Editor’s Note: We welcome Jeremy Hanks as our newest contributor. He is a serial tech entrepreneur who founded two drop shipping companies: Doba and most recently DropShip Commerce. For us, Hanks will handle drop shipping and ecommerce supply chain issues. His first piece on supply chain evolution is below.
To fully address the good and bad of dropship As a supply management technique, I start with the history and current state of the retail supply chain.
According to a recent report by IHL Group, a research and consulting firm, nearly $ 1.5 trillion in global merchandise is in overstocking annually, causing lost sales. Losses from greatly reduced overstocking amount to $ 362 billion per year. Out of stock is an even bigger problem with annual losses of $ 456 billion. Together, these are annual losses of over $ 800 billion a year. Those losses are increasing by nearly $ 50 billion a year due to a lack of infrastructure to cope with the growth of retailing in emerging markets. These numbers also exclude losses from “out of stock” inventory: products that are not even selected as inventory by retailers.
It’s called inventory skew. Prior to 1994, retail supply and demand developed within consumer geographic and physical inventory constraints for four reasons: (a) retailers could only sell to consumers who lived near their stores; (b) Consumers could only buy products that retailers in their region wanted to have in their stores. (c) These stores had four walls and a ceiling that were only suitable for a limited amount of physical products. and (d) Even when physical space was not the limitation, money was there to buy inventory quickly.
The retail supply chain has evolved to accommodate these constraints. Manufacturers built the retailers’ orders and shipped them to physical retail stores. With a few exceptions, the roles of business-to-business (B2B) and business-to-consumer (B2C) were very discreet and distinct. This resulted in limited product penetration for the brands and manufacturers, fewer sales for the retailer, and less choice for the consumer. It was an inefficient, product pushing and predictive supply chain.
With the advent of e-commerce, demand was no longer limited by geographically limited consumers.
The Internet has made it possible for any retailer, large or small, to potentially sell to consumers anywhere in the world. Retailers were no longer constrained by the limitations of physical store as a point of sale. Their ability to aggregate demand increased sharply and online retailers increased their inventories in response. However, they often followed the traditional supply chain model by aggregating inventory levels in centralized distribution centers while maintaining the dynamics of the older B2B roles and business models. While e-commerce removed geographic restrictions on B2C, physical inventory restrictions were only postponed and product offerings were still severely restricted in a world of almost limitless routes to consumer demand. The inventory distortion persisted.
Supply chain evolution
- Drop shipping and marketplaces. Even in the early days of e-commerce, economists studied what would happen if you could take virtualization further up the supply side.
Since the consumer was not physically at a point of sale, if they could collect product data and make inventory visible to a manufacturer’s or distributor’s inventory of products, they could hold inventory until a consumer sale occurred and then pass it directly to the customer on behalf of the retailer. This is known as “drop shipping”. It is also known as Inventory Free Retail, Endless Aisle, and the Silver Ball for Quick, Easy, and Instant Ecommerce Wealth.
The marketplaces later developed further and enabled an even greater virtual product supply, since the market was able to place the work of procuring new suppliers on the shoulders of those suppliers who had the physical product supply through transparency of the suppliers and not blind fulfillment.
- Manufacturer directly to the consumer. Before e-commerce, the companies that make the products – brands and manufacturers – wanted to sell directly to the consumer. With the internet and the ability of manufacturers to open an e-commerce storefront like retailers did, they could actually do it.
Selling directly to consumers creates conflicts with retailers, ie “channel conflicts”. For years, most manufacturers have not contacted consumers directly for fear of alienating their base from retailers.
However, think of these developments from the perspective of a manufacturer or distributor.
- A large number of retailers, especially large ones, have consistently asked you to support dropship by creating consumer-friendly online product content and implementing order fulfillment and logistics for individual items so they can expand their product range without having to buy inventory .
- The Great Recession of 2008 hit and your B2B business suffered as retailers reduced wholesale orders or went out of business.
- Facebook and other social networks have created a scalable and direct way to connect with loyal fans and customers. Once connections were made, trading should follow soon.
In short, it is becoming increasingly rare to find manufacturers who do not sell directly to consumers in addition to their B2B channels.
Trends now and for the future
There are two macro trends that affect the supply chain.
- Internet-based supply and demand.
- The ability for scalable direct-to-consumer models where traditional players can be removed from the equation.
Both trends speak for the consumer, who fits upstream in the supply chain. In other words, the removal of the geographic restrictions on consumer demand through e-commerce and the Internet is removing the physical barriers to supply through distributed inventory and advanced supply chain strategies.
Drop Shipping: Legit? Hype? Scam?
When you make things, you have a problem with product penetration. When you sell things, you have a problem with product selection. In both cases, inventory is skewed and supply and demand are inefficient. The reason drop shipping has received so much attention over the past 15 years is because, in its purest form, it addresses the core problem of inventory distortion within the traditional supply chain.
Drop shipping can be beneficial for manufacturers and suppliers as it increases exposure and penetration of existing or new channels. This can be beneficial for retailers as it reduces inventory risk while increasing product choice. And it can be good for consumers finding the products they want to buy from the company they prefer to shop from.
For more information, see “Part 2: The Basics” in the next edition of Drop Shipping for Ecommerce.