Drop shipping has quickly become one of the biggest tools in an online retailers’ repertoires. Merchants are constantly on the lookout for ways to improve their operational efficiency. Accomplishing business goals while utilizing as few resources as possible has become the name of the game, as retailers look to maximize their margins amidst growing competition and wavering economic growth.

According to a study conducted by Multichannel Merchant, more than 60 percent of respondents said they are currently drop shipping merchandise sold through their eCommerce platforms and online marketplaces straight to customers. On average, retailers ship as much as one-fifth of their SKUs via drop shippers.

Those numbers are set to rise as well, simply because new eCommerce solutions not only makes managing drop shippers significantly easier, but also because drop shipping gives merchants an unprecedented amount of freedom and flexibility to manage their inventory while maintaining a smaller footprint.

Why drop shipping is so effective in the current retail climate

Although the brick-and-mortar store is an important piece of the retail puzzle, it’s just that – a piece. Merchants over the past few years have expanded into eCommerce, creating new strain on inventory management. Because merchants are growing, they want to expand their product catalog offered to customers while also having greater inventory availability. This can result in additional expenses – retailers need to house that extra inventory somewhere.
Drop shipping allows merchants to avoid having to buy larger warehouses and more distribution centers to handle a larger product catalog.
Drop shipping can help significantly in that regard, as it allows merchants to avoid having to buy larger warehouses and more distribution centers to handle a larger product catalog and increased demand. Retailers can simply route pertinent orders through drop shippers, which then deliver the item straight to the consumer. This means merchants save money by not having to invest in more physical space and, in some instances, it may even allow them to cut costs by getting rid of unnecessary warehouses and distribution centers.

“Drop shipping allows us to increase our SKU base without storing more SKUs,” Mark Desrosiers, worldwide director of distribution at S&S, explained to Multichannel Merchant at Operations Summit 2014.  We have a limited amount of warehouse space as many companies do, and this gives us the opportunity to really test market items and also offer really large items without us having to try to ship those and manage those shipments.”

The reasons above are why retailers large and small are taking advantage of Amazon FBA to grow their business.

The challenges of drop shipping

That’s not to say that drop shipping is the end-all, be-all solution for merchants, it certainly has its fair share of challenges and issues as well.

As is the case whenever retailers work with a third-party partner, there are bound to be some confusion that will otherwise complicate relationships. In the specific case of drop shipping, this often manifests in the form of customer service issues – if someone wants to return an item or has a question about delivery status, retailers need to defer to the drop shipper.

It’s really important for the merchant that these issues are resolved promptly, or else the retailer may end up shouldering some of the blame for problems caused by third-party vendors. It can also lead to off-brand communications between customer service and shoppers.

Additionally, the management of multiple drop shippers alongside internal distribution can cause problems for merchants that don’t have the right eCommerce solution in place. With the right rules set, however, retailers can automate the way orders are processed so they are automatically routed to drop shippers if specific conditions are met. This makes the utilization of drop shipping much more efficient and seamless no matter how many channels a retailer is selling on.

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