February 27, 2003, 12:00 AM

Re-assessing drop shipping—again

Commerce Hub has built a drop-shipping business on using the web as an efficient communications vehicle.

Back in the early days of online retailing, the term “virtual merchant” meant just that-such retailers were all but merchants. Many stocked no inventory and had no customer service reps.

That was the market that Commerce Hub Inc. targeted. Founded in 1997 by Frank Poore, an ex-computer salesman and logistics expert who was familiar with the vagaries of retailers’ order management systems, Commerce Hub identified as its market retailers who wanted to sell online but didn’t want to stock inventory. Instead, they would fulfill orders via drop shipping-the retailer is the conduit for the order and the manufacturer fulfills it.

Drop shipping was nothing new, but Poore had a notion that the web would change the way retailers and manufacturers communicated to make drop shipping work. “Every retailer has a different file format, wants different selections of products and has different business rules,” he says

EDI was too cumbersome to accommodate all those formats. And, with the web suddenly a viable retailing channel attracting retailers who had never sold direct, the sheer volume of orders that the web would create made fax, telephone or other forms of manual communication way too inefficient.

Growing acceptance

Enter Commerce Hub and its web-based approach. “This system allows any party to connect one time to us, regardless of their system, and then talk to partners without regard for differences in how they conduct business,” Poore says.

Retailers today are buying into that vision of the market. In October, Commerce Hub signed a deal with Staples Inc. that included Commerce Hub’s drop shipping product. And the agreement is indicative of a changing market, says Greg Girard, AMR Research Inc. analyst who follows drop shipping.

“Today more established store-based retailers are using drop shipping to reduce inventory risk and to expand product lines,” Girard says. “That’s in contrast to three or four years ago when the focus on drop shipping was from the dot-coms who were simply providing a storefront on the web with little continuity to the back end and very little control over or management of the products.”

While many retailers now own warehouses which, they believe, gives them more control over merchandise and order fulfillment, the benefits of reduced inventory and warehousing costs are just too attractive, Girard says. And with web-based approaches making drop shipping more efficient and drop shippers more accountable, retailers who might not have relied on outsiders are taking a middle approach-stocking crucial goods and drop-shipping the rest.

Commerce Hub now is in a position to benefit from that swing, Girard says. “They have a strong ability to aggregate suppliers and provide that as a value-add to retail customers,” he says. Other Commerce Hub customers include QVC Inc., Sears Roebuck and Co., Dell Computer Corp., KB Toys and GSI Commerce Inc.

Especially in computers and consumer electronics, keeping current and inventorying the product can be a problem, so drop shipping makes sense, says Skip Moreland, vice president of information systems for International Marketing Group Inc., drop-ship vendor of consumer electronics to QVC that links through Commerce Hub. “Computers are tough for retailers,” he says. “They change quickly, they’re complex and they don’t hold their value for long.”

Brand integrity

But retailers-like all businesses-often need to make decisions that take into account more than economics, such as speed of fulfillment, customer service and brand image. “Traditional retailers will be more comfortable with outsourcing if they can be sure the integrity of their brand won’t be damaged,” Girard says. “They want to know that the package will have the right labeling and the right returns notice and that the entire system can integrate into their customer service environment.”

They also want assurances that the technology they use to communicate with vendors is better than what they can provide themselves, Moreland says. “The key is to have people who understand EDI and the web,” he says. “You typically don’t find those skills in retailers’ IT departments, especially the smaller operations. But Commerce Hub has been down that road a lot, so retailers might find it easier to pay someone to do it than do it themselves.”

Those skills are crucial, Girard says. “One of the great stories about e-business is that you can separate the flow of goods from the flow of information as long as you have control over the information,” he says. “Drop shipping is a key capability in delivering on that value proposition.”


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