The relationship between retailers and manufacturers has evolved dramatically in the last decade, and enterprise dropship has helped improve this partnership. In the past, manufacturers had, for the most part, utilized two go to market strategies: direct sales and channel sales. Direct sales require manufacturers to do their own marketing and hold a high degree of supply chain expertise necessary to build, store, merchandise, market, sell and deliver their products to end-consumers. Channel sales essentially transfers these responsibilities to a retailer, who then markets and sells the product to consumers.
In dropship, a slightly more complex fulfillment method is quickly gaining popularity in the retail environment. Although dropship has long been used for large, bulky items that did not sell at high volumes (for example, items like gun safes and fitness machines), the prevalence of e-commerce has made demand for dropshipping explode. Dropship allows retailers to significantly expand their inventory without physically storing or purchasing goods. Instead, when a customer purchases an item from an online retailer, the order ships directly from the manufacturer.
Manufacturers that provide dropship have the opportunity to grow revenue and expand into new markets by introducing direct-to-consumer strategies and exploring new channels with existing and prospective retailers. While dropshipping is not without challenges, those that invest in necessary infrastructure and processes, and prioritize collaboration with retail customers will see a strong return.
“The average profit of the manufacturer in the dropshipping channel is 18.33% higher than that in the traditional channel.” - The Journal of the Operational Research Society
1. Prepare Your Supply Chain Systems
It’s crucial that you prepare your supply chain for the addition of a new fulfillment method by ensuring that your IT infrastructure and systems can support the complexities of dropship. Because you will be fulfilling frequent single-SKU orders, scalability becomes incredibly important. Take inventory of your current processes and identify weaknesses, bottlenecks, and vulnerabilities to be addressed with upgrades, integrations or new technology. This includes (but is not limited to) the following:
● Electronic Data Interchange (EDI): A digital communication platform used to exchange business documents previously sent via fax or mail.
● Enterprise Resource Planning (ERP): Your business organization software may be as simple as an accounting system, such as QuickBooks or Xero, or a more complex custom system combining accounting, CRM, HR and more.
● Warehouse Management System (WMS): Software designed to manage and optimize warehouse organizations and distribution center functions.
2. Provide Real-Time Inventory Updates
In the modern retail landscape, providing periodic inventory updates to retail customers will no longer suffice. The most successful manufacturer-retailer partnerships are those that prioritize collaboration, in which the manufacturer provides frequent, real-time inventory feeds . Without having near accurate insight into virtual inventory levels, retailers risk virtual stock-outs, lost sales and decreased customer satisfaction.
3. Know When to Enlist the Help of a 3PL
Third-party logistics providers (3PLs) can help suppliers within each stage of the supply chain process from transportation, warehousing and distribution, to shipping and receiving. For example, if you’re currently handling your own shipping (packaging, tracking, overnight or next-day delivery, etc.) for 20 orders per day, how will you handle a sudden increase of 60 per day? There are other red flags that signal a need for a 3PL, and ignoring them can have disastrous consequences for your business. Here are a few:
● Storing costs are eating up your profits. If you’re spending money on a warehouse or storage facility consider partnering with a 3PL provider. You might be surprised to learn your storage costs could be put to better use supporting fulfillment.
● You’re struggling to process current order volume. Have you experienced a rapid increase of orders, or anticipate a rise in order volume due to new fulfillment models, such as dropship? If you’re working around the clock to process incoming orders, you won’t be able to keep up with increasing order volume.
● You’re partnering with retailers in other countries. You may not have knowledge of local markets, shipping regulations, capacity constraints or government agencies in foreign countries, which could mean it’s time to partner with a 3PL that does.
4. Get Familiar With EDI
If you plan to dropship goods on behalf of big-name retailers, they will likely require you to become EDI compliant. Electronic data interchange (EDI) replaced the old methods of exchanging business documents, namely fax, and mail. EDI ensures a standardization or ordering and communication and is commonly used to exchange purchase orders, invoices and shipping documents.
If you’re a smaller manufacturer, a simple web EDI solution should be all you need, but if you’re growing rapidly or expanding to many trading partners, you should consider integrating your EDI with your ERP, accounting or business system to automate much of the ordering process.
5. Mind Your Retailer’s Business Rules
Most retailers will impose business rules on their manufacturers to help maintain consistency in order processing and avoid costly shipping mistakes. These rules outline how goods should be packaged, labeled, and shipped, as well as when and how business documents (purchase orders, invoices and other EDI transactional documents) should be exchanged. Failure to adhere to retailer’s business rules may result in financial penalties (chargebacks or invoice offsets) or even loss of business.
Each retailer will have its own set of business rules, which might be manageable when working with one or two retailers, but becomes increasingly complex as your number of partnerships grows. Consider Artificial Intelligence software that can equip you with built-in alerts and quarantine capabilities to ensure that exceptions to business rules are spotted and removed from the supply chain before they create issues. For example, a retailer may require that the SKU on the Advanced Shipping Notice (ASN) match the SKU on the Purchase Order (PO). If ever the SKU numbers do not match, the ASN is quarantined before it is issued to the retailer. The manufacturer is immediately alerted of the error and given suggestions for how to proceed.
6. Prioritize Your Partnerships
While it’s true that retailers may not leave you much of a choice when it comes to providing dropship services, you do have a choice in how you respond to that mandate, as it could result in a considerable growth opportunity. Since dropshipping offers retailers new revenue streams from distributed inventory capabilities, it’s advantageous for them to create more partnerships and promote a wide variety of products at once, which works in your favor. In essence, dropship is a door that could open many other opportunities for manufacturers. It’s crucial that you keep that door open by maintaining positive relationships with your retailers. At its core, the manufacturer-retailer relationship should be an equal and collaborative partnership.
Dropshipping has a lot of benefits and risks, and it’s up to you to anticipate and mitigate those risks to ensure maximum profits for your business. Learn more about finding the right percentage of dropship during our webinar, Hitting the Dropship Sweet Spot, which reviews the results of a groundbreaking dropship study of retailers and manufacturers.