Submitted by: Stephen Green

Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in retail businesses, the majority of retailers makes their profit on the difference between the wholesale and retail price but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.

A drop shipper is a manufacturer or authorized wholesale distributor who will ship your single item orders directly to your customers. You will put the product pictures on your site at retail and wait for an order. Once you receive an order you will email or call the drop ship supplier with the customers order information and they will in turn ship the product directly to your customer.

Two significant benefits of drop shipping are the elimination of upfront inventory and a positive cash-flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer’s money, but has not yet paid the wholesaler.

Drop shipping also eliminates some duplication of effort, since only one warehouse will pick, pack and ship the product. This approach can reduce total inventory management and shipping costs. These cost reductions can subsequently reduce the price to the consumer.

Risks involved in drop shipping. For example, backordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Backordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner’s job to be aware of the quantities that the wholesaler has available.


Drop shipping has also featured prominently in some Internet-based home business scams. Scam artists will promote drop shipping as a lucrative work from home opportunity. The victim who buys into this scam will be sold a list of businesses from which drop-shipment orders can be placed. These businesses may not be wholesalers, but other businesses or individuals acting as middlemen between retailers and wholesalers, with no product of their own to sell. These middlemen often charge prices that leave little profit margin for the victim, and require a regular fee for the retailer’s usage of their services.

Benefit from drop shipping are as follows:

You dont carry any inventory

You get to set the retail price at whatever you want for huge profits

There are no minimum order requirements

You pay the wholesaler only after you receive an order.

The disadvantages are some of the following:

You completely rely on the supplier to send the product to your customer on-time

Your profit margins are sometimes affected by fluctuations in wholesale pricing.

Not all drop shippers have an up-to-date supply chain. This means they may not have any ability to track inventory or automate their accounts.

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