While it may seem confusing at first, dropshipping is pretty simple to understand. In this fulfillment process, the online seller puts their merchandise on sale, which has neither been bought by the seller nor put into inventory and partners up with a manufacturer who will deliver these products directly to customers. In other words, they outsource while simultaneously cutting out all the usual middlemen. This can be rather beneficial for budgets upfront as business owners don’t have to funnel money into holding inventory, but manufacturers benefit in the long run from this arrangement as they charge the seller a higher wholesale cost for the merchandise in exchange for filling orders rather than shipping to the wholesale seller. The eCommerce seller then handles the marketing and provides customer service, rather than product warehousing or distribution.
At the end of the day, this method might be a great form of logistics for those who lack enough assets to purchase their inventory or simply do not want to invest and get into the hassle of storage and fulfillment. This often translates into high efficiency, although it certainly isn’t the best route for all businesses. Like any other option, it has several pros and cons attached to it. For example:
- Helps start and run a business with less capital.
- Grants you further freedom to test products.
- You can expand SKU breadth.
- It allows for higher risk, the higher payoff on untested products.
- Dropshipping can be slow and expensive depending on your business’ situation.
- Can offer limited profits.
- It grants less control over the availability of products.
Third-party fulfillment is kind of what you’d expect from the name. Essentially an outsourced fulfillment plan where you engage a service company to store goods, collect and pack orders, and tackle the logistics of shipping to customers on your behalf, 3PL allows for less stress and in-house involvement while lowering shipping costs and improving delivery efficiency. Still confused? Well, practically this looks like the seller purchasing inventory in bulk and making an agreement with a warehouse to tackle the hassle of all other aspects of order fulfillment.
This makes it a preferable option for sellers not wanting to lose inventory even when they don’t have their own warehouses. All the e-Commerce seller has to do then is display the products online and contact the fulfillment company to finish order processing once customers click “buy.” The 3PL provider will do all the rest of the work collecting, packaging, and delivering the product, making it a good choice for those who have the funds for inventory maintenance but who don’t want to do everything in-house. As with drop shipping, though, it works for some and not for others. Some of the pros and cons include:
- Allows for direct involvement in your own inventory.
- It offers shorter shipping times.
- Storage expenses are variable, potentially offering major savings in the long term.
- Can sometimes limit available product lines.
- Directly ties your capital to your inventory.
- 3PL takes care of fulfillment, but still leaves all the inventory responsibility on you.
It must be made clear that both drop shipping and third-party fulfillment have the capability to enhance your business but in different ways. They each have their positives and negatives that you need to consider before making a decision either way. Every business is different, so every logistics option will work differently for you as well. What might work for one will work terribly for another. Take a good, hard look at your business’ needs and your outsourcing preferences, though, and you’re sure to make the right choice.