Can software help retailers tackle the unique challenges of drop shipping? We explore the ways new tech can help with brand standardisation, logistics, and customer communication.
Introduction to drop shipping...
Drop shipping is an increasingly popular retail fulfilment model with larger retailers, where the retailer acts as a ‘middleman’ between the customer and the supplier/manufacturer.
The main difference between drop shipping and traditional fulfilment models, is that the retailer doesn’t stock or handle the product at any stage in the supply chain. Instead, the retailer purchases stock as and when required from the supplier – which is shipped directly to the customer.
As drop shipping is constantly evolving, presenting ever more complicated challenges, it’s important for retailers to be aware of the solutions available to them which can help them better fulfil customer expectations.
The risks and rewards…
The benefits for the retailers and suppliers differ. Unlike the traditional retail supply chain, in drop shipping it’s the supplier who shoulders more of the risk, which explains their higher margins. For retailers the benefit is a reduction in inventory costs and warehouse running costs. Of course, some of these reductions can be passed on to the consumer in terms of cheaper goods.
However, for manufacturers used to shifting mass in bulk, storing products longer term is a negative due to the increased cash flow risks should they get their forecasting wrong.
Does this raise the possibility of a ‘middle-middle man’ arising in the future, a distributor if you will? With a return to a more traditional model of someone buying in bulk from the supplier at some point in the supply chain.
Moreover, if all a successful stockless retailer needs in the beginning is successful marketing and website operation, what’s to stop them being overtaken by a rival who can do those fundamentals more effectively? Loyalties that bond retailer to supplier are weaker with drop shipping than under a more traditional fulfilment model. If a plucky up-and-comer tests your suppliers by offering more per unit, who’s to say your market share couldn’t be taken fairly swiftly?
Of course, consumers are the winners when retailers enter price wars but not if the battle is unwinnable and unsustainable.
Challenges drop shippers face in the future...
Logistically, working with multiple suppliers means the products sold will be coming from a multitude of different sources – complicating shipping costs. The challenges of working with multiple suppliers can be further broken down into the following:
- The difficulty in offering a single, low cost delivery price to the consumer at the same time as maintaining profitability.
- The difficulty in bringing in a new service, for instance weekend deliveries, if you have to negotiate that with multiple suppliers.
- Lack of visibility of successful shipping performance, for example first time delivery rates for different suppliers.
- Potential increase in the time taken in invoice reconciliation – which is not to be underestimated.
Responsibility for shipping
Furthermore, businesses will need to accept responsibility in shipment and delivery errors that technically are the responsibility of the various suppliers. This is further complicated when a retailer is no longer 100% stockless. Why? Because once they’ve got a finely tuned, profitable marketing model, they start getting bulk offers from suppliers that they really can’t afford to turn down. Ultimately, how do you manage stock when some of it falls under your responsibility and some doesn't?
With online shoppers placing ever more importance on excellent delivery and returns policies, and convenient return methods – how does the drop shipping model deal with this? Could there be ways to incentivise buyers into accepting longer wait times when it comes to delivery? Zulily, the Seattle-based flash sale site, recently began giving discounts to customers in exchange for accepting longer delivery times. Indeed, our Black Friday research showed that Millennials are more willing than any age demographic to accept longer delivery times for a reduced price. Could this point to further incentives in the future when it comes to drop shipping?
Lastly, what happens when drop ship retailers are using a multitude of suppliers yet want to standardise their brand experience? Ultimately, the question is if the retailer doesn’t own the relationship with the carrier directly, how can they standardise the experience? If one supplier works with carrier X who offers great customer communications, but another supplier works with carrier Y who doesn’t, how does the retailer ensure this inconsistency doesn't reach the customer?
After all, inconsistency in the shopping experience is not conducive to customer loyalty.
Can software solve these drop shipping issues?
The drop shipping model, particularly when using vast networks of different suppliers is complicated, so it’s a positive that there are various pieces of software that can help you manage different areas of the model. Dropship management software offered by companies such as Kewill, Linnworks, and eBay Enterprise sit in between a retailer’s ecommerce platform and the drop ship supplier – allowing greater customer experience by way of standardisation of brand and effective logistics management across a multitude of suppliers (and of course, delivery management software such as Electio can streamline the management of multiple carriers!).
However, whilst software is fantastic, it isn’t a silver bullet.
How does a drop ship retailer choose the right piece of software for their business to ensure maximum return of investment? They need to consider ease of use, as well as ease of implementation and integration. Whilst drop ship retailers may find it more difficult to hold on to their market share when compared to traditional retailers, the ones who solve these questions will be better placed to lead in the future. Throughout the year, we’ll be looking at the various challenges retailers face when implementing new tech into their warehouse, as well as switching from other providers.