Dropshipping vs Order Fulfillment: 5 Key Differences in 2023
In this day and age, where competition in the eCommerce space is rife, online sellers have to do everything in their power to ensure that their customers have an exemplary order-to-delivery experience to ensure they return and have a favourable view of the company. In order to ensure an ultra-smooth delivery process, small to medium-sized businesses can opt between dropshipping vs fulfillment, after analysing their own capabilities and requirements.
In this article, we go through the differences and pros and cons of dropshipping vs order fulfillment so that you can make a more informed decision as to what would be right for your business.
- What is Dropshipping Order Fulfillment?
- What is an Order Fulfillment Company?
- Essential Requirements for Dropshipping vs Order Fulfillment From a Warehouse
- Dropshipping vs Order Fulfillment Services: Key Differences
- Dropshipping vs Order Fulfillment Services: 4 Tips to Consider Which Option is Best Suited for Your Business in 2023
- Dropshipping vs Order Fulfillment Services: Advantages & Limitations
- Advantages of Dropshipping
- Limitations of Dropshipping
- Advantages of Order Fulfillment Centers
- Limitations of Order Fulfillment Centers
- What’s the Verdict for Dropshipping vs Fulfillment?
- Dropshipping vs Order Fulfillment: Conclusion
- Dropshipping vs Order Fulfillment FAQs (Frequently Asked Questions)
What is Dropshipping Order Fulfillment?
Dropshipping Order Fulfillment is a retail fulfillment process where the buyer (e.g., a retailer or an eCommerce firm) doesn’t store the products they sell. Instead, they purchase the products directly from a third party and ship order directly to the customer that has purchased them, in short they dropship products to direct customers. Therefore, the seller does not directly handle the product.
As explained in greater depth below, the greatest difference between Dropshipping and order fulfillment is that the seller does not own, or even stock, any inventory. Instead, it is purchased from a third party (e.g., manufacturer or wholesaler) to fulfill the orders as required.
Why does a dropshipper not show up as a stakeholder in the supply chain?
The simple answer is that dropshipping order fulfillment is a service and not a role. Additionally, any of the three pillars that typically form the supply chain i.e manufacturer, wholesaler, and retailer, can play the role of a drop shipper.
- For example, suppose a manufacturer ships its goods directly to your customer. In that case, they are conducting dropshipping on your behalf.
- A retailer can also offer to do the same on your behalf. However, remember that the competitiveness of the end consumer pricing would depend on who the dropshipper is. Typically, a wholesaler or a manufacturer would hold the advantage here.
WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.
What is an Order Fulfillment Company?
Order Fulfillment is defined as the chain of receiving orders, processing them, and delivering those orders to the customer. By extension of the definition above, an Order Fulfillment Company is a third-party firm that executes this process on behalf of its client companies that receive orders directly from its customers. Examples of such clients for an Order Fulfillment Company include an online eCommerce portal or a chain of offline retailers dealing directly with the end customer.
The starting point of this process is when a customer places an order, and the order information is delivered to the inventory storage location or a warehouse facility. The line items in the order are located, packed, and dispatched in a timely manner so that it reaches the customer’s doorstep on time, thereby completing the order fulfillment process. In cases of order returns, the return process and transactions are also managed by the Order Fulfillment Company.
Although the end customer doesn’t see any of this behind-the-scenes activity, the many parts of executing order fulfillment are crucial in achieving the most critical metric of a successful business, i.e., customer satisfaction.
Essential Requirements for Dropshipping vs Order Fulfillment From a Warehouse
Quite naturally, each buyer has different needs for their order fulfillment based on their business requirements. Buyers are dependent on their suppliers to provide them with accurate and timely information to enable them to satisfy client expectations. Typical data points and information required include goods and item data, inventory levels, legal and financial documents, shipping details (etc).
Some Common Requirements for Electronic Trading of Dropshipping Fulfillment Centers are:
- To have a setup to receive electronic orders
- To have comprehensive information about products to effectively sell the supplier’s (wholesaler, manufacturer) products online
- To contain updated information about inventory and stock levels
- To possess the ability to furnish order confirmations, provide ETAs
- To be able to manage order cancellations
- To be able to manage varied shipping documentation including packing slips, tags, shipping labels, retailer’s brands, logos, and information about shipment tracking.
- To be able to handle invoices electronically
- To be able to handle order returns and manage financial and re-order-related transactions
Some Common Requirements for Order Fulfillment to a Warehouse or Storage Facility:
- To have comprehensive product information
- To receive, acknowledge, manage, and process orders electronically
- To be able to handle invoices electronically
- To be able to hand scale and rapidly expand operations as orders increase quickly, manage cyclical peaks, e.g., holiday season orders and promotion-led demand.
