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Drop Shipping: How to Manage Inventory Visibility

By: Jeremy Hanks

If you’re new to drop shipping, read my 4-part series on the basics, for ecommerce.

Drop shipping requires three major data integrations between the retailer and the supplier: product catalog, inventory, and orders.

Last month, I addressed how to manage product catalog data. I started with the premise that drop shipping requires that the seller-retailer have a virtual representation (i.e., data) of a physical thing — a physical thing that the retailer will never see, touch, or control. A product catalog is the collection of descriptive data — title, brand, category, attributes, images — of that physical thing.

Conversely, inventory is the data that tells you where the item is, how many units there are, and what they cost you as the reseller. In this article, I’ll address inventory matters.

Inventory Visibility

Having visibility to your supplier’s inventory is what links all of the virtual descriptive data about products to actual items that you can offer for sale to your customer — with the expectation and confidence that if a customer order is created, the product will then be able to be fulfilled and drop shipped to your customer. Inventory is the key link between product catalog and order processes. It’s the part of drop shipping that most likely requires software or solutions to manage effectively.

Here’s a list of the basic inventory data that should be provided to you from a vendor-supplier.

  • sku. Stock keeping unit.
  • title. The title of the SKU. A common practice is to concatenate this data with other fields (such as manufacturer and brand) to end up with a more complete title — e.g., “Lenovo ThinkPad T410 Notebook.”
  • quantity_available. The quantity available for order. The amount in the supplier’s warehouse ready for shipment.
  • cost. The wholesale price of the SKU.
  • status. The status of an SKU. Typically, options are “in-stock,” “out-of-stock,” “backordered,” or “discontinued.”
  • estimated_availability_date. The date the SKU will be in stock. This is typically an estimate. It is the date that the shipment of quantity_on_order products come in.
  • quantity_on_order. The quantity that has been ordered and is expected to be received. To determine how much stock will be available after the next shipment arrives (estimate_availability_date), add quantity_on_order to quantity_available.
  • currency_code. The three-letter ISO — International Organization for Standardization — 4217 currency code.

Of this data, the only essential fields are “sku” and “quantity_available.” That is enough to link to the product catalog and to provide inventory visibility.

Inventory Process

Compared to product catalog, the process and amount of data required to capture a vendor’s inventory view isn’t nearly as complex. However, the complexity arises not in the scope of data or the data transforming-mapping, but from the fact that while the product catalog changes only a few times per year for most suppliers, inventory can change by the minute. As such, the inventory process is the most important to have automated, in real-time if possible.

From what I’ve seen, a daily update to inventory would be the average that suppliers can support and that drop-shipping retailers use. Ideally, hourly updates could be shared and processed. Until more back-office systems come to support web-based APIs, the concept of “instant real-time” doesn’t exist in 99 percent of business-to-business data integrations. So, four times per day would be a target to aim for. However, If your vendors don’t update their inventory feeds more than once a day, you don’t need to be looking for updates every hour.

Another point to remember is that if a human consistently and reliably logs into a portal four times per day and manually updates inventory quantities for a set of SKUs, that’s as automated as more technical process, like flat file integration or EDI (electronic data exchange).

Considerations

The biggest question to ask is, “How clearly do I need to see into my supplier’s inventory data?” There are vendor characteristics that make this either critically important or far less so. Inventory visibility requires that you understand each and every vendor.

Here are some questions to ask a vendor, and the reasoning behind the questions.

  • Does your vendor make products as orders come in? If so, its inventory may be almost unlimited.
  • Does a vendor have long product lead times? If so, a product that goes out of stock and then to backorder may take months to come back in stock.
  • How automated and accurate is the vendor’s back-office its uses to track inventory? Don’t assume that the vendor really knows how much inventory it actually has.
  • Does your vendor sell wholesale? An inventory update showing quantity available for a SKU of 10 at 1:00 p.m. can quickly go to 0 if a wholesale order for 10 comes in at 1:05 p.m.
  • Does your vendor sell wholesale to larger retailers? If the retailer is Walmart, a quantity of 100 or even 1,000 for a SKU can go to 0 with one order.
  • How many other retailers does the vendor drop ship for, and does the vendor sell directly to consumers? Your orders for a given amount of inventory may be competing with lots of others.

These questions lead to an understanding about how much confidence you have in a vendor’s inventory data and might determine if, for a particular vendor, you should maintain a buffer on its inventory — i.e., the vendor tells you quantity 10 and you assume quantity 5.

Success

Once you have a virtual product assortment determined — remember, curation is the key — from some number of vendors, inventory visibility is where drop shipping success will be made or broken. You can’t have very many instances where you sell something to a consumer that doesn’t really exist and can’t be fulfilled by your supplier partners before you have big problems.

Make inventory data and its process the one that you spend the resources on to (a) understand how vendor characteristics impact your strategy, (b) automate, and (c) make as accurate and as close to real-time as possible.

 

Originally published at Practical Ecommerce: http://www.practicalecommerce.com/Drop-Shipping-How-to-Manage-Inventory-Visibility