Dropshipping Fulfillment: Understanding the Supply Chain and Fulfillment Process

For many small businesses, the act of capturing and fulfilling orders in their online store is tricky. To make matters worse, ecommerce fulfillment operations have become more complex, with multi-node networks, sophisticated technologies and many different transportation strategies. 

In-house fulfillment and warehousing comes with an ocean of hassle:

  • Poor inventory management
  • Unsatisfactory order management 
  • Expensive labor
  • Slow processing speeds

It’s no wonder why one-third of merchants are outsourcing order fulfillment and more plan to do so. 

One way to solve these problems? Dropshipping fulfillment, which allows ecommerce businesses to meet order demands without managing a warehouse, plus reduce the cost and risk of inventory carry. 

So, how does dropshipping fulfillment work? And how can you start with it? This guide covers exactly that.

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What is dropshipping fulfillment?

Dropshipping fulfillment refers to when a business doesn’t keep the products it sells in stock. When the business sells a product, it purchases the item from a third-party supplier and has it shipped to the customer. As a result, the seller doesn’t have to handle the product directly or manage any supply chain. 

Supply chain is a fancy term describing the path a product takes from conception through manufacturing and finally into the hands of a customer. If we were talking with hard-core supplier chain gurus, they’d insist a product’s supply chain reaches all the way to the procuring of the materials (like oil and rubber) used to manufacture an item. But that’s a little intense.

For the purposes of this article, we don’t need to get quite that detailed. You simply need to understand the three most applicable players that make up the dropshipping supply chain: manufacturers, wholesalers, and retailers.

Manufacturers. Manufacturers create the product, and most do not sell directly to the public. Instead, they sell in bulk to wholesalers and retailers. Buying directly from the manufacturer is the cheapest way to purchase products for resale, but most have minimum purchase requirements you’ll need to meet. You’ll also need to stock and then re-ship the products when selling them to customers. For these reasons, it’s often easier to buy directly from a wholesaler.

Wholesalers. Wholesalers buy products in bulk from manufacturers, mark them up slightly, and then sell them to retailers for resale to the public. If they do have purchasing minimums, they’re generally much lower than those required by a manufacturer. Wholesalers will usually stock products from dozens—if not hundreds—of manufacturers and tend to operate in a specific industry or niche. Most are strictly wholesaler operators, meaning they sell only to retailers and not directly to the general public.

Retailers. A retailer is anyone who sells products directly to the public at a markup. If you run a business that fulfills your orders via dropshipping companies, you’re a retailer.

You’ll notice that “dropshipper” isn’t one of the players listed in the supply chain. Why? Because any of the three—manufacturer, wholesaler, or retailer—can act as a dropshipper.

If a manufacturer is willing to ship its products directly to your customer, it is dropshipping on your behalf. Similarly, a retail merchant can offer dropshipping, although its pricing won’t be as competitive as a wholesaler’s because it isn’t buying directly from the manufacturer.

Just because someone claims to be a dropshipper does not mean you’re getting wholesale pricing. It simply means the company will ship products on your behalf. To get the best pricing, you want to make sure you’re working directly with a legitimate wholesaler or manufacturer, a topic we cover in 7 Best Dropshipping Suppliers and Companies to Work With in 2021.

Dropshipping order fulfillment benefits

Here’s the question you’ve been wondering: How does dropshipping fulfillment benefit your business? The short answer is: You can offer different products in your store without any supply chain. Once you find a supplier, like DSers, an AliExpress dropshipping partner, one click and you’ll have products live in your store, at no extra cost. 

Other benefits include:

  • Low capital requirements. You don’t have to purchase products ahead of time when using dropshipping fulfillment. This makes it cost-effective to start an ecommerce store or expand your product offering without investing thousands of dollars in inventory up front. 
  • Easy to start. You also don’t have to deal with physical products. Dropshipping suppliers have their own warehouses where they pack and ship your customers’ orders. You never have to worry about inventory management or managing stock levels. All you need is a laptop to start.
  • Low overhead. Because you don’t have to invest much money upfront, your overhead expenses are low. Many dropshipping stores start as a home-based business idea that turns into something bigger. 
  • Easy to scale. If you are a traditional retailer, every time you receive an order, you must receive, fulfill, pack, and send the order manually. That’s a lot of work for a small team. With dropshipping fulfillment, suppliers do all of that for you. So you can sell as much as you want, on any marketplace or channel you want, without falling behind.
  • Wide variety of products to sell. You’re not limited to the items you can sell as a dropshipping retailer. If your supplier stocks a new product, you can list it for sale in your store at no extra cost. 

The first sale was an incredible experience. Even the 100th and 300th sale was fun.

Karolis, Dropshipping Entrepreneur

Common challenges faced by dropshippers

Every dropshipper faces different challenges. Although they all share similar goals, some get stuck on finding good suppliers, while others have trouble with shipping. Whatever the case may be, there’s always one area you can improve to turn your dropshipping business into a revenue generator. 

Let’s look at the current downsides of dropshipping services. That way, you can tackle them easily if they show up in your business. 

