For retailers, the benefits of drop shipping are obvious. It allows them to easily offer a wider assortment of products at retail prices while shifting much of the costs and risks associated with warehousing inventory back up the supply chain.
By contrast, the benefits that suppliers gain are not so immediately clear. Not only do they take on greater inventory risk, but they also incur high initial overhead for retraining their staff and overhauling warehouse space, technology, and logistics for pick, pack, and ship capabilities that are completely unrelated to their current operations. And all this without the upfront financial security that wholesale provides.
All of which begs the question: why would suppliers and brands agree to what appears to be a rather lopsided trading arrangement? What do they get out of drop shipping?
In order to answer this, I contacted over 200 suppliers and brands with large drop shipping operations, asking about the benefits of drop shipping.
Their responses showed a rather sophisticated understanding of best practices for harnessing the modern supply chain through drop shipping.
Let’s take a look at seven of the most cited benefits.
Seven Major Benefits of Drop Shipping for Brands and Suppliers
More channels for selling products quickly
Drop shipping augments traditional wholesale revenue streams by opening up faster sales channels. Since there is no need for retailers to manage physical inventory, they are more willing to work with new suppliers for their online catalogues. As a result drop shipping not only allows suppliers to quickly sell their products online but gives them access to a greater number of trading partners than would traditionally be the case with wholesale.
Given the fact that ecommerce is expected to grow to $4.9 trillion (or 17.5% of global retail sales) by 2021, companies need to make sure they are able to get their products in front of as many ecommerce eyeballs as possible. Drop shipping is an important strategy for doing this.
According to the National Retail Federation, retailers who hold physical inventory carry on average only 13% of a supplier’s product line. With drop shipping, however, retailers are willing to expand their online product selection because there is no inventory risk involved and the costs for adding products to their ecommerce site is negligible for an already established drop shipping partnership.
Drop shipping is therefore a great way for brands and suppliers to get more of their product assortment in front of a greater number of customers.
Development of direct to consumer capabilities
For years, most manufacturers wouldn’t touch direct-to-consumer for fear of alienating their base of retail dealers. However, with the rise of ecommerce, direct access to customers through social media, and the risks of running a 100% wholesale operation entirely dependent on the fortunes of struggling retail partners, it’s becoming increasingly rare to find suppliers and brands that don’t sell directly to consumers, in addition to their B2B channels.
For suppliers that don’t already have a direct-to-consumer program, drop shipping is a great reason to develop the necessary pick, pack, and ship capabilities, but with the added security of working with already established and profitable trading partnerships.
Conversely, if a brand already sells products to consumers through their own digital storefronts, then they have built-in infrastructure for expanding out into drop shipping. This mitigates a large part of the initial setup costs.
Rebalances trade relationships
With drop shipping, in return for the opportunity to market more products through the retailer’s channel, the supplier is now taking on all of the inventory risk, while at the same time having far less up-front financial security.
Since the financial equation is changed, the trade relationship is changed too. Not having to purchase inventory reduces the amount of leverage the retailer has over its supply partners, especially since retailers are no longer the gatekeepers to customers they once were.
Overall, this means that drop shipping replaces the commit-to-buy discussion (where a retailer is negotiating with a supplier to purchase inventory at wholesale prices to then resell) with a commit-to-integrate discussion (where both sides need to understand the virtual part of the relationship and work together to allocate resources to handle different business processes and new technology requirements).
This is why RCVF concluded in their 2017 report on drop shipping compliance that brands and retailers need to “develop mutually beneficial solutions that maximize profits and satisfy heightened expectations of the end customer”.
Helps alleviate inventory distortion
According to IHL, inventory distortion is a major global problem in retail, accounting for roughly $1.1 trillion in lost revenue, with $471.9 billion lost to overstocks, and $634.1 billion lost to out-of-stocks. When implemented correctly, drop shipping can be an important tool for tackling both sides of this issue.
In terms of overstocks, by increasing product exposure and penetration through existing or new channels, drop shipping reduces the amount of excess inventory sitting in supplier warehouses and opens up options for moving off-price products.
As for out-of-stocks, since drop shipping requires greater control over inventory levels and higher rates of data exchange with trading partners as compared to wholesale, inventory visibility and analytics is greatly improved. This allows suppliers and retailers to work in tandem to prevent or quickly deal with out-of-stock situations.
Makes you a more appealing trading partner for retailers
Modern consumers expect fast, error-free shipping. For retailers that don’t have the massive supply side infrastructure and logistic capabilities of Amazon or Walmart, drop shipping is one of the major strategies for meeting these heightened expectations. Suppliers and brands who are able to support drop shipping are therefore in high demand with retailers, while those that don’t are missing out on an important opportunity for developing new trading partnerships.
Drop shipping allows for quick and cost-effective product testing. Little overhead is required to add a test product to a retail partner’s ecommerce catalogue and the resulting sales results can let suppliers know quickly whether or not it is performing.
Drop shipping is full of benefits for suppliers
The above list provides an interesting insight into the supply-side business case for developing pick, pack, and ship capabilities. It clearly demonstrates that the idea of drop shipping as a retailer-centric supply chain model is not accurate.
This is important because many suppliers and brands have been much slower in comparison to retailers to implement large-scale drop shipping operations and tend to do so reactively, at the behest of larger retail partners such as Nordstrom, Macy’s, and Kohl’s, who have been drop shipping for years.
By contrast, those brands and suppliers who proactively launch drop shipping programs gain a leg up on their competitors through access to an array of important benefits and capabilities not available to pure wholesalers.