How Retailers Can Start Lowering Their Inventory Risk

If you’re like most retailers in 2022, your wholesale business is weighing you down.

We’re not kidding — retailers have been struggling with excess inventory this year:

• Target reported its operating profit dropped by 90% in Q2 2022 because of markdowns related to its excess inventory (which were 43% higher than last year)
• Walmart reported its inventory has jumped by 32% in Q122, which led to product pileups on its store floors.
• Nike’s inventory was up 44% in its first fiscal quarter of 2022.
• Levi’s inventory surged by 43% in its third quarter, following a 29% rise in Q2 and a 20% rise in Q1.

While the ongoing supply chain crisis is to blame, retailers also made inventory forecasts with poor assumptions that contributed to more product than they needed. The result is a host of retail inventory management nightmares that have drastically affected profit margins in multiple retail categories.

Inventory forecasts will never be 100% accurate. Instead of improving your forecasts, you should reduce your inventory exposure entirely. One way we’re seeing retailers do this is by moving some of their product categories to virtual inventory models like dropship.

Dropship is a strategy many retailers believe in, but they don’t know where to start, especially when their existing operations are built around a wholesale model. In this blog, we’ll share a step-by-step process by which you can get started with dropship without disrupting your existing wholesale operations.

1. Set up your dropship program with a single category

When you’re getting started with a dropship program, you might be overwhelmed by the thought of which products you should move from wholesale to dropship. We recommend taking a phased approach to your dropship efforts and transitioning one product category at a time.

Managing a single category with dropship has two benefits. First, you can allocate a dedicated merchandising resource to handle your dropship products instead of splitting your merchandising team’s focus across your wholesale and dropship assortment. Second, your finance team can manage the P&L of your wholesale and dropship assortments more accurately since you aren’t blending the two inventories together within a category.

Choose your ideal category

What category should you go after with dropship to get started? Here are a couple of ways you can answer that question:

1. Bulky and oversized products
   One category we’ve seen retailers use to stand up their dropship infrastructure is with bulky and oversized products in their assortment. Examples of these products include standing desks if you’re a furniture retailer or mattresses if you stock home goods.
   
   These products are usually costly to store in fulfillment centers, ship to customers, and handle returns. Although they tend to be higher ticket items, their margin ends up being on par with products at lower price points because of these operational costs.
   
   
2. Adjacent categories
   You could also go after an adjacent product category that you don’t already have in your assortment. Doing so with dropship is a risk-free experiment to test new product categories that align with your customer promise.
   
   Harry Rosen is a menswear retailer that was forced to close its stores during the COVID-19 pandemic. As it focused on expanding its ecommerce assortment, it decided to test out offering grooming products to its customers to complement its luxury apparel products. They onboarded over 50 brands to their website in a couple of months before they went live. Their grooming category was an immediate hit with customers and has elevated their brand. They’re not just a menswear brand anymore, but a men’s lifestyle brand as well.

Design and launch your dropship program

Once you’ve chosen a category that will be your testing ground for dropship, it’s time to set up your dropship program.

This process involves:

1. Defining your financial goals
2. Building your dropship team
3. Designing policies for packaging, shipping, returns and billing
4. Mapping out your supplier onboarding process
5. Choosing a dropship automation platform
6. Source and onboard your dropshipping suppliers
7. Launch your dropship program

We’ve covered all these steps in detail here: The Modern Retailer’s Guide to Launching a Dropship Program. 

2. Streamline your dropship operations

At this stage, your dropship program is off the ground. But it’s not running like clockwork just yet. Without first overcoming these two hurdles, your program is at risk of inefficient growth – your labor costs will scale at the same rate as revenue:

1. Reducing supplier onboarding times and getting products live
2. Validating your products and optimizing them for performance

Reducing supplier onboarding times

Deciding to move a product category from wholesale to dropship is great, but it doesn’t matter if suppliers aren’t able to easily onboard to your dropship program.

Suppliers usually get stuck in their onboarding process for technical reasons. Maybe you need them to connect with you through EDI, or maybe your IT team needs to connect their APIs to your PIM or your ERP. Whatever the case may be, we’ve seen suppliers languish in onboarding hell where they’re waiting to get their products live for two to three months.

If it takes months to onboard your suppliers, you won’t be able to test your dropship program effectively. We created Convictional to address this need. No matter what ecommerce platform your supplier is on, including Shopify, BigCommerce, and WooCommerce, they can connect to your online store in minutes, not months. You can also test new vendors in your dropship product category quickly and adapt your assortment to consumer trends with speed and agility.

Validating your products

Retail dropship programs often fail to deliver on revenue goals for a simple reason - products aren’t ready to sell online.  Merchandisers struggle when product data is missing or in the wrong format, as SKUs get added to an ever-increasing backlog of products that can’t be listed on the website. This delays revenue from new products and categories, while requiring teams to chase down vendors for missing data.

Around 30% of the time, data such as images, descriptions, pricing, and barcodes aren’t shared as a result of human or process errors. All these hurdles can add up for your merchandising team, sometimes averaging 20-30 minutes per SKU. If the average vendor you onboard has 20 SKUs you plan to add to your assortment, that can end up taking 10 hours of work for your merchandising team.

This is why we built product validation, a feature that allows retailers to define what information their systems need from suppliers to take a SKU live on site. 

Instead of being blocked on new product and category launches due to missing or incorrect barcode data, images, and more, retailers can now set rules requiring suppliers to add this data before a product can be considered available to sell.

In cases of missing data, suppliers will see errors that need to be fixed, letting your team spend less time chasing suppliers and more time finding the next great product.

When you solve your onboarding and product validation hurdles, you’ll streamline your dropship operations. A North Star metric you should hold for your dropship operations is to take 5 new vendors in your dropship assortment live each week. That’s what we’ve seen from our most successful customers. 

3. Measure catalog churn to optimize your assortment

Many retailers treat their dropship assortment with a “set it and forget it” attitude. One reason for this is without the right dropship automation tool, it can take weeks to onboard a dropship vendor, so it can be challenging to consider removing a vendor if their SKUs aren’t generating sales.

We think this point of view is a mistake and a detriment to the success of your dropship assortment. Not every dropship SKU is going to be productive, so you need to set SKU productivity thresholds for your dropship assortment. When a SKU falls below your threshold, it should be cycled out. Retailers should be prepared to cycle out unproductive SKUs as often as they add new SKUs to their dropship assortment.

This practice is called catalog churn and it’s measured by the time it takes to replace an unproductive SKU with a productive one. By measuring catalog churn, you can optimize the productivity of your dropship assortment instead of rolling the dice on your initial pick of vendors and SKUs. 

4. Rinse and repeat for the next category

You’ve optimized the performance of your initial category. Now you can take these steps and apply them to another product category.

Over time, as you transition product categories from wholesale to dropship, you’ll be able to identify SKU splits within product lines — a group of SKUs can be purchased wholesale while another group can be sold via dropship.

At Convictional, we’ve worked with retailers like Indigo, Harry Rosen and MADE.com to pilot their dropship programs and expand them to multiple product categories. If you’re looking for a dropship platform and team to help you set up your own program, let’s talk! Contact our sales team to get started.