Support Services: Navigating the Retail Shipping Minefield: Drop Shipping1 May, 2013 By: Ayal Latz Response
This Web Exclusive column is an extension from a story that appeared in the April issue of Response Magazine. There, we detailed the key issues related to shipping to retail distribution centers and stores. We continue with a detailed analysis of a specialized form of retail shipping: drop shipping.
Question 1: Are all orders fulfilled the same way? What are the differences?
Marketers are faced with varying requirements for order fulfillment. The three most common categories are:
- Direct to Consumer (D2C): In the DR world, shipping to the consumer is the most common form of fulfillment; however, consumer expectations continue to change the landscape and challenge marketers who are competing for the consumer’s business.
- Retail Distribution (B2B): This is usually the end goal for DR marketers. Selling to retail often requires shipments to distribution centers or direct to stores in bulk quantities. The order fulfillment process is a different animal than shipping to consumers.
- Drop Ship: This hybrid between D2C and B2B involves direct-to-consumer fulfillment by the marketer on behalf of the retailer. This method is becoming increasingly popular as retailers expand their product assortments without the need to increase their distribution capabilities.
Question 2: Exactly who processes the drop-ship orders?
The marketer, commonly through a fulfillment partner, drop ships orders direct to consumer on behalf of the retailer.
Question 3: What are the differences between the retailer shipping and the marketer shipping?
When a retailer ships an order to a consumer, the order is sent from the retailer’s distribution center (DC). The entire process is self-contained. The retailer takes the order and ships it to the consumer from its own DC.
With a drop ship model, the first part remains the same. The retailer processes the order. Then, instead of shipping it directly, the retailer transmits the order to the marketer of the product (or the marketer’s fulfillment partner) for fulfillment and shipment to the consumer.
Question 4: Why do retailers use the drop-shipping method?
Think of a retail store with hundreds, if not thousands of SKUs. All of these items are supported by the retailer’s distribution system. Many retailers want the best of both worlds – a large selection of items, but without the need to provide logistics support for them all.
Many items have low, very unpredictable or seasonal volumes. These factors can make them time consuming and risky for the retailer. By “storing” those items at a drop shipper, the retailer simplifies logistics and expands their product offering without incurring the logistics costs of doing so.
Drop shipping is a good solution when the particular item is large and/or heavy. These are harder for the retailer to handle physically. Retailers know that the cost structure for such handling is higher than they can afford to include in a product’s pricing. Examples are large exercise equipment, mattresses or large appliances.
In D2C, offers often change quickly and frequently. Most retailers do not have the facilities, management and expertise to perform these unique D2C functions. Outside fulfillment centers are particularly adept at providing this service.
Some products require special handling, including food and products requiring temperature control. The retailer may not be equipped to store and handle these products.
Question 5: Under what conditions would a marketer wish to drop ship, instead of having the retailer fulfill the orders?
First, let’s understand that the retailer makes the decision whether to handle the product or have it drop shipped. However, marketers can plead their individual cases with the retailer. There are several situations that make sense for the marketer to drop ship.
Retailers have some formula for pricing shipping and handling when they self-fulfill. Suppose that is $10 for a particular item. If the marketer knows that its own fulfillment operation can perform that function for $7, then drop shipping will save money.
If the marketer is located closer to the source of the product, overall freight costs might be lower. Again, this squeezes cost out of the system. For example: the product is produced in Georgia, and the marketer’s fulfillment operation is located there also, while the retailer has a DC in Los Angeles. Instead of shipping the product to California for self-distribution, the product is shipped more cheaply to the marketer’s fulfillment operation.
When the campaign anticipates high volume and a high degree of change where offers change quickly and require value added support services such as kitting and assembly, the marketer’s fulfillment operation can handle it. Retailers typically are not set up to perform this function.
Finally, the marketer, through its fulfillment operation, has the sophistication to handle the drop-shipping process. For the record, not all fulfillment operations are capable of doing this.
Question 6: Why is drop shipping so complicated?
Each retailer has its own specific instructions for shipping. Included is the need for branding throughout the fulfillment process. This may include shipping with the retailer’s branded boxes and packing materials. The packing list, invoice and any return label must all be customized by the fulfillment operation so that the package looks as though the retailer shipped it.
Next, the retailer sends the order to the marketer/fulfillment operation via the same EDI network that we discussed in the April column on retail shipping. Remember the cost, complexity and risks associated with EDI?
Question 7: What is the cost of non-compliance for drop shipping?
While retailers can penalize the marketer for non-compliance in shipping to DCs and stores, penalties also apply to drop shipping, although they are different.
Penalties are often assessed by retailers for non-compliance with their drop-shipping rules and guidelines. These include penalties for shipments sent late, inaccurately, or even with the incorrect shipping carrier/method. In some cases, the marketer via its fulfillment partner, is required by the retailer to determine the most cost-effective shipping method that adheres to a complex set of rules, i.e., deliver in a certain number of days and don’t incur carrier surcharge fees, etc. Sophisticated shipping software is needed to comply with these complex parameters set by the retailer. Then, the retailer demands an accounting/explanation from the fulfillment center regarding the shipping method selected. If the retailer finds an acceptable alternative, at a lower cost, they will bill the difference to the marketer. Ouch!
Question 8: What tools do I need to drop ship successfully?
Sophisticated shipping software is a starting point. These systems are expensive and complex.
Experience is critical. There is no room for error. So make sure that you know what you are doing before setting sail.
Understand and appreciate the complexities of retail distribution. Rely on an experienced fulfillment center to help. They have the knowledge, software, equipment and physical space to handle the task. And most important, they can be your pilots in navigating the minefields.
Ayal Latz is the owner of Greensboro, Ga.-based a2b Fulfillment. He can be reached at (866) 843-3827 or via E-mail at [email protected].