Dropshipping vs Order Fulfillment Services: Key Differences
|Dropshipping||Order Fulfillment Services|
|Definition||A retail order fulfillment method where the seller promotes, advertises, sells, and accepts orders for goods (inventory) that is owned and fulfilled by the supplier.||The seller owns the inventory for which he takes orders. He only outsources the tasks of order fulfillment to a 3rd party firm.|
|Who owns the stock?||Supplier owns, stocks, manages, and ships the goods.||The seller owns the inventory, but orders are packed, processed, and shipped by the fulfillment company. Inventory is also stored on the premises of the 3rd-party.|
|Storage||Dropshippers either manufacture or are wholesalers of the products that they sell. They are retail fulfillment companies that don’t store the products they sell in stock.||Order fulfillment firms rent out storage spaces in their warehouses and fulfillment centers to clients (sellers), who then receive orders from consumers and pass them onto the Order Fulfillment firms for execution.|
|Capital Expenditure||Limited CapEx needed to launch a dropshipping business.||Significant CapEx is needed to start a company that involves setting up of warehouses, fulfillment companies or urban dark stores|
|Best Suited For?||Sellers/Retailers with limited funds.||Sellers/Retailers with substantial capital for large CapEx with a view on long-term profitability.|
|Retailers who want to test out new products, market segments & geographic areas.||Retailers with confidence in their product lines. Typically for established products with a stable customer base.|
|Sellers that don’t want to invest in their own workforce, warehouse space, or inventory management infrastructure.||Sellers that invest in their own inventory but not in warehouse space, fulfillment teams, transport assets, etc.|
Dropshipping vs Order Fulfillment Services: 4 Tips to Consider Which Option is Best Suited for Your Business in 2023
Determine the Nature of Your Products and Vendors
To help you determine whether you should make use of dropshipping vs fulfillment, you should consider the nature of your products and the services offered by your supplier or manufacturer. Not all vendors offer dropshipping services so if yours doesn’t provide them, it immediately disqualifies dropshipping as an option. Similarly, if you deal in goods that require special storage facilities such as cold storage facilities, not all fulfillment services would qualify. You need to make this decision based on the types of goods you offer and the requirements you need to store and transport them to the customer in the safest and fastest way possible.
Identify Your Customer Base
It is in every retailer’s best interest to identify their customers and it should be no different for you. Depending on the products you have, the audience that will have interest and eventually convert that interest into a purchase will vary vastly. You need to identify your customer base, which regions they are located in, and which delivery option, whether dropshipping or order fulfillment, would be the best to deliver their orders swiftly and reliably.
Shortlist the Technology Needed
You, as an eCommerce retailer, need to make use of advanced technology in order to provide the best service to your customers and keep up with your competitors. Whether it is a WMS, advanced transportation systems, or inventory management, you need to determine your needs and which dropshipping or order fulfillment company can meet your requirements. Fulfillment companies are generally better in this regard as they have to keep up with the crowd, but different retailers will have varying technological requirements.
Determine Your Profit Margins
You need to determine the number of financial resources you have at your disposal. Prices vary when it comes to dropshipping vs order fulfillment, but prices charged by fulfillment companies are generally higher, due to the fees associated with storage, transportation, and technological solutions. Conversely, dropshippers mostly only charge you for the shipping of products that are already sold, so this is convenient if your sales volumes are lower and far between. You need to check how much you are willing to spend and balance it out with your requirements to make the best decision.
Dropshipping vs Order Fulfillment Services: Advantages & Limitations
Dropshipping vs order fulfillment companies meets different needs of eCommerce sellers. Depending on your business needs – and as they change with time – you could outsource your fulfillment to either, or both types, at different points of your business journey. Remember, one isn’t exclusive to the other, and you can use both simultaneously. For example, 3PL fulfillment centers can be used for stable products and a drop shipper for testing or launching new ones.
Advantages of Dropshipping
Maintenance of Broader Product Lines
You could sell various lines of products with greater choice since you can tie up with numerous drop shippers. Maintaining a wider product line is more feasible since you aren’t purchasing or carrying inventory.
Trying New Products
Dropshipping allows you to test new products with minimal risks since your financial costs and risks are minimized. You can test out product innovations, logistics innovations, and new trends that could potentially become cash cows of the future.
Lower CapEx Needed
With drop shipping, the only significant investment is to get your eCommerce portal up and running since you aren’t buying or stocking inventory. This eliminates any significant CapEx needed to get you off the ground.
Limitations of Dropshipping
Using drop shipping fulfillment companies excludes you from the advantages of bulk discounts since you buy one product, or a limited number of them, in small quantities per order.
Limited Control of Inventory Supply
With a drop shipper partner, you are dependent on them for inventory. They may distribute their available stock based on preferences that exclude you. For example, during holiday sales, you may not get as much supply as you could potentially sell.
