While the e-commerce boom has been a disruptor to the traditional brick-and-mortar retail sector, it also has benefited third-party logistics companies that assist online retailers uninterested in holding inventory at their own distribution centers.
Drop shipping has grown recently as e-commerce has gobbled up a larger share of the retail landscape, although figures aren’t tracked on the practice. Drop shipment refers to when a buyer orders an item online and the retailer turns to a supplier or 3PL to fulfill the order, a process also known as DC bypass. In this supply chain model, the e-commerce company holds little to no inventory itself.
“The longer I delay taking control of the inventory, the less inventory that I have on my balance sheet. So if I can transfer 100% of the risk of owning the inventory to a third party, then I’m going to do that,” explained Mike Regan, co-founder of TranzAct Technologies, a company that helps shippers and carriers negotiate terms of engagement.
He said one of his clients doesn’t own a single warehouse and all orders are fulfilled by a third party. But Regan pointed out that there also drawbacks to the practice.
“One of the issues to balance, especially in e-commerce, is being out of stock. If I have the inventory, then I can control my buildup rather than be at the whim of others,” he said.
Satish Jindel, founder of SJ Consulting Group, added that companies such as Dell and Apple Inc. have used drop shipping for many years to directly fulfill orders for computers, tablets and smartphones.
“That is the ultimate of managing a supply chain; it’s faster and less expensive because every extra handling adds to the cost,” he said.
Sanne Manders, chief operating officer at Flexport, a freight forwarder, added that drop shipping also saves on labor costs within the warehouse.
“If you have to store inventory, then eventually you have to take it out of storage and that’s two extra things to do. Drop shipping is also faster and speed to market is very important in e-commerce,” he said.
Zulily, a well-known online retailer, outsources the shipment of heavier nonparcels such as outdoor play sets, dining sets, comforters, couches and other furniture.
“If product cannot be combined with other products, we typically don’t bring it in. If the vendor has the capability to drop-ship, we typically ask the vendors to do this,” said Vipin Varkey, Zulily’s director of worldwide transportation.
While the vendor is the supplier, often a third-party logistics provider holds the inventory and fulfills the order for both parties. Seko Logistics, which ranks No. 55 on the Transport Topics sector list of the largest warehousing firms, offers e-fulfillment services on many items, including furniture, and has received inquiries about appliances and electronics.
“One of our clients … has four distribution centers around the country and their retail customers said, ‘We want to drop online orders on you. You store it, you hold it.’ And they know it’s coming, so they’re not pushing back,” said Rick Lee, Seko Logistics’ chief operating officer. He declined to name the client but said it was a major appliance and electronics manufacturer.
He continued, “So our shipment volumes are remaining flat, but the mix is changing and a lot more are drop shipments.”
The trucking industry could also benefit from the new supply chain model, said Jeff Knuth, director of account management at logistics firm AFN, which ranks No. 32 on the Transport Topics freight brokerage sector list.
“Carriers have to be as efficient with their fleets as possible. Being able to drop ship and not have driver detention at a shipper can create efficiencies for a carrier, which will matter more than ever with [electronic logging devices],” he said.