Ops Summit Discussion: How Do You Help “Mom and Pop” Drop Ship Suppliers Who Underperform?

Ops Summit was a great conference this year, topped off by the fact that just down the road was a Waffle House!

Wednesday morning, Dsco’s Founder & CEO, Jeremy Hanks, sat with a table of retailers to discuss drop shipping automation and distributed inventory visibility. There was one question asked that stood out to me, so I will repeat it here:

What do you do about “Mom & Pop” drop ship suppliers who underperform?

Excellent question because there are so many terrible answers.

Some of those answers include, “Charge them order penalties”, “Charge them to be part of your program”, or “Shut them down”.  It’s extremely easy to be short term in thinking here, but doing so will sacrifice the growth of your drop ship program for short term efficiency gains.

Here instead are six recommendations for helping your underperforming suppliers improve.

Six recommendations for improving mom and pop supplier performance

1. Determine their strategic importance 

What is your overall retail strategy? Is there a specific category that you intend to be absolutely extraordinary in? When thinking about that strategy, does carrying products from this supplier reinforce and strengthen your authority in that category?

In addition to the above, you also need to aggregate your revenue performance with these underperforming suppliers. When you look at all suppliers who are underperforming, what portion of your revenue is coming from products drop shipped by those suppliers? Are we talking about 10% of your revenue? More? If so, and if you just decided that this is of strategic importance, then cutting them off holistically is out of the question.

2. Change your mindset 

Remember that drop shipping is not just a different financial model with an integration need. Drop shipping is an entirely different way of doing business. It requires a partnership mindset, because your suppliers are being trusted now with 70% or more of the customer experience.

This means instead of taking a top-down, retailer as the enforcer, or retailer-centric approach to supplier relations, you need to engage your suppliers as equal partners in creating the retail experience you are trying to give your customers.

Especially in the context of drop shipping operations, you’re asking them to do your job, plus theirs, so think of this as a chance to show how good a partner you really are.

3. Communicate the pain of performance

This often starts with a rich performance scorecard, a very effective way for you to gather all the relevant data relating to this conversation. Here at Dsco we recommend that your scorecard include both metrics of physical performance as well as metrics of virtual performance.

This is largely because a supply partner’s performance may be fine during periods of low demand, but if they are poor at managing their data, they become much more likely to show poor performance during periods of high demand.

Gather your cost analysis alongside metrics such as on-time shipment, fulfillment rate, shipment mismatch, inventory update frequency, etc. Your cost analysis can include GMV from cancellations, your operational team’s time, lost customers, etc. Your objective is to communicate that their actions are impacting real people.

4. Show the possibility

Especially with a small craftsman shop, when you ask them to communicate more, they’ll say, “we’re busy actually building the order”. Touche.

It helps to show them that they are not alone. You might consider sharing with them that you have 100 other suppliers who operate Mom & Pop operations, and they are in the bottom 10% of that group.

Work with them on how to improve; showing them what in particular they can change to help the people they impact is extremely helpful. If they are not communicating order status until 3 days after the order actually arrived, have that data in their scorecard. Listen to their needs. It may be that there’s a technology challenge to overcome.

5. Structure an incentive plan, and make it good

If your drop shipping operation does not yet have an incentive program, you need one. We celebrate whenever we hear about a strong incentive program for excellence in drop shipping.

The prerequisite to an incentive program is the same scorecarding and performance analysis I mentioned above. We’re currently doing research about what incentives are considered most effective (hopefully we’ll be able to release that within the month). Some ideas for incentives include:

• Dedicated email marketing for a supplier brand
• Inclusion in email marketing
• Prominence on either the home page or category home page
• A sort boost for relevant filters and searches
• A margin bonus for consistent excellence

Since we’re talking here about Mom & Pop suppliers, a dedicated email and heavy prominence will likely be too much demand for them, so focus more on the other incentives.

6. If you bring a consequence, make it real

Some retailers set up a 3 step violation process to surface and remove poor performing partners. After 3 major violations the partner is no longer in the drop ship program.

Some retailers align their supply operations and merchandising teams together in such a way that if a supplier is performing poorly (and unwilling to improve) in drop shipping, they will also lose their wholesale partnership as well.

What consequences you bring depend largely on the strategic priority of drop shipping as well as the strategic value of the supplier to your organization. Just remember that while your aim is to lift the customer experience, chopping poor performing suppliers will only get you so far.

Additionally, you’ll see much more substantial results by having a data-driven conversation with a supplier to help them improve their performance before applying any consequences.

Conclusion

Excellence in customer experience through an intelligent distributed supply chain is the major victory of modern retail, but doing so requires being a real partner to your supply chain.

Good data, good communication, and aligned incentives do more to help retail supply more perfectly than any amount of penalties and severed partnerships ever will.