Low margins 

Low profit margins is a top challenge for many dropshippers operating in competitive dropshipping niches. Because it’s easy to start, competitors can sell items at low prices to grow revenue through sales volume, versus quality. Since they don’t invest much to start a dropshipping business, they can afford to operate on small margins.

Samuel Belanger, CCO and Vice President of Growbuds, has particular expertise in dropshipping, operating under the fulfillment model for four years. Through his experience, he’s learned that some dropshipping wholesalers will charge more to pack and ship small orders.

“This leaves a very thin margin for the dropshipper. When you add the cost of running ads and other marketing efforts, it becomes difficult to generate significant profits.” If you’re also running an Amazon dropshipping operation to complement your store, your margins will be even thinner. 

Samuel recommends negotiating your margins based on the value you’ll provide to the wholesaler or brand. In his cases, that includes “investment in paid advertising, dedicated content production to put their brands in the spotlight, and other promotional efforts via social media.” 

He also recommends looking for tier pricing options. “Many partners will be open to offering better margins if you generate high volumes of business for them,” he says. For example, 15% margins if you sell below $20,000 monthly, or 20% margins if you sell below $50,000 monthly. “This has been a great incentive for us to create long-lasting, win-win relationships with the brand or wholesaler.” 

Supplier challenges

Even the best dropshipping suppliers will make mistakes fulfilling customer orders. Mistakes you’ll need to take responsibility for and apologize on behalf of. Low-quality suppliers can cause havoc with missing items, mishandled shipments, and poor packaging. If you work with multiple suppliers, which many dropshippers do, it makes fulfillment more challenging. 

“The process of receiving orders, placing the order with the supplier, and waiting for their tracking information can be longer than you would expect,” Samuel says. “Each supplier is different: sometimes they are prompt, sometimes, not so much. The only solution is putting a process in place that includes several follow-ups to make sure your orders are placed, paid, and shipped in a timely manner.” 

His experience has shown that some suppliers just can’t offer competitive lead times or lack inventory updates. These challenges do your business more harm than good. In these situations, he recommends talking with your supplier to find a solution. If you can’t improve it, then you may have to end the relationship.

The only solution is putting a process in place that includes several follow-ups to make sure your orders are placed, paid, and shipped in a timely manner.

It’s important to find reliable dropshippers to fulfill your orders. Vet your options. Check reviews on supplier sites like DSers. Top things to look out for when choosing a good supplier include:

  • Fair fees
  • Low order minimums
  • Expert knowledge
  • Customer support
  • Responsiveness 

If you can find a supplier that checks the boxes above, you’re more likely to have good dropshipping fulfillment experiences. 

Poor unboxing experience

For online businesses, shipping and fulfillment is the most direct touchpoint and connection with a customer. Customers can’t touch or feel products before purchasing them. The unboxing experience is where you can create a memorable experience and differentiate yourself amongst competitors. It’s also a common challenge for many dropshippers. 

Creating a premium unpacking experience was an ongoing challenge for Rihards Piks, former owner of dropshipping store Grafomap. The brand, which sells premium maps and posters, would often disappoint customers upon delivery. “Our ecommerce website and pricing was setting high expectations,” Rihards says. “It was a bit of a letdown when our customers received a poster tube that’s labeled with multiple ugly shipping labels.”

In response, Rihards found a boutique dropshipper that would wrap the poster tube in plastic wrapper before applying shipping labels. Now, customers could remove the plastic wrapper along with the shipping labels and they’d have a clean poster tube to reuse as a gift. 

Rihards also negotiated with the dropshipper to add thank you notes to every order, making them feel a bit more personal. “This may sound like nothing special, but our experience shows that people appreciate these little things—we received a lot of positive feedback from our clients.” 

Shipping issues

Shipping times and delays are common in dropshipping fulfillment. Depending on the country you’re shipping to, shipping times can take up to 60 days. Marc Bromfall, founder of Surf Gear Lab, found that shipping issues were upsetting his customers. “When I first started dropshipping with AliExpress, I was told by others to always use ePacket shipping service due to the relatively cheap and fast shipping times,” he says. 

The acclaimed speedy delivery service didn’t always work though. Marc found packages were often delayed, which frustrated his customers. “The way I’ve gotten around this is to now only source products which are shipped from the US, which you can now do on AliExpress.” 

Shipping from your home country is one option to bring down shipping costs and complexities. Some dropshippers also solve this shipping problem by buying products wholesale, then hiring a fulfillment center in the country they ship to. This lets them deliver orders in a few days versus a few months. 

Dropshipping fulfillment services in action: The order process

Now that you understand the players involved, let’s take a look at how a dropshipped order gets processed. To illustrate, we’ll follow an order placed with our theoretical store, Phone Outlet, an online merchant that specializes in accessories for smartphones. Phone Outlet dropships all of its products directly from a wholesaler we’ll call Wholesale Accessories. 

