In an era of omnichannel dominance that has been fueled by evolving customer preferences, the dynamics of fulfilling customer orders has changed. Some retailers are fulfilling orders from a distribution center, while others fulfill orders from their stores. And some are doing both. With multiple options, ongoing disruptions and ever-changing consumer demands, how does a retailer know which order fulfillment model is best for them?
The answer, of course, will depend on the particular scope and abilities of the business. Finding the right solution starts with understanding each option and asking the right questions about the goals and vision of your brand.
Dropshipping vs. Warehouse Fulfillment
When it comes to fulfillment, retailers have a wide variety of choices. And the way you operate impacts everything from budgets to the end relationship with the customer. Therefore, it’s an important decision. Let’s begin with defining the differences between dropshipping and order fulfillment from a warehouse.
Dropshipping is when a supplier ships a product directly to a customer on behalf of a retailer. The benefit here for retailers is they can expand their product offerings without the need for expanding the amount of inventory they carry in-store.
When a retailer fulfills orders from a warehouse, they buy in bulk and house the inventory in their own warehouse and ship orders from there. Retailers are then responsible for the entire lot of inventory they buy and plan to sell. (This can lead to the excess of inventory many retailers are seeing today.)
Which Shipping Strategy Makes Sense?
In order to determine what type of order fulfillment method to use, it’s important to begin with a clear picture of broader objectives by asking — and answering — a series of questions.
1. How much capital do you have to invest?
Smaller, newer businesses or those looking to keep operating costs low for any reason naturally have less cash upfront to put into the company. Dropshipping requires much less overhead, because you aren’t purchasing products until they’re already sold and you don’t need to pay to store inventory through renting or purchasing warehouse space.
2. How many different products do you intend to sell?
Retailers specializing in a few unique products will likely look to the warehouse fulfillment model. It’s generally less expensive to buy products in bulk at the outset, so this strategy may save money over time. On the other hand, dropshipping allows for more experimentation with a variety of products, as you can list and market products without committing to a large purchase.
3. How much control do you want over the process?
Purchasing inventory and housing it in a warehouse offers business owners a lot more flexibility and oversight. You control the volume, timeline and back-end fulfillment process. You can also inspect products and make decisions about what to carry based on your personal experience. While dropshipping offers many advantages, including the ability to scale seamlessly, supply chain disruptions or quality issues that may arise leave a retailer at the mercy of the manufacturer.
4. How established is your business?
If you already have an established customer base and you know which types of products they’re interested in, it’s less risky to buy products in bulk. If you’re just starting out, a drop-shipping model gives you more freedom to test products and change up offerings often while monitoring purchase volume and consumer feedback.
Whether you choose dropshipping or warehouse fulfillment, the logistics and data management can be complicated. Therefore, it may make sense to work with a partner that specializes in electronic data interchange (EDI) and logistics. Outsourcing may seem cost prohibitive on its face, but in practice relying on experts can save money, time and energy in the long run. A logistics partner can bring down shipping costs and improve customer service, provide more flexibility and help with the planning process.
Retail strategy may be constantly evolving, but if you do your research, start from a place of clarity about your business, and find the right tools, the choice between dropshipping and warehouse fulfillment becomes much clearer.
Archie Black is the CEO of SPS Commerce, where he has led the company to become a recognized leader in retail cloud services with the industry’s largest retail network.
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