Industry Trends within Drop Ship Programs
By Joshua Mayer, Managing Partner, Summit Advisory Team
As Omnichannel capabilities evolve with offerings such as supplier direct fulfillment (or drop ship), the line between Retailer and Supplier has become blurred from the Customer’s perspective. Creating a consistent experience throughout the Direct to Customer order life cycle is more important than ever, and requires significant collaboration between Retailer and Supplier.
In this article, we will explore some of the industry trends and best practices/benchmarks within key drop ship program topics:
● Program Policies
● Product Setup & Inventory
● Customer Orders & Shipments
● Customer Returns
● Reporting & Visibility
● Program Goals & Terms
○ Retailers are striving for drop ship comprising 15% - 30% of online revenue, 30% - 40% of the online assortment.
○ Consistency is key; Suppliers should focus on matching Retailer customer experience metrics and service level agreements. Speed is important, but consistency across Retailer and Supplier is even more important.
○ Reduce complexity by simplifying program topics of contention (e.g., rate of customer returns) into the program fees. Track each metric independently and discuss it during the Retailer/Supplier quarterly program review.
● Supplier Onboarding Duration
○ Maximum of 4-6 weeks for the Supplier to be onboarded and shipping on behalf of the Retailer.
○ The Retailer should be targeting a minimum of 60-100 styles (200–500+ SKUs) per drop ship Supplier (varies by category).
● Sales & Operational Planning
○ Ongoing assortment planning meetings between Retailer and Supplier; best practice is to build drop ship assortment planning into existing merchandise planning processes.
○ Retailers should provide Suppliers with daily operating forecasts, especially prior to key marketing promotions.
Product Setup & Inventory
● Product Content
○ Retailers are using the Supplier provided content for their website, other demand channels (e.g., mobile handhelds in-store), and social media (e.g., Instagram posts).
○ Product videos are becoming a more popular request by Retailers; Suppliers should have the ability to produce product videos or have a plan in place to begin capturing product videos.
● Inventory Events
○ Typical inventory sync processes between Retailers and Suppliers are based on frequency. Industry leaders are shifting from frequency to event-based inventory updates.
○ Suppliers should be able to provide an inventory status (e.g., “discontinued”) to the Retailer in addition to quantity available.
● Inventory Visibility
○ Consumer Inventory vs. Physical Inventory; Retailers and Suppliers should have mechanisms to configure safety-stock levels and create a view of “Consumer Inventory” based on sales and operational plans.
○ Consumer Inventory views can (and should) change throughout the season.
Customer Orders & Shipments
● Order Sourcing Logic
○ Retailer order management and sourcing logic becoming more robust and minimally needs to account for order completeness.
○ Specific order sourcing rules (e.g. resourcing vs initial attempt) for drop ship products since inventory displacement caused by customer returns becomes more impactful as the program scales.
● Operational Performance
○ Industry-leading Suppliers are consistently maintaining a 99%+ unit fill rate throughout the year; Retailers expect 99%+ unit fill rate from Suppliers;
○ Defined SLAs for all facets of the customer order life cycle; order-to-acknowledgment, acknowledgment-to-ship, ship-to-delivery, etc.
○ Supplier ability to cancel customer orders; typically enabled via the portal, EDI, or API.
● Shipping Expenses
○ Retailers should provide prepaid accounts to Suppliers for shipment tracking visibility and to avoid unnecessary (1-3%) parcel expenses associated with third-party billing accounts.
○ Industry-leading Retailers providing access to either a rating engine endpoint or loading rates into order broker platform for real-time service selection at the time of Supplier packing.
● Shipper Clarity
○ Cluttered packing slips cause confusion to the end customer; ensure that the “order number” is the Retailer order number (for Customer Care/Operational search purposes) and that there is no product pricing on the packing slip.
○ Drop ship products should be eligible for all Retailer returns processes; in-store, call center, online, etc.
○ Process for carrier returns must be defined for the Supplier, visibility into carrier returns rate provided to the Retailer.
Reporting & Visibility
● Program Level KPIs
○ Retailer/Supplier: Program Profitability (compare drop ship program profitability to other channels)
○ Retailer/Supplier: Sales & Operational Plan vs. Actual
○ Retailer/Supplier: Customer Order Life Cycle
○ Supplier: Inventory Sell-thru (helps define safety-stock thresholds)
● Operational Reconciliation
○ Retailer: Dashboarding for Supplier performance (based on program level KPIs)
○ Retailer/Supplier: Balancing reports for customer order statuses, supplier invoices, etc.