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The dynamic growth of the e-commerce market over the past two decades has created completely new challenges for manufacturers, distributors and shopkeepers. Growing competition and customer demands for assortment diversity and lead times have led to new methods of distributing goods that simplify the logistics chain, reduce storage costs and increase sales efficiency.
These methods undoubtedly include dropshipping and cross-docking - in this article we will try to discuss the differences between them and indicate in which situations they work best.
Dropshipping is a relatively new sales model that has been gaining particular popularity over the last few years. Dropshipping involves transferring responsibility for stock management, as well as the preparation and dispatching of orders, from the owner of the online shop to the manufacturer or distributor of the goods in question. Using this strategy, the retailer can concentrate fully on customer acquisition, professional and fast customer service and marketing activities, leaving order fulfilment on the shoulders of an external supplier.
Some of the biggest advantages of running dropshipping sales include:
- no need for a large initial capital - payment for the goods and their dispatch takes place during the transfer of the order to the supplier or after its fulfilment, e.g. in the case of monthly billing
- no need to invest in storage of goods - this applies to storage space itself, as well as the associated IT systems, personnel or transport
- low entry threshold - immediately after opening an online shop you can offer hundreds or thousands of products in your range and start selling them immediately
- a significant reduction in the seller's responsibilities
- relatively small increase in costs when scaling up operations - extending the assortment to include the offer of additional suppliers does not cause a drastic increase in the costs of running a shop
- freedom of choice of assortment and suppliers - the shop owner can withdraw or add products to the shop at any time, collaborate with another supplier or completely change the profile of the shop
Although these and other benefits of running a business based on the dropshipping model are its indisputable advantage, such a form of sale is also associated with certain limitations, which may to a large extent affect the final reception of the shop - among them, we can distinguish high competition in the case of cooperation with popular suppliers, the lack of possibility to verify the correctness of the content of the shipment, the lack of influence on the final content of the shipment (method of packaging, branding, additional attachments) or the necessity to divide orders into multiple shipments in the case of selling goods of different suppliers.
The answer to some of these inconveniences is cross-docking, which can be an excellent complement to dropshipping.
Cross-docking is an assortment and distribution management system that uses transhipment points to pick orders and prepare them for dispatch. It represents a kind of intermediate solution between classic sales from the own warehouse and dropshipping.
The main advantage of cross-docking is a significant reduction in warehousing costs - goods are not stored 'in stock' at the retailer's local warehouse in case demand for a particular product range increases. Instead, as in the case of dropshipping, the stocking of the shop takes place dynamically, as further orders from customers are received.
However, operating a cross-dock warehouse presents logistical challenges that cannot be underestimated. In the case of cross-docking, it is crucial to ensure that distribution runs smoothly and that the time a consignment waits at the transshipment point is kept to a minimum. Optimising this process requires both properly prepared IT systems, dedicated staff and full synchronisation of information between all links in the distribution chain - manufacturers or wholesalers as well as courier companies.
Based on the above information, several key advantages of cross-docking can be detailed. Among these would be:
- similar to dropshipping - no need for a large financial outlay at the beginning of the business; in the case of a small scale of sales, aggregation of orders and their redistribution do not require dedicated solutions and personnel
- no need to stock the shop in advance - goods are delivered to the shop as orders are already placed
- greater control over the contents of the order - reloading allows you to complete shipments with your own advertising materials, discount coupons, accessories or your own branding; it also allows you to introduce specific standards for the way in which shipments are packed and secured
- greater control over product quality and order accuracy - it is possible to verify at the transhipment stage whether the goods delivered correspond to the contents of the order and the specifications provided by the supplier
- the possibility of order picking for goods from different suppliers
- the possibility to provide customers with delivery methods independently of the services offered directly by the supplier
Like dropshipping, however, cross-docking has its drawbacks that need to be taken into account when deciding to introduce it. In our opinion, the increased complexity of order fulfilment is worth singling out here - the introduction of an additional element in the form of a dropshipping warehouse can increase the overall delivery time, as the shop expands and sales scale increases, order management also requires additional expenditure on optimising order handling.
Ordering using a transshipment warehouse also often means increased shipping costs - the order is processed in two stages, between the supplier and the shop and between the shop and the end customer.
The final aspect is the selection of suppliers - both dropshipping and cross-docking are particularly demanding in this respect. For 'live' sales to be possible, full cooperation between the shop and the wholesaler or manufacturer is required, including synchronisation of product information (such as availability or price) and order progress, good communication and clearly defined rules in case of any irregularities.
When dropshipping, when cross-docking?
Our experience shows that there is no universally best solution. The choice of logistics model should depend on a number of factors, such as the type of assortment, scale of sales, business assumptions, experience of running a shop, number of staff and many others.
However, we believe that dropshipping and cross-docking are worth using in parallel in certain situations, as each solution to some extent makes up for the shortcomings of the other. An example of this is overseas sales - in the case of orders from a single supplier, this can be based on the dropshipping model, while larger orders can be completed at the cross-docking point and sent to the recipient as a single shipment; this reduces the cost of overseas shipping.