Drop Shipping Vs. Fulfillment Companies: What’s the Difference?

People often confuse Order Fulfillment Services and Drop Shipping or they incorrectly refer to them interchangeably. Much of this confusion comes from the fact that each involves a retailer looking for an outsourced fulfillment solution. Despite the similarity, the differences are significant. Understanding these differences is key to finding the right retail fulfillment solution for your small business. Here’s drop shipping vs. fulfillment companies – battle to the definition. 

This article will explain the key differences order fulfillment services and drop shipping. You will also know which is best for your small business.

Let me cut to the chase:

If you sell your own products/inventory and want a third-party to handle storage, packing, and shipping for you, you’re looking for an order fulfillment company. There are many companies to choose from. We recommend FulfillmentCompanies.net, a matchmaking service that can pair you up with one of their 500+ fulfillment centers. Click here to get free quotes from multiple providers.

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If you don’t have any products/inventory but want to sell someone else’s and also have them handle storage, packing, and shipping, you’re looking for a drop shipping company. 

Order Fulfillment Services vs. Drop Shipping: At a Glance

What are Order Fulfillment Services?

Order fulfillment companies offer warehousing and shipping solutions for retailers. The retailer buys their inventory in bulk from a manufacturer or wholesaler. While the retailer knows they can sell all the inventory they bought, they don’t have the infrastructure in place to handle the logistics of so much inventory. Rather than limit the amount of inventory they buy and sell, the retailer enlists the help of an order fulfillment company to store, pick, pack, and ship their inventory.

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Retail Cycle with Order Fulfillment Services

What are Drop Shippers?

Drop shipping companies are actually manufacturers or wholesalers. They own the inventory, not the retailer. Retailers partner with companies that dropship to sell products without having to buy the inventory in bulk. The retailer markets and sells the product as if it were their own. They also provide all customer service. When a customer orders a product from the retailer, the retailer places a duplicate order with the drop shipping company. The drop shipping company simply processes the retailer’s orders, one at a time, and forwards the product to the customer.  

Retail Cycle with Drop Shipper

Key Differences: Order Fulfillment Services vs. Drop Shipping

They Have Different Stuff to Offer

One of the keys to understanding the difference between order fulfillment services and drop shipping companies is realizing what they have. Order fulfillment companies have storage space, warehouse staff, and favorable shipping agreements. What they do not have is their own inventory. They have nothing to sell except their space and services.

In most cases, drop shipping companies also have storage space, warehouse staff, and favorable shipping agreements. But, critically, they generally produce the product and it’s their inventory. The primary thing they have to sell is their inventory.

These companies have difficulty getting traditional retailers to buy and sell their products in bulk. Therefore, they must entice nontraditional retailers to sell their products by offering more than just the product. So they sweeten the pot by offering their infrastructure as well.

Solving Different Problems for Retailers

Order fulfillment companies are offering retailers access to their infrastructure.

Order fulfillment companies understand that some retailers will have the ability to sell many more products than they can effectively store, pack, and ship. The order fulfillment company is then helping small businesses overcome three primary limitations:

• Capital limitations
  • Some retailers have the capital required to purchase products from manufacturers and wholesalers in bulk but do not have the capital they need to buy/lease and staff a warehouse. Order fulfillment companies can offer their services for significantly less than it would cost for a retailer to build out equivalent capabilities.
• Geographic limitations
  • Some retailers’ physical location may be very far from their customers. In order to offer competitive shipping times they will need to have their products stored in and shipped from a location nearer to the customer. Order fulfillment companies make this possible without a retailer moving.
• Forecasting limitations
  • Some retailers will feel confident about future sales in the near term, but not in the long term. This uncertainty about the long term outlook might make them uneasy about investing in a warehousing and shipping operation of their own. Working with an order fulfillment company gives them a much greater degree of flexibility.

Drop shipping companies are offering retailers access to their inventory and infrastructure.

Because drop shipping companies own their own inventory, they need to find find retail partners to sell those products. For reasons we’ve discussed before, traditional retailers aren’t willing to sell those products. Drop shipping companies must then find nontraditional retailer to sell their product.

