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Drop shipping is a
Supply Chain Management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.

Procedure

Some drop shipping retailers may keep "show" items on display in stores, so that customers can inspect an item similar to those that they can purchase. Other retailers may provide only a catalogue or website. Retailers that drop ship merchandise from wholesalers may take measures to hide this fact to avoid any stigma, or to keep the wholesale source from becoming widely known. This can be effected by "blind shipping" (shipping merchandise without a return address), or "private label shipping" (having merchandise shipped from the wholesaler with a return address customized to the retailer). A customized packing slip may also be included by the wholesaler, indicating the retailer's company name, logo, and/or contact information.

Small business

Drop shipping can occur when a small retailer who typically sells in small quantities to the general public receives a single large order for a product. Rather than route the shipment through the retail store, the retailer may arrange for the goods to be shipped directly to the customer. Drop shipping is also very common with big ticket items like steel buildings where the retailer will take a deposit and have the building shipped direct to the buyer's building site from the supplier's manufacturing facility.

Online auctions

Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller will list an item as new and ship the item directly from the wholesaler to the highest bidder. The seller profits from the difference between the winning bid and the wholesale price, minus any selling and merchant fees from the auction site. A seller is permitted to list items that are currently not in his/her own possession, provided that he/she follows eBay's policy on pre-sale items.

What can be dropped shipped?

Any type of product can be drop shipped as long as two companies agree to develop a drop shipping program with one another.  According to the Apparel Search Company, some of the best product to drop ship would be clothing or fashion accessories.

Custom products

A new emerging trend in the drop ship business is private label drop shipping, in which a manufacturer produces a custom item for a retailer and drop ships it. The range of private label drop shipped items varies from simple keychains and t-shirts with custom logos or pictures to customized formulations for vitamins and nutritional supplements.

Developments

Major dropshipping suppliers are primarily based in the US, as seen in the location of suppliers like Commerce Hub that support major chain stores like Sears and advertising at major directories of suppliers including Worldwide Brands, Salehoo, and Doba. The key benefit of having services like this is that delivery origin of the goods is located in the same country or region as the end customers which, according to some eBay sellers helps dropship suppliers and dropship vendors increase the trust a customer feels towards an item listed on an online auction site

Since 2006 several dropship companies have emerged in China, including for example the companies Chinavasion and Modbom. This is largely due to the increasing ease of e-procurement and larger part that internet plays in ecommerce. China-based dropship suppliers have increasingly been able to compete with same-country distributors due to improving logistics for small packets and easing of trade barriers.

Two main benefits of drop shipping are - no upfront inventory to purchase and a positive cash flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer's money, but has not yet paid the wholesaler.

Other benefits of drop shipping include:

  • Eliminates duplication of effort as only one warehouse will pick, pack and ship the product thereby reducing costs in the supply chain.
  • Reduces total inventory management and shipping costs which can be passed on to the customer by the retailer.

Risks

As in any business, some risks are involved in drop shipping. For example, back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Back ordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner's job to be aware of the quantities that the wholesaler has available.

Learn more about Drop Shippers.

The above article is licensed under the GNU Free Documentation License. From Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Drop_shipping).  9/3/09 Modified by Apparel Search.
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