September 1, 2010, 12:00 AM

Goods to Go

More automated data exchanges with suppliers enable retailers to expand drop-shipping programs.

When the holiday season arrives, Wine Country Gift Baskets hits a surge that would make the peak holiday traffic of many retailers seem like a lazy day in July.

"On an average day through most of the year, we'll do one to two thousand baskets," says general manager Bill Shea. "On an average day in December, we'll do 200,000."

That kind of a demand spike makes it tough for Shea to make sure he has enough inventory on hand without running short or risking costly overstocks. And the seasonal imbalance in sales—with more than 50% of Wine Country's revenue coming in December—also poses the challenge of diversifying into a broader product line that would appeal more to consumers throughout the year.

One way Wine Country is responding is by relying more on suppliers to drop ship directly to consumers who place orders on WineCountryGiftBaskets.com. Since it started using drop shippers three years ago, Wine Country has been building its product line with a broader assortment of items like fresh flowers, freshly baked cookies and chocolate-covered strawberries—items it's not equipped to store in its own warehouse facilities.

"Each year, we're working at getting more drop ship vendors," Shea says. "The big benefit for us is it removes the inventory risk. We only commit to 60-80% of our demand forecast with our own inventory, and drop ship the rest. If we covered the rest of the forecast with our own inventory, we'd take on too much risk."

But working with more drop shippers means coming up with a way to communicate quickly and accurately with many companies that use various types of computer hardware and software. Solving that data exchange problem has been key in enabling Wine Country and other online retailers to expand their offerings through drop shipping.

Shipping complications

When Wine Country started working with drop shippers, it would overnight packing slips and shipping labels to vendors, then follow up with e-mails, faxes and phone calls to confirm that vendors had received and shipped the orders. The retailer also had to manually enter vendor invoices into its accounting system to reconcile invoices against orders. Even with a person dedicated to reconciling drop-shipping documents, it could take weeks to catch up. "It was not pretty," Shea says.

Wine Country now employs a web-based application that lets it electronically exchanges orders, confirmations and invoices with drop-ship vendors. The Dropship Manager software system, which is provided by VendorNet, a subsidiary of e-commerce technology and services company GSI Commerce Inc., transmits documents electronically while avoiding time-consuming and error-prone manual data entry; it also automatically reconciles orders and invoices on a daily basis instead of taking weeks, Shea says.

Now, instead of wondering if and when a drop-ship order departed a vendor's warehouse for a customer, Wine Country receives an instant shipping confirmation in the Dropship Manager. That confirmation prompts the retailer's e-mail system to automatically send the customer a shipment alert with a link to the carrier so the consumer can track shipment status.

The application pays for itself by eliminating the need to overnight documents, Shea says. Although Wine Country only recently deployed Dropship Manager, Shea says a previous retailer he worked for made back the cost of deploying the application in six months by reducing document shipping costs.

To get maximum benefit from drop shippers, he notes, Wine Country will agree to purchase a minimum number of items from each vendor, and the vendor will agree to produce a level of safety stock to cover additional demand if and when it materializes. Instead of buying 1,000 Christmas wreaths to maintain in its own warehouse without knowing how many will sell, for example, Wine Country will agree to buy 500 from a drop shipper, who will commit to have another 500 available as necessary. "When we get close to selling the first 500, we'll ask the vendor for 200 more," Shea says.

Managing risk

That steady and instant flow of information provides what a drop shipper needs to manage production levels while confirming that a retailer is on course to hit its forecasted numbers—a situation that becomes all the more crucial as retailers and drop shippers match up in larger numbers.

That's a lesson recently learned by The Shopping Channel, a multichannel web and TV retailer that is working with VendorNet's Dropship Manager to increase the number of products it sells exclusively through its web channel.

"Before VendorNet, we tried to handle drop shipping in a manual way with one or two drop shippers," says Ba Linh Le, vice president of finance and new business development. "But we realized that as we added more drop shippers, we needed to automate and streamline the process."

The Shopping Channel, based in metropolitan Toronto, recently increased the number of drop shippers it works with by 30%, to about 200, as part of a strategy to sell more products only online. The web now accounts for about 38% of the retailer's total sales of $300 million.

The increased drop-ship relationships will enable the retailer to double the number of web-only products it sells to 10,000—including desktop and laptop computers, and large bulky items difficult and costly to warehouse and ship—from 5,000 today, and without taking on the risk of paying for and warehousing inventory that may not sell as planned, Le says.

Like Wine Country, The Shopping Channel has deployed a licensed version of Dropship Manager, an option that typically takes about 90 days to deploy and costs from $100,000 to $500,000 based on the size of the retailer's drop-ship network, plus maintenance fees, according to VendorNet CEO Sharon Gardner. Retailers can also choose a software-as-a-service option, connecting to the software via the web and paying a per-order fee ranging from $1 to $3 depending on volume, Gardner notes.

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