Last month’s article, “Drop Shipping for Ecommerce, Part 1: Supply Chain History”, was the first in a series about drop shipping as an e-commerce supply management technique.

What is drop shipping?

Here is my definition of drop shipping.

“Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead puts the inventory of a third party – a manufacturer, distributor, wholesaler, or other retailer – up for sale. Upon customer order, the retailer transmits this order and shipping data back to the product supplier, who then sends the goods directly to the customer on behalf of the retailer. “

And this is what it looks like.

Drop shipping occurs when a consumer places an order with a retailer who sends it to a supplier who ships it to the consumer.

Drop Shipping: Hype?

In today’s market, drop shipping is sometimes a polarizing concept. On one side, you’ll find magazines with ads that make drop shipping easy and lucrative, such as: B. this ad.

Many ads, like this one from a magazine, falsely claim that drop shipping is easy and easy to make money.

Many ads, like this one from a magazine, falsely claim that drop shipping is easy and easy to make money.

A simple google search will also find plenty of drop shipping news about risk-free and easy options.

Conversely, however, you should consider the view of Tony Hsieh, the CEO of Zappos. In his book Delivering Happiness, he writes: “We all knew deep down that if we were serious about building the Zappos brand around the very best customer service, sooner or later we would have to give up the drop ship business. “

He then explains that in March 2003, Zappos removed all drop shipping products from its website and that the removal was one of the main reasons Zappos went around the corner and was ultimately successful.

So what is it Is it that simple that you can retire to the beach and throw marine products in your bathing suit and look good doing it? Or if you want great customer service and ultimately want to sell successfully online, can’t you get involved with drop shipping?

The truth lies in between.

Drop shipping is easy to sell. In fact, it kind of sells itself. Think about the other terms used to describe it: “inventory-free retail”. “Endless corridor.” As I mentioned last month, drop shipping presents a retailer’s fundamental challenge: product inventory and inventory skew. So it’s hard to break the hype surrounding drop shipping.

But it’s not new either. Catalogers have been drop shipping for decades – meaning “this product can take 4 to 6 weeks to ship to.” Retailers have been drop shipping for decades – meaning “We can order this couch that you see here in our showroom directly from the factory.” And in the eleven years since Zappos stopped drop shipping, a large part of the Changed the dynamics of the supply chain so that drop shipping is a widespread strategy in today’s e-commerce market.

How common is drop shipping?

It is difficult to determine how many ecommerce retailers are using drop shipping. The answer is hard to pin down. Here is information that can help.

  • In 2013, CommerceHub, a software company that facilitates dropship for retailers, processed 44 million transactions, representing $ 7 billion in retail sales. That’s nearly 3 percent of all e-commerce ($ 7 billion out of $ 263 billion of total e-commerce sales) in the United States. There are many other technology companies out there that enable drop shipping and many more companies that developed their own technology directly.
  • Billions of dollars plus retailers like Hayneedle, Wayfair and Overstock each work with thousands of sources of supply and drop the majority of their consumer sales. Many other top retailers are also following these market leaders by dropping a significant portion of their sales out via dropship.
  • More than half of everything Amazon sells is through its third-party marketplace, which is similar in concept to drop shipping. It is estimated that even at Amazon, you expect sales of almost 100 billion US dollars in the drop shipping sector (marketplace). Many other companies (like Walmart, Staples, also operate marketplaces.

The best guess I’ve had in drop shipping for over 15 years is that 25 to 33 percent of all ecommerce transactions in the US could be classified as a drop shipping transaction. In emerging markets like China, where Alibaba operates marketplaces like Taobao, the lion’s share of e-commerce could be described as drop shipping.

Routinely complicated

Drop shipping is routine, but not easy. It sounds simple, it just looks; but it is far from it. It is a significant departure from the typical flow of how the product reaches the consumer. Your systems and relationships need to be rethought differently compared to a traditional supply chain. The fundamental challenge is that retailers and suppliers are exposed to system-to-system integrations and automations in attempting a virtual supply chain to share product catalog data, real-time inventory feeds, and a coordinated life cycle of customer orders to meet consumer expectations can be met.

Some specific challenges include the following.

  • The need to capture, create and share product information (descriptive text, images, taxonomy, physical properties) that come as close as possible to a perfect virtual representation of a physical product
  • Each supplier will be a source of inventoryTherefore, instead of integrating and making visible a single inventory repository, you need up-to-date visibility of potential inventory pools.
  • Loss of control Retailers now have to rely on their suppliers to ship orders in a timely and expert manner. To ensure good customer service, suppliers must be able to accept electronic orders and provide timely status updates directly to their systems, as well as support specific fulfillment and packaging requirements.
  • Your e-commerce platform now needs to be coordinated Products from multiple vendors and locations to start with a customer order and break it down into multiple supplier orders and in turn consolidate the order status updates back into a single customer view.
  • The need for suppliers to pick, pack, and ship customer orders in a very different process than sending pallets or cardboard packaging to a retailer or distribution center.
  • The likelihood that shipping will cease may require updates from the supplier Warehousing, fulfillment and invoicing systems, as well as changes to processes and channel policies.
  • The transfer of inventory risk back to the supplier.

Drop shipping: it’s worth it

Despite the challenges, one of the major trends in the ecommerce supply chain over the past decade has been the shift towards drop shipping and third-party distributed inventory. A lot has changed since 2003. With these clear benefits, retailers and suppliers are forced to adopt drop shipping in order to be competitive in product selection and penetration. Those unable to tackle the challenges associated with drop shipping and a more virtual supply chain will face far more serious drawbacks as e-commerce inevitably changes that direction.

For more information, see “Part 3: Suppliers vs. Retailers” in the next issue of Drop Shipping for E-Commerce.