Determining the best way to store and ship products is a crucial part of your business. There are a number of options for doing so, and two of these are becoming increasingly popular: drop shipping and third-party order fulfillment.
These two options are often compared to one another given their similarities, but there are key distinctions, so let’s start with a brief definition of each.
Drop shipping is the process whereby a merchant’s ecommerce or mail orders are handled and shipped directly by the manufacturer or distributor to the end customer. Order fulfillment is the process whereby ecommerce or mail orders are handled and shipped by the merchant or a third-party fulfillment provider.
In the case of drop shipping, manufacturers or distributors ship products directly to consumers. For merchants, this means little to no inventory costs. It also means less risk, as merchants aren’t sitting on a pile of inventory that may or may not sell. A downside, however, is that it comes with less control. By not managing your inventory, you have less knowledge of what’s available, and you will ultimately be held responsible for any errors made by your suppliers that may lead to back orders.
The level of control merchants have over inventory is not the only distinction between drop shipping and order fulfillment, so to help you determine which option may best suit your business, here are four tips to consider.
Consider your products and suppliers
Merchants often use more than one manufacturer or distributor, but not all of those suppliers will drop ship orders directly to your customers. Because of this, you may find that drop shipping all of your orders is simply not an option, or that you have fewer options when it comes to viable suppliers. Likewise, depending on your products or requirements, not all fulfillment providers will be a match for your business. For example, if you sell items that require refrigeration, some fulfillment companies won’t be able to house your inventory.
To a large extent, the products you sell and the number of suppliers you use will determine your options for drop shipping and order fulfillment. For drop shipping, merchants are often forced to sacrifice flexibility to save on inventory costs. They can also experience added complexity when it comes to what they charge their customers for shipping and handling, particularly if merchants use multiple suppliers to drop ship products, each charging them different pick/pack and shipping fees.
Consider your customers
Where are your customers located? Are many of them grouped in a certain part of the U.S.? Do you have customers in Canada or other international markets?
Customer location is another important consideration when evaluating your fulfillment options. Ideally, you want your drop shipper or fulfillment house to be as close to your customers as possible. If your manufacturer is on the east coast of the United States, but most of your customers are on the west coast, rather than having that manufacturer drop ship, you may be better off finding a fulfillment house closer to your customers.
Consider the Technology
Online merchants should also consider the back-end technology involved in processing and shipping orders.
Manufacturers and distributors are accustomed to filling large B-to-B orders, in which shipments are delivered to a relatively low number of commercial addresses. This type of order fulfillment is much different than direct-to-consumer ecommerce fulfillment, in which smaller orders come in more frequently, often from multiple channels, and must be quickly processed, filled and shipped to hundreds or thousands of residences.
Talk with potential drop shippers and fulfillment companies about their turnaround time on orders, and the level of integration they offer with your shopping cart and/or order management system. Ideally, your software will communicate automatically with their software, allowing for rapid order processing, and a real-time view of inventory and shipments.
Consider Your Margins
Lastly, when comparing drop shipping and order fulfillment, consider your profit margins. While inventory storage costs can be virtually eliminated with drop shipping, there are other fees that need to be considered. In some cases, merchants pay manufacturers a greater percentage of suggested retail rates to drop ship their orders, lowering their profit margins.
To determine whether drop shipping or order fulfillment will yield greater margins for your business, take a look at your total average cost per order when evaluating each. When doing so, make sure to factor in any overhead, such as facilities and labor in the case of in-house fulfillment, as well as production costs, inventory costs, fulfillment fees, and shipping expenses.
There is no one-size-fits-all approach when it comes to getting products in the hands of your customers, nor do you need to put all of your eggs in one basket. For some merchants, the best model is a mix of drop shipping and order fulfillment, which can either be done in house, outsourced, or a combination of the two.
The thing to remember is that you have options, and the key is to closely evaluate each of them in order to make your business as efficient and profitable as possible.