May 30, 2008, 12:00 AM

The Hand-Off

Drop shipping expands a merchant’s offerings, but not without a lot of homework. Here’s how some e-retailers manage drop-ship relationships.

Drop shipping is akin to the superstar job applicant with the killer resume, tons of experience and multiple degrees.

It looks great on paper.

The benefits of drop shipping-a program in which a third party, often the manufacturer of a product, owns the goods that a company sells and ships them to the consumer on behalf of the e-retailer-are enticing indeed. There are the obvious: the ability to offer more inventory without additional financial risk, zero warehouse costs and less staff to pay as the drop shipper takes care of running and staffing the shipment and fulfillment center.

And, there are the not-so-obvious: the ability to constantly test or gauge interest in different products and the capacity to offer niche goods and truly become a one-stop-shop retailer.

Elbow grease

But merchants who dig a little deeper and evaluate what it takes to launch a successful drop shipping program will learn that the rewards don’t come without a bit of elbow grease. Drop shipping, retailers and consultants say, requires a lot. A lot of time. A lot of preparation. And, in many cases, a lot of money.

Just ask Don Cohen, president and founder of ToolKing.com, a hardware and tool e-retailer with about $30 million in annual sales. ToolKing began its drop shipping program about four years ago and today works with 30 manufacturers who drop ship about 25% of its orders accounting for 30% of sales. Cohen says drop shipping helped triple its SKUs from about 6,000 to 18,000.

“It allowed us to expand our product offering with little inventory risk. We now pride ourselves on having the most comprehensive tool selection online,” Cohen says. “And we are offering items that we didn’t have the space to stock or the desire to put up the money to buy before, like more obscure goods.”

But such rewards didn’t come without a price. Cohen estimates ToolKing’s drop ship program cost about $100,000 and took about six months to implement.

Most of that time and money was spent building the technology that allowed it to communicate back and forth with vendors. ToolKing brought on a freelance programmer and used its own team to build the technology in house. But even with careful planning and patience it wasn’t a glitch-free launch.

“At first it was tedious, there were a lot of e-mails and going back and forth,” Cohen says. “There were times when customers would order three tools and get them in three separate packages on three different days from three different vendors.”

ToolKing now tracks orders online and works with each vendor differently, setting up programs for sending and receiving data.

‘What we have here…’

If there is one resounding message among consultants, merchants and vendors involved in drop shipping it is that communication is key.

Lack of communication is a gaping hole in drop shipping programs, says Mark Clendenin director of consulting for Fry Consulting Services, a unit of e-commerce technology firm Fry Inc. Fry has helped such major retailers as The Home Depot Inc., Meijer Inc. and Kohl’s Corp. launch drop shipping programs.

“Retailers tend to oversimplify. It’s a problem a lot of companies run into, you need the technology to manage inventory and fulfillment and communicate with your drop shippers,” says Clendenin, who recently wrote the white paper “Supplier Direct Fulfillment: Strategic Enabler to Accelerating E-Commerce Growth and Profitability.” Drop shipping is often referred to as supplier direct fulfillment.

If an order is out of stock, for instance, the e-retailer needs to know-fast-so that it can take the product off the web site or inform the customer that it is on back order. The same goes for a product that arrives damaged or late. Other cases, such as a product returned to the drop shipper’s warehouse, require communication lines with the shipper so that the retailer can credit the account quickly. Or, if a drop shipper is discontinuing an item, or running low on a particular product, the e-retailer needs to know so it can work with another manufacturer to acquire more or inform customers.

Bill Pryor, chief operations officer of footwear and accessories retailer Shoebuy.com, a subsidiary of IAC InterActive Corp., which owns such other retailers as HSN and the former Cornerstone Brands online and catalog merchants, says data sharing is top priority when his company sets up a drop shipping program with a new manufacturer.

“First we look to understand the drop shipper’s company,” Pryor says. “Is it one person or a multi-billion dollar corporation, and what kind of systems do they use? How can we get our data out of their system and into ours?”

Shoebuy, launched in 1999, has drop shipped all orders since its inception. Beginning with about 50 drop shipping partners the e-commerce site now offers over 550 brands from more than 500 drop shippers. About 4.5 million shoppers visit the Shoebuy site each month to purchase the more than 700,000 goods it offers.

It’s a lot to keep track of, Pryor says.

Outside help

While Shoebuy built its data-exchange technology in house using a variety of systems such as EDI, XML, FTP and SOAP, or simple object access protocol, to share data with drop shippers, many vendors will help manage that communication process for a fee.

CommerceHub, a division of Commerce Technologies Inc., for example, offers a hosted software system that integrates retailers’ systems with more than 4,200 drop shippers, manufacturers and carriers. CommerceHub charges a variable percentage of each transaction for its service, depending on volume, says Steve Hamlin, CEO. Sears Holdings Corp., Circuit City Stores Inc. and The Home Depot all use CommerceHub to help manage their drop ship programs.

Yet whether a retailer manages its own communication technology or uses a third-party, figuring out how to share information is just the beginning. Once the data-sharing system is set up, other issues arise: How often will shippers and retailers communicate? What information will they share? And, when will they share it?

Hamlin, along with many other retailers that drop ship, recommends merchants set up a list of business rules that a vendor must meet and a system to notify the retailer if a benchmark is missed.

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