Drop shipping has the potential to completely change the world of retail. However, as John Weber, Director of Business Development and Product Management at Aptean, explains, retailers need an effective ERP system to truly make the most of this new retail reality.
It'll come as a shock to no one that e-commerce is growing rapidly. For years, the traditional retail sector has been finding new ways to adapt to the shift – not to mention looking to avoid the high-street store demise that many brands have already suffered.
It's fair to say that online shopping is nothing new. However, businesses might be surprised to discover the scale of the opportunity that still exists. Over the last five years, the amount generated by e-commerce has more than doubled, and it's almost five times higher than what was spent online a decade ago. The thing is, it's still growing, with global e-commerce predicted to generate $653bn by the end of this year. Looking further ahead, 95% of purchases are forecast to take place online by 2040.
A huge number of transactions still take place in stores, but will soon shift online. That's why retailers – big and small – are building their share of the market now, developing the quickest, easiest and (potentially) cheapest ways to get products from suppliers to customers.
These efforts are currently focused on a concept that's set to transform the sector, fundamentally changing the relationship between retailer and supplier. This concept, called drop shipping, is a new way of distributing products.
For those who haven't come across it, drop shipping is a new method for facilitating sales and distribution that is fast growing in popularity. Currently, most retailers purchase stock in bulk from their suppliers, store it at their own cost and take responsibility for the delivery of items bought by consumers.
Drop shipping, however, streamlines the process – allowing retailers to purchase products from suppliers as and when a consumer buys them. The suppliers then take care of the delivery, sending products directly to the consumer.
In effect, drop shipping is an on-demand version of retail, and it's not difficult to see its appeal. Forget the limitations imposed on your inventory by warehouse or in-store space; drop shipping makes it simple to expand your sales inventory without having to cover the costs of keeping it somewhere. This is just one example of the efficiencies of drop shipping – along with the potential to achieve quicker, easier and cheaper sales within the right retailer/supplier partnership.
It's no wonder that businesses are swiftly adopting drop shipping as a practice, and it'll soon change how the retail sector operates. Almost a third of e-commerce transactions are already fulfilled by drop shipping, which is soon forecast to account for up to 20% of all retail sales – representing one in every five purchases.
Drop shipping is here, and it's only set to grow. The real question is how it will shape retail businesses at different levels. From large retailers through to small-to-medium enterprises (SMEs) to individual entrepreneurs, drop shipping creates a number of opportunities across the sector:
- For large retailers, there are a number of attractive reasons to adopt drop shipping. As mentioned earlier, it instantly removes the limitations on inventory, making every item a supplier has available at any time. Think of it in clothing terms. No longer will customers be unable to get hold of an item of clothing in the right size or colour – the risk of anything being out of stock is vastly reduced for retailers, meaning they don't lose business because of it.
- On top of this, retailers can cut the costs of storing products in their own warehouses and delivering purchased items to customers. This can lead to huge operational savings, along with the ability to focus the business on increasing sales.
- For omnichannel retailers with bricks-and-mortar stores, it can also reduce the need for shop floor space while opening up the opportunity to operate in a way that more closely matches the processes of the online-only retail giants.
- For SMEs, drop shipping offers similar benefits to their larger competitors, additionally creating a major opportunity to grow that otherwise wouldn't have existed. For the first time, SMEs will be able to boast a similar inventory of products as the more-established brands in the sector (providing they have the supplier deals to back this up).
- Of course, these businesses still have a long, long way to go to catch up with the larger retailers in terms of scale, reach and customer base, but drop shipping offers a far more level playing field than we've ever seen before. It has the potential to drive a massive shift in consumer behaviour – especially for shoppers for whom support for local business and CSR are important decision-making factors.
- Drop shipping makes it easier than ever to start your own retail business from scratch. The process of effectively turning retailers into third-party bridges between suppliers and customers means that an individual with a laptop and an internet connection can get their business off the ground with the investment of very little capital.
- A change this big also lends itself to disruption – creating a wealth of opportunity for innovators in a range of fields. Entrepreneurs don't necessarily need to start a retail business to take advantage of drop shipping as a concept – there'll be plenty of ways for other businesses to improve and streamline the distribution process.
With drop shipping offering so many benefits to businesses at all levels of the sector, you might wonder why retailers aren't pushing for it to handle 100% of their transactions. As with any distribution system, drop shipping presents companies with challenges that they either have to overcome or risk reputational and financial damage to their brands.
The main challenge involved with drop shipping is that it operates on incredibly tight margins – with the idea being that retailers can sell a larger amount of a wider range of products. Ditching the bulk-buying model reduces retailers' ability to negotiate low wholesale prices for stock, raising the cost of each item. This puts added pressure on every transaction, with any issue chipping into already-slim profits.
Similarly, drop shipping forces retailers to surrender a certain level of control over distribution. While drop shipping removes the cost and responsibility of storing and delivering products to consumers, it also places control over the distribution process in the hands of suppliers. This means that a fundamental element of how successful a retailer is relies on how efficient the suppliers are in picking and distributing a product. It's estimated that 70% of consumers will abandon a brand completely after just one bad delivery, which means that drop shipping introduces a lot more risk to each transaction for retailers.
The need to maintain tight margins when using drop shipping makes efficiency vital – from all three perspectives. Large retailers, SMEs and entrepreneurs need to know that every order is checked then received and acted upon by their suppliers as swiftly as possible. Suppliers, on the other hand, need to have the ability to process orders, pick items and deliver them accurately while under immense pressure from the retailers who depend on them. This is where small, but critical, elements of the distribution process have to run smoothly. For example, the ability to verify a consumer's address is a tiny part of making a sale, but – if not done properly – will derail the entire order.
Retailers of all shapes and sizes looking at drop shipping need to have complete visibility of their sales process. Having access to a wider range of products on-demand sounds promising, but it isn't an automatic benefit – especially for SMEs and entrepreneurs. For instance, how do companies set rates for a massively expanded range of products without it costing an exhausting amount of labour?
All of these challenges have a solution in the form of an enterprise resource planning (ERP) system. This gives retailers the features & functionality they need to process drop shipping orders efficiently and effectively. The right ERP system can make it simple to take full advantage of all the benefits that drop shipping offers – at all levels. For large retailers, it operates at scale to help process huge numbers of customer orders both quickly and accurately.
For SMEs, it removes the daunting task of managing a near-limitless product inventory and makes operating at scale a realistic prospect. For entrepreneurs, it takes the leg-work out of processing orders, leaving them free to spend time building relationships with suppliers and customers.
As outlined above, drop shipping is set to transform the retail industry, but it can only be as effective at driving business as retailers are at processing orders. That's why ERP is the key to unlocking the future of retail. The theory behind the concept is sound, but – as always in retail distribution – delivery is critical.