Best Practices in Drop-shipping

Drop-shipping enables you to leverage a third party’s inventory to sell goods without the costs and associated risks of warehousing and fulfillment. The first part of our article pointed out the various risks and rewards of drop-shipping. Now we’ll look at what you need for a successful drop-shipping program.

In the past, drop-shipping was riddled with manual processes. There were no simple and timely methods for retailers to maintain control and visibility over drop-ship orders.

Today, automation is a must-have for a successful drop-ship model. Whether you develop automated technology inhouse, purchase third-party software, or subscribe to software from an ASP, retailers must be linked to their drop-ship vendors electronically.

Regardless of the automated system you select, it must have flexible options to accommodate all levels of vendor sophistication – from low tech to high tech. It should also manage the lion share of order communication and processes throughout the entire life cycle of an order.

In other words, you should only be managing exceptions. Transactions such as order transmission, order acknowledgements, shipment notifications, invoicing, returns processing, order changes, customer service requests, product master updates and delinquent vendor notifications should all be automated.

Staffing, ownership and vendor relations
Because automation eliminates the manual processes traditionally associated with drop-shipping, you don’t need much staff to manage drop-ship operations.

But you must establish ownership of vendor sales relationships, overall performance, and day-to-day execution. This includes vendor relationships with merchandising, purchasing, operations and customer service.

Your vendors can’t represent your brand if they are not a true extension of your company. It’s important to cultivate retailer/vendor relationships throughout both organizations that foster a collaborative partnership to successfully serve the end customer.

Building relationships requires you to understand your drop-ship vendor’s capabilities. Is the company equipped from a facilities and systems standpoint to ship direct to your customers? Does it have automated systems to receive orders electronically? This eliminates lag time for order processing and minimizes human error associated with rekeying an order.

Is the vendor sufficiently staffed to handle your peak order periods? If a supplier is providing drop-ship services to other retailers, check its references. Ultimately, your goal is to determine if a vendor is capable of servicing your customers based on your own fulfillment standards.

Business rules and compliance guidelines
Paramount to a collaborative retailer/vendor partnership is laying a sound foundation that defines business rules, values, and customer service metrics, and clearly communicating these to your vendors.

Remember that vendors are not mind readers. In order to function as an extension of your company, they need business rules to operate by. Your drop-ship success depends on it.

Tell your vendors your expected order turnaround time and fill rate percentage. Identify the shipping carriers to be used and a method to provide shipment updates. Provide them with branded packing slips, and identify any special packaging requirements.

Establish a method for maintaining inventory visibility to avoid backorder situations. Set timeframes for responding to customer service issues. Identify product costing procedures and methodologies for handing returns and canceled orders.

Ultimately, the best practice for drop-shipping is to provide your vendors with formal compliance guidelines, or a written set of business rules governing the relationship specific to fulfilling drop-ship orders. They should be feasible and reasonable–not utopian, and provide your vendors with everything they need to know to meet your standards.

Guidelines should help not hinder your vendors. When executed properly, compliance guidelines bring efficiencies and cost savings to business operations; they act as a baseline for vendor scorecards; they help you drop-ship more aggressively and confidently, and improve customer satisfaction and profit for you and your vendors. Compliance guidelines should include your company history, vision, and expectations for customers, service standards and key compliance areas, systems used for communications, accounting and paperwork requirements, routing guides and ship method requirements, returns instructions, reporting and chargebacks for noncompliance, and contact information for merchandising, purchasing, customer service, accounting, and IT.

Execute your compliance guidelines at the start of a new vendor relationship, and include a formal sign-off in your contract that guidelines have been acknowledged and agreed to.

Vendor performance
Monitoring the performance of your vendors and taking corrective action before problems escalate is key. It’s just as important to acknowledge good performance. Be sure to communicate your performance, reliability, and safety expectations to your vendors.

Develop a scorecard for rating your vendor’s performance. Set timeframes for scoring your vendors and tell your vendors the results. Give timeframes for vendors to correct problems, and work with your vendors to help them (and you) succeed.

Ask yourself if there is something you can do to correct a problem. Sometimes it is as simple as identifying your vendor’s limitations and making adjustments.

For problem vendors, evaluate if the relationship with the vendor is short or long term–are they more trouble than they are worth, are their products unique, or can they be replaced by comparable products from a more capable vendor?

It’s your job to hold your vendors accountable. In the end, that may mean enforcing chargebacks such as flat rates of $50 to $100 for late shipments, vendor cancels, shipping errors, missed order changes, or wrong shipping carrier. Chargebacks can be the biggest incentive for vendors to stay in compliance. At the same time, chargebacks need to be administered judiciously.

Best practices in drop-shipping lead to higher service levels and profitability — here’s a list of my Top 12. Following simple rules can help your drop-ship business excel. It¹s a win for you, a win for your vendors, and ultimately, a win for your customers.

Louisa Rupp ( is director, strategic marketing, of VendorNet, a provider of Web-based supply chain collaboration software.

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