5 Drop Shipping Fundamentals for Inventory Management
By: Azad Sadr
In order to launch a successful drop shipping program you must carefully plan for the effects that pick, pack, and ship will have on your inventory and warehouse management processes.
At its most basic, certain products sell better through drop shipping than others and there may be greater demand for sizes and colors that did not exist with pure wholesale.
If not properly taken into account, drop shipping could leave you unable to fulfill wholesale orders and/or overstocked with products that don’t sell as rapidly through ecommerce.
Here are five things to consider for maximizing inventory efficiency and revenue when drop shipping:
1) Certain categories of products are better suited for drop shipping
When it comes to drop shipping, not all products are created equal. Certain categories such as books, electronics, CDs, DVDs, furniture, and auto-parts sell well online. Other categories such as apparel and produce are more challenging.
Your demand planning process needs to factor in such differences when forecasting the effects that drop shipping will have on your warehousing and inventory.
For a more indepth discussion on this topic, take a look at my previous post, where I explain the features of both drop ship friendly and drop ship resistant products.
2) Drop shipping leads to more assorted product offerings
One of the great benefits of drop shipping is that retailers are not forced to hold every permutation of every product physically on hand in order to sell it.
This means that brands can not only offer retailers a larger portion of their catalogue to drop ship but can also provide more colors, sizes, and styles than is possible for retailers to physically hold in their stores.
This needs to be taken into account in your manufacturing and inventory forecasting to avoid out of stock situations.
3) Drop shipping is a great channel for eliminating distressed inventory
Drop shipping has been touted as an efficient method for reducing losses from overstocks through providing extra channels for liquidating excess inventory. This has the potential to save a lot of money considering that overstocks account for roughly $472B in worldwide retail losses annually.
The added benefit of using drop shipping to liquidate inventory is that your products retain their association with top retailers instead of being offloaded to off-price stores and channels.
4) Drop shipping can both increase and reduce your ability to meet demand for bestsellers and high volume products
There are two basic reasons a best-seller goes out of stock at a physical store: either a brand is unable to manufacture enough product to meet demand (as is currently happening with Nintendo’s new Switch console) or its retail partners did not order enough.
In the first case, without increased factory output, drop shipping will significantly slow your ability to fulfill wholesale orders of high volume products. Strategies must therefore be developed for properly harnessing this new sales channel to increase overall profits while not hurting your other revenue streams.
For example, if both wholesale and drop ship volumes are equal you may decide to prioritize channels based on the importance of the retail partner making the order or based on the respective profit margins of the two channels.
In the second case, drop shipping gives you the ability to make just-in-time inventory immediately available to retailers who are running out of an unanticipated best seller.
Even if such retailers make further wholesale orders, drop shipping allows them to keep offering your high-volume products to customers long before their bulk orders arrive at their stores (something Nintendo might want to consider as it ramps up production of the Switch).
One final note on best-sellers. Since you are able to sell a larger variety of sizes and colors through drop shipping, more of these types of unusual variations of your high-volume products will also have to be manufactured and stocked to meet any increase in demand for such orders.
5) Should you combine inventories?
There are three approaches to this question.
First, some companies completely separate their wholesale and drop ship inventories and operations. Enterprise brands may even take this a step further by having distinct manufacturing processes for these two different kinds of inventory, or they might send drop ship products to a separate 3PL to handle.
Separating the two inventories allows brands to keep the more complicated shipping, invoicing, and return logistics of drop shipping out of their wholesale processes. It also means they will never run the risk of being unable to fulfill a bulk order due to drop shipping eating into their wholesale pallets and stock.
Other companies keep wholesale and drop ship inventory combined. This allows them to simplify their warehousing and reduce overhead by using the same teams and systems for both wholesale as well as pick, pack, and ship.
A third set of companies use a combination of both strategies, keeping drop shipping and wholesale inventory separate but dipping into one or the other as needed to fill orders.
Which strategy you choose to follow will be based on the particular circumstances that your company faces such as sales concentration among retail customers, total drop ship order volume, staff size, operating margins, and the ability to absorb various manufacturing, warehousing, and 3PL costs.
Take a holistic approach
All the operations involved in a well-planned drop shipping program should complement–not compete with–other revenue streams.
This means that every manufacturing, warehousing, and logistics decision should be made with the goal of strengthening your other wholesale and direct-to-consumer sales channels, and vice versa.
Conversely, any action that allows drop shipping to cannibalize sales and retail partners from these other revenue streams should be avoided at all costs without sufficient volume to justify it.
In short, always think of the vitality of your entire operation first and then plan for how drop shipping can help strengthen it.
Azad Sadr is Dsco’s head of industry research and content development.