The retailer has a dilemma that’s been brought on by this empowered customer: he wants to provide the broadest possible selection of products but doesn’t have unlimited space or funds. What’s the solution? Rather than building huge warehouses and borrowing money to buy inventory, many smart retailers are turning to drop shippers to help them compete.

What’s a drop shipper? The easiest explanation is that it’s the retailer’s supplier, except that instead of (or in addition to) shipping products in bulk quantities to the retailer, he ships order quantities directly to the retailer’s customer. The practice of drop shipping has been around forever, but expectations of the customer have evolved. That’s where the challenge comes in for the drop shipper. Let’s look at an example.

You’re a hand tool manufacturer who sells to BBR (Big Box Retailer). BBR faxes you an order every week for deliveries to their DCs scheduled 6 weeks out. You enter it into your system, schedule the production run, and ship to meet their delivery date. Your latest conversation with BBR has left you scratching your head, though. They’re expanding their web presence and want to increase the number of SKUs they buy from you from 10 to 35- your entire line. The kicker, though, is they want you to drop ship the additional SKUs directly to the customers placing orders over their website. What would normally be cause for rejoicing is now cause for concern. What’s it mean?

Let’s turn to the customer experience, which is really driving this new ‘ecommerce model’. The consumer wants lots of product choices, low prices, immediate availability, impeccable packaging, fast shipment, next day delivery, and order traceability. BBR, your ‘true’ customer, wants to meet those expectations, plus make it appear seamless to the consumer by having its brand on the drop shipment labeling and pack list. If your experience to this point has been limited to shipping pallet loads of product by LTL or full truck carriers to retail DCs, your world is about to change. 

So, what’s needed at a high level to support those requirements?

• You’ll need to be in synch with BBR on all item level information, especially with respect to fields such as part number, description, and unit of measure. Lots of information will be passed between you and BBR.
• The customer wants to know the delivery timeframe on the BBR website. BBR will need an inventory feed from you on a periodic basis (daily? weekly?) showing SKU counts available for shipment. Inventory produced for DC orders and other commitments need to be backed out of your SKU counts, since BBR only wants to know what’s available for drop shipping.
• You need to get the order quickly into your system, so you’ll probably need an EDI connection to BBR. This will allow you to receive drop ship orders and have them automatically entered into your system, send BBR an acknowledgment that you’ve received the order and when you’ll ship it, a ship notice when you send it, and an invoice to BBR. If you don’t already support EDI, this is a significant step.
• Since BBR’s brand is at stake, they want you to label the product with their label and include their packing list with the shipment.
• You need to figure out the most effective way to pick, pack, and ship small orders. Do you set up a separate area of your facility for this? Do you segregate small shipment inventory from what you’re producing for DC shipments? Since same-day shipping is expected, you’ll need to modify your processes to ensure orders received by a certain time are handled immediately.
• Traceability needs to be supported by the ability of your system to send tracking information with your ship notice back to the retailer. Since you’ll be shipping mostly via parcel carriers, you can take advantage of some of their technical advances to help with this.
• You need to ensure that information flows quickly back to BBR, since they need to not only notify the customer of expected delivery dates but also close out the credit card transaction that originated the order.
• You need to have a ‘returns process’ worked out between you and BBR.
• You’ll need to have a ‘customer service’ role identified in your organization to help the retailer or direct consumer when he calls regarding an order. To minimize follow-up calls, you could provide a web service for order lookup in your system or provide limited system access to BBR.

In other words, everything must be automated, fast, transparent, seamless, and BBR-branded. That’s a tall order, especially if you’re new to the ecommerce model. What are some of the options you have in this situation with your retail partner? 

• Say ‘no thanks’, but it’s a rare business entity that can reject the higher sales and profits that could come with a drop ship arrangement.
• Negotiate higher prices for the drop ship SKUs. Essentially, you’re assuming the inventory risk for the retailer and are making an additional investment in physical layout and process changes. Recent research tells us that retailers often are willing to pay extra for drop ship SKUs.
• Engage with a 3rd party that specializes in helping non-EDI-capable businesses automate some or all of their necessary transactions. Companies like SPS Commerce can help identify opportunities to do tasks electronically in a more efficient manner.
• Engage a ‘fulfillment house’ to actually assume the storage, picking, packing, and shipment functions for you. Don’t forget, though, that all the requirements you have (speed, visibility, branding, etc.) also need to be met by the fulfillment center.

Although this new arrangement will change your relationship with BBR, think about how the increased exposure and additional sales will affect your bottom line. This can truly be a win-win if done right!