In today’s modern retail landscape, only the most customer-focused and resourceful retailers will survive. A growing number of retailers are relying on manufacturers to ship online orders directly to customers in a fulfillment model called dropshipping. Retailers can rapidly expand their product assortment by leveraging a virtual inventory and eliminating the need to keep products in stock by enabling manufacturers to fulfill orders on their behalf with the same branding and customer experience as if they were fulfilled directly from their own warehouse.
In theory, dropshipping sounds like a foolproof fulfillment method for the retailer, but in practice, when shipments are late, not as described or improperly packaged, the negative customer feedback is directed towards the retailer. As such, retailers are concerned about losing control of the direct-to-consumer fulfillment process. Conversely, many suppliers struggle to transition from standard, bulk fulfillment to a single store or distribution center to potentially fulfilling single-SKU orders to thousands of individual consumers. These obstacles can become a significant impediment to your dropship supplier onboarding process.
Modern enterprise dropshipping requires preparation and planning to be successful. Here’s how to make dropship work for your organization:
1. Review Your Current Systems
Adding an entirely new fulfillment method to your supply chain requires an infrastructure capable of handling another set of processes. Take stock of your current systems and IT infrastructure to determine the following:
- How are orders and inventory managed, and how well will your current strategy work with the addition of dropship?
- How easy or difficult is your onboarding program? How will it change by implementing dropship?
- Is your ERP and/or inventory management system capable of handling another fulfilment method?
- Is your EDI solution scalable?
Once you’ve answered these questions you’ll have a better idea of any areas that need to be improved upon or replaced to facilitate the addition of dropship.
2. Integrate EDI into Your ERP or Accounting System
After taking inventory of your systems and updating where necessary, consider integrating supply chain data (EDI) into your ERP or accounting system. This lack of systems integration becomes particularly problematic in the dropship fulfillment model, because record keeping and tracking are so critical with a large volume of orders sourced through many different manufacturers, shipped to multiple geographical locations.
For example, a retailer with 100 bulk fulfilment suppliers and 100 dropship manufacturers will likely have hundreds of transactional (EDI) documents coming in every day. Without integrated systems, retailers normally need to hire staff to manually enter order EDI data into their ERP, then manually copy and paste tracking information from their shipping carrier back into their ERP. The risk of error is high and the manpower needed to process all this information is extensive. By integrating EDI with your ERP or accounting system most of these processes will become automated, eliminating the need for manual entry and ultimately leading to substantial savings in overhead and labor, not to mention increased customer satisfaction.
3. Choose Dropship Manufacturers Wisely
When selecting a manufacturer to partner with for dropshipping, you must ensure that they are capable of providing single-item fulfillment to meet your needs where shipping options are concerned. Manufacturers must be able to select individual items from their warehouse or fulfillment center and provide near-real time inventory visibility to you to avoid online stockouts. Often, manufacturers will work with a third-party logistics provider (3PL) capable of handling such requirements. Manufacturers also tend to underestimate the time and cost associated with implementing a single item fulfillment model, so be cautious when working any entity who offers to provide dropship specifically for your organization.
For retailers with hundreds or thousands of manufacturers, it’s important to note that not all of them will not be suitable for dropshipping. To protect your customer experience, it is absolutely critical that you carefully assess each manufacturer’s capabilities, including their ability for technology integration, organizational maturity, EDI compliance status and agility in their supply chain.
4. Prioritize Transparency and Collaboration
The foundation of a successful dropship partnership is transparency, particularly when it comes to inventory. Retailers must have real-time visibility of manufacturer inventory in order to avoid online avoid stockouts, back orders, inadvertently selling products that have already sold out, or missing sales of items incorrectly listed as sold out. Manufacturers also benefit greatly from demand forecast data and e-commerce sales forecasts, yet some retailers are reluctant to provide them regularly. This lack of visibility creates tension and ultimately undermines the common goal of a successful dropshipping collaboration.
Unlike other fulfillment models, with dropship the manufacturer-retailer power dynamic has shifted. While the retailer benefits from not having to purchase additional inventory, they are forfeiting much of the leverage they would normally have over the manufacturer’s behavior. In exchange for the use of the retailer’s channel, the manufacturer is essentially taking on significantly more operational and financial risk. Therefore, when a retailer requests that a manufacturer invest in operational costs to fulfill direct-to-consumer orders, they may be more resistant to additional demands. As such, it’s crucial that manufacturers and retailers work in coordination with one another, as partners.
5. Use the Right Dropship Tools
As retailers strive to expand inventory assortment, improve customer satisfaction and cut costs, the trend of dropshipping will continue to grow. In order to leverage this fulfillment method, you must invest in seamless dropship systems that can provide easy onboarding, inventory and real-time auditing capabilities. This should ideally take the physically disparate systems (EDI, ERP, OMS, 3PL) that make up your supply chain and integrate them into one capable of automating and streamlining your ordering, inventory, shipping and communications processes. With integrated systems, strong supplier relationships and an emphasis on collaboration you will be poised for dropship success.
To learn more about the implications of dropship, register for our upcoming webinar, Hitting the Dropship Sweet Spot. The event will be co-hosted by Lehigh University Professor Zach Zacharia, who conducted a recent study of retailers and suppliers facing the risks, benefits and pressures of dropship as well as recommendations for the "sweet spot" of dropship ROI.