Traditional inventory (stock) refers to an array of finished products and materials that a business holds for the ultimate goal of sale or production. For example, stocked vegetables and meat is inventory at a restaurant, while newspapers are considered inventory for a newspaper vendor.
Dropshipping is the exact opposite of holding an inventory. In an eCommerce business, sellers carry out their sales by receiving customers’ orders and directly ship the product from suppliers without storing products in their inventory. If you are trying to build your eCommerce website, you need to choose the best distribution method to ensure you have an effective supply chain for your business. The below analysis will help you understand the two major concepts of the supply chain, i.e., “Dropshipping” and “Traditional inventory.”
Dropshipping Model
Dropshipping is a supply chain method completely different from the traditional retail procedure. In dropshipping management, the retailer receives an order from a customer and passes it directly to a wholesaler or manufacturer, who then becomes responsible for delivering the product to the customer.
The vendor doesn’t stock up or possess any physical products in an inventory in a dropshipping model. He simply accepts online orders and payments and passes the customer information to the wholesaler.
So, what are the benefits and drawbacks of the dropshipping model?
For an e-commerce business, this model of managing shipping has countless benefits, but there are also some downfalls.
Take a look at the pros and cons of dropshipping.
Benefits Of Dropshipping
In 2017, approximately 23% of online sales were carried out using the drop shipping model, which emphasizes the benefits of this model.
Eliminates The Need Of A Warehouse
Firstly, buying or even renting a warehouse to stock products means investing a high sum of capital. However, with dropshipping, businesses don’t need a physical warehouse and won’t have to bear the extra maintenance cost.
Therefore, using dropshipping, you can build your e-commerce website and start earning profits right away.
No Investment On Inventory
Filling up a warehouse with products means you have to incur great expenses. Along with hands to manage the warehouse, you have to handle all aspects of product delivery from packaging to final shipment and utility bills.
Dropshipping, on the flip side, saves you from all these costs. The third party handles the entire shipment process for you, allowing you to focus more on increasing the consumer base.
Increases Cash Flow
The dominating feature of the dropshipping model is the quick payment method. When a customer places an order, the seller receives instant payment. This becomes beneficial for businesses with low cash flow, allowing them to invest in better marketing to promote the business.
– The profit margin is 18.33% more in dropshipping as compared to selling products through an online store.
– Also, e-commerce retailers can earn more than 50% profit than those who have an extensive inventory.
More Products Less Risk
Dropshipping allows selling more and more products without the fear of loss. Besides, the upgrading process is easy as well as cheap. If you think a certain product is doing well in the market, simply add it to your online store with a few clicks and increase your online inventory.
Drawbacks Of Dropshipping
Some cons of dropshipping include:
Third-Party Errors
You have a long chain of suppliers, manufacturers, and wholesalers in the dropshipping model, which increases the chance of mistakes and errors. Being a vendor, you have little to no control over the errors made by a third party.
No Control Over Inventory
You are selling goods from your supplier’s inventory. This leaves you dependent on his stock. If you receive an order for a particular product, and your supplier does not have it at the time, this can lead to issues affecting your business reputation.
Low-Profit Level
The ease that e-commerce business offers to vendors also gives them tough competition. Every seller in the online market sells the same product, and since you are not making bulk purchases, you are bound to sell products at a low price. For higher gain, you need to scale up your business.
Traditional Inventory Model
The traditional inventory model is the most trusted and standard way of carrying out businesses, online and otherwise. This model requires you to purchase goods and products in bulk directly from the manufacturer, stock these commodities in the warehouse, and sell them through the online business.
The vendor takes care of all the fine details in the inventory model, from picking to finally delivering the product to the customer.
Benefits Of Inventory Model
The benefits of traditional inventory include the following:
Immediate Shipping
You have a full supply of products and goods ready to be shipped the instant someone places an order. This allows you to ship products much faster, giving the shoppers highly reliable customer service.
Full Control Of Supply Chain
The retailer has full control of the supply chain involving the process and cost of shipping, the products available in the inventory. Having a complete record of inventory makes it easier for a retailer to track the movement of shipment and rectify errors much effectively.
Better Customer Service
Being fully informed about the inventory at hand and the entire shipping procedure, you are better positioned to handle any complaints made by customers. This allows you to provide top-notch customer service.
Drawbacks Of Inventory Model
The traditional inventory offers many benefits to your eCommerce business, but it also has some shortcomings on the flip side of the coin.
Require Higher Investment
The initial capital required to set up your inventory is pretty high, therefore this can be a real problem for small-scale and mid-size businesses.
Risk Of Capital Loss
Consumer demand is always changing. The products you have in your inventory will not only occupy space but may go out of demand resulting in a higher cost of storage and may lead to damage or loss.
Inventory Managing Expense
When you have a huge inventory filled with products, you need an extra pair of hands to manage things. You need employees to manage, organize, load, and unload items in your warehouse, which can cause you additional expenses.
Conclusion
Which model best suits an e-commerce business? In the process of building an e-commerce website, you need to have an in-depth knowledge of both models. After contemplating the pros and cons of both, decide on one that best suits your business requirement.
Mejix provides digital marketing solutions keeping in mind your business requirements. Being a software and digital marketing agency, we know how to create customized products for your business. From website development to utilizing SEO techniques, we know how to improve your presence in the online world.
So, whether you opt for dropshipping or want traditional inventory for your business, Mejix can help you draw a more customizable and effective e-commerce platform.
