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Drop Shipping Costs versus Bulk Shipping Costs – They Should Be Similar

Wise financial managers have long resisted entering the drop ship business.  After all, it’s much more profitable to process a large LTL, truckload or container order than it is to process one order, one item at a time.  The economies of scale are enormous in bulk shipping!  Let’s take one example of bulk shipping versus drop shipping:

                              Bulk Shipping                                           Drop Shipping

                        1 order worth $40,000                           2,000 orders worth $20 each

                    Order Processing Cost of $4                Order Processing Cost of $4 each

                      Shipping Time of 2 Weeks                           Shipping Time of 2 Days

                    1 Clerk, 1 PC and 1 Desk                           8 Clerks, 8 PCs and 8 Desks

                    2+ EDI Transaction Charges              4,000+ EDI Transaction Charges

It’s pretty clear that Bulk Shipping is more profitable, right?  But does it have to be?  Not really.  What if drop shipping looked like this, instead?

                                                                     Drop Shipping with OPAL

                                                                   2,000 orders worth $20 each

                                                         Order Processing Cost of 40 cents each

                                                                     Shipping Time of 2 days

                                                                   1 Clerk, 1 PC and 1 Desk

                                                                 Zero EDI Transaction Charges

Makes a pretty substantial difference don’t you think?  And it certainly opens up a lot of new markets for your products.  But what about 3PL picking and packing costs?  Certainly these would increase when drop shipping wouldn’t they?  After all there’s more handling.  Potentially, but these can be overcome as well.  When using a 3PL, all successful drop ship suppliers have renegotiated pick and packing charges with their warehouse provider.  In addition, they often eliminate the cost of their 3PL’s Warehouse Management System by providing them with the Picklist, Packing Slips and Shipping Labels that are needed for processing, simplifying the process and reducing the cost.    

This is what OPAL gives you:  1) Efficiency – process a drop ship order in less than 8 seconds without touching a keyboard, 24 hours per day, 7 days per week, 2) Simplicity in warehouse management, providing your 3PL(s) with pick lists, customized 3rd party shipping labels and packing slips at their fingertips, and 3) No EDI Charges – execute all of your EDI transactions without manual intervention or transaction cost.

Why Big Retailers Want You to Drop Ship – and Why It’s a Good Thing

You know that big box retailers like Walmart, Sears, Target, Kohl’s, Kmart, etc., etc. are expanding their presence in the e-commerce world as a means to compete more effectively against more agile e-retailers.  So what advantages do big retailers really get out of making you drop ship?

First, no cost. Retailers don’t need to spend a single extra penny when utilizing drop shipping. All they need to do is get permission to resell your products. 

Second, convenient transactions. Retailers ask the customer to fill out an order form and then submit it to you for sorting and fulfillment. The money will be sent to the retailer who in turn pays you, the supplier. 

Third, abundance of suppliers. Retailers can opt to have as many suppliers as they desire and they don’t have to limit themselves to only one brand. 

Fourth, free storage. With drop shipping, retailers don’t have to worry about having a large warehouse to store products. All they need is a constant connection with prospective customers and, of course, to suppliers for price and availability updates.  

Fifth, effortlessness. Drop shipping is effortless. The retailer does not have to lift a finger or put any extra effort towards handling items. All they need to do is convince their audience to purchase their products. 

While this is great for retailers, there are also advantages to the suppliers working with them as drop ship vendors (DSV).

One of the biggest advantages is your risk as a supplier can be spread across MANY retailers as opposed to big box programs that can end without notice at any time leaving you with unsold inventory and a huge financial loss.

Another advantage is better margins.  In typical big box brick and mortar fulfillment you can get beat down on price with the expectation of making it up in volume.  Unfortunately, that rarely if ever happens – you end up taking lower margins due to allowances.

Lastly, online shopping is a powerful and lucrative force that allows you to be agile and react quickly to market demands, to observe changes and gain a better sense of real-time demand for product making inventory forecasting easier.

Yes, there are still the challenges of managing the internal cost components and complexities of a small drop ship order as compared to a much more lucrative and relatively simple pallet shipment.  However, there are inexpensive tools that drive errors and most of this cost out of the order process.  One example is OPAL. In less than 8 seconds, OPAL automates receiving an order from a retailer, manages all EDI transactions without the cost of a 3rd party EDI provider, processes and invoices the order through your ERP and accounting system, and creates a packing slip and custom branded 3rd party shipping label per any retailer’s requirement.  Once the order is shipped, OPAL also sends back tracking information and the invoice to the retailer, as well as tracking the package and sending inventory updates to the retailer.  So you really can reap the rewards of being a drop shipper vendor.