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Getting the Drop on Inventory Control

With drop shipping, supply and demand forge a new relationship

Getting the Drop on Inventory Control

Since the launch of the online era, companies of all types have incessantly searched for shipping methods that will serve their customers in a more cost-effective, streamlined manner.

And with an ever-increasing number of companies offering their wares via the internet, drop shipping has become a must for buyers, sellers and distributors.
Simply put, drop shipping is a supply-chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.

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The main benefits of drop shipping are no up-front inventory to purchase and a positive cash-flow cycle. A positive cash-flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer’s money but has not yet paid the wholesaler.

For someone looking to start an online novelty business, who has no room to store inventory, drop shipping is the way to go.

“We sell some larger-scale products (like furniture) and some luxury items that some newer online customers cannot afford to keep in stock,” says Lisa Mazurek, sales and marketing director for Entrenue, a distribution company created to support retail businesses selling sexual enhancement products. “I think it is great they have the ability to offer them on their site and contact us when they sell,” Mazurek says. “It also seems like a way for newer customers to learn what sells best for them and eventually what they might want to keep in stock.

“As a distributor, we’ve enjoyed the fact that customers who do all of their business through drop-ship companies can now work with us.”

In separating the selling function from the fulfillment function, drop shipping takes a special kind of business model.

“For example, you might have a website that features a product, but does not have any inventory,” says Robert Largen, a founding member of Las Vegas-based distributor Satistec, the United States distributor of the Japanese-based male masturbation tool Tenga. “When you get an order, you send it to me, and then I ship it to your customer from my warehouse. I would pay you what in effect is a commission for selling the product.”

Instead of handling shipping in-house, Satistec uses Entrenue.

“With Entrenue, they actually have our product in their warehouse and ship to the customer directly,” Largen says. “This is a sub-distributor relationship. In other words, a distributor or sub-distributor actually takes possession of the product before the sale, while a selling agent does not, and relies on the drop shipper to fulfill the order.”

Other benefits of drop shipping include eliminating the duplication of effort because only one warehouse will pick, pack and ship the product, which reduces costs in the supply chain. Drop shipping also reduces total inventory management and shipping costs, which can be passed on to the customer by the retailer.

“Drop shipping can be an easy way for a retailer to get their business started,” says Jennifer Schmidt, wholesale manager for SexToyDistribution.com, which started drop shipping in 2008. “There is no warehouse space required, no inventory investment required, less payroll and overall less overhead. Companies can offer a large selection of products very fast. Everything is pretty simple in small scales, but it can get more difficult as a business grows. Automation is the key to success in this business model.”

SexToyDistribution.com offers a fully operational site for a small fee and retailers can have their website up and running with more than 2,000 products in just days.

“With our automated process, orders that are placed on SexToyDistributing.com are downloaded every morning into our system from the website,” Schmidt says. “We then process these immediately, and the orders are sent to the onsite warehouse to be pulled and shipped. Our automated system requires less work on our end, thus making it more cost efficient.”

One of the company’s key features is each drop-ship order is sent out with a tracking number via email. This tells the retailer the package went out on time and it can provide customers with more information. 

“Our system includes the retailer’s name and information on the packing list,” Schmidt says. “So the whole process looks as if the package is coming from the retailer and not us.”

And while it seems like a simple concept, drop shipping is actually very detail-oriented.

“You need to have a good crew that works in the drop-shipping area exclusively,” explains Laura Sweet, a sales representative with Honey’s Place. “They need to be trained on product knowledge as well as all of the details any given client wants with respect to packaging, substitutions and shipping agents. We also wanted to offer a personal warehouse feel for each client’s retail customer. With that service, our clients can have personalized packing slips, which include their logo and any other step they request to personalize their packages. It’s all about good customer service.”

Companies that partake in drop shipping constantly strive to streamline the process, keeping abreast of the freshest and fastest developments in technology, which adds speed and avoids human error.

“We create programs that allow us to upload orders directly from both retail and internet clients,” Sweet says. “That streamlines the data-entry process on both incoming orders, as well as invoicing outgoing orders. Both steps are done virtually automatically. That saves a lot of time as well as avoids human error as mentioned before. It all ties into our inventory control and buying department. This allows us to track every order at any step in the process. We have also organized our warehouse to allow for a virtual map of a product location. This streamlines the order pulling process, which is still done manually. By scanning orders out, it is impossible to ship the wrong item or short an item on an order, which saves time with the returns department. All of these are time-saving ideas that have been put into place to streamline how Honey’s Place conducts business daily.”

With website owners looking to focus on marketing and remaining competitive, automated order processing systems are constantly being improved, with client feedback and suggestions fueling many of the changes.

“We always welcome our clients’ input,” Sweet says. “That also helps us to continue to provide the type of support and services internet accounts are looking for. The way technology is developing, I can see even further streamlining processes in the near future, allowing for even less human involvement and error.”

For SexToyDistributing.com, the implementation of a multi-ordering process system has been key in the company’s efforts to process all orders at one time, while leaving less room for mistakes.

“Before this, we had a system that required us to process one order at a time,” Schmidt says. “Having to do it this way meant each order would take five to 10 minutes to process. With the new multi-order processors we can process all the orders we receive in 10 minutes or less.”

As in any business, some risks are involved in drop shipping. For example, back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. This may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which might reflect badly on the retailer. A good wholesaler will keep retailers updated, and business owners need to be aware of the quantities the wholesaler has available.

“It allows you to get your product into many Web outlets fast,” Largen says. “The downside is that you have to have strong systems to be able to ship many very small orders efficiently.” 

This article originally appeared in the October 2009 issue of AVN.






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