Importance of Supply Chain Management in Dropshipping

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The Internet and the rocking e-commerce market have really opened up business opportunities for anyone with a modicum of computer knowledge and an idea rattling around in the old attic. With wholesalers offering dropshipping opportunities to anyone willing to handle the customer service end of the equation, it isn't even necessary to put up any capital to buy inventory. No one needs to go to business school anymore to make it big in retail. Right?


When you're dropshipping as a supplemental, secondary sort of business, you can make do with winging it. Sure, you'll drop the ball a couple of times, but it's not a big deal since you don't depend on the profit. When you're dropshipping as a full-time occupation, however, even on a small scale you'll need to be familiar with something called supply chain management.

What is Supply Chain Management?

It sounds fancy, but the phrase “supply chain” basically refers to the process that brings products from the manufacturer to the consumer. As a dropshipper, fulfillment is the be-all, end-all of your business. Even more important is the management part, which focuses on streamlining the entire supply chain so that it's efficient.

Supply chain management, or SCM, is not a new concept, but it really came into prominence when the market became globalized. Because retail is no longer strictly a local operation, manufacturers, wholesalers, and retailers must find a system that can handle the expanded scope of the market, without losing money to inefficiency. That's where SCM comes in.

Think of SCM as the processor of a computer, which delivers the end product by retrieving, collating, coordinating, and calculating data in the back end—before presenting it on the monitor. In and of itself, SCM has no physical part in the supply chain. Rather, it's the controller.

Without effective supply chain management, the manufacturer could end up making too much of one thing and not enough of the other, the wholesaler could be stocking up on slow-moving items that no one needs, and the retailer will run out of items that the consumers are demanding.

Demand for SCM Professionals

The largest companies first realized how important SCM was when it became apparent that the traditional way of handling the supply chain was costing them money. The global market was shifting rapidly, and the old system was not responding fast enough.

For one thing, individual components of the supply chain were not always in one physical location, so consultation and coordination was becoming more difficult. For another, the demographics of the market were rapidly changing, and forecasting was becoming more difficult because of the lag in the old methods of gathering and analyzing market data. A whole new way of thinking became necessary, and this required the insight of a properly trained SCM professional.

Unfortunately, the demand for SCM professionals far outstripped that of the supply, because SCM wasn't yet considered an important field of study. According to this Business Week article, almost 200,000 SCM jobs will remain unfilled every year until 2018, because there simply aren't enough qualified warm bodies to do the job.

In response, business schools are beefing up their programs to include courses in SCM to fill current demand, which will only grow as the market continues to expand. Here are some of the more prestigious business schools and their SCM programs as ranked by the Wall Street Journal:

Top ranked business schools

The biggest corporations are the most in need for top-notch SCM talent because their supply chains are the most complicated. Hardest hit by this dearth in SCM pros are companies that had sourcing partners in other countries and depended on quick and efficient turnaround to avoid running out of stock, such as fast-fashion brands.

However, one could argue that dropshippers aren't really concerned with stock so they have no need for SCM.


Purchasing and Supply Chain Management in Dropshipping

Just because dropshippers don't keep physical inventory doesn't mean they won't benefit from an effective SCM process. The typical consumer has no idea what it takes for the products they buy to get to them, and if the SCM works well, they will never have to. Unfortunately, problems can happen more than they should, especially with dropshippers.

Precisely because dropshippers don't handle the actual products they sell, they have no real control over how the products get to customers. To illustrate, here is a sample of a ERP supply chain management organization:

supply chain process

Typically, a traditional retail company implements an SCM strategy internally encompassing everything from supplier to customer. The dropshipper only takes part of the retail end of the system which deals with sales, marketing, and customer service. There are a lot of problems that can really put a major crimp in your day. What if the item is out of stock? What if the wholesaler experiences delays in shipping logistics? What if the price has changed? What if there was a mistake in the product sent?

Because the dropshipper is essentially a silent partner in the supply chain and has no control over any process in the supply chain, it is more important to monitor the SCM system in place and integrate it into how the dropshipper does business. In that way, the dropshipper can be more proactive in selling, marketing, and taking care of customers. Everybody wins.

Online dropshippers essentially work with technology and customer service, which are crucial aspects in global SCM. In setting up SCM in dropshipping, consider these two basic facts:

  1. The wholesaler handles products and shipping logistics.
  2. The dropshipper handles sales and customers.

While manufacturers and wholesalers take on the capital- and labor-intensive aspects of consumer market, dropshippers and retailers they take on the task of what this survey considers the most important aspect of retailing: providing a seamless and positive customer experience.

In the graph below, it is apparent that retailers are more or less satisfied with their efforts at reaching their supply chain goals but there are still areas that need improvement.

Supply chain survey

A hybrid SCM model would accommodate the requirements of dropshipping so that it can be integrated seamlessly in the supply chain of the wholesaler without in any way disrupting the wholesaler's own SCM.

The essential function of this hybrid model would be to allow the dropshipper to monitor inventory and to provide input on market demand. This would be beneficial to the wholesaler, who will be able to use the data to improve its production efficiencies, and the dropshipper, who will be assured that fulfillment of customer orders will not be a problem.

Moreover, many wholesalers benefit from dropshipping because they can serve multiple retailers, which reduces the costs of holding inventory and they do not have to do sales and marketing or handle individual customers. They most likely will welcome SCM integration because it will translate to more sales down the line.


It should be apparent by now that SCM can do loads for a dropshipping business, but don't get me wrong; the SCM for such a purpose will not be a simple matter to come up with and implement. For one thing, there will have to be extensive coordination with wholesalers to get the necessary information to design a workable SCM hybrid, and not all wholesalers will have the same SC design.

You need to really get in there and dig for gold. However, dropshippers who have established relationships with wholesalers and a wide customer base will benefit greatly from the efficiencies of a smoothly functioning and proactive SCM, which will make all that effort worthwhile.

The only thing you need now is someone who can do it for you.

Know anyone who designs SCM systems for dropshippers? Do you have any experience yourself? Share your thoughts in the comment section.


About the author
Simon Slade
CEO of SaleHoo Group Limited

Simon Slade is CEO and co-founder of SaleHoo, a platform for eCommerce entrepreneurs that offers 8,000+ dropship and wholesale suppliers, 1.6 million high-quality, branded products at low prices, an industry-leading market research tool and 24-hour support.

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  • cristal 29th of May
    Nice Post thanks for the info in Supplier Management