Picking up drop shipping

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.

Still, some retailers say they’re not optimistic that the process will ever get fully automated. QVC Inc.’s QVC.com, for example, is able to take automatic electronic feeds from vendors to update inventory control and it gets some electronic feeds on product descriptions that it can review and install on its web page. But Steve Hamlin, vice president of operations for QVC.com, believes his company will always require some manual intervention on product descriptions. “We usually need several people to review changes, including someone from the legal department, so I doubt we’ll ever get to the point where the copy is never touched by human hands,” he says.

But while help appears imminent to improve the ability retailers to communicate with vendors with regard to product descriptions, it may be more challenging for them to improve issues associated with order fulfillment.

Today, many retailers e-mail orders to their drop shipment vendors, expecting immediate shipment. But if a customer calls to ask about order status, the retailer may not be able to determine whether it has been shipped or when, or how it is being sent, where it is now and when it is expected to be delivered. That information is generally easier to access if the retailer shipped the item itself.

Complicating factors

Complicating this issue is the fact that many retailers work with numerous vendors that have different ways to communicate with retailers. “J.C.Whitney has 1,200 different vendors that it communicates with,” says Shawn Boler, category manager for J.C. Whitney Inc., which sells automotive components and accessories online. “To deal with this, we have developed an in-house system that has integrated the communications between our customers and our vendors. The system takes the product feeds we get from the customer and sends them out as orders to the vendors.”

J.C. Whitney uses drop shipping for customized orders, such as automotive interior accessories where customers request that their initials, special colors or unusual designs on the items. It also uses drop shipments for specialty items for which it does not receive a lot of demand. For commodity orders, the retailer stocks inventory and ships the items itself.

But communicating electronically with vendors can be difficult. While most of Cooking.com’s vendors can accept electronic orders, the company works with some that still require Cooking.com to print the order and fax it. Even those that take electronic orders use different computer standards that require Cooking.com to convert the orders to different standards for each vendor. Cooking.com uses software from Kewill Solutions North America to do this.

Several companies have sprung up to develop technology or services to deal with the needs of retailers working with multiple vendors. Commerce Hub, for example, serves as a middleman to develop connections to thousands of vendors and then connects via one link to the retailer. “Different vendors are often on EDI, XML, Cobol or even Quickbooks. We support which ever way they do it,” Poore says.

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Another way to deal with the communication issue is to use special software such as that designed by Marlborough, Mass.-based Kewill. Such order management software provides the conversion abilities so that retailers and vendors can effectively talk to each other regardless of the type of operating systems they are using. In addition to sending order and product information between parties, the software allows retailers to log into the vendor’s database to check on the status of orders that it originated.

No more faxes

The development of such third-party solutions has helped retailers expand their use of vendors. “Commerce Hub’s middleware solution has helped us communicate with our vendors in a more efficient manner,” says QVC’s Hamlin. “Before, we had to fax some orders and we’d find out later that the order didn’t arrive because the vendor’s fax machine was out of paper. When we’d use EDI, we had difficulties getting our systems to talk to each other. We’d end up with a lot of files that were dropped as well as duplicate orders.”

Also, by having a middleware that can talk to vendors using different type of systems, QVC has been able to expand the list of potential vendors because it has not had to limit its business relationships to vendors that had compatible technology, Hamlin says.

Other retailers are working on the communications links with vendors so they can offer the same service through drop-shipping that they offer through their own distribution centers. “We’re working on getting the messaging specifications in place so that we can offer overnight shipping on drop-shipment items,” says Kent Anderson, CEO of Macys.com. “We have to deal with some internal issues in order to do this.” Macys.com currently offers overnight shipping on items it carries in stock. The company discloses on its web site when an item is not available for overnight delivery.

Key to the success of the technology-based solutions, experts say, is the transparency associated with tracking the order. Even with its current system, when Baby Universe.com gets an inquiry at its call center asking the status of an order, it sometimes has to send an e-mail to the drop shipper to check where the order is. Typically within 24 hours, it gets an answer back and it can then get back to the customer. Epstein says the delay has not caused problems.

But many experts say 24-hour responses are not good enough for many retailers. “If a shipper wants to provide first-class service, it has to have complete visibility to fend off customer service calls,” says Ira Grossman, vice president of Kewill’s professional services group. “A customer service representative needs to be able to check the status of an order when the customer is still on the phone.”