Dropshipping fulfillment

Here’s a sample of how the entire ordering process might look:

Step 1: Customer places order with Phone Outlet 

Mr. Allen needs a case for his new smartphone and places an order via Phone Outlet’s online store. Once the order is approved, a few things happen:

  • Phone Outlet and Mr. Allen will get an email confirmation (likely identical) of the new order, which is automatically generated by the store software.
  • Mr. Allen’s payment is captured during the checkout process and will be automatically deposited into Phone Outlet’s bank account.

Step 2: Phone Outlet places the order with its supplier

This step is usually as simple as Phone Outlet forwarding the email order confirmation to a sales representative at Wholesale Accessories. Wholesale Accessories has Phone Outlet’s credit card on file and will bill it for the wholesale price of the goods, including any shipping or processing fees.

Note: Some sophisticated dropshippers will support automatic XML (a common format for inventory files) order uploading or the ability to place the order manually online, but email is the most common way to place orders with dropshipping suppliers because it’s universal and easy to use.

Step 3: Wholesale Accessories ships the order

Assuming the item is in stock and the wholesaler was able to successfully charge Phone Outlet’s card, Wholesale Accessories will box up the order and ship it directly to the customer. Though the shipment comes from Wholesale Accessories, Phone Outlet’s name and address will appear on the return address label and its logo will appear on the invoice and packing slip. Once the shipment has been finalized, Wholesale Accessories will email an invoice and a tracking number to Phone Outlet.

Note: The turnaround time on dropshipped orders is often faster than you’d think. Most quality suppliers will be able to get an order out the door in a few hours, allowing merchants to advertise same-day shipping even when they are using a dropshipping supplier.

Step 4: Phone Outlet alerts the customer of shipment

Once the tracking number is received, Phone Outlet will send the tracking information to the customer, likely using an email interface that’s built into the online store interface. With the order shipped, the payment collected and the customer notified, the order fulfillment process is complete. Phone Outlet’s profit (or loss) is the difference between what it charged Mr. Allen and what it paid Wholesale Accessories.

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Handling returns as a dropshipper

Returns get more complex with a dropshipping supplier involved. Every supplier will have different policies for returns. Some won’t allow returns at all, some will charge you a high restocking fee. You may have to pay postage to return defective items. It varies. 

Regardless, the customer is coming to you for returns. And you need to make sure it’s an easy experience for them. “You need to iron out returns before you start selling products from a supplier,” Samuel of Growbud says. “Adjust the specific product return policy to fit the one offered by the supplier.” This will help customers return products faster and get their refund in a timely manner and lets them know they can depend on your brand.

Suppliers aside, the returns process for dropshippers looks like this:

  1. The customer requests a return.
  2. You request an RMA (return merchandise authorization) number from the supplier.
  3. The customer mails back the merchandise to your supplier, noting the RMA number on the address.
  4. The supplier refunds your account for the wholesale price of the merchandise.
  5. You refund the customer for the full price of the merchandise.

There is no right or wrong way to handle returns as a dropshipper. Some ecommerce businesses will even offer “returnless refunds,” or a full refund that’s granted to a customer without having them return the merchandise. 

Marc had decided to not deal with returns for Surf Gear Lab, saying that he “accepts that a small percentage of customers will want to return items,” and simply issues them a full refund, absorbing the financial cost on his end.

Rihards recalls Grafomaps’ “no questions asked” returns policy, where customers could get a refund “for literally any reason” and the company wouldn’t ask them to send the product back. “At first, we were worried that this would backfire, but in the end, very few people asked for a refund,” he says. “Such a refund policy was 100% worth it. It gave our customers confidence that they have nothing to lose before placing their order.” 

A returnless refund policy can be worth it because it gives customers confidence before placing an order. 

Write out a return policy and place it on your website for customers to see. It can build trust with shoppers and encourage them to buy. If you’re stuck, use Shopify’s Return Policy Generator to create one quickly and easily. 

Fulfillment companies are invaluable

Despite its critical role in the ordering and fulfillment process, the dropshipper is completely invisible to the end customer. When the package is received, only Phone Outlet’s return address and logo will be on the shipment. If Mr. Allen receives the wrong case, he would contact Phone Outlet, which would then coordinate behind the scenes with Wholesale Accessories to get the right item sent out.

The dropshipping wholesaler doesn’t exist to the end customer. Its sole responsibility is to stock products and ship orders. Everything else—marketing, website development, customer experience—is the responsibility of the business owner.

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Dropshipping fulfillment FAQ

What’s the difference between a dropship order and a regular order?

The difference between dropshipping and the traditional retail business model is that sellers don’t own inventory. Instead, when a customer purchases an item, a third party, like a wholesaler or manufacturer, fulfills the order.

What are the benefits of dropshipping fulfillment?

  • Low risk
  • Low capital requirements
  • Low overhead 
  • Easy to start
  • Wide variety of products to sell

How do I process a dropship order?

  1. Your customer places an order from your online store.
  2. Your store automatically sends the order to a dropshipping supplier.
  3. Your dropshipping supplier prepares the customer’s order. 
  4. The dropshipping supplier ships the order to your customer.