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Virtual Order Fulfillment: Key to Success or Path to Failure?
Swen Mehta
“Drop ship for huge profits!” “employ
a drop shipping wholesale company to work for you!” “Drop shipping
has opened the door to many e-commerce startups…” “Tap the power
of drop shipping!” “A low-risk way to build direct marketing
profits!” “No investment! No inventory!”
Current web come-ons from some wholesalers make drop shipping –
also known as virtual order fulfillment – sound like the greatest
thing that’s happened to retail since sliced bread. And the
prospect is mouth-watering. Consider this scenario: one
establishes a website and advertise products on it – anything from
sporting goods, books, or bath and body products to astronomy
equipment, software, home and garden décor, wedding supplies or
vitamins. When customers send in orders, system simply forward
them to wholesaler or distributor, who ships the orders directly
to customers’ homes with company’s label on them. You completely
avoid the enormous costs and risks involved in inventory,
warehousing, and fulfillment. It sounds too good to be true. Is
it?
For some e-tailers, drop shipping has actually proved the goldmine
it is touted to be. Forbes reported in February 2000 that the CD
retailer Spun.com avoided an $8 million investment in inventory by
using the fulfillment capabilities of wholesale distributor
Alliance Entertainment. Spun.com is still thriving, having
recently sold the business to Idealab, a major Internet incubator,
while retaining managerial control. In contrast, one of Spun’s
chief competitors, CDNow, which had its own inventory and
fulfillment, has gone bankrupt. Currently 30% of pure-play
Internet retailers use drop shipping as their primary order
fulfillment mechanism, and the trend is growing. If we look at
India scenario rediff.com can be taken as one of the examples of
successfully employing such practice.
But for others, virtual order fulfillment has contributed to their
downfall: According to an August 2000 article in the now-defunct
Industry Standard, when virtual retailer Value America declared
bankruptcy, it cited in part an inability to fill customer orders
from virtual stocks.
Of course, it can be hard to pinpoint what makes a company
collapse: Order fulfillment is one factor among many. But
according to Wharton professor of operations and information
management Serguei Netessine, “successful order fulfillment can
often make or break a company, especially an e-tailer”. It is the
virtual supply chain that decides whether an e-tailer will be in
business or not. In India Rediff.com and indiatimes .com have been
successful in imbibing this strategy and are thriving
“If you look at all the Internet retailers that died, many of them
blamed their [demise] on order fulfillment,” says Netessine,
adding that this has been the case whether a company used virtual
or traditional fulfillment. While Value America may have lost too
many customers because of drop shipping inadequacies, Webvan lost
all its cash by spending millions on warehouses.
If switching to the new virtual fulfillment system doesn’t work
for everybody, who does it work for? The research carried out by
Wharton school professors on, 54 publicly-traded Internet
retailers that sell a wide variety of consumer goods shows that
“that if an Internet company chooses its supply chain type
logically – if it’s aligned with its strategy, products, and
operating environment – it’s highly correlated with success,” . In
fact, it correlates much higher than other more commonly adopted
measures of financial performance. The research suggests that
“firms making irrational supply chain choices are twice as likely
to go bankrupt than those making rational choices.”
What can be the advantages of using a virtual supply chain ,one
may be able to provide customers wide variety of products ,one
stop solution for customer and for the e-tailer the advantage is
of : a greatly reduced investment in inventory and fulfillment;
savings on product handling and warehousing (because the
wholesaler can achieve economy of scale), and reduced
transportation costs, as the cost of shipping the item to the
retailer first is eliminated.
But there are also pitfalls. A wholesaler performing the service
of drop shipping may mark up products to between 10% and 15% of
the regular wholesale price, which might be unacceptable for some
retailers. The retailer may also experience problems with control
and service quality. Using a virtual fulfillment system also makes
a retailer more vulnerable to “rationing” by wholesalers.
Typically when wholesalers can’t meet product demand, they parcel
out products among retailers. While this can happen with both
traditional and virtual order fulfillment, it becomes more risky
for the retailer using the virtual structure because it holds no
safety stock of its own.
Encroachment on customers is a possibility, too, when retailers
share specific order information with wholesalers. The retailers
can directly ship product required by customer next time when he
requires the product. But it is a distant possibility for two
reasons first if one wholesaler does this with one retailer then
others may find this and may boycott wholesaler and second reason
is that it is difficult for a manufacturer to get into
distribution.
According to the research the drop shipping works best in
situations of:
• High demand volatility: When demand is highly variable – as for
example with “fashionable” items – retailers holding their own
inventory are at a high risk. Using a wholesale fulfillment
partner that serves multiple retailers out of the same stock can
help smooth out demand fluctuations. Fingerhut, the well-known
catalog retailer, provides this service for thousands of retail
clients.
• High product variety: Firms aiming to offer a wide range of
products might want to choose the virtual inventory structure. A
CD retailer who becomes a partner of Alliance Entertainment, for
example (as Spun.com did), can make available to its customers
Alliance’s entire inventory of over 200,000 different CD titles.
On the other hand, the traditional structure is probably better if
business has:
• A high need for order consolidation: Imagine, ordering groceries
online, then having 35 different packages arrive at customer’s
door. Product categories such as grocery strain the limits of what
drop-shipping can handle. (The exception is unless one can find a
shipper willing to consolidate orders from multiple drop-shippers:
UPS, for example, combines computers and monitors drop-shipped
from Dell and Sony into single orders for customers.)
• A lack of small-order fulfillment capabilities among
wholesalers: Some industries, such as the jewelry business, do not
have many wholesalers who are equipped to ship individual customer
orders.
Another major consideration simply boils down to whether company
is big or small, beginning or established. large retailers tend to
invest in their own capabilities. Younger companies that don’t
have the money to invest in fulfillment capabilities will try to
outsource fulfillment, do drop shipping, and be a virtual
storefront . But as a company becomes older, bigger, and increases
revenues, it might want to consider bringing fulfillment in-house
to increase profit margin. As it gets products cheaper from the
wholesaler.
So what is the choice if your business lies in between above said
range ,Hybrid arrangements are a possibility. For example
BlueLight.com stocks some of the most popular CD titles internally
while drop shipping others. A company with a traditional supply
chain can use drop shipping judiciously to enhance product
selection, or as a backup for delayed orders. Even the traditional
retailers can also benefit from virtual order fulfillment if they
decide their strategy consciously that which product to ship
directly or which through virtual order fulfillment.
As more manufacturers invest in drop shipping capabilities, the
picture may continue to shift. Amazon, which successfully uses a
traditional supply chain, began its business with drop shipping.
The company quickly discovered that existing wholesalers could not
meet its requirements for speed, transparency, and real-time order
data, and decided to create its own fulfillment system. But today
even Amazon – long famed for holding customer service close to the
vest – is using drop shipping for cell phones, computers, and
non-best-selling books, according to a recent CNET article. It
plans to strike more drop shipment deals in the future.
Whichever way retailers choose to go, opting for a virtual,
traditional, or hybrid inventory structure “is and will continue
to be a high-stakes decision where companies risk customer
loyalty, large investments, and ultimately market success.”
Some material copyright of the Wharton School of the University
of Pennsylvania, quoted here for information purpose only.
Swen Mehta
Student of PGDIM VIII
NITIE, Vihar Lake, Mumbai, 400 087
swen_mehta@im8.nitie.edu |
