Dropshipping, renting of a warehouse or fulfilment? When we consider the issues related to setting up an online shop and conducting mail selling, we should include how to solve the basic problem related to shipping our goods in the best and most convenient way possible. The reason is that this is a key factor that exerts a huge influence on achieving successful sales and the positive perception of our brand.
Nowadays, setting up a shop, designing a website and acquiring customers has become one of the easiest aspects of conducting sales activities. There are dozens of shop systems enabling us to create and set up a fully functional online shop. Additionally, if we know a little bit about positioning, or at least about Google Adwords, we may soon expect to attract our first customer. Even if we do not want to build a shop on our own, there are many places like Allegro, for example, that enable us to achieve successful sales. Finally, whichever route we choose, we will have customers starting to place orders with our shop. What should we do then? How can we execute these orders?
The next task is to seek ways to delegate these warehouse-related tasks to somebody else. We may obviously create our own legitimate warehouse, build it up, employ people to work there etc. Unfortunately, during the first few months of a shop’s existence, we usually reach a point where we are not able to manage the warehouse work on our own while the creation of a real warehouse from scratch is not a necessity yet, and thus unprofitable.
Luckily, there are many other possibilities. These alternatives, which are described below, will help us to get through the most difficult period of developing our commercial activity without the need to invest excessive financial means.
Dropshipping is a service dedicated mainly to people who supply themselves from huge warehouses. An increasing number of warehouses include this kind of service in what they offer, but how does it work? Thanks to this type of service, as a shop owner we do not have to store all our goods on our premises. In many cases, we do not even see the goods that we offer to our customers. When we sell them, some or all of the goods are still in our supplier’s premises (e.g. in their warehouse). When our customer buys something from our shop, we buy it from the warehouse, from where it is shipped directly to our customer. As with any kind of solution regarding the organisation of shipping goods, dropshipping has its advantages and disadvantages:
ADVANTAGES of dropshipping:
- Dropshipping minimises the costs and investments related to establishing a commercial activity as no funds are required in advance in order to purchase the goods. We only buy the goods when we have a guarantee that they will be sold (because they have already been ordered by a customer).
- Dropshipping eliminates the need to perform the work of a warehouse as it is conducted by our supplier, i.e. their warehouse.
- Dropshipping shortens the time for order execution as the goods are shipped from the warehouse directly to the customer, excluding the seller/shop.
DISADVANTAGES of dropshipping:
- Dropshipping requires a lot of confidence in the warehouse responsible for the shipments. As a seller we have no control over the order execution process. We exert almost no influence over when the goods are to be shipped, in what manner they will be packed etc.
- As part of dropshipping, we allow the warehouse to exert significant influence on our reputation and brand. This arises from the fact that the goods that we offer to our customers are not available to us. We do our business exclusively on the basis of the knowledge that the goods should be available in the warehouse. However, we have no impact on the methodology used to store the goods in the warehouse, the level of stock on hand or the speed of replenishing stock in the case of shortages. This means that if we sell goods that are not in stock, then we have to face the consequences in terms of claims as the customer does not have to know how an online shop operates. The only thing that they know is that they have ordered the goods and that they have not received them yet, or that they have received them after a delay.
2. Renting a warehouse
By renting a warehouse, or at least renting some warehouse space, we obtain a set amount of space in a warehouse building where we can store our goods and perform all warehouse-related tasks. It is almost like we possess our own warehouse, the basic difference being that the costs are lower than the initial investment required to construct a warehouse. However, it does not undermine the fact that we still have to employ people, train them and manage their work. Additionally, contrary to dropshipping, we must organise the supply and shipment of our goods on our own.
This means that, apart from the costs of the warehouse, we also have to fill it with goods, which in turn means that it is necessary to invest in stock and to manage its rotation. Therefore, this does not differ that much from the independent management of a warehouse. It does require a thorough knowledge of new fields, e.g. the supply, organisation, and tools related to warehouse operations (Warehouse Management Systems, warehouse equipment etc.) as well as the day-to-day management of warehouse operations.
ADVANTAGES of renting a warehouse:
- significantly better control over the level of stock on hand and the process of order execution than in the case of dropshipping; here the warehouse is “ours”. We are responsible for the goods which will be stored in it and for the manner in which they will be shipped. Therefore, we have full control over those elements which influence the buyer’s opinion about our shop.
DISADVANTAGES of renting a warehouse:
- the need to invest in the warehouse, employ people and equipment etc.,
- the need to maintain stock and manage the supply,
- the need to supervise and manage the work of the warehouse,
- the need to negotiate contracts with courier companies etc.
Purchasing a fulfilment service is a third alternative. Fulfilment means renting warehouse space along with full service, i.e. with the requisite warehouse staff, ready solutions facilitating performance of the work of the warehouse, and sometimes even a range of courier services. Generally we rent not only some space in the warehouse but also an entire, functioning warehouse operation, where we only need to place the goods. As the shop owner we only have to manage the supply and commission the execution of our orders. We do not have to go into operational details with regard to the work of the warehouse (how many people should be employed, how to organise the work etc.).
ADVANTAGES of fulfillment:
- Fulfilment ensures full warehouse services without the need to invest in a warehouse or to employ people.
- Fulfilment gives us control over the quality of the work of the warehouse (packaging and shipment of packages) comparable to the management of our own warehouse (i.e. we can make decisions concerning every aspect of order execution, deadlines and manner of shipment, or even about how to pack the goods) without the need to possess specialist knowledge regarding warehouse management.
- Warehouses providing fulfilment services are usually equipped with all the tools facilitating the speed and quality of work (Warehouse Management Systems, code readers, warehouse equipment etc.).
- Fulfilment services are usually settled based on monthly periods, on the basis of the actual usage of the warehouse space and the amount of commissioned work (e.g. the quantity of executed orders). Thus, the commencement of work does not require any financial outlays while the cost of the service is scaled on the basis of the shop’s increasing sales. This means that each incurred cost is covered by the increasing sales.
- Fulfilment usually means that optimisation of the warehouse organisation is higher than achievable for independent management. We buy the service we require, and have it provided by people who have more experience than a beginner. Thanks to this, we may omit the stage of learning from our mistakes and instead use the knowledge and experience of a cooperating company.
DISADVANTAGES of fulfillment:
- Fulfilment does not exempt us from the obligation to manage the supply situation and monitor the rotation of stock.
- Similarly to dropshipping, fulfilment requires a lot of confidence in the company that we have entrusted with performing certain activities that exert direct influence on the perception of the quality of service among our customers.