Drop-Shipping. Implications for the Supply Chain

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Drop-Shipping. Implications for the Supply Chain
Diana Alexandrova, Entrepreneur, United Kingdom, Premium Member
The drop-shipping model in the supply chain has been quickly gaining popularity in the e-commerce field. The parties in a drop-shipping supply chain are the usual ones; customers, retailers and manufacturers. But in drop-shipping, after the online retailer receives a customer order via its website, the manufacturer undertakes the task of delivery to the customer site. In other words, manufacturers (the suppliers) are responsible not only for production, storage, packaging but also for delivery, while the retailers just need to concentrate on marketing.

Advantages of drop-shipping for retailers:
  1. COST SAVINGS: Inventory pooling and scale economies effect – the retailer does not need to keep any inventory and goods in stock which improves cash flow and cost of capital.
  2. VARIETY: Retailers can increase the categories and variety of products for sale on their website.
  3. DIVERSIFICATION: An opportunity for diversification - the retailer is able to apply this model with manufacturers from a range of industries. Thus diversifying the business risk.
Disadvantages of drop-shipping for retailers:
  1. INCREASED PER-UNIT COSTS: The retailer usually places single orders to the manufacturer for fulfillment, not able to benefit from bulk discounts.
  2. INCREASED DELIVERY TIMES: Delivery times in the drop-shipping model are usually longer than if the retailer had the goods available in stock. A longer delivery period sometimes puts customers off.
  3. LESS CONTROL: The retailer has no control on the quality of the goods since they are sent directly from the manufacturer to the customer.
In summary, drop-shipping offers significant advantages to retailers. But poor management or lacking trust relationship between the retailer and manufacturer can be devastating for the retailer through bad quality goods or late delivery.

My advice to firms or entrepreneurs considering drop-shipping as an opportunity to start a new business with relatively small investment is: if possible, meet the manufacturer(s) that you have chosen to work with personally and try to establish and build a relationship based on trust. By meeting your manufacturer(s) you will be able to evaluate their reliability and whether or not they are able to meet the standards that you want to offer to your customers.

For example, in my business, I have personally selected and met the manufacturers I work with. As soon as I receive an order from a wholesale customer, I get in touch with the manufacturer who then produces, packages and delivers the goods to the customer for me (with my brand). This works well for me because I also save costs from investing large amounts in stock and storage expenses but knowing the manufacturer personally and having a good trade relationship with them gives me the assurance that my customer will receive the best quality product and on time.

⇒ Have you considered using drop-shipping in your business?
⇒ What are the challenges you’ve come across and how did you overcome them?

Sources: Li Feng,Tu Yijian,Guo Xiaolong,"Who Is the Free Rider in the Drop-Shipping Supply Chain?", IJIEEB, vol.3, no.3, pp.44-51, 2011.

Vendor Development is Sacrosanct for Drop Shipping
C.L. Kappagomtula, Professor, Malaysia, Member
The topic Diana initiated (Drop-shipping) and its pros and cons and her recommendation to ensure quality delivery of products to customers direct from the manufacturer is absolutely right.
An entire area in Supply Chain Management is devoted to Vendor Development. The six stages of this aspect, right from Strategic Alliances 1 to 3, Joint Venture, Making Vendor's facility as Subsidiary, and finally reaching the stage of 'Keiretsu' are all to be properly and scrupulously followed. This will ensure a seamless fulfillment of the business transactions between the retailers, manufacturers and the customers as the beneficiaries for getting quality products, and 'on time' delivery, at the best possible costs.

Drop-Shipping / Direct Shipment
Roland van der Leede, Manager, Netherlands, Member
Dropshipping is also known as 'Direct Shipment' or 'Direct Shipping'. In this construction, a dealer / retailer receives an order from an end customer (normally over the internet). The dealer transfers the customer order and shipment details to the producer (or to another intermediate party). The manufacturer delivers the product directly to the end customer. The invoice of the producer goes to the intermediate trader. The dealer invoices the end customer and maintains the customer relationship.
Because of the above, for retailers drop shipping is a low-risk form of entrepreneurship, because there is no need to invest in stocks. As a result, there are also cost savings for the retailer in the areas of inventory, personnel and logistics.

Legal Issues of Drop Shipping for Retailer
Jaap de Jonge, Editor, Netherlands
Note that even if the manufacturer ships the product directly to the end consumer, the retailer (web shop) is legally responsible for the proper delivery. Depending om the country of course. Think of issues like timely delivery, damage during transport, consumer's right of withdrawal, product returns and warranty rights. The retailer should arrange all of this in advance with the manufacturer.

It's About Time and Money, but not only
Bernhard Keim, Business Consultant, Germany, Premium Member
Highly interesting topic. The major question is how time sensitive the products for shipment are. If they have to be manufactured on order, drop-shipping might save time and money. But if time matters you hardly can avoid stocks and the question is who is keeping these stocks?
If the manufacturer is holding the stock and does provide the shipment you don't have to invest in stock and might save time.
On the other hand, the manufacturer receives your most valuable asset, your customers' addresses. Do you really want this? It's a little bit like becoming your supplier's sales agent. The difference is that you bear the risk of a credit default of your customer, not the manufacturer.
So what you need is a customer protection agreement similar to the one sales agents use.
As one can see there are pros and cons on drop-shipping. Don't focus only on the tangible advantages of drop-shipping, but take its wider implications for the way you do business into account as well.

Possible Backlash for Big Box?
Barney Wade Howard, Manager, United States, Member
Just curious, do any of you see a possible backlash to major brick and mortar chains as drop-shipping increases in popularity? As it stands right now, Cyber Monday is surpassing Black Friday sales. Also Walmart is starting to have stores where you can order items online and drive through to pick them up including groceries.
These trends will never replace certain types of shopping but I wonder if inventories can reduced or even employees? Not to mention, perhaps an over-reaching summation, but jobs in general considering where some manufacturer's locations abound. However, in your personal business you have at least the option to choose the manufacturer that you want. Like I said, just curious.

Clarity of User Requirements via Retailer
srinivas, Lecturer, India, Member
The concept of drop shipping for improving on the delivery mechanism is good, but there could be some issues with regard to user requirements conveyed to the manufacturer via a retailer. There could be a misinterpretation of the requirements. In order to overcome that a provision of early involvement of the client into the production process of manufacturer could be of help.

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