Drop shipping products can really improve your eCommerce business. You can expand product lines more quickly. You can reduce your investment in inventory. You can streamline how you get customers’ orders into customers’ hands. But, realizing the benefits of drop ship is not as simple as checking the “drop ship” box in your eCommerce system (despite what the system may suggest).
Drop ship done well can transform your business, but done wrong, it can have a significant negative impact.
What is drop ship?
The elementary version of an eCommerce business looks like this: you buy products from suppliers to sell online, you store them in inventory, then when a customer buys them you ship. If a customer buys something out of stock, you put it on back order until you can get it from the supplier, then you ship it to the customer.
Drop shipping products means you outsource the fulfillment of customer orders to whomever supplies the product. If a customer buys an item, you simply create an order from your supplier for that item and the supplier ships directly to the customer. Then the supplier invoices you for it.
You don’t have to keep that item on hand. You don’t have to pack it up and ship it.
Drop Ship Problems & How to Avoid Them
Consider the complexity of drop shipping a single product from a single supplier.
The customer orders the product from your website. Your eCommerce platform creates the purchase order for the supplier to drop ship the product. They ship the product, when they can. They give you the shipping information, when they can. Then, they invoice you for the item. You assume the customer received the product, unless they send you a nasty “where is my item” email. You pay the supplier.
There are many places this can fail.
- How do you know your supplier received the purchase order? Often, eCommerce drop ship simply means sending the supplier an email. What if it gets caught in the junk mail folder?
- How do you know the supplier shipped the item, when they shipped it, or that they shipped it to the right place?
- How do you know the supplier shipped the right item and the right quantity of items?
- How do you know the supplier charged you the right amount for that item?
These issues represent an accounting concept called the “three-way match“. You need to be able to reconcile your purchase order to your vendor (1), the shipping information from the vendor (2), and the invoice your vendor sends you for payment (3). Those three artifacts represent the full lifecycle of sourcing and shipping a product. They are your paper trail for identifying where your orders end up.
If those items are reconciled, you’re good to go. If not, then you are either paying more or earlier than you have to and/or you are providing a poor customer experience.
If the supplier has invoiced you for an item they haven’t shipped, you may pay them earlier than you have to (impacts cash flow). If they relay inaccurate or incomplete information about shipping the product to you or the customer, it creates a negative customer experience. If you use multiple drop shippers, you’ll likely struggle trying to figure out what items are where.
None of these are good scenarios.
Do something about it.
Think about the manual steps you’d have to go through to reconcile the three-way match for one drop shipped order from one supplier. Now multiply it by x number or orders, y number of products, and z number or drop ship suppliers. Unless you have a scalable solution for handing drop ship and reconciling supplier orders, drop ship will destroy your business.
In the long run is it going to be cheaper to hire a person/people to deal with three-way matching? As your products, orders, and suppliers increase, the complexity of figuring this out increases exponentially. The only answer is looking to technology.
In a digital world, where you’re selling products on a digital platform, you need a technology solution to reconcile drop ship orders. At the heart of that technology solution must be an ERP and/or accounting system that facilitates the a reconciled three-way match.
This is the final word about your order management. This ensures your cash flow isn’t negatively affected, because you are paying for products too early or paying too much.
Overcoming Drop Shipping Problems
If you’re really serious about using drop ship to scale your business, you also need to build a platform of integrated systems. You shouldn’t have to manually record customer orders and purchase orders into your ERP. You shouldn’t have to manually validate order fulfillment in your ERP. This is time you spend that isn’t growing your business.
Take advantage of technology opportunities, like nChannel’s drop ship management solution, which integrate your systems into a multichannel selling platform. Building your business, with this perspective, will help you stand head and shoulders above your competition.