Drop shipping is a supply chain technique in which the retailer does not keep goods in stock. Instead of doing that the retailer transfers customer orders and shipment details to wholesalers. Wholesalers are in charge for shipping the goods directly to the customer. The retailers make their profit on the difference between the wholesale and retail price.
Some shopping retailers may keep "show" items on display in stores for the customers to view a similar item to those that they can purchase; others may provide only a catalogue or website.
Retailers that drop ship merchandise from wholesalers may hide this in order to avoid the wholesale source from becoming widely known or else. It can be affected by "blind shipping" (goods are shipped but there is lack of return address), or "private label shipping" (having merchandise shipped and a return address customized to the retailer). Packing slip is a shipping document which accompanies delivery packages. The wholesaler may include such a customized packing slip to indicate the retailer's company name, logo or contact information.
Drop shipping can occur when a small retailer (who sells in small quantities) receives a single large order. If so the retailer may arrange for the goods to be shipped directly to the customer.
There are two basic benefits of drop shipping- no upfront inventory to purchase and a positive cash flow cycle. The positive cash flow cycle is due to the fact that the seller is paid when the purchase is made. But he usually pays the wholesaler using a credit card or credit terms, so there is a period during which the seller has the customer's money but hasn't yet paid the wholesaler.
As in any business, there are risks here too. Such is the case with back ordering when a seller places a shipment request with a wholesaler, but the product is sold out.If the period of waiting is too long it may reflect badly on the retailer. A good wholesaler will keep retailers updated.
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