What is Dropshipping?- The Concept

Dropshipping or DTC (Direct-to-Consumer) is a fulfillment method that enables retailers to deliver products directly to their customers. With this method, retailers do not have to worry about stocking products in their warehouse. Usually, they purchase the products from a third-party manufacturer and have them ship/ship them directly to their customers.

Most small companies start off with a small startup/or no investment at all and scale up by providing a unique value to their customers. A dropship model works great if you are thinking of starting an online business from your garage, have limited space and do not want to worry about upfront costs of stocking products.

Dropshipping supply chain concept has become popular during the pandemic because many people who lost their jobs and thought of starting their own business, could accomplish their goals of making money or running a side hustle. The dropshipping market is forecasted to grow to $461.1bn between 2021 and 2026. Solopreneurs were able to get on Amazon and sell their homemade products, home-stocked diapers, toilet papers, face masks etc. Small mortar and brick shops closed their physical shops and started online directly to their customers and made millions in revenue. Even large brands stood the test of the time when they had to pivot to an online DTC model and put more spending towards digital marketing to attract potential customers.

How Does Dropshipping Work?

1. Your customer makes a purchase on your online store which is created “as an order” in your ERP.

2. The “order” is now sent to your supplier to package the product and ship it to the customer

3. The supplier will package and ship it to the customer and will send you an invoice.

You are technically interfacing with your customer on the front-end and your supplier/manufacturer at the backend. You need to understand that you do not have a control over the inventory or how the packaging is done. This can be an advantage from a space and money saving perspective and a disadvantage because you cannot customize the look of your brand when it gets delivered. You will need to worry about marketing your products and how you can deliver good customer service to your customers.

Is Dropshipping Profitable?

Dropshipping is a profitable concept of distribution if you have a limited startup budget but have a differentiated product(s) in your portfolio to offer to your customers in the online ecommerce space. It is also important to consider that profits from dropshipping depend on the volume of transactions you are doing. The profit margins usually are lower as compared to the wholesale distribution model. You will need to sell more to see a considerable profit margin in your business.

Role of EDI in Streamlining Your Dropshipping Business

Order fulfilment process in the drop-ship model can be a complex process considering the of number of parties involved on the retailer and supplier side. EDI helps in automating the entire dropship process by facilitating a secure exchange of business documents, such as purchase orders, shipping notices and invoices.

Let’s look at the above dropshipping process from an EDI standpoint when you transmitting back and forth with your supplier.

1. Your customer makes a purchase on your online store which is created “as an order” in your ERP.

2. The “order” is now sent to your supplier to package the product and ship it to the customer

3. The supplier sends a Purchase Order Acknowledgement (EDI 855) back to confirm the receipt of the order.

4. The supplier prepares and ships the order to the customer and sends an Advance Ship Notice (EDI 856) with the shipment and tracking details to you so that you can share them with the customer.

5. The supplier also sends an Invoice (EDI 810) to you requesting a payment for the product sold.

A streamlined process like this one brings transparency to the whole business both sides and makes tracking any errors easy versus when you are communicating on paper or fax and paying staff to enter orders as they come in multiple systems.

If you are looking to use the dropshipping distribution model for your business, you should choose the right EDI solution that complements your internal infrastructure and overall business processes. It is important that the EDI solution you choose should be able to handle the volume of transactions your business requires to do with your trading partners and can integrate via different formats or APIs with your back-end systems.

Read the basic concepts of wholesale and dropshipping along with advantages and disadvantages for both and make your decision on which one is the best for your business.