I’ve frequently blogged about online retailing, but I have not mentioned an operations phenomenon that often underpins this business model – ‘dropshipping‘. This is the concept of not holding any retail inventory, but shipping goods to customers directly from their source – sometimes the manufacturer or sometimes a wholesaler. This approach is made possible by digitisation and can significantly speed up delivery times.
Like all business models, operating an online store that relies on dropshipping has some advantages and disadvantages. The pros are:
- significantly reduces start-up costs – no investment in warehousing or inventory
- reduces operating costs – no costs associated with holding, handling and shipping inventory
- possible to offer a wide range of products
- physical location of business is immaterial
- seasonality or a sudden shift in consumer demand has no significant impact on the retailer – it is shifted to suppliers
The cons are:
- requires highly effective supplier selection and digital tools to communicate with them
- reliant on suppliers to hold inventory, thereby increasing risk of poor reliability
- distribution may be complex and expensive if a single customer orders goods the are sourced from three separate suppliers
- tends to be a low margin business.