Drop shipping is a supply chain management technique. The goods are not kept in stock by the retailer. However, the retailer transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. Basically, in the drop shipping arrangement, the middleman between the manufacturer and the customer is the retailer. The profit of the middleman (retailer) in the transaction guided by drop shipping agreement is the difference between the wholesale and retail price of the products sold.
The arrangement of drop shipping is particularly beneficial to smaller retail shops, internet-only storefronts and shops using catalogs for sales. This is so because customers of these outlets don't mind a slight delay between ordering and actual delivery of the product. The following is an example of how the arrangement works: A representative product may be displayed on the store's shelves or pictured in its catalog. However, the actual product purchased may not be present in the store. It can be in the factory's warehouse situated hundred miles away. An excellent example of the same is offered by the online auction sites like eBay.
As any other arrangement, drop shipping comes with benefits and costs. The benefits are no upfront inventory to purchase, a positive cash flow cycle, reduction in total inventory management and shipping costs. The costs of this supply chain management technique are the back ordering possibilities. Back ordering occurs when a seller places a shipment request with a wholesaler, but the product is sold out. The latest emerging trend in the drop ship business is private label drop shipping. The manufacturer produces a customized item for a retailer and drop ships it. The range of private label drop shipped items varies from key chains and t-shirts with custom logos to personalized pictures.
