Dropshipping is a supply chain management technique in which the retailer does not keep good in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.
Dropshipping can occur when a small retailer who typically sells in small quantities to the general public receives a single large order for a product. Rather than route the shipment through the retail store, the retailer may arrange for the goods to be shipped directly to the customer. Drophipping is also very common with big ticket items like steel buildings where the retailer will take a deposit and have the building shipped direct to the buyer’s building site from the supplier’s manufacturing facility.
Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller will list an item as new and ship the item directly from the wholesaler to the highest bidder. The seller profits from the difference between the winning bid and the wholesale price, minus any selling and merchant fees from the auction site. A seller is permitted by eBay to list items that are currently not in his/her own possession, provided that he/she follows eBay’s policy on pre-sale items.
An emerging trend in the dropship business is private label dropshipping, in which a manufacturer produces a custom item for a retailer and drop ships it. The range of private label drop shipped items varies from simple key chains and t-shirts with custom logos or pictures to customized formulations for vitamins and nutritional supplements.
Major droshipping suppliers and fulfillment services are primarily based in the USA. This can be seen in the location of companies like CommerceHub, who support major chain stores like Sears.
Since 2006, many dropship companies have emerged in China, many of which offer wholesale and dropshipping services to both companies and individuals. This is largely due to the increasing ease of e-procurement and larger part that internet plays in ecommerce. China-based dropship suppliers have increasingly been able to compete with same-country distributors due to improving logistics for small packets and easing of trade barriers.
Two significant benefits of dropshipping are the elimination of upfront inventory and a positive cash-flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer’s money, but has not yet paid the wholesaler.
Drophipping also eliminates some duplication of effort, since only one warehouse will pick, pack and ship the product. This approach can reduce total inventory management and shipping costs. These cost reductions can subsequently reduce the price to the customer.