As a growing eCommerce business, one way to expand your catalog with minimal risk is to add dropshipped products. However, you may reach a point where you want to bring that in-house to maximize profitability and have control over those items.
You should see an increase in profit because you should get a lower per-unit cost from your supplier. This is because the supplier is getting all of that payment up front when you order or receive products, depending on your payment terms.
Your cost price and landed cost price will be lower because you are transferring the risk of carrying that inventory from your dropshipper to you. When you are dropshipping, you pay a premium to your supplier because you don’t have store inventory, or deal with spikes or drop-offs in demand. The suppliers take all that risk. When you take on the risk storing the inventory, you should get a lower per-unit cost.
Determining what inventory to bring in-house
How quickly do you need to turn your stock and break even on your inventory investment? Work through cashflow projections to see what your threshold is. If you need to make back your investment in one week, that will narrow significantly your options compared to a one month return.
2. Forecast Profits
You want to turn a large enough profit. What is that profitability threshold? It may be too low for the investment or opportunity cost.
What is the threshold to make it worth your while? For example, is it worth it to your business to bring inventory in-house for another $5000/year? That profit may not even cover your time to complete the project. Keep reading to learn about other hidden costs to take into consideration.
3. Forecast Units in Demand vs MOQ
Look at the number of units forecast to sell during your cash flow / return on investment window. This can be important because your supplier might have minimum order quantity (MOQ). If the forecast says you are going to sell 50 units, but the MOQ is 500, that poses a problem. This forces you into over-ordering, and you won’t be able to turn around your investment quickly enough.
4. Variant Performance
Look at each individual variant so you can see which size, color, or style is selling. Concentrate on what is working, not what isn’t.
Let’s say you’re selling a dress in three different colors and only the green dress is really performing well. That is the only one you should bring in-house. The others will sit on the shelves too long, stockturn will be low and you won’t see a return on investment quickly enough.
Potential sources of hidden costs:
If you are considering bringing inventory in-house, consider building into your calculations certain amount (ie 10%) for unexpected expenses like time, logistics, and delays. Of course you do your best to think through everything, but build in a buffer against the unknown so that you’re not overly optimistic about what your profit could be, particularly if this is your first time moving from dropshipped products to storing inventory and fulfilling orders yourself.
1. Infrastructure is another consideration. If your company is already handling some fulfillment in-house, this isn’t as much of an issue because software, employees, and workflows will already be in place. It will be lower barrier to bring additional products on board in terms of operations.
If your company is totally new to fulfillment, there is a lot of software, customer support, and moving pieces to make this happen. Think through the infrastructure of handling fulfillment yourself. It’s a huge undertaking. Talk to people who have done it before to figure out what is involved and detail every single cost. Infrastructure costs – including your time to manage and set-up the process – can add up very quickly.
2. Are you staying with the same supplier? If so, it’s really important to spell out the costs, fees, and timelines. Even if you trust your supplier, have everything spelled out in writing. Everyone should be on the same page so there are no surprises down the road. What the costs are going to be? Are there up-front fees? When fees are due? Does everyone agree on the timeline?
3. You may want to go with a different supplier. The big caution here is not to infringe on any intellectual property. You can’t move to a different supplier and blatantly use someone else’s design. You must come up with a unique product that is your own, so think about production time involved.
4. Alternatively, you may consider licensing from another supplier. Be sure to take into consideration the costs and time involved in the licensing process.
5. Think about timeline of testing products and cost of producing samples. You need to physically see the product from your new supplier to make sure it is exactly what you want; just seeing it online isn’t good enough. Plan for production time for a sample, time to ship it to you, there could be (probably will be?) several rounds of changes to make to your product before going into production on a larger order.
6. When bringing inventory in-house, what additional storage fees are incurred? If you turn to FBA, it could be Amazon storage fees. If you are working with a 3PL (third party logistics) company, there are also fees to consider such as receiving, kitting, and storage fees.. Think about the cost of the item sitting on the shelf with the 3PL or with Amazon fulfillment fees. How does that raise the per-unit cost for each item?
Benefits of bringing inventory in-house
While there are many elements to consider and opportunities for hidden costs, bringing products from a dropshipper to in-house fulfillment, can also produce some benefits to you and your company.
1. Look at the per-unit cost and by extension the landed cost. You may be able to lower costs. You are lowering the risk for your supplier so they should reduce costs as a benefit of this arrangement.
2. Have you ever outsourced responsibility for a job and found it to be not up to your standards? By bringing your inventory in-house, you can handle the packaging and quality control. There is a lot of upside with the control, especially for brands based on quality. You can really hone in on ensuring that brand value is communicated to the customer. Custom packaging, branded packaging, and speed of fulfillment are just a few things that you can directly manage when moving product from dropping to in-house fulfillment.
3. Another potential benefit to your company could be better shipping rates due to increase shipping volume. If you are shipping out a lot more units, that may be something you can work with your shipping provider (FedEx, UPS, etc.) to lower your costs. It could put you into another tier so that you are getting a lower total shipping cost. Think about if that lowers your overall expenses. A dropshipper typically charges a premium for shipping supplies and fulfillment. Talk to your shipping representative frequently to explore better rates.
While bringing items in-house isn’t for everyone, it is certainly worth considering if it will increase profitability enough to be worth your time and effort. This can also give you greater control over your final product. Run the numbers to see if having any in-house items is feasible and, if so, which ones you want.