In Part 3 of our Drop Shipping Series, we outline 4 solutions to drop ship challenges supplier commonly encounter
March 13, 2015
This is the third post in our series on drop shipping. Please click here to see the previous post.
To sell Direct to Consumer (D2C), or not? Is this the true question suppliers face in today’s retail environment? Not really.
The question isn't whether you should support D2C fulfillment, but when and how quickly can you do it.
Shipwire works with manufacturers, suppliers, and brands of all sizes. Recently, a consistent theme we’ve heard from these parties is that they are looking for solutions to support drop ship fulfillment. The demand for this type of fulfillment is increasingly being imposed upon them by big retail channels whose purchase orders could make or break some of these businesses.
In 2014, we began rolling out solutions with manufacturers, suppliers, and brands that has enabled the launch of several successful drop ship fulfillment programs, and we want to share some of the pain points we have seen, as well as tips we have collected throughout the process.
Challenge 1: The bigger the retail channel, the tougher the retail compliance guidelines. This is really costly.
It’s true that doing business in the big leagues means that you need to step up your game. While it’s great news to learn that a major retailer like Walmart, Target, Costco, or Staples is going to pick up your product, it can be stressful to build the processes, systems, and tools necessary to meet all the retail compliance guidelines that come with the deal.
In order to support drop ship fulfillment for the top online retail channels, a supplier must be able to support things like retailer-branded packing slips, strict service level agreements (SLAs) that dictate penalties for non-compliance, and third party carrier billing.
It can be costly to set these things up, and it’s also costly to maintain them in the long term. Either way, managing these guidelines takes you away from your core skill set, which is what makes you a successful supplier.
Unfortunately, there’s no magic solution to this one. Retail compliance is a unique challenge, and has to be taken seriously. When done incorrectly, penalties add up and quickly eat into your profit. Issues around compliance can also cause your products to be discontinued, so it’s important to get it right. Fortunately, there are a few options to ensure success:
- Our favorite option: Find a strategic fulfillment partner to whom you can offload this part of the business. Doing so positions you as being able to handle whatever big retailers throw at you and simultaneously allows you to remain focused on building your business. This was part of the vision for the Shipwire Drop Ship for Suppliers Solution.
- Start with smaller channels that have less strict retail compliance guidelines. Doing so gives you an opportunity to gain some experience and build up your internal processes over time. While you may not be able to scale as quickly as the demand dictates, in the long term, you’ll have a better chance at success by doing what you do well and ensuring a great customer experience.
- Hire a resource that has experience setting up D2C fulfillment, plan a budget to accommodate the necessary software, physical warehouse reconfigurations, and internal resources, and let your resource handle this part of your business. Whether this is an option for you or not depends significantly on your physical warehouse setup and business requirements.
Challenge 2: Retailers want to do business with us, but don’t want to pay for any products up front. How do we run a business like this?
This dynamic is part of the changing nature of retail. Retailers have realized how much inventory distortion costs them, so they try to minimize distortion, and offset risk to themselves as much as possible. Drop ship fulfillment is part of the strategy to accomplish these goals and from a retailer’s perspective, it’s an attractive option — it’s great business to pay for something only after you’ve collected payment for it!
Financially, it can be challenging for suppliers to support this type of demand, but it can also be seen as an opportunity to create profitable relationships.
*Inventory Distortion = the $800 billion dollar problem of over-stock clearances and out-of-stock shelves.
Seize the opportunity presented to you. In today’s world of e-commerce and retail, a lot of suppliers (your competitors) don’t have the ability to support drop ship fulfillment, but as pressure from retailers mounts, this won’t always be the case and more suppliers will find a way to support the demand. It is hard to find a competitive advantage — being in the right place at the right time is definitely an advantage and having the capability to support drop ship fulfillment at this time could be yours. Take the opportunity to expand your product into new channels and access consumers that were previously out of reach.
Since retailers carry less risk by not paying for inventory in advance, they may be willing to accept smaller margins on drop ship fulfilled products. Consider whether charging a premium for products fulfilled this way (as opposed to wholesale) is possible. Doing so may justify the resources required to set up a drop ship fulfillment program.
Challenge 3: How do we keep our inventory levels accurate as we start selling on many channels? Some channels eat up large quantities of our stock.
Inventory accuracy, management, and awareness can be the difference between success and failure when setting up a drop ship fulfillment program.
As a supplier, now that you are carrying the risk of stocking inventory, you have to balance a fine line between keeping enough stock to fulfill orders, and maintaining finite resources like cash reserves and warehouse space.
On top of this, you need to have systems in place that are accurately aware of inventory at all stages of the manufacturing and fulfillment process. Retail compliance guidelines from major retail channels often have SLAs in place that dictate an order fulfillment rate of >98 percent. If you “think” you have 100 items left in stock and you publish that number to your retail channels, but are incorrect and thus cannot fulfill 100 items, you can get hit with penalties.
There are two parts to keeping your inventory levels as accurate as possible, which increases your chances of success in rolling out a drop ship fulfillment solution.
- Get your orders and inventory levels updated as close to real-time as possible (if not truly real-time). With integration technologies like APIs and EDI Transmission, providing inventory levels on-demand and accepting orders as they are placed is not cost prohibitive.
This capability is part of Shipwire’s Drop Ship for Suppliers solution core offering because we recognize it as a need in today’s multi-channel retail environment.
- Understand, forecast, and plan for the potential peak sales of the channels you are selling on, not just the average order volume.
While it is great to announce that your product is now “sold on Amazon,” when it comes to inventory volume, you need to be prepared for the spikes in demand that coincide with it. This is accomplished by holding enough safety stock or having a rapid manufacturing process that can keep up with peak sales (not just average sales). Keep in mind that if one big retailer drains all your inventory, you are not only out of stock for them, you are out of stock for everyone. That could equate to penalties, stock outs, and lost customers.
Challenge 4: Every retail or e-commerce channel we engage with has different system integration requirements. How can we afford to build all of this upfront?
This is a great question. Either you can afford to do this or you can’t.
If you’re in a position to invest in this part of your business, you will have to build out systems and processes to support both the physical pick and pack facilities (physical space, packaging materials, staffing, IT infrastructure), as well as the software to support all the typical data exchange methods such as self-service, batch processes (CSV), Electronic Data Interchange (EDI) or web services (API, XML). This seems like a lot to put in place, but it is possible with the right resources and budgets in place.
If you are not in a position to build all of this out or if you don’t want to invest in this area, you have to find other means to achieve these goals. Avoiding this altogether puts you at risk of being a competitors that’s left behind as everyone else ramps up this part of their business.
Truly understand the importance of integrations and processes to the success of a drop ship fulfillment program.
We have seen many of our merchants start with two or three retail channels, then very quickly expand to 10 channels within weeks. Within a year, they have their sights set on 30-40 channels. Merchants who achieve this type of growth are able to do so because they have the technology in place to support virtually every retail channel out there, via any data-exchange method, and they have the fulfillment infrastructure to scale with business demands.
Whether you align with a strategic partner to build out integrations or decide to tackling this in house, in order to be successful, consensus indicates that you need to invest in the foundational pieces to support all system integrations.
Thank you for taking the time to read Shipwire's drop shipping series, we hope you've found it useful! Please use the comment section to add points we've missed or to ask any questions you may have. If you're learning about drop ship solutions that have been successful for Shipwire merchants, you can learn more here or email [email protected] for a free Drop Ship Fit Business Analysis Session.
For a review of the series: