One major challenge in starting an e-commerce business relates to inventory. Very few individual or small business entrepreneurs can afford to keep the kind of inventory needed to do the volume of business you'll want to undertake to make it worth your time. In the initial stages, setting up an e-commerce website with the products you sell and having someone else manage inventory, shipping, and returns may be the more prudent option. This is where supply chain strategy becomes important.
Basic Supply Chain Management Terms
Before exploring a viable supply chain strategy, let's establish some basic concepts related to supply chain management.
- Product sourcing is locating a source of products to sell that you do not manufacture yourself.
- Drop shipping involves transferring customer orders to another company, who fulfills the orders by shipping the items directly to the customer on your behalf.
- Wholesale suppliers are simply providing you items at wholesale prices from the manufacturers.
First Steps to Clarifying Your Strategy
There is no one-size-fits-all strategy in any aspect of business and certainly not in supply chain management. To come up with solutions to work for you, begin by asking yourself the following questions:
- Will you manufacture or resell items?
- Will you keep an inventory or not?
- How much control do you want over the packaging and shipping?
- How critical is price control to your business model at this stage?
- What volumes will you be dealing in?
With these questions answered, you can determine what your supply chain management model will look like.
Contact Trade Magazines and Associations to Develop Suppliers
If you are setting up an e-commerce business, you probably have some thoughts on sourcing. If this happens not to be the case, trade magazines are a great place to start in finding manufacturing companies offering products of interest.
Contacting trade organizations and attending trade shows associated with the products you wish to deal in provide great opportunities to network and make valuable contacts. In fact, these organizations aim to connect manufacturers and retailers, even if they are from different countries.
Evaluate Local Retailers as a Source
Do not rule out local retailers with limited resources as product sources. They are successful in their own town but might have an interest in someone selling their products elsewhere.
Sourcing Directly From Manufacturers
Sourcing directly from manufacturers is Desirable but often difficult for small players. A manufacturer usually does not want to fuss with small retailers. Wholesalers have a sales force, and resources, in place specifically for distributing the products to e-commerce businesses that will retail the products. Also, the manufacturer wants to sell very large quantities that are usually beyond the reach of smaller e-commerce players.
If a manufacturer is willing to work directly with you, it is most likely because they are too small to catch the attention of wholesale distributors. In a case like this, a benefit, if executed properly between you, is the opportunity to grow together. Conversely, the ability to keep up with volume demand, which is essential to your own growing business, is a risk in partnering with smaller manufacturers.
In forming partnerships with manufacturers of any size, it's important to understand potential risks, discuss them at the outset of talks of working together with them, and clearly establish expectations and outcomes.
Drop Shipping for E-Commerce
Drop shipping is the real revolution of e-commerce. There are many benefits and few risks in drop shipping.
The Benefits of Drop Shipping
- Keeping stock no longer necessary
- Lower wholesale prices
- No upfront investment in stock
- Range of products extended without investment or risk
- Less time devoted to inventory and delivery
The Risks of Drop Shipping
- Some drop shippers can raise their prices after getting an e-commerce player dependent on them.
- There might be fixed overheads and other costs that are not directly related to the fulfillment of orders.
- Some drop shippers may require a membership fee. The idea of a membership fee in and of itself shouldn't necessarily elicit red flags or a 'hard no', as it could be a tool to weed out frivolous players. But make sure that you find the fee to be reasonable.
- The drop shipper might cut corners by using an unreliable shipping company.
- Situations requiring reverse logistics could turn out to be sticky.
- The billing policies of the drop shipper might be unsuitable.
- New drop shippers are born every day and crowd the marketplace. As a result, some drop shippers might go out of business.
The Bottom Line
An e-commerce business depends upon its sales. That is why sourcing is a primary activity in the business of e-commerce. Your marketing plan, budget, and the stage of the life cycle you are in will help you decide the right approach for yours.