Understanding dropshipping and inventory management

27 July 2023
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Dropshipping has been around for decades, but with the rise of online shopping and the ease with which businesses can market online and on social media, it has grown exponentially in recent years. While there are many things to consider before you dive in, one of the most important is ensuring you're using the best inventory management system for dropshipping.

The popularity of e-commerce has revolutionised the way businesses operate today. Easy access to shopping online has given businesses unprecedented opportunities to reach a global customer base. While it may be easy to get a sale from a customer on the other side of the world, shipping the product to them can be a little less efficient. One of the most innovative and popular models for e-commerce businesses is dropshipping.

What is dropshipping?

Dropshipping is a sales method where a store doesn't physically stock the products it sells. Instead, when the store sells a product, it purchases the item from a third party, such as a manufacturer or wholesaler, who then ships it directly to the customer. The store doesn't have to hold stock, handle inventory management or order fulfilment. In this process, the retailer is essentially a middleman between the buyer and the supplier.

How does dropshipping work with my inventory management system?

The normal process of uploading every product on your website into your stock management system isn't necessary with the dropshipping model because you don't physically hold the stock. Instead, you only need to upload the product when the order comes in.

What are the benefits of dropshipping?

When comparing dropshipping with traditional retail, there are several advantages, including low startup costs, minimal risk, and the ability to sell a wide range of products without the need for inventory management. However, it also has its challenges, such as fierce competition, reliance on suppliers for product quality and potential issues with shipping times and order fulfilment.

The advantages of dropshipping

Reduced stock on hand: One of the key advantages of dropshipping is reduced assets tied up in stock. Traditional retail models require substantial investment in inventory, warehousing, and logistics. With dropshipping, you can reduce the upfront investment and stock storage costs.

Wide product selection: Since you don't need to pre-purchase inventory, dropshipping allows you to offer a vast range of products to your customers. You can quickly add new items to your store without worrying about storage space or inventory management.

Reduced freight costs: Orders are shipped direct from the supplier to the customer, removing the transport costs incurred in shipping to the store.

Reduced risk: With traditional retail models, there's always a risk of being stuck with unsold inventory. In dropshipping, you eliminate this risk because you only purchase the product after you've received an order from a customer. This "pay as you go" model minimises financial risks and allows you to focus on marketing and customer acquisition.

However, there are some downsides to dropshipping, and it's worth exploring these before you jump in.

The disadvantages of dropshipping

Lower profit margins: While dropshipping provides convenience and low upfront costs, it often comes with lower profit margins than traditional retail models. Since you're acting as a middleman, the products you sell may have lower markups, as the manufacturer or wholesaler takes a share of the profits.

Inventory and supplier management: While you don't have to worry about managing inventory physically, you still need to manage your relationships with suppliers. Finding reliable suppliers who can fulfil orders promptly and maintain product quality is crucial. Building a strong network of suppliers can be time-consuming and requires ongoing communication and coordination.

Limited control over shipping and fulfilment: When you rely on third-party suppliers to handle shipping and fulfilment, you have less control over the entire process. Any delays or errors in shipment can directly impact customer satisfaction, and resolving these issues may require coordination with multiple parties.

How to manage dropshipping in inventory management software

Inventory management systems such as CIN7Core or Unleashed allow you to configure your system so the product is created when it is brought through your e-commerce platform. Instead of having to upload the thousands of products that the supplier stocks into your inventory system, you only need to enter it when there is a sale. This is a marked shift from how a stock system is typically configured, where it is necessary to enter every product you stock.

It's important to weigh up the pros and cons of the dropshipping model before venturing in. A critical aspect is how your inventory management system can handle dropship inventory. If you'd like to know if your inventory management system can handle dropshipping, get in touch today.

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