What is drop shipping?

What does it mean to dropship (or drop ship)?

When the dropship or drop ship model is used for retail, it means that the seller or the store does not keep physical inventory of the product, but instead arranges for the product to be shipped directly from a third party to the customer. The third party in many cases is the manufacturer. To illustrate the concept; a buyer (consignee) in Singapore may place an order for a product from a seller in Thailand. The seller in Thailand will then arrange for the manufacturer in India to ship the product directly to the buyer in Singapore. This typically means that the seller in Thailand buys the product from the manufacturer in India, then sells the product to the buyer in Singapore.

The buyer in Singapore will never see the invoice between the manufacturer in India and the seller in Thailand. However, if the arrangements between source and seller are not set up correctly, the wrong invoice may land in the buyer’s hands!

There are many reasons for a seller to use the drop ship model to fulfill retail obligations to buyers.

Benefits of drop shipment:

  1. The seller (consignor) does not need to purchases inventory.
  2. The seller does not need to invest in warehousing facilities to store any inventory.
  3. The seller does not need to manage freight and transportation.
  4. The seller does not have to manage Sales & Operations (S&OP).
  5. The seller can offer inventory from any source in any part of the world.
  6. The seller can engage buyers in any part of the world.
  7. The seller can sell a wide variety of products.
  8. The seller can scale up operations easily.

As with all business models, there are also some reasons why sellers may not want to use a dropship model for business

Disadvantages of drop shipment:

  1. Profit margins are typically very low, since the source has to handle shipping.
  2. Competition is fierce among sellers that dropship products.
  3. The seller has no visibility on inventory availability and may commit to orders that he/she cannot make good on.
  4. Suppliers may mess up the shipment by sending wrong products, wrong sizes, wrong colors and/or damaged goods. The seller will then have to co-ordinate returns and refunds.
  5. Delivery lead times may vary greatly and the seller will only be able to guarantee delivery within long lead times which may discourage buyers

While many buyers are familiar with the drop shipment model being used on popular online mass markets, many multi-national companies also use the drop shipment model to supply their products. This could include drop shipments from manufacturing sites to customers, or drop shipments from global distribution centers. It may also be possible for MNCs to use the drop shipment model to fulfill orders from contract manufacturers.

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