Reducing the WIZMO calls

Not only does that provide good customer service, but it also reduces costs. Each where-is-my-order call costs at least $2. Being able to fend off a few hundred calls a week can save a retailer significant money.

QVC, for instance, reports that visibility into its drop shippers’ activity has reduced where-is-my-order calls from 2.5% of call center volume to 1%. Hamlin reports that QVC keeps up-to-date status reports using its Commerce Hub link. QVC is automatically notified by vendors when they received orders and then when and how the merchandise was shipped and when it is expected to arrive. Not only do QVC’s customer service reps have access to this information, but customers can also go to QVC.com to check the status of their order using this information.

And while it seems like a small matter, what label the vendor puts on the shipment is also critical to the success of drop shipping. Many vendors want to put their own name, return address and phone number on the box. But many experts say retailers should insist their name and related information, including product code data, be placed on the box instead. Macys.com, for one, is wrestling with how to deliver drop-shipped items in Macy’s gift boxes. Anderson says some drop shippers offer their own decorative holiday boxes, but some customers still want the box with the Macy’s name on it. “Your vendor needs to act as if it were your own warehouse,” Poore says.

Customers who receive shipments with the vendor’s labels may encounter problems if they have questions regarding the purchase or attempt to return the merchandise. Not having the right retailer information on the box is an especially big problem for retailers who allow customers to return merchandise purchased online to a store. If the merchandise does not have the proper retailer-issued coding on the box, the clerk at the store handling the return may have difficulty identifying the item—especially if the store does not carry that merchandise, Poore says. With the proper coding, a clerk should be able to scan the item and know right away that the item was purchased from that store’s online operations and how to handle the return.

Beyond logistics, there is a sound marketing reason for retailers to use their own packaging. “If a customer sees the manufacturer’s name and contact information on the box instead of the retailer’s, they might think that next time they can go directly to the manufacturer and buy it. You don’t want anyone coming between you and your customer,” Poore says.

Once they have the logistics down, many retailers are looking to expand their operations.

Cooking.com, for example, today mostly limits its drop shipment orders to perishable items and bulky products, like large cutting boards. In addition to negotiating with several book publishers to offer 8,000 cookbooks, Cooking.com has wanted to sell large outdoor grills but found the grill manufacturer did not have the capability to drop ship the items to the retailer’s specifications. Now, Cooking.com is talking to other third-party companies that can do that, according to Handlen.

Macys.com currently offers a limited line of perishables and unique gift items through drop shipment, but is looking to expand its product line through drop shipment. “We’re looking at expanding our fashion line, especially with shoes and handbags,” Anderson says. “We’ve identified several manufacturers of shoes and handbags that will drop ship for us. And we’re even looking at drop shipment for some specialty clothing lines like bridesmaid’s dresses.” In addition, Macys.com is considering drop shipping luggage, given the size and shape associated with that product.

“Drop shipping has expanded our product assortments and helped us on our way to being a multi-channel retailer,” says QVC’s Hamlin. QVC, for example, uses drop shipments for all goods offered on QVC.com that are not available as part of the retailer’s television offerings. Except for large items, such as computers, QVC keeps in inventory most of products offered by its television networks because those items are typically sold in large quantities.

But for all its benefits, drop shipments offers challenges that retailers need to be careful of. “The Internet landscape is littered with companies that wanted to eliminate the cost of warehousing, but didn’t know how to handle drop shipping right,” says Poore. l

Lauri Giesen is a Libertyville, Ill.-based freelance business writer.

If you build it, they will come—but do you really want to?

The web expands merchants’ ability to sell much more merchandise than they can through catalogs or in stores. But retailers need to ask: Just because they can do it, should they?

That was a question that came up during a panel discussion at last month’s Annual Catalog Conference in Chicago. And nearly all panelists answered “no.”

Jonathan Shapiro, president of cataloger Lillian Vernon Corp., raised the subject. “Why not have the ultimate drop ship and sell 4 billion products?” he said. He quickly answered his own question: “We’re cautious with drop ship because we want to differentiate ourselves. If you can walk into a Target or a Macy’s and find the same product at the same price as at Lillian Vernon, Lillian Vernon will lose the sale every time.”

In addition, he said, the items don’t just somehow appear on the web site and in product databases; someone needs to manage them. “How many of you struggle now on your web site trying to categorize your current offerings?” he asked the audience. The challenge becomes much harder with an exponential increase in products.