Companies have a lot of choices on how they want their products delivered to customers and other companies. Supply chains are becoming dynamic, allowing for products to move swiftly from manufacturer to destination — sometimes with the e-commerce company never physically touching the items.
In 2021, it was predicted that the e-commerce market would produce $4.89 trillion in sales globally. Having the right fulfillment method can ensure that products will not experience delays. A fulfillment method that has created industry competition is drop-shipping. However, many companies are unsure about what drop-shipping is or believe that it is just another name for e-commerce fulfillment.
What Is Drop-Shipping?
Drop-shipping refers to an e-commerce fulfillment method where a company never engages in product fulfillment and warehouse storage operations. Instead, the e-commerce company waits until a customer places an order. When the order becomes processed, it contacts the supplier that then ships the product directly to the destination. The e-commerce company never stores the physical inventory in a location that it controls. In addition, the supplier manages all transportation logistics.
What Are the Pros of Drop-Shipping?
The biggest advantage a company gains is cost control, since it does not have to spend money on fulfillment or warehouse operations. It simply needs to take orders from customers. The e-commerce company does not have to worry about the manufacturing or transportation of products in any way.
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What Are the Cons of Drop-Shipping?
One of the major downsides of drop-shipping is that an e-commerce company shares the profits for each sale to the supplier, since it must pay the supplier for managing all fulfillment tasks. The company receives lower profit margins. Also, the company has less control on how products are filled and shipped to customers. Another factor to keep in mind is that suppliers may not allow the e-commerce company to market and brand the products under a separate name.
What Is E-Commerce Fulfillment?
E-commerce fulfillment is the traditional method used by businesses. An e-commerce company procures products from the supplier and then stores the inventory at its warehouses. When an order arrives, workers from the e-commerce company pick and pack products for shipment. The company oversees the entire supply chain from inventory purchases, warehouse storage and final delivery to the customer.
What Are the Pros of E-Commerce Fulfillment?
An e-commerce company has control of the entire fulfillment, marketing, warehousing and shipping processes. It manages customer service for shipping related concerns. It also obtains higher profit margins. It does not have to pay the supplier for any fulfillment tasks, since the e-commerce company stores enough products for orders.
What Are the Cons of E-Commerce Fulfillment?
The major disadvantages to e-commerce fulfillment are the investments needed for this method. An e-commerce company takes on full costs for warehouse storage, fulfillment and inventory purchases. It must also have the warehouse location ready for the inventory.
This infographic was created by AMS Fulfillment, a fufillment management system provider
Which Method Is Best for You?
Many companies turn to drop-shipping fulfillment processes when they are startups or have lower budgets. This method does not require a large initial investment toward purchasing inventory, buying or renting warehouse space, or handling product transportation and shipping. This is done so they can continue to build and expand their operation until the time comes where they are financially stable enough to switch to more traditional e-commerce methods.
Yet also keep in mind that many large and well-established corporations also use drop-shipping methods. They may turn to this process when introducing new product lines to customers.
Before committing themselves in stocking the inventory at warehouse locations, the large corporation wants to gauge customer demand for the product. It is easier to allow the supplier to directly pick, pack and ship the items to customers instead of taking warehouse space for the products that might not have high inventory turnover. Once customer demand grows, the corporation then begins storing the products at warehouses.
If a company wants to retain complete control of its fulfillment and shipping, then e-commerce fulfillment is the better alternative. A company may also choose e-commerce fulfillment if it wants to have more control over marketing and branding strategies of the products.
When it comes to handling customer service tasks as well as retaining customer information for additional marketing and promotional activities, e-commerce fulfillment becomes the viable method. An e-commerce company is better positioned to offer enhanced customer service for shipments as well as perform cross-selling and upselling of additional products by placing coupons, discounts and other promotional materials within shipping packages.
A company does not have to select one or the other when it is deciding on a fulfillment process. It may also use both methods for specific product lines to have an omnichannel supply chain. Then, the company can reap in the benefits from both tactics to please customers. For further information on drop-shipping and e-commerce fulfillment, please read the accompanying resource.
Related: How to Identify Your Most Important e-Commerce Competitors
Author bio: Jay Catlin is CEO at AMS Fulfillment, a leading order fulfillment company servicing B2B and B2C clients nationwide. Catlin has been with the company since 2002 and helped grow AMS into the successful third-party fulfillment entity it is today.
Very interesting read helping me better understand the difference between E-commerce and drop shipping.