There are several benefits of drop shipping for merchants. Most broadly, it reduces a lot of challenges that both new and established retailers would face if they were using a standard fulfillment model. For example:
- Less upfront capital required – Retailers often tie up significant capital in purchasing inventory. Drop shipping requires less upfront investment by enabling a more on demand model. Nordstrom, for example, doesn’t need to stock hundreds of pairs of a new shoe.
- Lower overhead – Since retailers aren’t actually keeping merchandise in stock, they don’t have to pay for warehouse space or oversee operations to keep items handy.
- Increased flexibility – Retailers are also able to offer a wider array of products at no additional cost, allowing them to better meet consumer needs, scale quickly and rapidly respond to the evolving purchasing demands of today’s consumer. They can sell new items or remove old ones from their website easily without stressing about excess leftover inventory.
While drop shopping is a very attractive model, with the convenience comes a couple of challenges that need to be considered:
- Limited visibility – Since retailers are shipping from outside their owned inventory, they often lose visibility into key fulfillment milestones like ship dates, delivery timeframes and shipment tracking.
- Stock-out risk and inventory issues – When retailers are sourcing from multiple warehouses and not managing their own inventory, they lose insight into how much of a certain item is available, resulting in less control over out-of-stock situations. Additionally, suppliers don’t always utilize modern API technology required to provide real-time updates around inventory levels and changes.
- Supplier coordination – Drop shipping often requires working with multiple suppliers for various products, which can become complex when trying to manage them all. This can result in errors on the supplier side, for which the retailer is typically held responsible. Additionally, a retailer’s ability to maintain a consistent cultural and brand experience is reduced when giving fulfillment control to their suppliers.
- Competitive landscape – Since drop shipping is an affordable fulfillment method even for small businesses, lots of competitors are also taking advantage of it. More cutthroat competition can result in lower margins.
The retailer and the consumer are the top winners with drop shipping. However, suppliers are also seeing great benefits from this tactic, since it has become increasingly in-demand, meaning ample new business opportunities and profits.
While there are some built-in complexities to the process, drop shipping can be seamless and near-fool proof with the right planning and technology in place. For example, when using APIs to facilitate data flow, information can be transmitted between a retailer’s system and a supplier’s within nanoseconds, reducing the abovementioned risks.
When it’s done right, drop shipping can be the perfect logistical orchestration that benefits all parties involved. However, when marred with challenges like lack of visibility into supplier inventory or complexity from managing too many different suppliers, it can result in unhappy customers or lost sales. The best way to avoid that is to have API technology in place that ensures on-demand transparency and communication between retailer, supplier and end consumer.
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