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What are the advantages and disadvantages of drop shipping?

For both retailers and manufacturers, drop shipping has pros and cons. Here's some considerations to fuel research into the best strategy.

There are a number of advantages of drop shipping, but there are downsides, as well. The ability to have a manufacturer or supplier drop ship an order can be an appealing business strategy for a sales agency, whether that is a retailer, representative, distributor or dealer.

A look at some advantages and disadvantages of drop shipping

With drop shipping, the sales agency doesn't actually stock products, but is instead a middleman between the supplier and the customer. This means no inventory investment and, in turn, no need for warehouse or storage space, and no handling, picking, packing or shipping. What's not to like?

One possible downside to the drop ship model is that the sales agent abdicates responsibility for the timely and correct shipment of the product, putting a major portion of customer service directly into the hands of the supplier. Another concern is that direct shipment establishes a contact between the supplier and the customer that might threaten the relationship between the sales agent and the customer in the future.

From the supplier -- or manufacturer -- side, this may not be such a bad thing. By taking over fulfillment responsibilities, the supplier can ensure better customer service and help build a stronger brand image for its products.

There are additional costs, however, for the supplier. It is certainly more costly to pick, pack and ship small quantities of products to individual customers than to ship entire pallets, containers or truckloads to the distributor or retailer. Presumably, pricing for the agent is adjusted to compensate for those extra costs, but there may be margin concerns with this business strategy.

Most suppliers have been developing direct-to-consumer sales strategies as a result of the dramatic rise of e-commerce and customer demand for online access to products in every category, including business-to-business sales. As a result, manufacturers are now generally better prepared to support drop shipping requirements as an extension of processes developed for e-commerce. At the same time, the e-commerce imperative may call into question the very need for those drop shipping sales agencies.

So, for manufacturers, do the advantages of drop shipping justify including it in the business strategy? It all depends on the market. Sales agents are responsible for market presence, putting products in front of customers and generating sales dollars. Some of those agents' sales may be replaced by e-commerce direct sales from the supplier, but those agencies may still be needed to maintain certain markets in many cases.

If the question is whether sales from drop shipping are good in and of themselves, then the answer is an unqualified yes. Any channel that can add profitable sales is most certainly a good thing.

The choice of whether to use drop shipping will likely hinge on the needs of the individual markets.

When comparing drop shipping to stocking distribution, whether the advantages of drop shipping outweigh any disadvantages is less clear. Margins are certainly different between the two sales and distribution models, as are the requirements and costs for the manufacturer.

The choice of whether to use drop shipping will likely hinge on the needs of the individual markets. Which strategy can reach the customers more effectively and drive higher sales and profits for the supplier? In many cases, a mix of sales and distribution channels is the right answer.

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