March 18, 2014, 10:49 AM

How makes sure drop-shippers are up to snuff

The retailer uses homegrown software to track manufacturer’s fulfillment performance—time to delivery, customer complaints, quality and the like—and imposes monetary penalties when too many errors occur.

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Discount flash-sale retailer Inc. uses drop-shipping for 100% of its fulfillment, says CEO Deepak Agarwal. That makes it crucial that the suppliers delivering orders meet customer expectations.

Although the retailer isn’t inside suppliers’ facilities, its team of supply chain experts makes sure the suppliers meet time and quality requirements, Agarwal says. The team uses a system of warnings and monetary penalties for errors, tracked with software the company developed itself. For example, if an order doesn’t ship from a manufacturer’s warehouse in the allotted time, the system triggers a warning; if it happens again, the e-retailer charges a penalty. Agarwal declines to say how much the penalty is, but says it is significant. penalizes 10 to 15 suppliers out of 400 in a given month, he says.

With drop-shipping the spine holding the business together, is also especially careful about which manufacturers it deals with, Agarwal adds. “If it’s a new supplier we take it slow,” he says.  Rather than listing hundreds of items from that supplier immediately, tests just a couple first, Agarwal says. “We check that they are shipping on time and shipping accurately before ramping up.”

As a result of the retailer’s meticulous feedback and penalties, its drop-shippers’ average delivery times have gone down while their quality of service has increased, even as web sales escalated, he says. had 2012 web sales of about $100 million, up 1023.6% from $8.9 million in 2011, according to Internet Retailer estimates.

“It’s going to get better for us over time. We’ve seen the infrastructure improve,” Agarwal says. “It’s going to be a fight for [which suppliers] can execute with high quality and as quickly as possible.” may not have built its business to rely so heavily on drop-shippers if those suppliers hadn’t been beefing up their own direct-to-consumer capabilities significantly over the last several years, Agarwal says.

“If three or four years ago you’d asked me about drop-shippers: ‘Are their systems up to date?’ I’d have said, ‘No, most are probably doing it manually,’” he says. “Whereas now a lot of the manufacturers and suppliers have really increased their ability to ship direct to consumers, as opposed to by the pallet.” is No. 202 in the 2013 Top 500 Guide

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