The Essentials of Dropshipping: Wish List or Reality for the Supplier?
by Scott Weiss, VP of Business Development, Port Logistics Group
In the growing ecommerce marketplace, dropshipping is on the rise. Dropshipping is a form of order fulfillment where the supplier handles shipping, and ships directly to the consumer on behalf of the retailer. In addition to freeing up capacity at their distribution center (DC), many big box retailers use the dropshipping capabilities of select suppliers to offer products online they normally wouldn’t carry in their stores.
Dropshipping can be a win-win for both the retailer and the supplier. Retailers of all sizes can expand their product lines online with additional low overhead products while freeing up space and labor from their distribution facilities. For suppliers, adding dropshipping capabilities opens up new channels and markets, and when done efficiently, can be a significant long-term boost to sales while making their relationship with the retailer even closer.
Online retail sales, while still less than 15 percent of all U.S. retail sales, are growing annually, according to analysis of government statistics by Internet Retailer. According to the National Retail Federation, holiday sales alone for November and December 2018 are estimated to exceed $720 billion.
There are great opportunities in dropshipping as online shoppers rate product assortment an important factor during the online search process. Whether you are a big box retailer or small internet retailer, dropshipping allows retailers to compete with Amazon by offering as many SKUs as possible. The challenge is many large importers and other manufacturer-suppliers don’t have the capabilities to offer dropshipping to their retailer customers.
For those that take on dropshipping, there are pros and cons to doing dropshipping in-house versus outsourcing to a 3PL. Whether you keep your dropshipping in-house or outsource to a 3PL, here are key factors to consider when adding dropshipping capabilities:
Systems. Systems, processes and software are the biggest success factors. As a supplier, you can easily manage a truckload of one SKU/500 cartons to a large retailer customer as a single order, but could you handle 500 orders of 500 individual items going to 500 consignees? Having the right system to effectively manage a high SKU count and high number of product touchpoints requires robust, scalable IT systems.
It’s critical to get the order from the retailer into the supplier’s system electronically. Orders typically come to the supplier from the retailer in EDI format. Suppliers should have basic EDI capabilities and preferably an ERP (enterprise resource planning) system.
When the supplier dropships in-house, they can keep their costs down but as orders and SKUs scale, it may require a greater investment in IT. When the supplier outsources to a 3PL, they can scale quickly and capitalize on the 3PL’s resources. If you are looking to outsource your dropshipping to a 3PL, ask about their dropshipping experience and system capabilities for ecommerce. EDI capabilities are a given and so is a WMS (warehouse management system). Some may have integrated OMS (order management systems) and LMS (labor management systems) which will allow them to scale with the peaks and valleys of your ecommerce orders.
Consumer expectations for service are evolving as Amazon and others continue to raise the bar. Transparency is the cost of entry. It’s critical for direct-to-consumer brands and retailers to present a unified front with the supplier. As the supplier, you provide ongoing order and shipment information to the retailer, and the retailer provides it to the consumer-consignee. For dropshipping orders, this means if a consumer receives the order late or not at all, the retailer must be able to provide answers online or via an 800 number. Real-time tracking, or at least shipping notifications, are standard today and these should appear to come from the retailer.
SLAs and communication. Hiring a third party adds complexity to the picture. It nearly goes without saying if you are outsourcing your dropshipping or other retail fulfillment to a 3PL, frequent communication and having SLAs (Service Level Agreements) in place is essential. Basic metrics to monitor include order fill rates, and maintaining minimum and maximum average number of orders per day. Conducting weekly conference calls with your 3PL is a great way to manage the process. In the calls, review upcoming expected orders, service issues and performance goals.
The next set of considerations are essential capabilities you want to make sure your warehouse or 3PL has in order to handle dropship orders as efficiently and cost-effective as possible:
Facility layout/slotting. Slotting is the process of organizing how items are physically positioned for order picking. Your warehouse or DC, or that of the 3PL, needs to be configured efficiently to process small orders and singles picking. Place products optimally to reduce labor and steps in the warehouse. What SKUs are likely to be ordered with other SKUs? Place those products in close proximity.
Batch picking. Like slotting, batch picking is another capability that goes a long way in the warehouse to gain efficiencies and reduce labor. Picking like items across orders in batches enables the supplier or 3PL to fill more than one order simultaneously. This means if you have 500 ecommerce orders for the day of single SKUs, you can optimize labor by bulk picking the product from inventory at the same time versus making 500 different trips to the same spot.
Customization. As a requirement for doing business with the retailer, ecommerce orders often require customizing to the retailer’s specifications. This may include customized packing slips, packaging materials such as branded tissue paper, or inserting marketing materials or specific product instructions. Be prepared to offer these services to the online retailer as their vendor compliance programs may require it, otherwise chargebacks and worse consequences may result.
On the upside, advantages to hiring a 3PL specialist in dropshipping include bringing the supplier up to par with Amazon-like standards. One example is positioning inventory in multiple geographic locations. A supplier with just one warehouse on the West Coast would not be able to offer today’s nearly standard two-day shipping to consumers nationwide from their single DC, but if they use a large 3PL with multiple DCs around the country, they can provide two-day shipping nationwide.
Likewise, small- to medium-sized suppliers may be able to leverage the transportation purchasing power of their 3PL. In the case of shipping costs with the parcel carriers, the supplier may be able to ship to the consignee pre-paid via their 3PL’s account and pay a reduced rate that’s between the negotiated discount rate of the 3PL and the rate they would pay the parcel carrier as a small-volume customer.
In conclusion, all of these are factors are key when considering adding dropshipping to your wheelhouse. Whether you keep dropshipping in-house or outsource it, having a robust returns program is essential. In the next article, we will explore the topic of reverse logistics.