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Retailers are interested in carrying our
manufacturing firm's new products, which help infants and
toddlers to stand and walk. However, many are asking for
drop-shipping, which we worry will increase our costs and sales
logistics. Should we require retailers to purchase product at
full price and then provide a credit to compensate them and
cover their profit after the sale has been finalized and the
period for returns has expired? —M.M., Phoenix
Drop-shipping is the delivery system used by most online
retailers and other companies that do not have the physical
storage facilities to purchase and hold inventory, as
traditional brick-and-mortar stores do.
When a customer orders a product online, or from a mail-order
catalog, the retailer transmits the order to the manufacturer—or
to a third-party fulfillment company. That company then
packages, labels, and ships the item directly to the customer.
"The retailer never owns the inventory," explains Stewart
Buskirk, vice-president for technology at One World Direct, an
order-fulfillment company in Mobridge, S.D. Drop-shipping saves
the online retailer or catalog firm in inventory, warehousing,
and shipping costs. Buskirk says it is becoming increasingly
popular in this economic climate, in which many small companies
and startups cannot get financing to purchase inventory.
Wide Range of Merchandise
"Some stores use a mix of drop-shipping and traditional
warehousing. A retailer selling baby items knows that 10% to 20%
of its items are pretty good sellers, and worth stocking. But it
needs to offer a much wider range of merchandise to attract
customers. Instead of tying up cash and space to experiment with
new product lines, it arranges for drop-shipping with a
manufacturer or distributor who has the inventory," Buskirk
explains.
Bill Donohue, vice-president of Virginia's Philpott
Manufacturing Extension Partnership, which provides business and
technical assistance to the state's manufacturers, says
drop-shipping allows retailers to refresh their product line
offerings without having to dispose of leftovers through
distress sales.
"The challenge for you is that you have to manage your inventory
levels while still performing as expected by your retailers. You
need sufficient working capital to keep the product flowing," he
says. Lean manufacturing methods can allow you to produce short
product runs economically, but the logistics get more
complicated if you are designing your products and then having
them produced overseas, he notes.
Providing drop-shipping, or outsourcing it to a freight shipping
consolidator, may indeed increase a manufacturer's costs and
logistics, but it is probably inevitable, Donohue says. "Even in
today's recession, shipments to the home have increased 33% year
over year. So my prediction is that the future is bright for
those manufacturers who learn to be savvy with business-to-home
logistics," he says. For a new company, where getting product
out to customers is imperative, drop-shipping encourages
retailers to take a chance on your products.
Respect the Retailers' Terms
Your idea of charging full price to retailers and then balancing
out their accounts in the future is not a good one, Buskirk
says. "Retailers all have different policies on returns and
warranties. You want to keep all that at arm's length and let
the retailers handle that—not you," he says.
He and Donohue both recommend that you charge retailers on a
"cost-plus" basis, meaning your wholesale price plus shipping
and handling. The customer chooses her shipping method based on
how soon she wants to receive the product, and you add a
handling charge for the work you'll do picking, packing, and
shipping the item. "If you go to a third-party firm like ours,
we pick, pack, and ship on demand for about $1.50 per item,"
Buskirk says.
You can bill your retail customers as they sell product, set up
an automatic debit at the time you ship, or ask for pre-payment
from retailers. "The last method is the best from the
manufacturers' point of view, but keep the payments small—maybe
no more than for a week's sale volume," Buskirk says.
By Karen E. Klein, a Los Angeles-based writer who covers
entrepreneurship and small-business issues.
From http://www.businessweek.com, Sept 2009
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