The "new" technology Macy's is betting on is drop shipping, a little-known e-commerce supply chain hack that has retailers investing millions, and that most people outside the industry know nothing about.
So what is drop shipping, exactly?
According to the Merriam-Webster dictionary, drop shipping is defined as a method to "ship goods from a manufacturer or wholesaler directly to a customer instead of to the retailer who took the order." In other words, rather than buying a product in bulk and hoping it sells, retailers can list a certain item on their site and begin selling it without immediate inventory risk.
Drop shipping and inventory distortion
Drop shipping is not really "new" and has actually been around for years, but the practice is now more widely adopted and seen by economists as the logical solution to inventory distortion.
Inventory distortion has cost retailers an estimated $818 billion annually, and is predicted to increase by $50 billion each year. With nearly 12-digit losses year-over-year, it's no surprise retailers are looking for ways to eliminate the issue.
Drop shipping has become the best solution for a world dominated by e-commerce: no longer do retailers need to physically hold every piece of product that may or may not sell. It's an industry trend with massive growth and increasing adoption by major retailers and brands across the world.
Why drop shipping might make sense for you
To date, many retailers have been hit hard by Amazon as customers continue to flock to its site to purchase books, home goods, clothing and millions of other items at lower prices than can be found in traditional department stores. In response, a lot of struggling retailers are taking steps to increase their relevance, diversify their goods and evolve as an e-commerce player.
If you are looking to expand into the e-commerce space but are afraid to invest thousands of dollars in inventory up front, drop shipping might make sense for you.
A drop-shipping program gives retailers the ability to offer more varieties of sizes and unique items that would have otherwise gone unsold in physical stores. It also gives retailers the flexibility to test out the product's popularity with customers without taking on the associated inventory risk. Finally, because retailers don't have to wait for bulk shipments from suppliers in order to have items in stock, drop shipping provides convenience and often faster delivery for customers (especially since there is often a fulfillment center closer to the shipping address than a retailer's warehouse).
Implementing a drop-shipping program in your retail company
There are a few steps retailers need to look into before starting their drop-shipping program:
- First, what products will interest your customers, but aren't practical to stock in your physical store? For example, longtail inventory as well as large and bulky items are especially suitable for drop shipping. Even big name retailers such as Pier 1 have started drop-shipping operations to offer their customers more options and keep them engaged with the brand.
- Second, identifying products that will add value for your customers is vital to your success, but finding a reliable supply partner requires a bit more work. Suppliers often come with their own costs and cuts associated with drop shipping for a retailer. Make sure every supplier that you work with has the same level of commitment to quality and dependability.
- Finally, after identifying a reliable trading partner to drop ship your chosen products, the next step is to choose and implement the right technology for integrating your order data with theirs. Finding a solution provider that fits your budget and allows you to exchange information with your suppliers without exorbitant data fees takes commitment and research. It will, however, be an important backbone of your drop shipping program, so take your time in choosing a solution that fits.
Jeremy Hanks is CEO of Dsco, drop-shipping B2B integration and data exchange platform.