Analysis

Opinion: Calling time on the retail supply chain

Frank Poore, CEO and founder of CommerceHub, explains why he believes that drop shipping is the future of retail and can help retailers meet the expectations of today’s shoppers.

To be competitive in this Amazon dominated retail environment demands better range, lower supply chain costs and improved customer service – a model which is not likely to be achieved with today’s complex and expensive supply chain. Yet some retailers continue to delay the adoption of one of the only cost-effective models now available – drop ship supply – citing a loss of control and fear of jeopardising customer experience.

Unfortunately, those retailers that have attempted drop shipping have typically lacked commitment and vision to fully embrace the model. Reliant on cobbled together legacy systems they have failed to achieve the end-to-end visibility and service model required to ensure consistent supplier performance and customer experience. Furthermore, by embracing drop shipping for only a fraction of overall product range, retailers have lost the opportunity to rationalise the supply chain and minimise the fixed cost burden.

Truly embracing drop shipping, however, can be transformative. With the right controls and end to end visibility, retailers can rapidly scale up drop ship suppliers and scale down supply chains – extending range while reducing costs and improving customer service.

Failing model

It is over 20 years since Amazon was founded and traditional retailers are increasingly failing to retain market share – or, in many cases, even survive. The online giant achieved £6.3 billion in annual sales last year and, in a difficult market, a significant proportion of that revenue was derived from the competition.  From homeware to fashion, groceries to, most recently, car parts, Amazon’s reach continues to expand. For retailers with a high cost fixed infrastructure, this shrinking market share means higher cost per unit sold and ever greater pressure on margins.

For all but the most niche retailers with a very specific, high value, high margin offer, the logistics of retailing are increasingly not stacking up. From product range to pricing, customer service to brand value, retailers recognise the need for a better model, one that expands the range on offer while driving down supply chain costs and ensuring the highest possible customer service levels.

The concept of drop shipping – where the supplier ships direct to the customer rather than to the retailer’s distribution centre – is clearly compelling. It offers retailers the chance to reduce the number of distribution centres, minimise logistics costs and massively expand the range on offer. Yet to date many retailers continue to delay their adoption of drop shipping and, as a result, continue to struggle with an outdated, unprofitable approach.

Lack of commitment

One of the problems with retailers’ attempts at drop shipping has been a typically tentative approach; relying on attempts to manage this process using legacy technology, rather than investing in specific drop ship solutions, has demanded a massive manual effort. From supplier on-boarding to quality control and poor supply chain visibility, retailers have struggled with every aspect of the drop ship model. The result has been operational loss, reputational risk and a lack of retailer confidence. Drop ship may offer an extremely compelling retail business model, but done badly it also represents a business risk.

The truth is that successful drop shipping demands more control over the customer experience, not less, and that means imposing end to end visibility and control.  Retailers need a better way of on- boarding suppliers; improved processes for tracking every stage of order process through to dispatch and returns; real-time visibility into potential issues, backed up with alerts, and an ability to proactively intervene before a problem occurs that could impact the customer experience.

Having failed to realise the expected benefits of drop shipping in the past, many retailers are understandably wary of trying again. But the key is to embrace a proven drop ship model – a managed service approach that combines consultancy with providing technology to manage every stage of the process in line with the retailer’s desired customer journey.  Critically, a per transaction fee model  – rather than a massive technology investment – enables the retailer to move away from the burden of fixed cost logistics to one that scales in line with range expansion and increased revenue.

From streamlining the supplier on-boarding process to tracking Key Performance Indicators and enforcing Service Level Agreements, a managed service approach removes much of the time-consuming administrative burden. In addition, with real-time supply chain visibility and alerts, the retailer gets early warnings of potential issues, such as delivery delays, and can intervene at any point in order to safeguard the quality of the customer experience.

Done correctly, a retailer can quickly scale up from tens of suppliers to hundreds, without adding heads, achieving that essential product range expansion and increased revenue while delivering enhanced customer service.  The willingness to embrace this new way of working with significant numbers of suppliers enables a radical constriction of the supply chain – including closing distribution centres – delivering a significant reduction in fixed costs.

Conclusion

There is no doubt that many retailers have worked incredibly hard in a bid to retain market share and profitability in the face of incredibly agile online competition. But offering click and collect, free returns or other customer-facing solutions is often simply not enough to drive increased demand and meet customer expectations. Declining sales and shrinking margins will continue to plague the industry. Unless retailers adopt a different approach.

Today Amazon sells over 480 million different products and its expansion into new categories continues. In the face of this phenomenally successful competition, the rest of the retail market needs to accept that innovation is necessary – traditional supply chain models no longer work. Drop shipping is one of the only ways to offer the expanded range and excellent service levels customers expect within an affordable business model.  The key is to find a drop shipping solution that can be quickly and effectively deployed.

Frank Poore, is CEO and founder of CommerceHub

 

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