December 29, 2009, 12:00 AM

Stock Options

When to drop-ship and when to stock-ship? There’s an application for that

Pegasus Associates Lighting, a web-only retailer that specializes in selling a deep selection of lighting fixtures, bulbs and accessories, basked in the glow of 25-50% annual growth rates from 2003 to 2007. Then the economic downturn and housing crisis clobbered sales of everything related to home improvement. Pegasus responded by streamlining operations and cutting costs through an overhaul of operations that included a new e-commerce platform and order management system.

The strategy has paid off, vice president Chris Johnson says. “We’re making money even with a reduction in sales.”

Part of the gains come from Pegasus being able to better manage how it ships, whether from its own warehouse or from its network of drop-shippers. Maintaining profit margins while keeping customers happy can be a tricky balancing act when relying on suppliers to fulfill orders. That’s because drop-shippers vary in their technology, use their own coding systems, and adjust prices based on volume and other factors, among many other variables, making drop-shipping a challenge to manage. But retailers like Pegasus are taking advantage of features built into order management systems to simplify at least some of the complexities of relying on drop-shippers.

More than a no-brainer

Indeed, drop-shipping is becoming a more important way for retailers to offer broad selection while keeping down inventory costs, experts say. “Drop-shipping is an element that all retailers should embrace for expanded stock assortments,” says Tom Frenchu, chief technology officer at Pets United LLC, a web-only retailer that handles about 45,000 orders a day through several niche web sites for pets and equestrian supplies and products for gardening and camping.

But retailers must be aware of the challenges that arise when working with drop-shippers, Frenchu says.

“Many retailers only look at the positive aspect of drop-shipping-that you don’t have to own the inventory up front-but they don’t look at the complete transaction end to end,” he says. “Retailers often just know that their customer’s order is at a drop-shipper, but they don’t know if it’s on back order or if it’s going to be late, or why. If the order fails to ship under an expected level of service, and if a customer calls to ask about shipment status and the retailer can’t answer that question, the retailer may lose the customer.”

An upgraded order management system helped Pegasus address some of these issues.

Pegasus, which does under $5 million in annual sales and processes about 50 to 100 incoming orders per day, moved in early 2008 to an order management system from Stone Edge Technologies Inc. that integrates with its Yahoo Merchant Solutions e-commerce platform, also known as Yahoo Store, from Yahoo Inc.

A manual system

Before working with Yahoo Store and Stone Edge, Pegasus would take orders from a home-grown web site and enter them into its QuickBooks accounting software. The retailer then would print out purchase orders to forward either to its warehouse for shipping from its own stock or via fax or e-mail to a supplier with a drop-shipping agreement-a system that too often resulted in inaccurately placed orders.

“When we were under a manual system, every few weeks something went wrong,” Johnson says. “So we had to spend more time making sure we did the right thing with more manual checks.”

Contributing to the extra time it took to process orders was the need for order-processing personnel at Pegasus to manually review orders to see which products could be fulfilled by drop shipping. Although Pegasus drop-ships only about 30% of its orders, having drop-shipping as an option with nearly all of its more than 100 suppliers helps manage inventory, control shipping costs and keep customers satisfied, Johnson says.

As a rule, Pegasus holds in inventory large amounts of popular items like under-cabinet lighting fixtures. That way Pegasus obtains larger discounts from suppliers for buying in bulk, and can ship orders in boxes adorned with the Pegasus logo.

For less popular items, such as battery-operated lamps, Pegasus is more likely to drop-ship so it can satisfy customers without tying up warehouse space.

Still, a decision of whether to fulfill an order from stock or through a supplier drop-shipping the item can hinge on several factors and vary with each order. If an extremely large order comes in for a popular item usually held in stock, for example, Pegasus may decide to drop-ship it so as not to deplete its warehouse inventory.

More productive

As Pegasus receives new inventory, it enters product and supplier data into the Stone Edge Order Manager system that ties each item and supplier to available shipping options. Although Pegasus still manually reviews each order to decide whether to stock-ship or drop-ship, clerks now see immediately which products are from drop-ship suppliers and click a button to instantly forward a purchase order to either a drop-shipper or the retailer’s warehouse.

“Since using Stone Edge our drop-shipping has saved us money and time in productivity,” Johnson says.

The Stone Edge system is also designed to accommodate multiple versions of product codes. It’s not uncommon for suppliers and merchants to wind up with different identifiers that can throw off purchase orders and order confirmations. “We may have as our model number AB-123 and the drop shipper may have 123-AB, so the Stone Edge system holds both versions of that information,” Johnson says.

Pegasus manually enters multiple identifiers of the same product into the Stone Edge system. Then when Pegasus sends a purchase order to a drop-shipper, the document automatically includes the supplier’s version of the identifier. The packing slip shipped with the order, however, includes the retailer’s product identifier. That way the customer sees the same identifier she saw on her original order form, and the retailer can more easily identify the item if it is returned.

Drop-shippers also send order confirmations and shipment status reports via e-mail or text file transfers into the Stone Edge order management system; Pegasus then typically e-mails those notices to customers.

Stone Edge Order Manager starts at $1,995 for a five-workstation license for retailers doing up to 500 orders per day; an enterprise version for a 10-workstation license runs about $6,000 and handles up to 5,000 orders per day, CEO Barney Stone says.

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