Sales without inventory—now there’s an oxymoron. Many of us who cut our teeth in the retail and catalog trade know that you have to own inventory to make sales. In fact, it’s the largest balance sheet asset in many businesses.
From the inception of the dot.com businesses their “virtual inventory” concept tried to change all that—and guess what? That business model has never really gone away; it remains with numerous occurrences in both large and small businesses of many different types.
There are two scenarios that we see for running businesses with little or no inventory. The first is the traditional vendor drop ship which businesses have used. The other is to build a business around a just in time inventory model which may include some additional stock which is warehoused for fulfillment.
Vendor Drop Ship
Here are a few examples. One of our clients is a retail specialty department store that has direct sales of over $400 million. In the holiday season, their direct business is in excess of 50% of net sales. Holiday assortments which are dropped shipped include a wide array of food, specialty items, wreaths and garlands, along with everyday big ticket items including furniture, rugs, draperies and other home products.
Another company we are working with sells unusual hardware. They keep best sellers in stock and drop ship the slower moving products, which can all be sourced and shipped within a 7- to 10-day window. That may not be the highest level of customer service, but then again, they don’t have a major fulfillment facility and the attendant inventories, concern for forecasting with required tight accuracy, or the significant overstock and liquidation problems common to other direct businesses.
A third company that specializes in business supplies has a small internal inventory and extends its assortment offering 80% by drop shipping directly to the customer. I’ve also seen a mega retail/direct sporting goods company expand its line tremendously to include many slower selling products that could not “break even” in the catalog’s merchandise selection process. The point is that with drop shipping you can open up a much broader assortment to your customers than you could justify for inclusion in print media and internal DC stocking.
What do these businesses have in common that makes this strategy effective?
- Systems functionality. Their web site and call center order management systems provide connectivity to the major vendors participating in vendor drop ship programs. These systems validate, credit and process the orders out to the vendors. The better ones download customer orders throughout the day or in batches. The systems are connected to terminals and printers in the vendors’ DCs to process all during the day. As orders are viewed and printed by the vendor, the drop ship system controls the process and gives the retailer visibility into the various order statuses. As the vendor prints the pick tickets and the order is ship confirmed to the system, those confirmations are sent upstream to customer service files on-line or in batches. The retailer eliminates all the costly manual processes that usually make drop ship a nightmare and lead to poor customer service.
- Domestically sourced product. Imported product, exclusive and long lead time products are not candidates for vendor drop ship because of the length of time required to get them. True fashion product is not a candidate because the retailer gets only one chance to purchase product, and possibly one reorder; by its very nature the product is new, with no selling history and little reorder ability. This concept generally works best where the replenishment is short: 1 to 10 days. This way you can continue to provide higher customer service, but without the attendant inventory and facility costs.
- Vendor reliability. Since the vendor is shipping directly to your customer on your behalf, they have to be as good or better in terms of accuracy than your internal fulfillment. This, I’m afraid, eliminates many vendors that do not understand the direct industry. Additionally, the retailer must develop and enforce vendor compliance standards for processing orders, accounting paperwork for POs, invoices, possible returns processing, etc.
Just In Time
We are seeing more and more businesses offer product that has shorter lead time to replenish or fulfill more frequently. Several companies we work with also hold some inventory that is longer lead time or exclusive; and they may also use some vendor drop ship programs.
With these just in time programs, clients are trying to achieve in addition to lower inventory costs:
- Reduction in the number of packages received by the customer
- Ability to insert company materials
- Use cartons and labels with the company name
- Reduction in the freight costs from fewer shipments.
Like the vendor drop ship scenario, the vendor has to be responsive and reliable. They have to be willing to hold inventory to cover your anticipated customer orders.
Consider both of these in your strategic thinking. Consider how they can build your sales without you carrying the most costly asset—inventory—and reducing the occupancy and labor costs to process product and fulfill customer orders.
