Walk down even the most affluent high streets in London and there are empty shops available. Traditional retailers everywhere are being squeezed by the ‘Amazon effect’ and e-commerce. Manufacturers on the other hand are benefiting from increased opportunities to sell to a wider and often borderless customer base – provided they have optimised their warehouses and established the right relationships with e-retailers. This upwards trend is thanks to dropshipping, which has helped to increase manufacturer profit margins by over 50%, according to new research.

Dropshipping is a fulfilment process whereby the manufacturer fulfils orders directly to the end consumer on behalf of an e-commerce retailer. Whilst dropshipping is not a new concept, it is becoming a bigger issue for manufacturing companies that don’t have the latest warehouse management technology in place to take advantage of it. That’s because dropshipping can fundamentally change the relationship a manufacturer has with the end customer. The operating model is very different to traditional bulk orders and requires that warehouse and logistics processes are carefully optimised, since more frequent, smaller orders are being processed around the clock.

Manufacturers benefit financially from dropshipping in a range of ways. In some instances, they can lose less margin on products sold through the retailer, because they simply sell direct and bypass the traditional channel. Where existing retailer relationships are maintained, although profit margins may be slightly lower, it can also provide an opportunity to implement e-commerce and benefit from a sales uplift without having to make the infrastructure investment directly.

One of Indigo’s customers, the lingerie manufacturer Panache, has seen significant sales increases as a result of adding dropshipping to their existing business relationships with retailers.  Panache has traditionally sold its garments through independent retailers and department stores, which continues to be an important channel. In addition, rather than create its own e-commerce website and potentially jeopardise these important relationships, the company also sells directly, through its retailers’ own e-commerce sites.

Dropshipping through Indigo WMS has enabled them to get involved with ecommerce and simply expand the sales opportunity. Customers are unaware that their order didn’t come straight from the retailer because Panache’s added value team packs each order to reflect each retailer’s branding and sales receipts. As a result of introducing dropshipping, margins have improved because Panache are selling a higher volume of products more frequently. They also benefit from detailed customer insights and have gained a better understanding of buying trends and who their best customers are.

Key benefits of dropshipping

Here are some of the key financial benefits of dropshipping:

• Increased manufacturer profit margins due to the ability to completely by-pass retailers or negotiate a lower sales fee rate;
• Greater ability to sell higher priced and slower moving items;
• Lower shrinkage risks and ability to maintain control of high value inventory onsite for manufacturers;
• Retailers can broaden the range sold without increasing physical inventory;
• Manufacturers gain detailed customer insights directly and become closer to the customer, which in turn improves decision making.

Without efficient warehouse processes and the support of best-of-breed warehouse management systems (WMS) software, the switch to dropshipping and fulfilling individual customer orders directly can be prohibitively expensive. In particular, supporting the dropship programs of multiple retailers increases complexity for manufacturers, as they take on more responsibility for order management, inventory, and fulfilment.

Using a WMS enables manufacturers to achieve consistent marginal gains in the form of reduced resourcing costs; faster, more accurate order throughput and real-time data visibility of sales orders. By operating in real-time, manufacturers and retailers can immediately check that sales aren’t being made on out-of-stock items. And by reducing operating costs, the WMS also offers greater opportunities to introduce value add fulfilment services, to personalise shipments for individual retailers, without the costs of these eroding margins.

Ultimately, dropshipping offers huge potential for manufacturers, not just to regain greater profit margins, but to increase their understanding and control of the customer relationship itself. As a manufacturer, the customer is buying your brand, and being responsible for the entire supply chain process means you have greater ability to achieve higher customer satisfaction.