Slower, Costlier Shipping
You don’t control fulfillment locations or the speed of order processing when you partner with a drop shipping company. Delayed or failed orders could cause severe, even irreversible, damage to your company’s reputation.
Advantages of Order Fulfillment Centers
Maintain Inventory Control
Perhaps the most crucial strength of using a 3PL fulfillment company for your business is that you can track your inventory levels closely, eliminate (or at least minimize) out-of-stock opportunity losses, and maintain an optimal mix of product inventory.
Get Orders Out Faster
Partnering with a 3PL fulfillment company with conveniently located warehouse facilities (both central and satellite) enables your parcels to reach in 2-days (or less) since this is now the delivery standard. This keeps your fulfillment-cycle competitive with industry benchmarks.
Storage Cost Becomes a Convenient Variable Expense
There isn’t any need to maintain fixed storage space since you can rent out only the amount that you need. This ensures a healthy cost structure for the business.
Limitations of Order Fulfillment Centers
Limited by Inventory Held
You are limited to selling only the inventory you have bought and stored. This burdens you with the risk of unsold inventory, increased carrying costs, sudden obsolescence, etc.
Suggested Read: How to reduce Inventory Carrying Cost?
While this business model yields a higher ROI, it also needs a higher CapEx. It also means that your funds stay locked till you can turn it around by liquidating the current inventory.
Cost of Damaged Inventory
While 3PL fulfillment centers tend to have a 10% allowance for damaged or lost items, you still risk losing money on unusable items. A drop shipper always owns and maintains the stock, and therefore, damaged goods aren’t your liability.
What’s the Verdict for Dropshipping vs Fulfillment?
Dropshipping vs fulfillment may seem like an easy choice. However, both satisfy different client needs. They should be used judiciously to serve different product lines at different stages of a company’s life-cycle and, importantly, should be used in tandem. Both can grow client businesses in different ways. Analyzing your business requirements – adjusted over changing times and scenarios – will enable you to decide on the type of fulfillment service best suited to you.
Top 5 Dropshipping Companies
- Inventory Source
Top 5 Fulfillment Companies
- Rakuten Super Logistics
- FedEx Express
- Fulfillment by Amazon
Dropshipping vs Order Fulfillment: Conclusion
As is evident, comparing dropshipping vs order fulfillment companies is necessary, not only because they operate on different business models but also offer a different set of advantages and limitations. Depending on your business needs, company, product life-cycle and target customers, you should choose the option best suited for you. WareIQ provides a whole host of products including same-day order fulfillment, warehousing, and everything in between where customers can choose exactly what they need, which proves to be a more cost-effective option.
Established in 2019, WareIQ, a Y-combinator backed startup, has rapidly grown to be the leading provider of full-stack eCommerce fulfillment services in India for some of the most reputed brands that spans more than 300 e-commerce brands such as Kama Ayurveda, Future Group, Piramal Group, Wingreens Farms and many more due to the ability to help them accelerate online sales with next day delivery and same day delivery service. WareIQ contributes to client success by not only providing 3rd Party fulfillment but also helping businesses store their inventory closer to their customers using our platform connected to a nationwide network of fulfillment centers and last-mile couriers – billed entirely on usage.
We offer a comprehensive centralised platform that assists you in your eCommerce operations. In addition, we also provide an ML-based prediction engine for strategic warehouse network design, smart inventory placement, and integrated shipping apps to offer transparent ETAs, branded tracking experience, RTO risk insurance, and NDR control.
We help you not only to reduce your logistic costs but also your delivery timelines – this could be the game-changer for your business needs!
- Pan India Fulfillment & Darkstore Network: Plug-and-play fulfillment infrastructure with no minimums, which is compliant with Amazon Seller Flex, Flipkart Assured, Myntra and other marketplaces
- Inventory & Network Planning Excellence: Best-in-class AI models for sales forecasting, product segmentation, and inventory management to reduce inventory by 40% and increase revenue by 10%.
- Vertically Integrated Fulfillment Tech Stack: Our Fulfillment Tech Solution supports integrations with 20+ top marketplaces & D2C platforms, and prominent national, regional and hyperlocal couriers, enhancing reach by covering deliveries for 27,000+ pin codes
- Supply Chain Productivity Applications: Integrate a host of supply chain productivity apps with a single-click to your existing CRMs, ERPs & accounting software to manage your logistics workflows from one command center. Use Apps like RTO Shield to get 100% RTO protection, Branded Tracking to turn your order tracking page into a profitable marketing channel, and many more.
Trusted by 300+ top Indian brands, we are helping them accelerate online sales and expedite their growth through a synergistic combination of advanced technology, robust fulfillment infrastructure & seller enablement services!WareIQ is backed by leading global investors including Y Combinator, Funders Club, Flexport, Pioneer Fund, Soma Capital, and Emles Venture Partner.