Drop-shipping

Definition

Drop-shipping is a retail fulfillment method where a store doesn't keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third-party supplier, who then ships the item directly to the customer. This allows the store to operate without maintaining its own inventory.

5 Must Know Facts For Your Next Test

1. Drop-shipping allows retailers to sell products without having to purchase inventory upfront or maintain a physical storefront.
2. The drop-shipping supplier is responsible for shipping the product directly to the customer, handling tasks like order fulfillment and customer service.
3. Drop-shipping can reduce overhead costs for retailers by eliminating the need for warehousing and inventory management.
4. Retailers can quickly expand their product offerings through drop-shipping, as they don't have to invest in stocking new items.
5. Effective communication and coordination between the retailer and drop-shipping supplier is crucial for providing a seamless customer experience.

Review Questions

• How does drop-shipping differ from traditional retail models in terms of inventory management?
  • In a traditional retail model, the store is responsible for purchasing, storing, and managing its own inventory. With drop-shipping, the retailer does not maintain any physical inventory. Instead, the retailer partners with a third-party supplier who fulfills orders directly to the customer as they are placed. This eliminates the need for the retailer to invest in and manage their own inventory, reducing overhead costs and allowing for a more flexible product selection.
• Explain how drop-shipping can impact a retailer's supply chain and relationships with suppliers.
  • Drop-shipping requires a close, collaborative relationship between the retailer and their suppliers. The retailer must effectively communicate customer orders, product specifications, and fulfillment expectations to the supplier. Suppliers, in turn, must be able to quickly process and ship orders directly to customers. This level of coordination and information sharing is crucial for maintaining a seamless supply chain and delivering a positive customer experience. Drop-shipping can also allow retailers to diversify their supplier network and source products from a wider range of wholesalers or manufacturers.
• Evaluate the potential benefits and challenges of implementing a drop-shipping model for a small online retailer.
  • The potential benefits of drop-shipping for a small online retailer include reduced upfront inventory costs, the ability to offer a wider product selection, and increased flexibility to adapt to changing customer demands. However, challenges may include the need for strong supplier relationships and communication, potential issues with order fulfillment and customer service, and a loss of control over the end-to-end customer experience. The retailer must carefully weigh these tradeoffs and ensure they have the necessary systems and processes in place to effectively manage a drop-shipping supply chain. Successful implementation can allow the small retailer to compete more effectively, but poor execution can lead to dissatisfied customers and reputational damage.

Related terms

Wholesaling:

Wholesaling is the selling of goods or merchandise to retailers or other merchants, rather than to consumers, for resale.

Supply Chain:

The supply chain refers to the network of individuals, organizations, resources, activities, and technologies involved in the production and sale of a product, from the delivery of source materials to the ultimate customer.

Inventory Management:

Inventory management is the supervision of non-capitalized assets (inventory) and stock items. It includes aspects such as controlling and overseeing ordering, storage and control of items.