Logistical strategies are heavily dependent on relationships between the manufacturer, retailer and any middlemen between such as distributors and wholesalers. While getting items into the hands of the consumer is the ultimate end goal, there are many different ways of going about that benefit all the links in the supply chain for reasons of inventory and cost. Sometimes, a direct-to-consumer shipping strategy is effective, but only if the manufacturer has a strong commerce system in place. A better solution may be to utilize drop shipments, which require coordination with a retail partner. It has great benefits to manufacturers, but only if done properly and through the effective use of an enterprise resource planning program such as Microsoft Dynamics NAV.
The retailer as a front
The way drop shipments work is simple, according to web blog eCommerceFuel. Usually, when an item finishes production, the company ships it to the retailer either directly or through a distributor. The retailer handles the customer’s order and gives them the item. With drop shipping, the manufacturer delivers the item directly to the consumers after they order it from the retailer. This skips the step of delivering the item to either the retailer or middleman in the supply chain. This mechanism is a common feature particularly among e-commerce companies that operate without any physical presence whatsoever.
There are quite a few benefits associated with using the drop shipment model. For starters, manufacturers have greater access to the customers without the necessity of creating an actual commerce operation. This lowers the cost of building a relationship with consumers. Alongside the savings, the retailer takes responsibility for any mistakes made in the shipping process, as noted by Shopify. Another key benefit is that the process enables greater control over key aspects of logistics. That includes negotiating the price of a given product, choosing a shipment and logistics firm for delivery and determining production methods based on demand. This can greatly improve the bottom line when worked out correctly.
Taking on the burden
However, there are various risks associated with using drop shipments. The primary one is based on inventory. Whereas before, the distributor or retailer would be responsible for the delivery of the product, drop shipping requires the manufacturer to take care of it. This means they must also hold inventory of the product in question. As such, the manufacturer must have warehouse space for merchandise explicitly being sent out to customers. That can create a lot of extra costs, from maintenance to leasing storage space to match demand.
Another issue that comes into play is that a well-executed drop shipping operation requires exceptional coordination between the retailer and the manufacturer it partners with. While certainly possible, communications can break down, leaving the door open for various errors. For example, the retailer could send the wrong customer details without the supplier knowing. The company then finds out too late it was sent to a completely different customer than was intended. On the opposite end, the manufacturer may fail to communicate it’s out of a particular product, which creates an unnecessary backlog of orders when the retailer fails to cut them off.
To best address these problems, proper inventory management and excellent communications are essential. A warehouse management system is a must, for it helps track merchandise based on history and demand and can give indications of when stock may run low. Companies should pair this with an ERP system that can communicate these details to the retailer. Moreover, the retailer should have software or other means to link to the ERP so there’s little room for error in sending customer and order information. Drop shipments are a partnership first and foremost, so it’s crucial to establish a strong relationship to make it work profitably.
For more information on how drop shipments can work for you, check out the white paper “Warehouse Management for Microsoft Dynamics NAV” today.