Sign Up for Discounts
This form does not yet contain any fields.
    Follow us on Facebook
    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library

    Home >> Inventory Management

     

    Drop Shipping


    The Need for Drop Shipping

    When a business sells merchandise that it has acquired from a supplier, it must deal with the following transactions, all of which can potentially involve damage to the goods:

    • Receive goods
    • Move goods to quality review area
    • Examine goods based on receiving criteria
    • Move reviewed goods to warehouse storage area
    • Pick goods and combine with other items for shipping
    • Ship merchandise to customer

    Overview of Drop Shipping

    In situations where a business is reselling goods produced by someone else, there is an opportunity to employ drop shipping. This method involves having the supplier ship goods directly to the customer of the seller. By doing so, the seller never has to touch the inventory at all, which eliminates the long list of activities just described. In addition, the seller no longer has to invest in any inventory, since the supplier maintains it. This approach is especially useful when the goods being resold are bulky, since the seller can potentially eliminate a large amount of storage space in its warehouse facility.

    Issues with Drop Shipping

    Though drop shipping can be a useful alternative for a reseller, it suffers from the following issues:

    • Suppliers may not agree to it, since doing so can involve shipping a large number of small unit-count deliveries, which are expensive to package.
    • The seller must institute new procedures and controls to issue shipping notifications to suppliers and ensure that the shipments are made. There must also be a system for notifying the billing department when shipments have been made, so that invoices can be issued.
    • The customer will now know the name of the supplier, which could lead it to order directly from the supplier in the future.

    In short, drop shipping tends to be a limited solution, but can be quite useful in those cases where it can be applied.

    Related Topics

    Eliminate the receiving function
    Reduce product options
    How do I reduce inventory without impacting customer service?
    What is a reorder point?
    What is supply chain management?