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E-Commerce Supply Chain Models to Consider

06 November 2018, 11:48 CET

In the rapidly growing e-commerce industry, myriad opportunities exist for entrepreneurs with an ingenious concept and the ability to scale a business. But in the age of free shipping, competitive branding and customer-focused shopping experiences, online stores stand little chance to flourish without a streamlined, cost-effective supply chain.

Ecommerce

If you've had the itch to start an online company but are still unclear about what e-commerce is and how a business is developed, you're in luck. Below we'll explore the various e-commerce supply chain models to consider before launching your store.

What Kind of Model Will You Run?

The first step of developing your supply chain is committing to your operational model. In general, there are four types of e-commerce models to use: dropshipping, product sourcing, DIY and wholesale. The three things to look at in these models, aside from feasibility for your store, is the price, quality and lead times associated with each model.

Here's a breakdown of each model:

  • Dropshipping - A dropshipping e-commerce model involves selling goods manufactured by a third party who also fulfills the customer's order on your behalf. Dropshipping is a popular business, particularly for new brands, because there's no upfront investment in inventory, stock to maintain or delivery system to develop—all while affording your store a diverse selection of products.

    However, it's not all peaches and cream; dropshipping makes e-stores dependent on their supplier, which can result in a variety of unfavorable scenarios. For example, if your store experiences massive growth, your dropshipping partner could raise costs, or they could start charging extra add-on costs not related to order fulfillment. In some cases, they may even charge a membership fee. And that whole reverse logistics process? It'll be more complicated and expensive through a dropshipper. Finally, because dropshipping models allow stores to get in business quickly and with considerably less risk, competition is fierce.

  • Product Sourcing - Have an idea for a product or line of products but haven't created a prototype yet? You'll probably need to source your products from a manufacturer. Doing so gives you quite a bit of control over product quality and branding, in addition to a low cost per unit, which ups your overall margins.

    Keep in mind that product sourcing is extremely difficult for a small e-commerce store, especially when one that's starting out. Most large manufacturers won't view your business as worthwhile, limiting you to smaller operations that might have difficulty scaling while keeping product quality high in the event your store grows.

    However, if you have solid product ideas and talk to enough manufacturers, you might find one that likes your ideas enough to see long-term mutual growth potential. In all cases, having your products manufactured will carry the longest lead times and minimum order volumes.

  • DIY - Have a unique product, perhaps something you've already created? Instead of paying a manufacturer to produce them at scale, can you launch your store running by making the products yourself? The DIY option is certainly not for the faint of heart, but if your products are highly personal, such as arising from a personal problem, developing your products in-house gives you full control over product quality while keeping inventory costs extremely low.

    And since you're sourcing all your materials and know how much time it takes you to produce a product, you can set more accurate prices. This usually means higher margins, but only if you're diligent managing your production time.

    Additionally, having full control of your product manufacturing makes it easier to implement production changes if you want to alter a component or add a feature. Perhaps the best thing about taking a DIY approach is that it affords you room for experimentation without large expenditures in capital and time. However, the long-term sustainability of this approach, particularly for brands that have high-growth aspirations, cannot be overlooked.

  • Wholesale - Wholesale e-commerce business models offer the best balance of risk, capital investment and time. Like dropshipping, you'll sell a variety of products manufactured elsewhere. The difference is that you'll purchase the products ahead of time and handle fulfillment.

    Selling products from established brands may help you convert customers, but because you're not offering anything unique to your brand, you'll encounter a lot of competition from other e-commerce stores. Buying products made by other brands means you little to no control over price. It also means you'll have to get storage for your products and keep inventory since you'll be subject to minimum order volumes.

    If you want to diversify your product offering further, that usually means working with more suppliers, which ultimately creates more work. Selling wholesale does give you branding control via fulfillment, which can be a remedy for sticking out if many other sites carry the same products as you.

No matter how powerful your store's concept or the buzz you generate, without a humming supply chain that allows for timely delivery, efficient reverse logistics handling, and favorable margins, you won't get far. Keep the above considerations in mind as you consider which of these four e-commerce supply chain models to adopt for your business.

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