Dropshipping and Direct Shipping.

 By Dave Piasecki

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There was a time when I convinced myself that Dropship and Direct Ship were two terms with unique meanings depending on where you were within the supply chain. But that was pointless because everyone else was using them interchangeably. Therefore, for the purposes of this article Dropshipments and Direct shipments are the same thing.

From my definition in my glossary of warehouse and inventory terms, direct shipping and drop shipping are two terms generally used interchangeably. They describe a process whereby three parties interact with the sales transaction (the buyer, the seller, and the supplier). The buyer initiates a purchase from the seller, who then arranges with the supplier to ship the product directly to the buyer. The seller does not carry inventory of the product, and the supplier does not have any direct communication with the buyer. The buyer pays the seller, and the seller pays the supplier. In the case of a "Blind" direct shipment, the supplier information is intentionally hidden from the buyer, so in theory, the buyer doesn’t know it didn’t come directly from his supplier.

Why dropship?

With dropship items, you’re able to sell products that you don’t need to keep in stock. That means no inventory investment, no warehouse, and no shipping operation. In theory, you could have a virtual business that only needs a means of handling the sales transactions to customers. If you do a google search for Dropship Suppliers, you’ll find suppliers that are targeting this market. While a virtual business is technically possible, my experience has been primarily with businesses that have warehouses and sell most of their products from stock but use dropshipping for specific items or specific quantities of specific items. In fact, most fulfillment operations I’ve worked with will have some dropship items.

Historically dropship items would be physically large and/or expensive items where there is a significant reason not to want to carry stock. For example, if you sell fishing gear, most of what you sell are physically small items, but you also want the option to sell some fishing boats because your customer base would be interested in buying boats. Your operation really isn’t set up for handling these larger items; you don’t have a big enough warehouse, and your shipping processes are optimized for parcel shipping. By offering boats as dropship items, you can sell them and leave the warehousing and shipping to someone who is better prepared for these kinds of items. This may be the boat manufacturer or a distributor. Your customers don’t even need to know the boat is not coming from you. Though typically, you would let them know this is a dropship item.
Another reason people dropship is when they occasionally get a customer place an order for an unusually large quantity of an item. Shipping that quantity would wipe out their inventory, and they wouldn’t be able to fulfill additional smaller orders that are likely to come in. If they tried to stock enough to be able to supply these large orders, they would likely be carrying excess inventory most of the time. If they knew in advance when these large orders were going to come in, they could work it into their inventory planning calculations and then ship it from stock, but in my experience, you don’t usually get that level of cooperation from your customers. If they create a dropship order for the large quantity, they meet this customer’s needs without negatively affecting their other customers.

What problems are associated with dropshipping?

Typically, you would expect problems with your inventory/accounting system when implementing special inventory situations, but dropshipping works pretty well with most systems. The basic process is you receive an order for a dropship item, then you place a purchase order with your supplier with your customer’s address as the Ship-To address. When your supplier ships the item, they will notify you and invoice you. At this point, you usually enter a receiving transaction for the dropship item so you can pay the supplier, and you show your customer order as shipped.
As I already mentioned, this process should work pretty well in most inventory systems. In fact, some will have a special item type or order type for dropship items that will prevent them from affecting your inventory. And some may even automatically create the associated purchase order and link it to the sales order when a sales order for a dropship item is entered.

You do give up some control when you sell dropship items. For example, you may normally ship the same day for your orders, but your dropship supplier may take three days to ship. You also may have limitations on the carriers you can use for a dropship item.

It’s near impossible to truly hide the fact that you are selling dropship items. You may be able to get your dropship supplier to print your company name on the packing slip and shipping label, but there are likely other clues that your customer will see that let them know it is not coming from you. This is especially true if they order from you regularly. The main reason businesses try to hide the dropship information is that they don’t want their customers trying to cut out the middleman (the seller). This would be more likely if you are a business-to-business seller. However, in many cases, your customer simply doesn’t have the option to go directly to your supplier. So while it’s not a bad idea to try to hide the dropship information, I wouldn’t go to great lengths to do it.

Returns can get messy. Let’s go back to the earlier example where we had a boat dropshipped. If the customer wants to return the boat, what are you going to do? You don’t want it shipped back to you, but your supplier may not want to take it back either. This is one of those things you need to make sure you work through it before you start dropshipping. In some cases, you may not allow returns of dropship items.

Your supplier may charge you extra to process dropshipments. If your supplier is a manufacturer or wholesale supplier, their business model is not based on small shipments to end users. Therefore, you may incur a “Dropship charge”.

Some suppliers may not provide dropshipping as an option. This is not that likely these days, but I’m sure there are still some suppliers that just aren’t interested in shipping directly to an end user. If this is the case, your only option is to stock the item or treat it as a special order item. A special order is similar to a dropship in that you place an order with a supplier when you get a customer order. The difference is the order gets shipped to you, then you receive it and reship it to your customer. The downside to this is that it will take longer for your customer to receive it, and it will add cost because it has to be shipped twice. Also, if we go back to our boat example, you really are still not prepared to be physically processing boats.

Working with your supplier on dropshipments.

You need to make sure you work closely with your supplier to make sure their dropshipping processes work with your dropshipping processes. First and foremost, you need to make sure they are paying attention to the “Ship To” address on your purchase order. Most systems will autofill the ship-to-address with your default ship-to-address unless someone specifies a different one. It’s a good idea to put some type of additional note on your PO just to make it clear that this will be a dropship.

If you need the supplier to provide shipping documents that make it appear that the shipment came from you (a blind dropshipment), you need to work out these details. If your supplier is already doing dropshipments for other buyers, they may already be doing blind dropshipments.

You need to work out how returns will be processed.

You need to work out the communication processes for the transactions. For example, customers expect a tracking number when products ship, so you need to get that communicated to you in a timely manner so you can communicate it to your customer. And, as mentioned earlier, you need to make sure your supplier knows this is a dropshipment and ships it to your customer (not to you).

Setting up your system for dropshipping.

As I mentioned previously, most systems can execute dropship orders relatively easily. First, check to see if your system has any special dropshipping functionality, such as a special dropship item type or order type. If not, check to see how this is typically handled in your particular system. Dropshipping is very common, so there will be others using the same software that has already been through this. In some systems, it may be recommended to treat them as non-inventory to avoid affecting inventory balances. Be especially careful if you have an item that usually ships from stock, but sometimes dropships (the quantity example I previously covered). You want to be sure you do not screw up the quantity on hand of your stocked item when you do the dropshipments. I've seen some companies set up 2 different SKUs for this situation (one for the inventory item and one for the dropship item) just to keep things clean.

If your system does not automatically create a Purchase Order when you enter a dropship order, you will need a separate process for this. This may be as simple as running a report of all new sales orders for dropship items, and then creating the associated POs. Obviously , you also need a process to communicate the dropship purchase order to the supplier.

 

More Articles by Dave Piasecki.

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Dave Piasecki, is owner/operator of Inventory Operations Consulting LLC, a consulting firm providing services related to inventory management, material handling, and warehouse operations. He has over 25 years experience in operations management and can be reached through his website (https://www.inventoryops.com), where he maintains additional relevant information.