In this post we touch on some of the things you have to get right with a drop-shipping approach to inventory.
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Inventory affects both sides of the business equation: money in and money out. On the one hand the broader your inventory is, the faster you can grow. You have a wider range of products to sell. On the other hand your ability to manage your inventory and accurately control your stock levels impacts your costs and efficiencies. Your success is largely down to how well you deal with this tension.
For this reason, inventory is closely related to the processing of orders. If you’ve got a decent reporting and analytics system you can regularly tweak your product mix and ordering frequency to maintain a good balance and inventory ordering cadence. It’s important too to synchronise your warehouse operations. If you’re finding that you’re doing just-in-time ordering and you’re putting away stock that has also just been ordered by your customers, then you need to swap things around to avoid doubling your efforts.
Of course, all of this hassle would go away if someone else was receiving the goods, warehousing them, and processing and shipping the orders – for you. Drop shipping is where you the seller don’t keep some or all of your goods in stock, preferring to send your customers’ orders and shipping details to the manufacturer, another seller, or a wholesaler. This third party then sends the fulfilled order directly to the customer.
At first glance this sounds like a win-win. For a fee, somebody else holds the stock for you and sends out the orders, branded, if you like, as though they came from directly from you. All you have to do is the marketing, listing and promoting the items so that they get found and bought by your customers.
A deeper look reveals some downsides to this set-up. Firstly, your drop-shipper may be serving not just you but perhaps dozens of sellers with whom they have the same relationship. You’re also relying on accurate and timely stock level information. If this is the case, stock levels are going to decrement very quickly indeed, with the result that overselling might become a regular hazard, or even a regular occurrence. Either you have to build in buffers, pulling the item if the drop-shipper is showing only 2 or 3 items, or you take the gamble and the order. It’s the revenue versus seller feedback dynamic, and a delicate balancing act.
Secondly, with little to differentiate your offering from those of others using a drop-shipping model, if you’re not careful this can become a race to the bottom on price in an effort to win the Amazon Buy Box or the sale on eBay or your web store. Bearing in mind you’re handing a sizeable portion of the order value onto the drop-shipper in the form of the costs of goods sold, warehoused, fulfilled and shipped, as well as paying your marketplace fees, so you can find yourself in a very low margin business.
Thirdly, this is a different kind of relationship. It’s a business-to-business relationship with your drop-shipper, as opposed to a business-to-consumer relationship with your customers. As with your traditional suppliers, you’re trusting the competence and reliability of your drop-shipping partner who becomes an extension of your brand. For this reason, many big brands avoid this model, as image and control are critically important to them.
So how do you make a success of the drop-shipping model? Some categories like Fancy Dress are well suited and established with drop-shipping, so perhaps yours might be too.
Automation is the key to making this model work, in both directions: from your drop-shipper to you and from you to your drop-shipper. It’s the way you avoid the gamble we alluded to earlier in this post. Ideally you need real-time stock level feeds, since in the scenario of serving 30 or 40 sellers the stock levels are going to move pretty quickly. Some drop-shippers are still considerably behind the curve on feeds. If your drop-shipper is still using manual methods to update you, they’re going to have a very hard and labour-intensive time giving you realistic levels to work with.
In turn, you need to be able to take the stock level feed information from your drop-shipper or shippers and transmit the level across your various channels as close to real-time as you can manage. If you have an ecommerce system that manages your business across multiple channels and marketplaces – rather than working directly on each marketplace and web store platform itself – them you can also automate this process and present accurate levels to your customers wherever they’re shopping.
Finally, when you receive orders for items that you fulfil using the drop-shipping model, you also need to automate the transmission of them to the drop-shipper as soon as possible. With orders that you ship from your own warehouse, you probably already keep your customers informed as to when their order has been received, processed, is out for delivery and has been delivered. If you’re planning on maintaining the same standards with your drop-ship orders, you’ll need this information – with the exception of order receipt which you yourself get – quickly from your drop-shipper, and in a format which is easy for you to pass on.
You’re very welcome to get in touch with us to discuss the role you want drop-shipping to play in your ecommerce business.