For retailers that want to offer a vast assortment of product options through their online channels, inventory management represents a perpetual challenge. Ordering all the products in advance from suppliers would mean that the retailers would need to invest in storage facilities, making it difficult for them to achieve the cost efficiencies associated with electronic retailing.

As a solution, some retailers rely on drop shipping, which is when the supplier sends the ordered product directly to the consumer. A shopper on the retailer’s branded website places the order with that retailer, but the box that arrives on her or his doorstep actually comes directly from the manufacturer, rather than the retailer’s distribution center or a local store.

The benefits of this option are straightforward: The products get to customers faster, and the retailer never needs to incur inventory costs to order, store, and ship the products itself. It can also expand its product offerings, because it can simply task a variety of suppliers with sending the wide array of options to consumers. It only pays for the products after it receives the order from the customer, so its accounting practices may improve as well. Accordingly, industry experts predict that approximately 75 percent of all retailers will soon rely on supplier’s delivery systems to complete their customers’ orders.

But in this shift, retailers also face potential problems. When they don’t deliver the product, they lose a critical interaction with the customer. Moreover, if they do not own any inventory, retailers cannot fully control the shipping speed or track the shipment. If something goes wrong with the delivery, a retailer relying on drop shipping is left with few answers for customers, because it doesn’t know where the box is either. Such a compounded failure could have serious implications for its reputation.

If the product is particularly popular, a retailer might confront another issue. A supplier with a hot product likely prioritizes shipments to customers who visit its branded site. Even if it does not have a direct sales channel, each retailer must compete with others for inventory, increasing the risk that its own customers suffer a frustrating out-of-stock event.

On balance, each retailer must decide which is more important: a pragmatic ability to get products to customers quickly and less expensively or a reputation for reliable, assured service and delivery.

Discussion Questions:

1. Why are some online retailers increasing the amount of drop shipping they use?

Source:  Tom Ryan, Retail Wire, August 22, 2016