Dropshipping is the standard for successful e-commerce. In fact, dropshipping has become almost interwoven with e-commerce because it is such a commonly used supply method that is used to fuel the growth of online orders. 22-33% of all e-commerce businesses use dropshipping, and names like Amazon, Sears, Zappos, and Wayfair are among the businesses that either partially or fully incorporate dropshipping into their online sales model.

The reason why dropshipping is quickly becoming one of the most popular supply chain management solutions is due to the nature of ordering online. It doesn’t make sense to keep a broad inventory of items for customers that order online and dropshipping does not really have that much local applications since a client can just visit a physical store to get regular items. However, when it comes to the infrastructure of the gargantuan $370 billion in online retail transactions, dropshipping is perfect. Dropshipping streamlines the process, making it easier and more cost-effective to transfer the items you sell online into the hands of customers around the globe.

What Is Dropshipping and What Are Its Supply Management Implications?

Dropshipping involves a firm taking orders from a customer and then directly relaying them to suppliers. The supplier receives the order from the customer, creates the product and then ships it to the customer in a sort of on-demand system. This drastically cuts down the costs that a merchant has to deal with when supplying customers because it eliminates inventory costs.

As a strategy for e-commerce, dropshipping is more efficient because it reduces the number of intermediaries between a customer and the product while also saving money for a particular merchant. One of the biggest e-commerce sites, Shopify, defines dropshipping in the following way: “Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.”

The fact that the merchant never sees or handles a product that is bought from their site gives new meaning to the idea of marketing. The costs that online merchants might previously have spent on keeping track of inventory and handling supply chain deficits can now be invested in casting a wider net. Dropshipping makes it so that the merchant plays the role of the conduit when a customer relays their orders to a supply company. It revolutionizes supply management.

More generally, dropshipping can be viewed as a form of economic mutualism. A seller partners with a supplier or manufacturer and agrees to list items from the catalog of the supplier. The seller benefits from mediating the transactions between the customer and supplier while the supplier benefits from the exposure of its products on the seller’s platform. There are now even automated dropshipping software available to further enhance communication between the seller and the supplier.

Connecting E-Commerce With Dropshipping

If you are running an e-commerce business, chances are that you will be able to gain a significant competitive advantage if you start using dropshipping as your primary supply chain management method. Before implementing dropshipping, it’s important for you to have an overview of the general advantages and disadvantages of this method.

Considering the costs and benefits of a switch to a supply method that involves dropshipping should be a key factor in your decision making process for increasing sales. The biggest benefit of dropshipping is lowered costs when it comes to holding inventory, materials handling, and obsolescence. On the other hand, a notable cost is fragmented order delivery when a customer orders products from a series of different manufacturers and possibly greater order times.

Once you have a solid grasp over how each of these costs and benefits will impact the functioning of your online business, negotiating dropshipping contracts with suppliers will be much more feasible. The explicit steps to starting a dropshipping business are relatively simple and involve a few tax obligations, management strategies, and platform choices. The problem is controlling the cash flow and success of a dropshipping business in the long run due to the tendency towards fragmented order delivery.

Getting Around Order Fragmentation

There are high and low seasons to most industries that occur in a cyclical pattern. What you absolutely don’t want to happen to your business is have a low season that you never recover from. For example, your the lack of customers to your business during an unexpectedly longer low season may produce an unrecoverable deficit in revenues.

Dropshipping is especially sensitive and vulnerable to order fragmentation. If your e-commerce business solely depends on dropshipping, you may want to diversify the number of income streams you have to compensate for when customer orders are scarcer. In fact, the optimal designation for many e-commerce agents involves a marketing mix that includes both holding inventory and dropshipping.

Categories: Investment