In “Drop Shipping for Ecommerce, Part 1: Supply Chain History,” my first article, I addressed basic supply chain evolution inside of ecommerce. Last month, in “Part 2: The Basics,” I defined drop shipping, reviewed contradictory real-world advice about it, estimated how large it might be, and outlined some specific challenges to adopting it.

This article will address how drop shipping alters the traditional relationships between suppliers and retailers.

Complications with Drop Shipping

While drop shipping presents advantages to retailers and suppliers, it has drawbacks. Many retailers have tried drop shipping and failed. According to Commerce Hub, a drop-ship solutions provider, “The lack of inter-company system integration is even more problematic in the drop ship fulfillment model, because record keeping and track-ability become even more critical as thousands of orders are sourced through hundreds of suppliers. In drop ship fulfillment, thousands of orders are being shipped to thousands of locations. The choreography of this is much more complex than single orders with thousands of line items being shipped to a few warehouses.”

Retailers also experience a loss of control as they must now rely on their suppliers to ship orders in a timely and expert manner. A supplier’s failure to execute can lead to customer service nightmares, back orders, complicated returns processing, and branding problems with packaging and packing slips.

There are challenges for suppliers as well. Picking, packing, and shipping consumer orders is a much different process than shipping pallets or case packs to a retailer or distribution center. Drop shipping can require updates to warehousing, fulfillment, and invoicing systems, as well as changes to processes and channel policies. Plus, a degree of inventory risk will be shifted to the supplier.

One of the greatest challenges faced by retailers and suppliers is system-to-system integrations with trading partners to automate drop shipping processes and the lack of any kind of standard for performing and maintaining those integrations. This is a challenge that industry organizations like e-DSS.org are hoping to address by providing a common set of data standards and best practices. You can find a list of seven additional high level drop shipping challenges in my previous article under the “Routinely Complicated” section.

Putting it all together, it can start to appear complicated to the point of impossibility. In my experience, that isn’t entirely far from the truth. But the one key that will make drop shipping successful as an ecommerce supply chain management technique is relationships.

Relationships: From B2B to Integration

With drop shipping, you are primarily replacing what used to be a B2B — business to business — discussion, where a retailer is negotiating with a vendor to purchase inventory at wholesale prices to then resell, with an integration discussion, where both sides need to understand the virtual part of the relationship and work together to allocate resources to handle different business processes and new technology requirements.

Here is a graphic of the major data, business process, and integration flows.

This commit-to-integrate discussion, and how each in the relationship approaches it, is the single key that will facilitate drop shipping success or guarantee drop shipping failure with no shortage of pain and suffering. Common and aligned expectations between the retailer and the supplier (drop shipper) are critical.

Partners, not Vendors and Customers

Traditional supply chain relationships and business processes also do not fit into this new economic world. When a retailer decides to embark on a drop ship or inventory-less fulfillment model, there are significant factors that need to be taken into consideration.

The first thing the retailer has to acknowledge is that drop shipping is not just another fulfillment model. Since the financial equation is changed, the vendor-retailer relationship is changed too. While not having the actually purchase the inventory is financially beneficial to a retailer, it actually reduces the amount of leverage the retailer has over the vendor’s behavior. Moreover, in return for the opportunity to market more products through the retailer’s channel, the vendor is now taking on all of the financial risk, while at the same time having far less up-front financial security.

In traditional fulfillment models, the retailer typically dictates the process and technical requirements and the vendor can perform a cost/benefit analysis because the benefit (the purchase order) has already been determined. Because financial negotiation has occurred between the merchant and vendor, it makes sense for the technical process discussion to be done separately or even outside of the retailer’s organization.

In the drop shipping fulfillment model, the conversations are much more intertwined. Because the retailer is going to be asking the vendor to spend time and money to work with the retailer on the promise of revenue, the vendor is going to be more resistant to additional technical and process demands. Vendors will also have less desire to add costs to participate in a drop shipping program because of the lower revenue per order normally associated with consumer-driven orders. These factors make it difficult for retailers to leverage existing partner on-boarding processes or (perhaps even more difficult) outsourced vendor management. It is simply too difficult for a third party to properly represent the retailer during these discussions.

Success Factors

Identifying and utilizing partners for a drop-ship or endless-aisle program is different than for a traditional order fulfillment method. Because there is no commitment to buy, retailers have potentially more supply partners to choose from. In turn though, this lack of financial incentive can affect the willingness of the supplier to spend time and money to meet a retailer’s compliance needs. Finally, because of the distributed nature of drop shipping, some component of electronic data exchange cannot be optional for the supplier.

Here are the two foundational factors that need to be considered.

Logistics capabilities. When selecting a supplier to participate in a drop shipping initiative, retailers must ensure that the supplier can do single-item fulfillment, and that its ability to do this matches the retailer’s needs — i.e., shipping times and expedited options. The ability for suppliers to select individual items (pick and pack) in their warehouse or fulfillment center is a prerequisite for drop shipping. Retailers can evaluate this ability if the supplier offers direct-to-consumer fulfillment via its own ecommerce site. Many suppliers underestimate the costs of switching to a single item fulfillment model, so be cautious of those who promise to make the switch on your behalf.

Technology options. Because both sides will need to commit time and resources to drop shipping, while neither is committing to a specific revenue number, it is important to minimize the technical excuses for not participating. This means providing multiple options to exchange data at no or little cost. Options need to range from partners with very little technical capabilities to those with mature and robust ecommerce infrastructures. Typical data-exchange options are as follows. Self-service, manual portal. (Do not discount manual work. More advanced integrations are sexy, but sometimes not practical.) Non-integrated batch process (spreadsheet). Automated, file based integration option. Web services (API, XML) automated option.

Because both sides will need to commit time and resources to drop shipping, while neither is committing to a specific revenue number, it is important to minimize the technical excuses for not participating. This means providing multiple options to exchange data at no or little cost. Options need to range from partners with very little technical capabilities to those with mature and robust ecommerce infrastructures. Typical data-exchange options are as follows.

Alignment: Consumer Is Key

The good news is that there is strong alignment on all of these issues: the consumer. Many more brands and suppliers have begun selling direct to the consumer in the past five years. This aligns the supply side of the equation directly (and in competition with, but that’s another article) with the retail side in that the consumer experience drives everything. Consumers need descriptive product data, they need to have trust in inventory certainty, they need a consumer-friendly ordering process, and they require item-level logistics that are trackable and returnable.

In short, the world is aligning to the consumer, and that is driving new partnerships in the supply chain, and especially partnerships between those that would like to be on one side or the other of drop shipping, to flourish and find success.

See the next installment of “Drop Shipping for Ecommerce” at “Part 4: Winning Strategies.”