Drop shipping involves having a supplier ship goods directly to the customer of the seller. By doing so, the seller never has to touch the inventory at all. When a seller uses drop shipping, it eliminates the following transactions, all of which could 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
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. These factors make drop shipping an excellent choice for an on-line retailer.
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.