Distribution Decisions: Drop Shipping or Inventory or
Fulfillment House?
Selling products on the Internet is easy. Hundreds of thousands
of people do it every day. The most difficult part of Internet
sales is getting the products delivered to the customer,
otherwise known as order fulfillment. Running a fulfillment
system is a full time and trying job.
The Solutions
Here is a discussion of the problem and some solutions for you.
There are three basic systems - fulfillment systems - that you
can use to get products to your buyers.
Inventory Model - You buy the inventory, store it in your
warehouse (basement, garage, building) and ship it to your
customers.
Fulfillment House - You buy the inventory and store it in
someone else's warehouse. That someone else also does the
shipping for you.
Drop Shipping Model - The drop shipper has the inventory. You
just sell, get paid, keep the profits and send the order to the
drop shipper who has bought the inventory and does the shipping
for you.
Inventory Model
This is the method used by most small retailers. They order
inventory from a manufacturer or distributor and store it in a
place that they control. This business model has advantages:
You can ship products immediately because you have total
control. The faster you can turn around the order, the more
impressed your customer is, and the better chance you have of
getting him back the next time.
You can provide excellent customer service. In case of a
problem, you will have all the records at your fingertips to
trace the order and make a correction.
The Inventory Method, of course, has its disadvantages, too:
You need the cash to buy and store inventory. Regardless of the
size of your company, you never have enough cash to do
everything. So tying up money in inventory that sits on your
shelves can limit your growth.
Paid for inventory can sit on your shelves, tying up capital.
When you own the inventory, you also own the risk if not being
able to sell it. If a product doesn't sell, you're stuck with
disposing of it at pennies on the dollar.
Fulfillment House
A second common Internet distribution model is the fulfillment
house. A fulfillment house will store your inventory and run the
fulfillment system for you.
A fulfillment house is nothing more than a warehouse operated by
a company that provides storage and delivery services to other
companies. They are specialists in getting products to your
customers.
They will maintain inventory, assemble, pick, pull, pack, and
ship. They do all do all this according to your specifications
and with your labels. They can, if you wish, also handle the
order taking, an Internet shopping cart, and provide an ordering
and customer service call center if you need one. In other
words, you can run an entirely virtual business, outsourcing
everything to the fulfillment house, if you like. You provide
them the inventory, you sell it and they take care of getting it
to your customer.
This is the system used my most large mail order catalog
companies and web sites that have the capital to purchase their
own inventories.
Drop Shipping Model
One of the simplest order fulfillment models to use is the drop
ship model. Every successful business person knows the
importance of focus. Business people articulate their focus by
talking about their "core business" activity. In short, it means
the primary activity that generates cash for them. Some people
focus on selling. Some focus on running a warehouse. Some focus
on manufacturing a product. Others focus on advertising.
Mail order catalog companies and professionals who use the
internet focus on selling. They are professional sales people
who know their chosen target market and they find products to
sell to their chosen market. These people do not manufacture
product, run warehouses or run advertising services. They do not
buy tons of inventory. They have manufacturers put products in
fulfillment warehouses, at the manufacturers' costs and have the
warehouses drop ship products their customers.
Let's put that another way. They have absolutely no stocked
inventory and they spent absolutely nothing on inventory. They
just have catalogs and web sites. They take an order from a
customer. They keep the profit. They send the cost of the
product to the fulfillment warehouse. The fulfillment warehouse
puts the catalog company's invoice in the box and sends the
product to the customer. The customer gets the product and
thinks that it came from the catalog company's own inventory in
its own warehouse. The fulfillment warehouse drop shipped the
product for the catalog company.
Drop shipping has some very strong advantages and a few
disadvantages. Let's look at the advantages first.
You don't have to pay for anything until after you sell it.
You have do not have inventory costs. You know that purchasing
inventory ready to ship to your purchasers is expensive. In
addition to the out-of-pocket costs, you need a place to store
the inventory. Finally you have to pick, pull, pack, and ship
the products once the order is placed. Having the distributor or
manufacturer take all these costs and responsibilities lifts a
real burden off your shoulders.
A drop-shipper is transparent. With most of your drop shippers,
especially those with whom you do a regular business, you can
send them labels and forms so their package looks like it is
from you. Your customer probably won't know that your hands
never touched the product. The customer will think that you have
a warehouse.
You can sell many more products than you could if you had to buy
and store them yourself. Drop shippers give you a wide choice of
products so you can sell a lot more.
It almost sounds too good to be true. But there are two things
that you should consider:
Lower margins. While the manufacturer may be willing to sell you
product for 30% to 40% of suggested retail, if you want
drop-shipping services expect to see higher costs to you and
lower profits when you sell. This is to be expected. There is a
lot of work and expense in storing and shipping inventory.
Someone has to pay for it.
On the Internet, some categories of products are very
price-sensitive. If you are selling computer hardware, for
example, and using the drop shipping model, you may find it hard
to be competitive price-wise and still make a profit. The
difference between making money and losing it may be only a few
percent. So be sure to pick a product that makes sense to drop
ship.
You will be using third party customer service so you will not
have full control. Drop shipping is really outsourcing your
order fulfillment services to a third party. You will be
dependent on your drop shipper to have the products in stock, to
deliver on time, and to properly pack and ship your products. So
pick your drop shipper carefully.
At the end of the day, however, drop shipping exists because it
works. And the largest catalog companies and web sites use it.
And savvy small web sites and auction site sellers use it.
Your Choice
The choice of your model depends on you.
If you selling off line at fairs, trade shows, expositions or in
a shop, then you need some inventory in your shop and the
inventory model is for you. But do supplement it with drop
shipping.
If you have enough cash to buy a substantial inventory for
retail or if you want to be a distributor and sell to retailers,
a fulfillment house will probably be your best choice.
If you are starting up or want to conserve cash while expanding
your product line, then the drop ship model is for you.
A Word Of Caution
Be careful of scams and overpriced products. Many companies drop
ship products to you at retail prices. And some companies take
money and ship things that might not otherwise be able to be
sold.
Stay with drop ship sources that have a proven record. If you
have enough money to take a loss, go off the proven path and
make a test purchase and evaluate the delivery service and the
product before you offer it to your customers.
If you are just starting out, or if you don't have money to
lose, I recommend that you find suppliers in one of the drop
ship directories. The people who make the directories police the
listings so you can be fairly comfortable that you will not get
burned. That is not to say that you might not have some
problems, but you will have a lot less than if you go off on
your own.
Another thing to remember is that it may not be good to go off
building a web site and setting up your business until you are
fully prepared and have a comprehensive business plan that gives
you a definite strategy for surviving against the competition.
End Note
Do some market research and think long and hard before you take
off running. Don't get burned by something that sounds too good
to be true.
Stay on the proven path. Plan, and work your plan.
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