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, for many businesses it’s the largest balance sheet asset.
In the late 1990s, dot.com companies with their “virtual inventory” concept tried to change all that. And guess what? These business models and inventory management best practices never really went away. It continues in both large and small businesses of many different types today.
There are two scenarios for running a business with little or no inventory. The first is the traditional vendor drop-ship, which requires no inventory. The other is to build a just-in-time inventory model, which entails warehousing certain products, typically those that need to be fulfilled frequently.
Here’s a few examples of traditional vendor drop-ship: One of our clients is a retail specialty department store that has direct sales of $400 million. During the holiday season, its direct business approaches 20% of net sales. Holiday assortments that are drop-shipped include food, specialty items, wreaths and garlands, along with big-ticket items such as furniture, rugs, draperies and other home products.
Another company we are working with sells unusual hardware. It keeps bestsellers in stock and drop-ship the slower moving products, which can all be sourced and shipped within a seven- to 10-day window.
That may not be the highest level of customer service, but then the company doesn’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 client 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, with the inventory management best practices of 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?
1. Systems functionality: These merchants’ websites and call center order management system provides 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 systems 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 online or in batches. This allows the retailer to eliminate all the costly manual processes that usually make drop-ship a nightmare and lead to poor customer service.
2. Domestically sourced product: Imported product, exclusive and long lead-time products are not candidates for vendor drop-shipping 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 nature the product is new, with no selling history and little reorder ability.
This inventory management best practices concept generally works best when the replenishment is short: one to 10 days. This way you can continue to provide higher customer service, but without the attendant inventory and facility costs.
3. 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.
What’s more, the retailer must develop and enforce vendor compliance standards for processing orders, accounting paperwork for POs, invoices, possible returns processing, etc.
Some businesses have migrated to the just-in-time model and are warehousing products with longer lead-times or which need to be fulfilled more frequently. Several companies we work with hold inventory that is exclusive. Many of these merchants use both inventory management best practices of just-in-time fulfillment and vendor drop-ship.
With these just-in-time programs, not only can you achieve lower inventory costs, you can:
- Reduce the number of packages received by the customer
- Gain the ability to insert company materials (value-added service)
- Use cartons and labels with the company name
- Reduce freight costs with fewer shipments
Like the vendor drop-ship scenario, the merchant has to be responsive and reliable. They have to be willing to hold some inventory in order to cover anticipated customer orders.
Each of these inventory management best practices can help you build your sales without being forced to carry a huge amount of inventory. Both can help you reduce the occupancy and labor costs associated with processing product and fulfilling customer orders.