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 retail businesses, the majority of retailers make their profit on the difference between the wholesale and retail price but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.
Some drop shipping retailers may keep “display items” on display in stores, so that customers can inspect an item similar to those that they can purchase. Other retailers may provide only a catalogue or website of their products.
Retailers that drop ship merchandise from wholesalers may take measures to hide this fact to avoid any stigma, or to keep the wholesale source from becoming widely known. This can be achieved by “blind shipping” (shipping merchandise without a return address), or “private label shipping” (having merchandise shipped from the wholesaler with a return address customized to the retailer). A customized packing slip may also be included by the wholesaler, indicating the retailer’s company name, logo, and/or contact information.
Drop shipping can occur when a small retailer who typically sells in small quantities to the general public receives a single large order for a product. Rather than route the shipment through the retail store, the retailer may arrange for the goods to be shipped directly to the customer. Drop shipping is also very common with big ticket items like steel buildings where the retailer will take a deposit and have the steel shipped direct to the buyer’s building site from the supplier’s manufacturing facility.
Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller will list an item as new and ship the item directly from the retailer or wholesaler to the highest bidder. The seller profits from the difference between the winning bid and the wholesale price, minus any selling and merchant fees from the auction site.
An emerging trend in the drop ship business is private label drop shipping, in which a manufacturer produces a custom item for a retailer and drop ships it. The range of private label drop shipped items varies such as simple keepsakes, apparel with custom logos, pictures or customized formulations for vitamins and nutritional supplements.
Major drop shipping suppliers and fulfillment services are primarily based in the USA.
Since 2006 many drop ship companies have emerged in China, many of which offer wholesale and drop shipping services to both companies and individuals. This is largely due to the increasing ease of e-procurement and the growing part that the internet is playing in e-commerce. Drop ship suppliers based in China have increasingly been able to compete with same-country distributors because of improved logistics for small packets and the easing of trade barriers.
Two significant benefits of drop shipping are the elimination of upfront inventory 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.
Drop-shipment can also be an advantage in some transactions as it (can) obscure the actual shipper from the final receiver, thus preserving a middleman’s role by preventing direct communication/awareness between the original seller and final buyer, without requiring a middleman to bear the costs/delay in physically taking in the goods, repackaging, relabeling, etc.
Drop shipping also eliminates some duplication of effort, since only one warehouse will pick, pack and ship the product. This approach can reduce total inventory management and shipping costs. These cost reductions can subsequently reduce the price to the consumer.
Some risks such as backordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Backordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner’s job to be aware of the quantities that the wholesaler has available.
Drop shipping has also featured prominently in some internet-based home business scams. Scam artists will promote drop shipping as a lucrative “work from home opportunity.” The victim who buys into this scam will be sold a list of businesses from which drop-shipment orders can be placed. These businesses may not be wholesalers, but other businesses or individuals acting as middlemen between retailers and wholesalers, with no product of their own to sell. These middlemen often charge prices that leave little profit margin for the victim, and require a regular fee for the retailer’s usage of their services.