Does drop ship put too much stress on the supply chain?

Dec 27, 2017

Dan Gilmore

Through a special arrangement, presented here for discussion is a summary of a current article from Supply Chain Digest.

A panel at last month’s Retail Value Chain Federation conference in Scottsdale explored the inventory challenges vendors face supporting drop shipping for their retail partners’ online operations.

Since RVCF is a semi-private function, the identities of the three manufacturers and one 3PL on the panel are kept anonymous.

Many approaches exist for managing drop ship inventories, including:

  • Having a dedicated inventory in a separate location in the DC;
  • Having one pool of co-located inventory for a company’s own piece pick/e-commerce business plus the retail drop ship;
  • Separating inventories logically but storing them together, if allocation and warehouse management systems can handle that.

One doesn’t seem to be preferred over the others.

All the panelists, however, tweak inventory availability information to guard against receiving a drop ship order for which they have no inventory, either because of accuracy issues or because someone else grabbed the merchandise first. One vendor reports no inventory to a retailer when the SKU count reaches five or less.

Almost all retailers want inventory information sent daily, although some want it refreshed multiple times throughout the day. The requirements seem to be based on the companies’ level of IT maturity.

One panelist interestingly highlighted the importance of thinking though inventory and order priority logic: How do retail drop ship orders rank compared to retail store orders and a vendor’s own consumer direct business? One vendor put drop ship ahead of its own B2C.

The need for a robust on-boarding process for new retail drop ship customers was stressed. Providing the custom packing slips retailers seem to want can deliver big IT headaches, particularly as costs for this work can be high. Also stressed was the need to analyze the impact of drop ship generally and new customers specifically on DC operations and throughput — which is of course why some outsource the function. Some vendors push surcharges to retailers to cover the higher labor and IT costs to drop ship versus sending to a retailer’s DC.

DISCUSSION QUESTIONS: What unique logistical challenges do drop shipments place on vendors as well as retailers? What extra steps may vendors or retailers need to take to execute drop ship effectively as the practice expands?

Please practice The RetailWire Golden Rule when submitting your comments.
"As drop shipments accelerate, data is the new currency."
"Going from shipping floor-ready inventory by the pallet to single units to a customer is quite a difference..."
"Simply trying to digitize the status quo analog world will not, and has not, worked."

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6 Comments on "Does drop ship put too much stress on the supply chain?"

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Peter Charness

Going from shipping floor-ready inventory by the pallet to single units to a customer is quite a difference, and the inventory control issues are just the start of the challenge. Whether the supplier puts dedicated inventory into a third-party logistics provider who can do customer pick, pack and ship, or invests in the physical, technical and personnel resources to do it themselves, the over riding question ends up being, who pays for this? The shopper expects this service for free, and until the cost and gross margin on a product changes to provide this service, “who pays” is really the elephant in the room.

Chris Petersen, PhD.

In the race to get the last mile to be 24 hours or less, drop shipments become essential. This requires managing inventory in “real time” across multiple links of the supply chain that are not necessarily owned by just the vendor or retailer.

One of the huge missing links in this discussion is the role of the distributor. In order to carry the quantity of inventory required for drop shipments in proximity to the customers, distributors become a critical strategic partner for both vendors and retailers.

As drop shipments accelerate, data is the new currency. Last-mile fulfillment at increasing speed requires real-time inventory across the interactive supply chains of vendors, distributors and retailers. The critical success factors will be inventory visibility, accuracy and speed.

Bob Amster

It is a new ball game. The supplier has to add the capability to ship individual packages to individual addresses. This is quite different than shipping in bulk to distribution centers or even directly to stores. The supplier now has to provide detailed information about each transaction electronically to the retailer, and in real-time whenever possible (we commented on the importance of real-time transaction processing in a previous discussion). It is new, it is exciting and it is very different from the old way of being a supplier.

Adrian Weidmann

All discussions around the “new” retail landscape (omnichannel) being transformed by the digitally-empowered shopper inevitably (and very quickly) lead to and include supply chain challenges. Successful digital transformation mandates that manufacturers of non-commodity goods must have 100 percent accuracy and visibility to the location of their inventory. This requires not only integrating new technologies but redefining the existing business models and workflows that are outdated in a digital world. Simply trying to digitize the status quo analog world will not, and has not, worked. I’ve been preaching this for several years now and hope the new year will enlighten a manufacturer and/or retailer to listen and implement a change!

Camille P. Schuster, PhD.

The unique logistical challenge is the requirement for collaboration, transparency and cross-company operations. This would solve the problem but very few companies are willing to take the steps to make it happen.

Dave Bruno

Wow does this feel like “deja vu all over again!” I can remember having countless eerily similar conversations with retailers as they struggled with single-order fulfillment challenges 15 years ago. Some of the “solutions” retailers were deploying sound eerily similar as well. Regardless of how they get there, however, suppliers will no doubt have to provide retailers with the speed and flexibility that shoppers expect, or retailers will take their business elsewhere, just as shoppers did when retailers failed to keep pace with their expectations.

"As drop shipments accelerate, data is the new currency."
"Going from shipping floor-ready inventory by the pallet to single units to a customer is quite a difference..."
"Simply trying to digitize the status quo analog world will not, and has not, worked."

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