The 4 Foundational Elements of a Drop Shipping Operation

By Logicbroker | June 26, 2020

For many, drop shipping is a no-brainer. Of course retailers want to expand their assortment and reduce their inventory. Of course brands want to expose new audiences to their products.

While the decision to implement a drop shipping system at your organization may be clear, less clear are the individual components you need to get started. How does a retailer connect to their supplier? How will returns be handled? What tools do you need to manage your data?

Drop shipping systems create new digital challenges to overcome, and if you’re just starting on this journey, these challenges can seem insurmountable. The reality, however, is that the digital challenges that drop shipping poses can be easily solved if you have four foundational elements in place:

  1. A connection broker
  2. A product data management tool
  3. A responsive method of managing inventory and pricing
  4. An adaptable order management system

Let’s dive into each in more detail.

Connection brokers

In any drop shipping system, there is a lot of data moving around. Product details need to be listed, inventory needs to be updated, orders need to be managed — even if your organization has a strong track record in technology adoption, managing the volume of connections between you and your drop-ship partner is still a challenge.

That’s where connection brokers come in. Connection brokerage services (such as those Logicbroker provides, among others) make it easier for retailers to onboard new suppliers to their websites or vice versa. Rather than manage potentially hundreds of electronic data interchange (EDI) or application programming interface (API) connections, using a connection broker leaves retailers and brands with just one integration point to manage.

Product data management

Brands didn’t spend all that time fine-tuning their product assets, imaging and messaging just to have that presentation misrepresented on a retailer’s site. In order to sell a product, it must be presented with the correct information and branding.

But between the different systems of retailers and different requirements of brands, doing this right each time and at scale can be difficult. To address this, successful drop shipping systems use product information distribution services, or PIDSs. A PIDS solution provides a single source of truth of product information, where retailers can easily access brand-approved assets and details and bridges the gap between a brands’ and retailers’ different data formatting requirements.

Responsive pricing and inventory management

Tools that handle pricing and inventory in a drop ship relationship are essential. Retailers and brands need to be on the same page regarding their available-to-promise inventory, and pricing can vary considerably by channel, model or the market.

Brands, for example, need to allocate their inventory across different channels, which often requires reporting different levels of available stock to different channels in order to ensure a minimum inventory buffer. Furthermore, retailers need to receive inventory updates from their suppliers as quickly as possible in order to ensure customers’ orders that can be faithfully fulfilled. This responsiveness also enables brands to hold less safety stock, ensuring they don’t have to leave any money on the table.

Equally important is possessing a method to price products correctly and dynamically. For brands, product pricing can quickly become complicated if they have multiple drop shipping partners with different channels and selling models. Factors such as the cost of sponsorship and advertising, discounts requested by individual partners, sales discounts and other pricing concerns will require management — doing this without a software tool at your side is cumbersome, to say the least.

Adaptable order management

Many retailers and brands will already have an order management system (OMS) in place before starting their drop shipping journey. However, in order to support drop shipping, your OMS will need to be capable of a few functions. It needs to:

  • Keep track of inventory levels per retailer and channel and recognize which stock has been ordered but not yet shipped.
  • Be capable of receiving data via your brokered connections to decrement inventory as retail channels sell individual units.
  • Handle variability in order returns — some retailers may handle returns themselves, but others may have customers ship returns directly to the brand or have returns shipped to the brand in bulk.

In short, your OMS needs to be capable of the multidirectional data flow that drop shipping requires. If it was designed with a rigid use case in mind, it may not be flexible enough to make managing your orders a smooth process.

Where to find more information

Fortunately, solutions for these needs exist, some of which solve for several of these challenges at once. Logicbroker, for instance, serves as both a connection broker and an inventory and pricing solution. As for the other foundational elements of a drop-shipping operation, there are many worthy solutions out there — which solution will serve you best depends on the unique needs of your organization. Get in touch with one of our experts to identify the best options for your organization.

Additionally, you may find it beneficial to read through Forrester’s Definitive Drop-Ship Guide for Brands and Retailers. In it, you’ll find a broad overview of drop shipping, more details on the foundational data needs discussed above, as well as a discussion of different drop-shipping models, among other subjects.

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