Drop Shipping vs. Carrying Inventory: Which is Best?

Date posted: November 21, 2017

By Michael Zhou

Online retail sales are continuing to climb in many areas of the world, with India seeing one of the biggest increases in the past few years, growing tenfold since 2009, from 3.8 billion USD to 38 billion USD within seven years. While this is good news for companies in the e-commerce industry, it also presents this set of business owners with one more decision. Should they drop ship or carry inventory? To answer this question first requires that one understands what each one is.

Drop Shipping & Carrying Inventory Explained

Drop shipping occurs when, upon receiving a customer order, the company receiving it contacts a third party supplier and has them send the item or items to the customer directly. In this case, the initial company that received the order acts more of a go-between for the customer and supplier. As such, it doesn’t have to keep any inventory on hand as that responsibility falls squarely on the shoulders of the supplier itself.

Carrying inventory is another alternative. In this case, once the company receives an order, they take the requested item or items from their shelves and send them to the customer themselves. In this case, there is no third party involved as the customer receives their order directly from the online business they’ve ordered from.

Advantages of Drop Shipping

Both options have their advantages. For instance, one major advantage of drop shipping is that, in addition to reducing the need for space to hold what is usually a large inventory, it also reduces the amount of capital a new e-commerce business needs before opening up shop. There are no products to buy, so no money is needed up front to cover this specific cost. It also eliminates the need for the purchase of an inventory management system, an expense that can easily cost tens of thousands and is money that a new business doesn’t necessarily have or doesn’t want to spend.

Other benefits of drop shipping include having the ability to set product price independent of the price set by the supplier (which means more profit) as well as having access to a larger, more expansive product line. Drop shipping also reduces a company’s financial risk because there is no concern of ordering products that never sell and having them take up valuable shelf space, or selling them at a loss just to get them out the door.

Advantages of Carrying Inventory

So why would a company choose to carry inventory? If the company is the manufacturer of the products as well as the seller, then carrying their own inventory makes the most sense. Additionally, even if they’re not the actual product manufacturers, some companies prefer to have their own inventory on hand so they have reduced lead time, which refers to the amount of time between the order being placed by the customer and received.

Another benefit of carrying inventory is that it provides companies with greater control over shipping options. For instance, if a company pays a supplier to ship products to their customers, it’s largely up to the supplier which shipping method they choose. This means that, ultimately, they determine the cost of the shipping as well as the reliability and quality of the shipper.

Some companies prefer to retain this control so they can choose their own shipping company. This enables them to select one that provides a reasonable cost for this service without sacrificing quality of delivery. This can be extremely important as, if a customer isn’t happy with the way a product has arrived at their door, they may choose to not order from that company in the future.

Deciding which is best

In the end, there are several factors that would influence whether drop shipping or carrying inventory is best for an individual company. Among them are: the amount of space available for inventory storage, the amount of capital on hand to handle inventory-related issues (storage, inventory management systems, etc.), and the level of control a company wishes to retain in relation to issues such as inventory control and shipping methods.

Individually, each one of these is an important consideration. However, together, the accumulated answers will determine which option is best for an individual company as there is no “one size fits all” solution to this particular question.

Michael Zhou is a Senior VP of Business Intelligence Development and has assisted the Fortune 1000 company with expertise in the web as a whole, including ground-zero marketing efforts that benefit both consumer and vendor. He is also contributor on Esprittoday.

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