If you are selling a tangible product, you'll have to decide on an storage method. Storage sounds a little stodgy in this fast-moving age of electronic commerce, but it is essential to having your product available and ready to ship as soon as you get an order. There's no single one-answer-fits-all -- each has advantages and disadvantages -- but here are the various models.
1. Warehouse Products Yourself
This brings visions of boxes of CDs lining the hallways of your home or running over in your garage. Some small companies lease light industrial space to store inventory. For the smallest e-businesses that want to make maximum dollar profit on sales, probably warehousing your own inventory will make the most profit. This is appropriate, too, for brick-and-mortar retail stores, which are small enough to ship products for online sales out of existing inventory. From a customer service standpoint, handling inventory and shipping yourself means that you have the records at hand to provide quick, efficient customer service for telephone calls and returns. You control the inventory, ordering ahead what you think you'll need. You'll be able to easily determine the amount of product in stock and know whether orders can be shipped or must be backordered. You are in control.
But there is a price. First, you must pay for the inventory that the manufacturer or distributor ships to you. Only individual artisans will be willing to negotiate payment for sales on consignment. Second, you must pay for inventory space. If you have extra space already, there's no extra cost. But if you need to lease space to warehouse inventory, you'll be paying for the square footage it takes to store the products. When you carry your own inventory and run your own shipping department, you are betting that your own shipping system will be more cost-efficient than that of a drop-shipper or fulfillment house.
A modification of this model is to carry inventory for your best selling products only and handle the occasional orders for other products using another model.
2. Buy from a Local Distributor
If you don't want to warehouse inventory yourself, one option is to find a local distributor who carries a considerable inventory of your most popular products. You get your orders from the night before, drive over to the distributor's warehouse, pick up the products, and ship them out. This was Amazon.com's first fulfillment method using an Ingram book distributor in Seattle. It worked well for the first phase of their company -- until a big bookseller competitor threatened to acquire Ingram.
The advantage here is that you don't have capital tied up in inventory or monthly leases for warehouse space -- the distributor takes care of that. You might get caught, however, if the distributor runs out of one of your important products. There's no easy way to determine what is in stock and can be shipped immediately.
3. Drop-Ship from a Distributor or Manufacturer
One of the most popular models for Internet start-ups is to set up relationships with distributors or manufacturers who will receive the order from you (faxed or e-mailed) and ship it to your customer with your supplied label and your packing slip. The customer probably won't be aware that it didn't come directly from you. You'll need to find which companies will drop-ship the brands you desire to carry in your online store. Fortunately, there are directories of such companies, brands, and products. One directory I'm impressed with is Chris Malta's online Drop Ship Source Directory (http://www.MyDSSD.com/enter.htm), which is constantly updated.
Drop-shipping is wildly popular among start-ups because it requires no capital investment for inventory. You only have to pay when you have an order (and money) in hand to fund it.
The downside is that many drop-shippers don't give you much information about what's in-stock or out-of-stock, so your customer may be left hanging. In case of customer service inquiries, you may not have much information at your fingertips about the status of any particular order. Since building a happy clientele that makes repeat purchases is dependent upon excellent customer service, drop-shipping can affect your long-term viability. In addition, your discount from the manufacturer or distributor isn't as great when you drop-ship; you're paying them to carry inventory and fulfill your orders, so your profit margin may be lower.
4. Have a Fulfillment House Warehouse and Ship for You
The final model is to contract with a fulfillment house to warehouse your products on their shelves and then pick, pull, pack, and ship to your customers when you get an order. You can send them orders from your own shopping cart, or use their shopping cart system to take your orders. In addition to shipping charges and the cost of the inventory items, you'll pay a per order fee and perhaps a monthly fee or minimum. (See the accompanying article "How to Select a Fulfillment House.") Many will also assemble your product, handle customer service inquiries, and reorder for you -- all for a fee. A fulfillment house is best for products that have a sufficient mark-up to make up for the costs of outsourcing.
Assessing What's Right for You
Which of these four models is best? A lot depends upon your goals and how mature your online business is. Here's one scenario that many Internet companies follow:
Drop-ship or buy from a local distributor initially to get started with minimal up-front fees.
Purchase inventory of their best-selling products.
As the business grows, either develop your own in-house warehouse and shipping system or outsource to a fulfillment house.