But those nontraditional retailers usually aren’t able (or willing) to buy inventory in bulk or set up large warehousing operations. So drop shipping companies offer access to their inventory and infrastructure at discounted prices in order to gain access to a network of nontraditional retailers who can effectively market and sell the products.

In this sense, we can think of drop shipping companies and their retail partners as entering into a kind of symbiotic relationship. On the other hand, order fulfillment services and their retail partners are entering into a much more traditional business relationship.

Order Fulfillment Service vs Drop Shipping: Pros and Cons

If you’re a retailer that buys inventory in bulk from a manufacturer or supplier, working with the right order fulfillment company can offer many benefits but comes with some natural drawbacks as well.

Order Fulfillment Service Pros:

• Greater control over inventory
  • You purchase and own the inventory. This means you should always know exactly how much inventory you have. You will never sell a product that is out of stock.
• Better Margins
  • Traditional retailers will typically have better margins than retailers who partner with drop shippers because they are assuming more risk by buying the products in bulk, up-front.
• Your products start closer to your customers
  • The shorter the distance your products have to travel, the quicker they can arrive. In a world where consumers increasingly demand same-day delivery, reducing your shipping times is critical.
• Your ongoing storage and staffing expenses are flexible, not fixed
  • By essentially renting storage space and shipping capabilities you can adjust your expenses to meet your sales.
• Your upfront storage and staffing expenses are reduced
  • If you’re business doesn’t have the capital to launch its own warehousing operation, or wants to commit the capital to another opportunity, this an affordable alternative.

Order Fulfillment Cons:

• Limited product flexibility
  • Since you can only sell what you own, your product lines with necessarily be limited. If the products you own aren’t selling or aren’t selling well, you can’t simply advertise a different product.  
• Greater capital required
  • You must have the capital to purchase enough inventory to meet a manufacturer’s or wholesaler’s minimum requirements. This can be expensive and ties up your capital until the products are sold.

If you’re a retailer who is looking for a flexibility flexible, inexpensive, low risk way to sell a new products given market finding a drop shipping company to partner with is essential. Here are the pros and cons of relying on a drop shipping company:

Drop Shipping Pros:

• Less Capital Required
  • Because you’re not buying inventory up front, in bulk, the capital required to start selling a product is greatly reduced.
• Increased Product Flexibility
  • You don’t own any inventory. The only thing you need to have in order to sell a product is a relationship with the manufacturer or wholesaler who owns the product. You never stuck selling an under-performing product.
• Test Products, Marketing, or Customer Bases
  • Without the hefty costs of large inventory purchases you can affordably test the viability of new products or marketing strategies. Once satisfied you have struck upon a winning strategy, you can graduate to a higher margin model.

Drop Shipping Cons:

• Smaller Margins
  • In decreasing your exposure to a product’s failure by not buying it in bulk, upfront, you also limit your payout when the product sells. The manufacturer or wholesaler has held onto more of the risk themselves and, likewise, a little more of the upside when it sells.  
• Less Control of Inventory
  • Since you don’t own the inventory, you are relying on someone else to inform you of how much inventory is left any given time. This coordination can sometimes lead to selling a product that is out of stock.

Summary: Rethink Drop Shipping vs. Fulfillment Companies 

It turns out thinking of this as drop shipping vs. fulfillment companies isn’t quite right. While order fulfillment services and drop shipping companies both offer the retail a hands-off fulfillment solution, they are made for two different retailers.

A retailer that can afford to buy inventory from a manufacturer or wholesaler in bulk but wants to avoid investing in their own warehousing operation will find tremendous value in a order fulfillment service. Click here to get quotes from multiple fulfillment providers through FulfillmentCompanies.net, or see our guide to the top order fulfillment companies.

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A retailer who doesn’t want to make a large capital investment in an unproven product or marketing strategy would find more value in a drop shipping partner. Ready to start drop shipping? Read our guide to getting started.