You may have heard these terms thrown around and been wondering, “order fulfillment vs drop shipping, what’s the difference?”. To understand the difference let’s take a look at what each one of these terms mean.
What is Order Fulfillment?
In general, order fulfillment is the process by which items are picked, packed and shipped to customers based on incoming orders.
However, some also use the term order fulfillment to describe order fulfillment services provided by third party logistics providers. When the term is used in this sense, it describes services provided by a third party (ie: not the customer or the seller). This third party (often called a third party logistics company or 3PL) takes care of all the picking, packing and shipping details for the seller. With this business model the customer places an order online, the order information is passed directly to the logistics company, the logistics company picks the necessary items for the order from the inventory (which they are also warehousing), then they pack and ship the items to the customer. The seller doesn’t have to worry about storing inventory, processing orders or ever touching the items being sold. (Nor do they have to worry about the overhead associated with holding inventory and processing orders, which is one reason order fulfillment is so popular for small businesses.)
What is Drop Shipping?
Drop shipping is a logistics model in which orders are picked, packed and shipped to customers by the manufacturer, distributor or other wholesaler.
With this business model the customer places the order online, the order gets sent to the drop shipper, the drop shipper then prepares and ships the order directly to the customer.
Similarly to the order fulfillment model, with the drop shipping model, the seller never has to touch or handle the product.
Order Fulfillment vs Drop Shipping – What’s the Difference?
So what’s the difference between order fulfillment and drop shipping?
One main difference is inventory ownership.
With order fulfillment, the seller buys product and has it shipped to the logistics company to warehouse and hold for orders. The seller incurs the costs of purchasing the inventory upfront and may also incur the tax burden of holding the inventory.
With drop shipping, the products’ ownership is typically not transferred to the seller until the time at which it is sold and it gets shipped to their customer. Therefore, the seller doesn’t incur any upfront inventory cost and only purchases goods as they are sold.
Order Fulfillment vs Drop Shipping – Which is Better?
There’s a lot to consider when deciding which ecommerce business model to choose. Here are some items to consider when trying to decide whether to choose order fulfillment or drop shipping for your business.
|Order Fulfillment||– More control over inventory and order processing|
– Higher margins
– Returns processing can usually be handled by your order fulfillment provider
|– Higher upfront inventory costs|
– Higher inventory storage costs
|Drop Shipping||– Lower upfront inventory costs|
– Lower inventory storage costs
|– You’re providing your customer information directly to the manufacturer or wholesaler (potentially a competitor)|
– Typically lower margins
– Less control over inventory (ie: out of stock items) and order processing
– Not all manufacturers offer drop shipping
– Returns processing more difficult