June 3, 2004, 12:00 AM

Picking up drop shipping

Retailers are expanding assortments and testing products—and letting someone else do the shipping. A look at when to drop ship.

Cooking.com Inc. sells 47,000 SKUs, everything a cook could need from cast-iron crepe pans to 70-proof vanilla extract from Madagascar. It fulfills orders from its warehouse and distribution center in Ontario, Calif. But when it wanted to expand its offerings to include cookbooks, it decided it just couldn’t invest in an 8,000-book inventory.

Cooking.com still plans to become a major source of cookbooks, but to do so, it is turning to a solution that direct merchants have used for years but that has become increasingly popular as more retailers adopt web-selling strategies: drop shipping. Cooking.com already had experience with drop shipping, by which a manufacturer or distributor fulfills an order on behalf of a retailer, because it used the method to fulfill orders for perishable products and a few bulky goods. But with its expansion plans, it expect use of drop shopping to go way up. “In the past, drop shipments accounted for less than 1% of our total sales volume,” says Bryan Handlen, senior vice president. “When some of our current plans are completed, drop shipments have the potential to account for significant amount of our sales.”

Management required

The growing trend toward drop shipments can be beneficial to many online retailers because drop shipping allows them to greatly expand their product lines without increasing their inventory or warehouse costs. But without the proper management of drop ship partners, a retailer can find itself with major problems, ranging from promising goods that don’t exist or are different from what gets shipped to serious damage of the brand and customer relations if orders are shipped late or incorrectly.

And then there are the customer service management headaches when customers call to find out order status and the retailer doesn’t know because of lack of communication with the drop shipper. On top of all that, retail chains can encounter problems when customers attempt to return purchases to a store and the store clerk can’t tell from the label that the product came from the online operation.

“Drop shipments can be the Holy Grail of e-commerce,” says Frank Poore president and CEO of Clifton Park, N.Y.-based Commerce Hub Inc., a company that facilitates drop shipment orders. “They can give a retailer the ability to offer just about every product they can conceive of without having to invest in any inventory. But there is a huge challenge for retailers who rely on suppliers to ship goods for them. The entire process has to be seamless and the customer should have no idea that another shipper is involved in the transaction. That takes a lot of planning and management.”

Indeed, many retailers are increasing the number of items they make available on their web sites through drop shipment, often expanding their product lines beyond core offerings as way to expand their customer base and capture more sales from existing customers.

An aid to testing

Some retailers also use drop shipments to test new products. Then, if the number of orders meets or exceeds expectations, the retailer can begin stocking the item. If the product fails to sell, the retailer can drop it without any associated cost. And if sales are mediocre-but profitable-the retailer can continue to use drop shipments to fulfill orders.

Besides test items, other products that lend themselves to drop shipments include:

l Perishable items, such as food and flowers, which cannot be stored in a warehouse.

l Large or bulky items which are expensive to ship. Rather than ship them from the manufacturer to the retailer, then to the customer, one shipment from the manufacturer to the customer saves on freight and reduces the opportunity for damage.

l Customized items that require the manufacturer to make alterations before the item can be shipped.

l Unusual or non-commodity items that a retailer does not receive a lot of orders for, but still wants to carry to fill out a product line.

Once a retailer decides that drop shipping is the route it wants to take, it needs a plan to make sure it is correctly managing the relationship with the vendor.

On the front end, retailers need to make sure they are getting the right information from a vendor with regard to changes in product description, price and availability. It is easy for vendors to forget to inform the retailer about minor changes to the product and as a result, customers may be disappointed when they receive items that are not exactly the way they were described on the retailer’s web site.

Today, most communications relating to product changes are made through a combination of e-mails and manual updates. Baby Universe Inc., for example, receives e-mails from vendors when they have a change in product description or price. The retailer then makes the necessary adjustments in the product description on its web site, BabyUniverse.com.

While Herb Epstein, director of distribution, says that process has not been difficult for the seller of baby goods to manage, other retailers may feel inundated by the number of e-mails about changes. Baby Universe works with 75 vendors. Most of the products it uses drop shipments for are for bulky items for which it wants to minimize shipment costs-such as baby seats. Some retailers, however, work with hundreds of suppliers and manually making each change after they get an e-mail can be overwhelming.

Seeking standards

Rob Garf, retail analyst for AMR Research Inc., says there is a movement afoot to standardize the language used in online product descriptions that will make it easier for retailers and vendors to make necessary changes in these descriptions. These standards will allow retailers to move corrected copy right from vendors to their web pages. In the short run, this might mean having vendors e-mail new product descriptions that the retailer will cut and paste onto its web site. Longer term, vendors will be able to automatically make the changes right onto the retailer’s site, Garf explains.

Using password-protected web sites where they can access only descriptions of products which they supply, the vendors will be able to automatically insert and change descriptions of their products, Garf says. In most cases, vendors will submit the amended copy for approval to the retailer. Once the retailer hits an Approve key, the change would automatically show up on the web site, Garf says.

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