Dropshipping, Warehouse Rental or Fulfilment?

When considering establishment of an online shop and mail-order sale, one should ponder what would be the best and most convenient solution to the fundamental problem of the dispatch of goods. This is a key aspect of business, which will greatly influence the success of the sale and the perception of the shop's brand.

In a way, setting up a shop, designing its website and acquiring customers have become some of the simpler aspects of conducting sales activities nowadays. There are dozens of shop systems that enable creation and launch of a fully functional online shop. Add a bit of knowledge of SEO or at least of operation of Google Adwords and that first customer can be expected to appear soon. And even if someone doesn't feel like building a shop on their own – there are many places, such as eBay, which enable efficient sales. Eventually, orders do begin to come. What then? How to process them?

Of course, putting together one's own makeshift warehouse is still the most commonly selected option. After all, one needs but some space for goods storage and some free time to package and dispatch goods on one's own. However, such an approach usually only works at the initial stage of the operation of an online shop. At some point, the number of orders is increasing so fast that the shop owner is faced with a much more difficult dilemma. The sheer number and intensity of warehouse operations take so much time that one begins to wonder whether one's still a shop owner, a seller or perhaps just a warehouseman.

That's when one begins to look for ways to hand over their warehouse duties and work to someone else. Of course, one can create their fully-fledged warehouse, erect a building, hire employees, etc. Unfortunately, in the first months of the existence of a shop, we usually first reach a point where we're no longer able to perform warehouse work on our own, but creation of a real warehouse from the ground up is still unnecessary and thus unprofitable.

Fortunately, there are many more options available. The options described below will help survive that hardest period in the development of a commercial business without the need to invest excessive funds.

1. Dropshipping

Dropshipping is a service aimed chiefly at people who get their supplies from large wholesale companies. It is included in the range of services of a growing number of wholesale companies. How does it work? Using dropshipping, a shop owner does not store all of the goods at ‘their place’. In many cases, the owner doesn't even own the goods they offer to their customers. At the time of sale, some or all of the goods are still at the supplier's (e.g. a wholesale company). When a customer buys goods at the shop, the seller purchases them at the wholesale company, from where they are dispatched directly to the customer. Just like all of the described solutions for the organisation of goods dispatch, dropshipping has its pros and cons:

PROS:

– dropshipping limits the costs and investments involved in opening a business to a minimum, as not even funds for purchasing the goods in advance are required. We purchase commercial articles only when they're guaranteed to sell (because a customer has already placed an order for them);
– dropshipping removes the need to perform warehouse work, as the entirety of that work is performed for us by our supplier, i.e. a wholesale company;
– dropshipping shortens the time required for processing of an order, as the goods are dispatched from the wholesale company directly to a customer, bypassing the seller/shop.

CONS:

– dropshipping requires a great deal of trust in the wholesale company which is going to handle the dispatching, for the seller almost completely loses control of the order processing. They have next to no influence on when the goods are going to be dispatched, how they're going to be packaged, etc;
– by using dropshipping, a seller also hands over to the wholesale company significant influence on their reputation and brand. This is because the seller offers for sale to their customers goods which the seller doesn't actually own. The seller only relies on their knowledge that the goods should be available at the wholesale company. However, they have no influence on the warehouse company's stock replenishment methodology, its inventory, or on the restocking speed in the event of a goods shortage. This means than if they sell goods that are currently not in stock of the wholesale company, all justified complaints are going to be addressed to the shop owner. After all, a customer doesn't have to care about how an online shop operates. They just know that they've ordered some goods and still haven't got them or got them late.

2. Warehouse Rental

Warehouse rental, or more precisely, warehouse storage area rental, is simply the rental of rooms in a warehouse, where we'll be able to store our goods and perform all warehouse operations. There is little difference compared to owning a warehouse. The fundamental difference is naturally that it costs less than the initial investment in the construction of a warehouse. However, this doesn't change the fact that we still need to hire employees, train them and manage their work. Moreover, as opposed to dropshipping, we need to organise the process of supply and dispatch of goods on our own. This means that in addition to the costs of the warehouse itself, we also need to fill it with goods, which necessitates investment in the stock itself and supervision of the rotation of said stock. Therefore, there is little difference compared to managing a warehouse on our own; this requires fluency in new fields of knowledge – supply, organisation of warehouse operations, familiarity with warehouse operation support tools (WMS, warehouse equipment, etc.) and ongoing management of the warehouse operations.

PROS:

– much better control over the stock levels and over the order processing than in the case of dropshipping. Here, the warehouse is ‘ours’ and we alone are responsible for which goods are going to be stored there and how they're going to be dispatched, thereby giving us full control over the elements that influence our reputation among buyers.

CONS:

– the need to invest in the warehouse, hire employees, equipment, etc.;
– the need to maintain stock levels and manage supply processes;
– the need to supervise and manage the warehouse operations;
– the need to negotiate contracts and agreements with courier companies, etc.

3. Fulfilment Services

The third option is to purchase a fulfilment service. Fulfilment means the rental of a warehouse storage area, but with full service, i.e. warehouse workers, ready-made solutions that facilitate the warehouse operation, and often also with a broad range of courier services. In broad terms, by using fulfilment, we rent not just some room in a warehouse, but an entire ready and working warehouse which we only need to fill with goods. As a shop owner, we only manage the supply process and commission the warehouse to process our orders, without needing to probe into any operational details of the warehouse work itself (how many people to hire, how to organise the work, etc.).

PROS:

– fulfilment provides full warehouse service without the need to invest in a warehouse or even to hire employees;
– fulfilment gives us control over the quality of the warehouse operation (packaging and dispatch of parcels) comparable to managing our own warehouse (i.e. we can decide upon any aspect of order processing, dates and methods of dispatch, or even how to package the goods) without the need to have any knowledge of warehouse management.

Usually, warehouses that provide fulfilment services are outfitted with all kinds of tools which improve the speed and quality of work (WMS, code readers, warehouse equipment, etc.);

– fulfilment services are usually settled on a monthly basis, based upon actual use of warehouse storage area and the number of works commissioned (e.g. number of orders processed). This enables commencement of the operations with no financial contributions and the cost of the service itself is scaled to the increasing sales at the shop. In other words, any cost borne is covered by the increasing sales.

Fulfilment usually means greater optimisation of the warehouse organisation than when we manage it on our own. As we purchase a service, it's nearly guaranteed to be provided by people with more experience than a novice seller has. This lets us bypass the ‘learn from own mistakes’ stage and take advantage of the knowledge and experience of our partner company.

CONS:

– fulfilment does not release us from the need to manage the supply process and to monitor the stock rotation;
– similarly to dropshipping, fulfilment requires a great deal of trust in the company which we entrust with the performance of activities that directly influence the perceived quality of service among our customers for us.