Expert Q&A: Drop shipping vs. fulfilment centres as supply chain solutions for eCommerce

Posted by Barloworld Logisitics on 29 Mar 2018 9:00:00 AM

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E-commerce is no longer a future trend – it is a retail segment threatening to overtake bricks-and-mortar in even the most traditional economies. This business model has arguably had the single most significant impact on how modern supply chains operate, and with ever-evolving consumer demand – is likely to do so for years to come.

We asked our supply chain experts to unpack the concepts of drop shipping vs. 3rd party fulfilment centres as viable supply chain options for e-commerce businesses.

Q: What can we expect from eCommerce in South Africa in the short to medium term?

Whilst SA has often been described as a laggard when compared to leading e-commerce nations this is likely to turn in the coming years. With smartphone penetration reaching all-time highs, pundits are predicting that local e-commerce spend will grow to over R53 bil in the next 12 months. This trend will undoubtedly increase the competition for local online spend as traditional retailers and start-ups alike accelerate their ambitions to claim a piece on the online pie. The beauty of e-commerce is that its digital nature creates an environment where entrepreneurs can gain access to the market with little other than a connected device and some smart supply chain thinking.

Q: Traditionally entrepreneurs are hamstrung by capital expenditure and investment in inventory. What solutions are available to counteract this?

In a traditional retail environment, storefront set-up and inventory investment are extremely capital intensive. Furthermore, cash flow is what keeps most entrepreneurs awake at night. E-commerce has offered alternatives to these barriers to entry by firstly removing the need for a bricks-and-mortar presence. With a bit of skill and a relatively small cash outlay, an e-commerce website can be set up rapidly. As to inventory tying up cash, online business models offers entrepreneurs the ability to build an extensive product offering without owning a single stock item and only to incur inventory costs once the end consumer has ordered and paid for a product through a process known as drop-shipping.

Q: Inventory with no stock and only outlying cash once an order is received? Sounds too good to be true. What exactly is drop-shipping?

Drop-shipping refers to a process whereby an online retailer markets and sells items that they do not own. Once an order is placed and paid for with the e-tailer, they place the same order with the manufacturer or original supplier who then fulfils the order and delivers directly to the end consumer. It is intrinsically a middle-man business model but allows start-ups a foot into a very competitive landscape without the traditional costs associated with creating an attractive product listing. The benefit of this model is that it will enable market entrants to offer products to market through both virtual store-frontage and inventory holding.

However, this model is not without its negatives. Purchasing stock items one-by-one on demand erodes the benefits of economies-of-scale. The cost-per-item that the e-tailer would be required to pay will be inclusive of shipping, handling and margin, which is likely to translate into them having to retail to consumers at a higher price than if they had held the stock themselves. Using the drop-shipment model also creates complexity within customer service in that the e-tailer has no control over the fulfilment process – and resolving any issues can become a three-way tennis match between the seller, buyer and producer.

Challenges aside, drop-shipping as a business model is an excellent way to either test new products before committing to large inventory orders or indeed a cost-effective way to launch into the market with an entire product range.  

Q: Drop shipping sounds a lot like having a third-party fulfilment partner? Is it any different?

In a fulfilment partner model an e-commerce retailer owns the inventory, but does not handle, store or ship said product. The retailer would engage a third-party to act as a warehousing and distribution partner. The model works as follows; the retailer would bulk purchase inventory from a manufacturer, instruct such to deliver the stock into the 3rd party facility, where it would be stored and managed. Once the e-commerce retailer makes a sale, an order is issued to the fulfilment partner with instruction to pick, pack and dispatch on behalf of the retailer to the end consumer.

The model still allows for a measure of cost containment since the retailer does not own and manage their warehousing and shipping, but is remarkably more capital intensive than drop-shipping. The benefit of such a model is that the retailer is not bound by spatial constraints within an owned warehouse and has access to expertise within handling and distribution that may be beyond their reach if they were to go it alone.

A negative to this type of model is that there is still a measure of lack of control, as well as complexity generated during the goods-in-transit period between manufacturer and fulfilment partner. If goods are listed within the retailer’s stock as soon as inventory is purchased, the situation could arise where such stock is sold while it is still in transit, rendering the 3rd party fulfilment centre unable to fulfil the order since they do not physically have the inventory.

This challenge adds complexity, but through smart data integration between supplier, fulfilment centre and the actual e-commerce site, inventory can be reflected accurately to the market.

Which is better?

Both drop shipping and 3rd party fulfilment have benefits and disadvantages, but the impact of these will wholly depend on the lifecycle and ambition of the e-commerce retailer. For start-ups, or those wanting to test products in the market – drop shipping is a viable option. For more cash-flush businesses wishing to compete on price, 3rd party fulfilment offers the benefit of owning inventory, without the hassle of managing such. When reviewing these options, it is advisable to consult a supply chain expert (you can contact Barloworld Logistics here) to get advice on which choice will best suit the unique needs of your business to accelerate growth and create value.

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Topics: Trends and Insights