In “eCommerce Logistics: A Transformation - Part 1,” we covered how the basic supply chain has changed over time and what options retailers have with shipping costs when setting up an online store. Following, in “Developed Markets - Part 2,” we touched on the functions of logistics, their benefits to shippers, customers, and 3PL service providers.
This article will address how drop shipping alters the traditional relationships between suppliers and retailers, as originally outlined by Jeremy Hanks, co-founder and CEO of DropShip Commerce, in PracticalEcommerce.
As with many things, drop shipping presents both advantages and disadvantages to retailers and suppliers. Many retailers today have tried drop shipping and unfortunately failed. According to Commerce Hub, “The lack of intercompany system integration is even more problematic in the drop ship fulfillment model, because record keeping and track-ability become even more critical as thousands of orders are sourced through hundreds of suppliers. In drop ship fulfillment, thousands of orders are being shipped to thousands of locations. The choreography of this is much more complex than single orders with thousands of line items being shipped in a few warehouses.”
This may lead retailers to experience a loss of control, as they now rely on their suppliers to ship promptly and skillfully. If a supplier fails to execute an order properly, the customer service wing may get hit. Or worse, it could result in back orders, complicated returns, and branding problems with packaging.
Though, there are many challenges that suppliers face too. Picking, packing, and shipping consumer orders is much different than shipping pallets to a retailer or distribution center. Drop shipping can require updates to warehousing, fulfillment, and invoicing systems, as well as changes to processes and channel policies. This all contributes to an added degree of inventory risk for the supplier.
One of the greatest challenges faced by retailers and suppliers is system-to-system integrations with trading partners. As well as, automating drop shipping processes and the lack of any kind of standard for performing and maintaining those integrations. I know, it may appear complicated and at this point even impossible. However, the one key ingredient that will make drop shipping successful as an eCommerce supply chain management technique is building and maintaining your relationships.
With drop shipping, you replace the B2B discussion -- when a retailer negotiates with a vendor to purchase inventory at wholesale prices, then resells -- with an integration discussion -- where both sides need to understand the virtual part of the relationship and work alongside one another to designate resources to handle different business processes and new technology requirements.
This commit-to-integrate discussion, and how each relationship accesses it, is the key ingredient that will facilitate drop shipping success, or guarantee failure. Extensive, coordinated expectations between the retailer and supplier are crucial.
Conventional supply chain relationships and business processes don’t necessarily fit into our newly adopted economic world. When a retailer decides to modify their supply chain to a drop ship or inventory-less fulfillment model, there are significant factors that should to be discussed.
Drop shipping is not just another fulfillment model. The financial equation is altered, so the vendor-retailer relationship is altered as well. While not having to actually purchase the inventory is financially beneficial to a retailer, it actually reduces the amount of leverage the retailer has over the vendor’s behaviour. In return for the opportunity to market more products through the retailer’s channel, the vendor takes on all of the financial risk, while having far less up-front financial security.
In conventional fulfillment models, the retailer usually controls the process and technical requirements, while the vendor performs the cost/benefit analysis. Since financial negotiation has already occurred between the merchant and vendor, it makes sense for the technical discussion to be conducted separately from the retailer’s organization.
With the drop shipping fulfillment model, conversations intersect much more frequently. Retailers will often ask the vendor to spend time and money to work with them on the premise of revenue. However, vendors are much more resistant to additional technical and process demands. Vendors have less desire to add costs to participate in a drop shipping program, because of the lower revenue per order normally associated with consumer-driven orders. The following factors complicate things for retailers, as it makes it difficult to leverage existing partner on-boarding processes or outsourced vendor management systems. It’s also generally very difficult for a third party vendor to properly represent the retailer during these discussions.
With drop shipping as your main strategy, everyone is partners, which requires critical alignment.
Determining and utilizing partners for a drop ship or endless aisle program is different than for a conventional order fulfillment method. While there is no commitment to buy, retailers have the opportunity to choose from multiple supply partners. However, this lack of financial incentive can affect the willingness of the supplier to spend time and money to meet a retailer’s compliance needs. Finally, because of the distributed nature of drop shipping, some component of electronic data exchange cannot be optional for the supplier.
Two foundational factors that should be considered:
Logistics Efficiencies: When choosing a supplier to participate in a drop shipping initiative, retailers must ensure that the supplier can do single-item fulfillment, and that its ability to do this matches the retailer’s needs -- such as, shipping times and expedited options. The capacity for suppliers to select individual items in their warehouse or fulfillment center is a prerequisite for drop shipping. Retailers can gauge this ability if the supplier offers direct-to-consumer fulfillment via its own eCommerce site. Many suppliers underestimate the costs of switching to a single item fulfillment model, so be cautious of those who promise to make the switch on your behalf.
Technology Opportunities: Both sides will need to commit time and resources to drop shipping. With that said, you’re not committing to a specific revenue number, but minimizing the technical excuses for not participating. This means providing multiple options to exchange data at no or little cost. Options will range from partners with very minimal technical expertise, to those with a mature and robust eCommerce infrastructure. Typical data-exchange options:
Self-service, manual portal
Non-integrated batch process
Automated, filed based integration option
Web services (API, XML) automated option
The good news it that there is a strong alignment with all of these issues: the consumer. Today, brands and suppliers are selling directly to the consumer. This positions the supply side of the equation directly with the retail side: the consumer experience drives everything. Consumers need descriptive product data, trust in inventory certainty, a consumer-friendly ordering process, and item-level logistics that are trackable and returnable.
The world is positioning its efforts on the consumer, and that is driving new relationships in the supply chain, and especially partnerships between those that would like to be on one side or the other of drop shipping, to flourish and find success.
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