Drop-Shipping. Implications for the Supply Chain

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Drop-Shipping. Implications for the Supply Chain

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.