Supply Chain
Before moving into the Dropshipping business model, I would request you to understand how
the product supply chain works. Do not get overwhelmed by the use of such jargons, it is
very simple to understand the concept.
The products you buy from your local retail shop involves the work of the various type of
companies. Traditionally, getting a product manufactured and selling it to the end customers
require a whole lot of effort from various business houses in order to ensure that the goods
produced are successfully delivered and sold for profits every time.
Let‘s see the most common flow of such a product flow supply chain. Be known that it may
differ a little between business to business and we‘ll see only the most widely used supply
chain model for easy understanding.
Manufacturers
Manufacturers are the ones who produce the goods. They buy the raw materials from the
respective agents and make it into a finished product. For example, the apparel manufacturers
buy fabrics like polyesters and linen from sellers like Reliance and Aditya Birla to weave it
into a complete product. Manufacturers do not sell one by one to the end customers, they sell
in lots to wholesalers and distributors.
Distributors & Wholesalers
Distributors buy products from manufacturers in bulk and store the inventory to resell to the
wholesale dealers. Distributors have big warehouses for storage of the products and network
with the regional wholesalers to ensure their products reach all the places in their reach. Later
wholesalers distribute the same to their network of retailers.
Retailers
Retailers are the endpoints before taking a product to the end customers. Hence retail shops
are set up in public places like high streets and malls to make it easier for people to buy from
them.
Differences between distributors, wholesalers, and retailers
Retailers have to set up shops in shopping places like high streets and malls which makes
their investment in real estate very high.
Retailers mostly sell single pieces and so get immediate payment on sale making their
business less risky.
Wholesalers may not have to spend lavishly on real estate as they deal with business people
who focus on products and prices more than the look of their offices.
However, as the competition increases, wholesalers are providing credit periods to the retailers to move more products from their godowns. If there is a delay or no payment, the
wholesaler has to bear the losses.
Interdependency
In this traditional supply chain flow, it is practically not possible to remove any of these
middlemen. Everyone depends on the other. Manufacturers usually deal with raw material
sellers and focus on what they produce, they cannot focus on sales or taking it to the end
customers. If a manufacturer wants to take the products directly to the end customers, they
need huge power to create retail stores in all parts of the country or region they target, and on
top of that, they need a good supply chain mechanism as well.
The same is the case with retailers. Most retailers cannot manufacture products themselves. If
you are going to manufacture something, you need to manufacture in huge quantities to
ensure that you are keeping the costs low. Hence if a retailer manufactures themselves, they
will end up with high costs and have to sell products at higher costs as well which will kill
their business.
The exception to this is the powerful businesses and small boutiques. The powerful
businesses like Reliance have tens of thousands of stores across the nation and as well have
all the raw materials and manufacturing capability in-house who can control the entire supply
chain single-handedly and still be successful. Boutiques on the other hand who design their
own stuff may find limited success except in exceptional cases. As both powerhouse
businesses and boutiques are rare cases, we‘ll rather focus on the regular business models
which guarantees a better success ratio.