4 July 2023

What is Drop Shipping and How Can EDI & Data Integration Help?

Drop shipping and EDI

Although the drop shipping market is forecasted to grow at a CAGR of 23.4% from 2023 to 2030 based on research, it is a difficult business to succeed in. Therefore, it is important to understand how the business works, what the issues are, and find solutions for those. Since a drop shipping business is a go-between manufacturer, retailer, or wholesaler, without actually storing stock, you are reliant on your partners for shipping, sharing accurate information, and informing you about any issues or delays. So, unless you have a streamlined process to share important communication such as electronic data interchange (EDI) messages with all your vendors and the EDI solution integrated with your systems, you might not see success. 

At To-Increase, we have worked with over 2200 customers from several industries, and it is our aim to build solutions to solve customer challenges in Microsoft Dynamics ERPs. We have a solution that can help you share EDI messages – EDI Studio, which is powered by our advanced integration solution – Connectivity Studio. Both solutions are available for Microsoft Dynamics 365 Finance & Supply Chain Management. 

In this blog, we will share a short introduction to drop shipping and then explain how EDI and integration solutions can help you streamline and simplify processes.  

What is drop shipping? 

Drop shipping is a business that works on the direct-to-consumer (D2C) model where products are sold with your own retail front, which is usually through e-commerce, by tying up with vendors which could be manufacturers, wholesalers, or distributors.  

The birth of drop shipping was way back before e-commerce even existed in 1928. But, the Great Depression followed soon after and it didn’t pick up pace till the 2000s. As a result of drop shipping, companies implemented a Just-In-Time (JIT) strategy in the 1950s. JIT was implemented to ensure that raw materials manufacturers align with the manufacturing production schedules for automobiles in the supply chain to eliminate waste. 

A drop shipping business is responsible for the presentation, marketing, and coordination between the customer and the supplier. So, while a drop shipper can add value to the way the product is sold, they cannot control the product quality, storage, or shipping. In drop shipping, revenue is earned through a margin just like a retailer would. Any warehousing costs and additional manpower would reduce margins for the drop shipping business.  

When you think drop shipping, think Shopify, Alibaba, Etsy, eBay, and other such e-commerce aggregators that do not sell their own products or own any storage facilities. Although Amazon started as a drop shipping business in the early 2000s, they soon started manufacturing their own products and also started their own logistics division after a few years. 

Drop shipping has picked up momentum after the boom of e-commerce over the last few years where people preferred the convenience of buying goods online as they spent most of their time indoors during the pandemic. Starting a drop shipping business needs very little investment and this has led to a massive growth in the drop shipping industry. In fact, Statista estimates the industry to reach $243.42 billion in 2023 which has almost doubled from 2020. 

How can EDI and integration help streamline drop shipping? 

In a drop shipping business when a customer places an order, you liaison with the seller which could be a distributor or supplier, and share customer information so that the order can be shipped from their warehouse. Once the order is shipped and you receive the details you share those with the customer. So timely communication is important to ensure a good customer experience. 

This usually involves several electronic data interchange (EDI) messages that are exchanged between the drop shipping business and its customers and suppliers. Using EDI is a secure and streamlined way to send out messages using globally accepted standards. Additionally, if you use an integration application to connect your ERP system to your EDI, web shop, and third-party logistics systems (if you use one), you could save yourself the time and effort spent manually entering data in several systems. 

Now let’s dive into this example in detail with EDI messages. 

Your customer adds a few items to their cart and makes a purchase from your web store. Since your website is integrated with your ERP system, you see the Purchase Order (EDI 850). You can share this EDI message with your supplier to their system or via email (if they do not have EDI) with the order details and customer information after checking it so that they can process and ship the order without any delays. Based on the terms of agreed compliance the supplier shares the Purchase Order Acknowledgment (EDI 855) in under 3 minutes and confirms the acceptance of the order.  

