Growing significance of Drop Ship Business Model Part II
The most obvious benefit of Drop Ship business model is reduced inventory levels. The supplier is able to control the lead-time component of order point better than a retailer with thousands of suppliers. Additionally, the supplier takes on a greater responsibility to have the product available when needed, thereby reducing the need for safety stock. These factors contribute significantly to lower inventories. Additionally, Risk is dramatically reduced for the retailer, who no longer has cash tied up in stock that he may not be able to sell.
The supplier keeps track of inventory movement and takes over the responsibility of product availability, resulting in a reduction of stock outs, there-by increasing end-customer satisfaction. Suppliers can increase their market reach and build a network for fulfillment that will make them more attractive to other retailers they are hoping to sign up.
Both the retailer and the supplier have greater visibility of orders and stock. This enables them to forecast activity much more accurately by analyzing previous performance, monitor current activity and plan promotional activity much more quickly to meet market opportunities. As the supplier does the forecasting and creating orders based on the demand information sent by the retailer, the retailer can reduce the costs on forecasting and purchasing activities.
Many suppliers prefer drop ship model because it reduces uncertainty of demand. Infrequent large orders from retailers force suppliers to maintain surplus capacity or excess finished goods inventory to ensure responsive customer service. Drop ship model helps dampen the peaks and valleys of production, allowing smaller buffers of capacity and inventory.
Drop ship model helps in reducing Transportation costs. This approach helps to increase the percentage of low-cost full truckload shipments and eliminate the higher-cost less than truckload (LTL) shipments. This is achieved by allowing the supplier to coordinate the resupply process instead of responding automatically to orders as they are received.
Finally, Customers are offered a wider selection of goods delivered through the channel that suit them best.
In spite of all above advantages drop ship business model is not panacea. There are tradeoffs, in terms of control over stock levels and the risks attached with working with a third party.
If suppliers are not reliable for delivery of product, retailer brand value can erode very fast. Managing returns and exchanges can be a headache. Ensuring consistent quality of product can be challenging. Retailers need to have an Order Management system capable of communicating customer orders to suppliers on regular basis.
Thus a drop ship business model may not allow retailers to get rid of all of their warehousing activities. What do you say?