When deciding on a shipping method for the distribution of orders, retailers must weigh the pros and cons of a drop-ship vs. a direct-ship model.
With 42% of shoppers expecting a 2-day shipping option, the pressure is on retailers to deliver the goods in record time.
Therefore, determining which method is best for your business is crucial. Understanding the advantages of each method can aid in this decision-making process.
Let’s see what the differences are.
What is dropship vs. direct ship?
First things first, let’s define what we’re talking about.
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third-party supplier that ships directly to the customer.
A report done by Grand View Research states that the dropshipping industry is expected to reach $557.9 billion by 2025.
On the other hand, direct shipping is when a retailer holds its own inventory and ships products directly to customers. This method of fulfillment bypasses the retailers brick and mortar stores if they have any.
Why choosing drop shipping vs. direct shipping is important
It’s important that leading retailers know when to use a drop ship vs. a direct ship option because the choice they make affects:
- Type of products offered
- Shipping costs
- Shipping speed
For example, drop shipping can have longer delivery times than direct shipping. The retailer needs to rely on a supplier to ship the products directly to the customer. This can add additional time to process and ship the order, which could result in longer delivery times for the customer.
On the other hand, choosing the direct shipping option may mean increased inventory storage and processing costs.
The choice between the two methods depends on your specific retail needs and goals.
Of course, there are pluses and minuses to both shipping options.
So, let’s dive into the pros and cons of each.
Pros and cons of dropshipping vs. direct shipping
As with many things, there is some good news and some bad news when it comes to working within these two fulfillment methods.
Pro: Low investment costs
Retailers will be able to:
- Save on purchasing inventory upfront.
- Save on storing expensive inventory in costly warehouses.
- Sell a wide range of products from third-party suppliers.
However, you miss out on one aspect that may be very important to you – control.
Con: Lack of control
The biggest issue is the lack of control over inventory and shipping.
You’re at the mercy of your suppliers, so if they run out of stock or have long shipping times, it’s going to reflect poorly on your business.
You’re also dependent on your suppliers to handle returns and exchanges, which can make the process much longer. Something consumers have little tolerance for.
Pro: More control
One of the biggest benefits of direct shipping is that you have more control over your inventory and shipping. You’re in charge, not your third-party supplier, of how much of a product you want to hold onto and when it gets shipped out.
You can offer faster shipping times like same-day shipping or next-day shipping, which consumers have come to expect since 33% of consumers have higher expectations for fast shipping post the 2020 arrival of the pandemic.
Con: Higher costs
Direct shipping requires you to invest in inventory upfront as well as warehouses to store it, which can be a significant expense.
You’ll also have to manage and maintain your inventory, which can be time-consuming, sometimes complicated, and will more than likely require you to invest in some type of inventory optimization software.
And of course, you’ll need to build relationships with logistics partners to handle the shipping process.
Which shipping option is right for you? Maybe both.
Choosing which shipping method is right for you depends on your retail business and what you’re looking to achieve.
A smaller retailer may be able to approach the question from a black-and-white perspective:
If you’re a retailer confident in your suppliers’ ability to maintain the volume of inventory you’ll need, you can work with their lead times, and if you’d prefer to forego the warehouse costs and management, then drop shipping may be your best bet.
Meanwhile, if you are a retailer who needs control over your inventory and can afford to house your inventory giving you full access at any time, then direct shipping may be your preference.
Here’s the thing though, as your retail business grows larger you are faced with the complexity and challenges of modern-day supply chains. To compete in today’s retail market most top omnichannel retailers use both shipping methods to best achieve their fulfillment goals.
Amazon – This global omnichannel retailer uses both drop shipping and direct shipping. It has a large number of third-party sellers on its platform who use drop shipping to fulfill orders, but it also has its own warehouses and inventory for products that it sells directly to customers.
Wayfair – This omnichannel retailer, selling furniture and home goods, benefits from both drop shipping and direct shipping. It has a large number of suppliers who drop ship products to Wayfair customers when they make a purchase, and it also has its own inventory and warehouses for certain commonly purchased products.
To determine the optimal fulfillment approach and stay competitive, an omnichannel retailer will need to consider a wide range of factors, such as:
- Storage cost/SKU/location
- Transportation cost/SKU/location
- Sales Demand/SKU/location
- Lead times and vendor relations
- Business limitations, goals, and trajectory
- The scale of distribution and consumer expectations
- ROI of chosen fulfillment approach
Finding a better approach for your business is easy. Finding the best approach may require a deeper analysis of your inventory demand.
Making the right choice: No one-size-fits-all
The nature of your retail business and the inventory you sell will affect whether you choose one shipping solution over the other, or some combination of the two.
Leading retailers such as Amazon and Wayfair were among the first to invest in advanced AI-driven analytics to meet the complex fulfillment needs of their businesses. These giants have redefined the retail fulfillment landscape.
When choosing a competitive fulfillment approach (whether you use drop-shipping, direct shipping, or a combination) start simple.
You’ll need to:
- Understand your business limitations and goals
- Weigh the fulfillment pros and cons
- Assess the optimal approach for your specific business
You can do this in-house or opt for a more advanced analytical look at your specific business needs.
After all is said and done, use the method(s) that best meet your order fulfillment demands and will facilitate the most growth for your retail business.
When you’re ready for a more in-depth look at how improving your fulfillment approach will tangibly benefit your business, reach out to one of our knowledgeable team members for a free demo.