Risks and Rewards of Drop-shipping

Even if you already drop-ship today, or if drop-shipping represents only a small portion of your business, it’s taking on new relevance in the current and foreseeable economy as a means for retailers to dramatically cut costs.

When executed properly, drop-shipping offers many tangible advantages–both financial and customer-centric. On the flip side, if not done well, things can get a bit troublesome.

Developing seamless processes, understanding the pitfalls and challenges, going into it with well-founded best practices, and ensuring both you and your drop-ship partners have the necessary knowledge and tools will ensure your success.

Why drop-ship? Drop-shipping allows you to leverage a third party’s inventory to offer products without incurring the upfront inventory carrying costs and associated risks. It minimizes your warehouse space; there are no warehouse personnel expenses for receiving and stocking, or picking/packing and shipping an order; there are no inbound freight charges or packaging expenses.

In other words, your warehouse costs are zero, and less staff is required for order processing. This means you have more cash available to grow your business or to keep in reserve, and given the current economic climate, a cash reserve is extremely attractive.

Drop-shipping also lets you test products and expand into new product lines in a controlled, low-risk manner. Unlike traditional catalogs, the Internet offers you seemingly unlimited space to market products, which means you can promote third-party products without purchasing inventory.

So where you may have been cautious and carefully weighed your options for introducing new or complementary products in the past, you can now test these products on the Internet without the inherent risks of bringing the products in-house. The ability to easily test new product lines by leveraging the Internet and drop-shipping the items may also create new revenue streams and new customers.

For example, Kohl’s used drop-shipping to test sales of high-end jewelry on its e-commerce site. As a result, the discount department store discovered a customer base it never knew existed.

Today, Kohl’s sells jewelry items for as much as $8,000 for a single piece. It never would have considered testing these items without using the drop-ship model.

Does drop-shipping have downsides? Absolutely.

For one, drop-shipping means putting your brand name and reputation in another company’s hands, and to some extent, relinquishing control over fulfillment. To compensate, you need to automate as many of the processes as possible, and automation costs money.

What’s more, you will lose bulk purchase discounts when you no longer stock the products, and you may incur freight costs on split shipments. And addressing customer demands for next-day delivery could become more cumbersome. So determining whether you should drop-ship is not a decision to be taken lightly.

Getting drop-ship right means overcoming five main issues – automation and data synchronization, staffing as it pertains to managing vendors, establishing vendor compliance guidelines, measuring vendor performance, and enforcing compliance. We’ll take a closer look at each of these issues next time.

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

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