In my first article, “Drop Shipping for E-Commerce, Part 1: Supply Chain History”, I looked at the fundamental evolution of the supply chain in e-commerce. Last month, in Part 2: The Basics, I defined drop shipping, reviewed conflicting real-world advice about it, estimated how big it could be, and outlined some specific challenges to get started.
This article explains how drop shipping is changing traditional supplier-retailer relationships.
Drop shipping complications
While drop shipping has advantages for retailers and suppliers, it has disadvantages. Many retailers have tried drop shipping and failed. According to Commerce Hub, a provider of drop ship solutions, the lack of cross-company systems integration in the drop ship fulfillment model is even more problematic as keeping records and traceability becomes even more important with thousands of orders from hundreds of suppliers. With drop ship fulfillment, thousands of orders are shipped to thousands of locations. The choreography is much more complex than single orders as thousands of line items are delivered to some warehouses. “
Retailers are also suffering from a loss of control as they now have to rely on their suppliers to ship orders in a timely and expert manner. Failure to execute a supplier can lead to customer service nightmares, reorders, complicated returns processing, and branding issues with packaging and packing slips.
There are also challenges for suppliers. Picking, packing, and shipping customer orders is a very different process than shipping pallets or cardboard boxes to a retailer or distribution center. Drop shipping may require updates to inventory, fulfillment, and invoicing systems, as well as changes to processes and channel policies. In addition, a certain inventory risk is shifted to the supplier.
One of the biggest challenges for retailers and suppliers is the system-to-system integration with trading partners to automate drop shipping processes and the lack of any standards for performing and maintaining these integrations. This is a challenge that industry organizations like e-DSS.org want to face with common data standards and best practices. For a list of seven additional high-level drop shipping challenges, see the Routinely Complicated section of my previous article.
All in all, it can seem complicated to the point of impossibility. In my experience, that’s not far from the truth. The only key that makes drop shipping successful as an ecommerce supply chain management technique is relationships.
Relationships: From B2B to Integration
With drop shipping you are primarily replacing a B2B business-to-business discussion in which a retailer negotiates with a supplier to buy inventory at wholesale prices and then resell it with an integration discussion where both sides need to understand the virtual part of the relationship and work together to allocate resources for different business processes and new technology needs.
Here you will find a graphic of the most important data, business process and integration flows.
This commitment to integration and the way everyone in the relationship deals with it is the only key that makes dropship easier or guarantees dropship failure without a lack of pain and suffering. Common and coordinated expectations between the retailer and the supplier (drop shipper) are vital.
Partners, not suppliers and customers
Traditional supply chain relationships and business processes also do not fit into this new economic world. When a retailer opts for a drop ship or inventoryless fulfillment model, there are important factors to consider.
The first thing the retailer needs to acknowledge is that drop shipping isn’t just another fulfillment model. As the financial equation changes, the supplier-retailer relationship also changes. The lack of actually purchasing inventory, while financially beneficial to a retailer, actually reduces the leverage that the retailer has on the seller’s behavior. In return for the ability to market more products through the retailer’s sales channel, the vendor now assumes all of the financial risk while having far less upfront financial security.
With traditional fulfillment models, the retailer typically determines the process and technical requirements, and the vendor can perform a cost-benefit analysis because the benefit (the order) has already been identified. Since financial negotiations have taken place between the retailer and the seller, it makes sense to conduct the discussion of the technical process separately or even outside of the retailer’s organization.
In the drop shipping fulfillment model, the conversations are much more intertwined. Since the retailer asks the vendor to spend time and money working with the retailer on the promise of revenue, the vendor is more resilient to additional technical and procedural requirements. Vendors will also be less inclined to add costs to join a drop shipping program, as the revenue per order is usually associated with consumer-facing orders. These factors make it difficult for retailers to leverage existing partner onboarding processes or (possibly even more difficult) outsourced supplier management. It is just too difficult for third parties to adequately represent the retailer in these discussions.
Identifying and using partners for a drop ship or endless aisle program is different from a traditional order fulfillment method. With no obligation to buy, retailers may have more delivery partners to choose from. However, this lack of financial incentives can, in turn, affect the supplier’s willingness to invest time and money to meet a retailer’s compliance requirements. Finally, due to the distributed nature of direct shipping, a component of the electronic data interchange cannot be optional for the supplier.
Here are the two basic factors that need to be considered.
- Logistics skills. When selecting a supplier to participate in a drop shipping initiative, retailers need to ensure that the supplier can perform individual item fulfillment and that their ability to do so meets the retailer’s requirements, i.e. shipping times and expedited options. The ability for suppliers to select individual items (picking and packing) in their warehouse or fulfillment center is a prerequisite for direct shipping. Retailers can evaluate this ability if the vendor offers direct consumer fulfillment through their own e-commerce website. Many suppliers underestimate the cost of moving to a single item fulfillment model. So be careful with those who promise to make the switch on your behalf.
- Technology options. Since both sides will have to spend time and resources stopping shipping while neither committing to a specific sales figure, it’s important to minimize the technical excuses for not attending. This means that several options for free or low data exchange are provided. The options must range from partners with very little technical skills to partners with mature and robust e-commerce infrastructures. Typical data exchange options are as follows.
- Manual self-service portal. (Don’t discount manual labor. More advanced integrations are sexy, but sometimes not practical.)
- Not integrated batch process (spreadsheet).
- Automated, file-based integration option.
- Automated option for web services (API, XML).
Alignment: Consumer is the key
The good news is that there is a strong consensus on all of these issues: with the consumer. In the past five years, many more brands and suppliers have started selling directly to consumers. This directly balances the supply side of the equation (and competing, but that’s another article) with the retail side as the consumer experience drives everything. Consumers need descriptive product data, trust in inventory security, a consumer-friendly ordering process and traceable and traceable logistics at item level.
In short, the world is consumer-centric, and this is driving new partnerships in the supply chain, especially partnerships between those who want to be on one side or the other of direct shipping to thrive and succeed.
For more information, see “Part 4: Profit Strategies” in the next issue of Drop Shipping for E-Commerce.