Drop shipping is a solution for selling online without having to manage stock. Adopted by numerous e-commerce sites, this business model entails outsourcing stock management directly to suppliers. To prevent nasty surprises and continually ensure a good match between demand and the available stock, it nevertheless requires putting transparency and agility at the heart of the relationship between the distributor and the supplier.  

Drop shipping or outsourced stock management

Imported from the United States, drop shipping is a form of direct delivery. In a nutshell, it enables e-commerce websites to sell online products that they do not hold in stock. The commercial sites are therefore positioned as simple intermediaries between the customer and the supplier, who prepares the order and organises the delivery. This model is today offered by numerous well-known global marketplaces but also a multitude of niche websites.  

Drop shipping therefore enables e-traders to offer a very extensive catalogue of numerous products without having to worry about logistics. They are responsible for ensuring that the products offered for sale are clearly visible. In this regard, the effectiveness of the digital marketing implemented by e-commerce sites is an intrinsic part of the success of drop shipping. If managed well, drop shipping also enables e-commerce sites to continually have positive working capital, as the order is only placed with the supplier once the sale has been executed with the end customer. 

The distributor – supplier collaboration, a key factor for success

However efficient it might be, marketing alone is not sufficient to guarantee the success of drop shipping. The products sold still have to be delivered on time and in a good condition. Otherwise, the dissatisfied customer will come back to the distributor – to be precise the e-commerce site – rather than the supplier.  

The choice of supplier is therefore fundamental. The supplier must, of course, offer high-quality products but also guarantee their availability and deliver them under optimal conditions. Collaboration between the two partners – the supplier and the distributor – is therefore critical. They both have to maintain a constant relationship so that, on the one hand, the stock position can be continually adjusted in line with the online demand and, on the other hand, the catalogue of products offered for sale can be updated according to the number of products available on the supplier’s side.  

The overall balance of the model and, as a consequence, the success of drop shipping therefore depends on the quality of the exchange between the distributor and the supplier. To achieve this the digitalisation and automation of the supply chain, from receipt of the online order through to the final delivery, are undoubtedly key factors for success. They influence the quality of the interface between the supplier and the distributor but also the satisfaction of the end customer.  

Stock management is key

Even though drop shipping is based on stock outsourcing, the e-traders most interested in this strategic aspect of their business are also those who will benefit the most from it. It is therefore essential that the relationships with their suppliers guarantee regular turn-over of the available products and warnings are issued if there are potential stock shortages or dormant stocks.  

From this point of view, even a limited understanding of the main techniques of stock management constitutes a real competitive advantage. For example, note that two approaches can be considered: 

Stock management linked to inflows 

  • Replenishment after orders prevents too much stock and dormant stocks. However, it does not make it possible to anticipate peaks in activity and prevent stock shortages. 
  • Replenishment on a calendar basis is based on the automation of orders on a specified date. It draws on data provided by the supplier and must be continuously adjusted. 
  • Demand projection is centred on minimum stock and supply management based on market analysis and trends. This method therefore requires anticipating expected sales volumes. 
  • The just in time method rejects the idea of minimum stock. The available stock volume primarily depends on demand. The risk is a lack of ability to react if there is an unforeseeable rise in demand. The shortage of masks last March perfectly illustrated the limits of this strategy. 
  • Stock replenishment entails automatically filling up stock once its maximum threshold has not been reached. 
  • Conversely, the order point method aims to automatically replenish stock once the minimum threshold has been reached. 

Stock management linked to outflows 

  • The FIFO (“First In First Out”) method considers the chronology in which the products came into stock. The first products stored are also the first ones sold. This method is essentially applied to perishable items and can be adapted to food e-retail or meal deliveries. 
  • The FEFO (“First Expired First Out”) method entails selling the product with the earliest expiry date. 
  • The LIFO (“Last In First out”) method is based on a principle of reverse chronology as it aims to take from stock the last product to arrive. Particularly suitable for the drop shipping model, it facilitates operational tasks and optimises the processing time.