Once the order is shipped to the consumer, the supplier shares an Advance Ship Notice (EDI 856) with tracking details to the drop shipper which is then shared with the consumer. The supplier then shares an Invoice (EDI 810) with the drop shipper. Since there is a delay in shipping after a day, this is communicated to the drop ship retailer who then informs the customer.  

The drop shipping retailers do not have to share the source of the goods or the supplier’s information therefore all communications to the customer are made using the drop ship retailer’s information. To ensure this, the products are shipped using a customized shipping label/packing slip with the drop ship company’s details by the supplier.  

What are the challenges for drop shipping that EDI and integration can help with for the drop shipping business? 

Reliance on suppliers for updates 

Since all the customer communication is shared from the drop ship retailer, there is a lot of reliance on the supplier to share updates instantly, which can be done using integrated EDI.  

Additionally, most drop shipping companies have policies and compliance guidelines for their suppliers to ensure timely updates are shared. 

Multiple systems that lead to confusion  

If you use multiple systems that are not integrated, you will need more manpower and time to do that. Using an integration solution that helps you connect your ERP system, EDI solution, and your website, can save a lot of time and cost. This also gives you a holistic view of what is happening at both ends and makes reporting a whole lot easier. 

Incorrect inventory information 

Sometimes suppliers can purchase orders from another marketplace or supplier to fulfill the order, which is forbidden by some drop shipping companies. Or the products could be back ordered and unavailable but not updated by the seller. This could lead to delays and customers getting upset if their order is canceled. In such a situation, an EDI 846, Inventory Inquiry which is a document asking for an update on the inventory, could be sent to the supplier before the order has been confirmed and an invoice is shared with the customer. Some drop ship retailers have a mandate for their suppliers to share an EDI 846 twice a day. 

What are the challenges for the supplier while engaging with drop shipping customers that EDI and integration can help with? 

Direct-to-consumer model 

Suppliers are used to bulk order processing but when it comes to drop shipping, they are working to ship smaller orders to more people. So, let’s say a supplier selling gardening tools is used to sending orders of 20 to each retailer but now has to ship 1 set to 20 consumers instead. So, if they do not have a streamlined process where they have integrated systems and an accurate view of their inventory, orders, and shipping, there could be a lot of issues and they might even have to pay penalties.   

Accurate response to Inventory Inquiry (EDI 846)  

To ensure you can share accurate Inventory Inquiry messages, it is important that your information in your inventory journal is correct. If you have integrated your EDI solution with your ERP system, you should be able to send out the correct information as you will not be manually entering that information in two systems. If you have an inventory system, it will help to connect that to your ERP system to ensure you can share this information as required to your drop shipping customer. All drop shipping businesses’ compliance requirements vary; therefore, it is also important to ensure you make note of this and have your employees adhere to those, or severe fines will be levied.  

Current solution is not the best fit  

Not all EDI solutions are built for high-volume transactions. When you are dealing with a drop shipping business you could receive several purchase orders in a day that need to be fulfilled within 24-48 hours. A solution such as EDI Studio can help you process thousands of EDI orders in a day and ensure there is no downtime. 

Another challenge with most EDI solutions that are outside the ERP is that they do not integrate with the main system used to process and ship orders. This not only makes the process time-consuming but could also lead to errors and missed information.   

Why choose EDI and Integration for your drop shipping business? 

  • You can integrate orders coming into your web shop and other systems with your ERP using integration. 
  • Exchange crucial business documents such as Purchase Orders, Advance Ship Notices, Invoices, and more using a secure technology that uses globally accepted standards. 
  • Automate processes and improve processing time by using document exchange solutions, such as EDI Studio and synchronization of data between systems using Connectivity Studio.  
  • Simplify document exchange when integrated with the ERP and identify errors. 

If you want to explore the world of EDI for your drop shipping business, we suggest downloading our EDI toolkit below. For more information on our integration solution, you can download our Connectivity Studio for D365 F&SCM factsheet. 

Digitally transform your communication with EDI. Start your journey now!

EDI Toolkit
Kaustubh Durve
Kaustubh Durve,
Kaustubh Durve,
Product Manager

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