Managing an effective supply chain is key to e-commerce success. When retailers compete directly with big players like Amazon or Wal-Mart, the only choice is to optimize logistics to match their – and more importantly, their customers’ – needs. As Frank Poore, founder and CEO of CommerceHub puts it: "The little guys have to act like the big guys" ,he said. "They have to do things systematically to minimize costs and transit times."
The different business models for digital commerce, however, aren’t exactly transparent. The terms order fulfillment and e-commerce shipping are thrown around, usually without explanation. Then there’s “dropshipping” again, without any context.
These models are valuable for their own reasons, but it’s important to consider which distribution system works best for your company, your industry, and your customers. So with that in mind, what are these different e-commerce business models all about?
Order fulfillment refers to all steps in the process of receiving, validating, and shipping orders. This accounts for the entire shipping cycle, starting when your customer makes a purchase through the point of sale, all the way through the delivery of that item. The life cycle of an order is as follows, with the order of steps depending on your specific model:
Receiving inventory. Purchasing wholesale or with the manufacturer, this is the first step for many retailers.
Storage. This begins when your inventory arrives at your storage site, whether you own a warehouse, house, or third-party site.
Inspection. Quality control before shipping means your customers won’t receive broken goods.
Processing an order. This is where e-commerce fulfillment kicks into full gear, the moment a customer finishes a purchase.
Distribution. Whoever manages your storage facility, whether yourself or a third party, ships goods to their destination.
Delivery. The end goal of every order.
Many retailers choose to outsource some, or even all of this process chain to third-party fulfillment agencies. This has a number of names, depending on who owns the goods, storage facility, and who initiates delivery. Agencies that specialize in order fulfillment are called fulfillment services, and there are a few different business models for the relationship between fulfillment service and retailer.
E-commerce shipping is the strategy an online retailer employs for shipping their goods. In the chain of events, e-commerce shipping is every step after an order is processed, up to the point at which a product arrives at the customer’s doorstep. There are several models for e-commerce shipping, including merchant, third-party, and dropshipping. Each refers to the specific method for storing and shipping goods, as well as the ways in which they are purchased.
Dropshipping vs. E-Commerce Shipping
Dropshipping is sometimes confusingly called e-commerce shipping, but actually refers to an e-commerce business model wherein the retailer orders inventory on an ad hoc basis, only as their own orders come in. The key relationship here is between retailer and wholesaler. The third-party manufacturer owns the goods for the bulk of the dropshipping relationship, up until the retailer receives an order.
Essentially, in a dropshipping model, the retailer doesn’t own inventory, they serve as the perfect middleman between producer and consumer. Storage, distribution, and inventory management are managed completely by the wholesaler, who is also at liberty to sell products to a variety of other vendors. The advantage to this is a much lower overhead for production and storage, as well as being low-risk if a product proves low-demand.
Investment costs for a dropshipping model are negligible. You only pay for what you sell, when you sell it. Aside from posting your offerings online, that’s about all there is to it, since you only pay additional fees when you have a guaranteed sale. That said, profit margins can be very small for this model since you don’t benefit from bulk pricing.
Third-Party Fulfillment Is Huge
Infrastructure is a non-issue when you outsource storage to a third-party company like Amazon’s Fulfillment program. This also means you can conduct high-volume shipping operations through their massive warehouse network. Whether through Amazon or any other provider, e-commerce fulfillment through a third-party guarantees specialized attention. But, at the same time, it can get quite costly.
Every e-commerce business model has its drawbacks, and navigating their intricacies costs you time – and therefore money. That’s why services like FirstMile, which offers an e-commerce shipping solution, exist. They take care of the distribution network so you can focus on expanding your lineup and improving your business.