropshipping-fulfillment
