Drop-Shipping vs. E-Commerce Fulfilment: Which Is Best For You?
The Internet has provided vast advantages for business owners to reach a broader range of customers in global locations; no longer does a business need to have a physical location. These e-commerce companies can market products to other businesses and customers through online websites, marketplaces and social media applications. In fact, there are more than 2 billion global digital buyers, and, in 2020, these virtual stores made $4.89 trillion sales worldwide.
However, with the lack of a physical store location, e-commerce shops must decide how to store and ship inventory. Two common inventory storing and shipping options are drop-shipping and e-commerce fulfilment. Both offer unique advantages and disadvantages, and comparing these options may help an e-commerce business decide on the right fulfilment method for its operations.
What Is Drop-Shipping?
Drop-shipping is a fulfilment method where a manufacturer, wholesaler or supplier controls the supply chain, rather than the e-commerce business. The merchant focuses on taking the order but does not take physical possession of any inventory. Once a customer places the order, the merchant sends the order to the manufacturer or supplier, who then ships the product to the customer.
This fulfilment method works for e-commerce shops that have minimal start-up costs and don’t want to tie their working capital into warehouse overhead expenses. It may also be used by companies that offer customizable products or inventory that has unique characteristics or special shipping requirements.
A disadvantage to this method is that the e-commerce business never owns the inventory, which may mean that you are unable to brand the products. Also, you may have to pay higher costs for fulfilment with the manufacturer or supplier.
Other key aspects of drop-shipping include giving control of customer service to the manufacturer or supplier and being unable to set timelines for shipping and delivery. Ultimately, you may make less profits with this method, as you are not passing your company’s shipping and handling costs to the customer.
What Is E-commerce Fulfilment?
Something to keep in mind when using the phrase “e-commerce fulfilment” is that many businesses use this term as a catchphrase to encompass all supply chain operations, whether they are using drop-shipping, third-party fulfilment centres or other methods. However, e-commerce fulfilment is a separate fulfilment option.
E-commerce fulfilment involves having physical possession of the inventory and either storing the products in your warehouses or at a warehouse or fulfilment centre owned by a third-party logistical company. When a customer order is placed, you have the order picked, packed and shipped to the destination.
One advantage of this method is that you have complete control over product branding, customer service, logistical timelines and company marketing. You also tend to have healthier profit margins. However, you may be paying more to own or lease warehouse locations or hire third-party fulfilment services. In order to utilise e-commerce fulfilment, a company needs to have a larger initial investment in storage and shipping operations.
Which Method Should You Pick?
Every company has unique operations where one method may be more appropriate than the other. Also, some e-commerce businesses may employ several fulfilment methods based on their inventory requirements, customer vs. fulfilment locations, and budgets.
Inventory Requirements
You may have products that would be difficult to store or incur higher storage costs that are outside your budget. For example, perhaps you offer perishable items, products that require cold storage, or hazardous products that need special handling or transportation protocols. In these instances, you may decide to select drop-shipping methods, or hire a third-party fulfilment company that offers specialised fulfilment services.
Yet, some fulfilment centres may have strict requirements where they cannot offer storage of certain products. Speaking with fulfilment centres can help you narrow down choices so you can select the right fulfilment method for your business.
Customer vs. Fulfilment Locations
The locations of your warehouses in relation to your customers’ locations may play a huge role on which fulfilment process you select. If you have suppliers or manufacturers close to a large contingent of your customer base, then selecting drop-shipping options may offer the most cost-effective solution. However, if your customers are in areas that are hard to reach for suppliers, then you may want to search for a fulfilment centre in that region.
Budget
Your available budget more often will dictate the type of fulfilment method your company selects when getting products to destinations. You’ll need to have a realistic and transparent viewpoint of your operations; how much your charge for products; how much customers are willing to pay for shipping/handling; and your supply chain costs. Then you can decide whether you want to handle the fulfilment services yourself or allow another company to take charge of your inventory.
Drop-shipping and e-commerce fulfilment can provide your company with inventory storage and shipping advantages. Remember, too, that you are not locked into using only one method over the other. Your operations may change such that you need to switch methods or offer additional fulfilment options.
For more information, check out the accompanying resource.
AUTHOR BIO: Jay Catlin is CEO at AMS Fulfillment, a leading order fulfilment company servicing B2B and B2C clients nationwide. Catlin has been with the company since 2002 and helped grow AMS into the successful third-party fulfilment entity it is today. Visit https://www.amsfulfillment.com/ to find out more about AMS Fulfillment.
