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forecasting fpr small business

What is Sales Forecasting and How Does it Affect Small Business

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If you own a small business, success will not come to you if you only wait for it. Instead, you need to go toward it. This is why it’s crucial if you’re a small business owner (or any size business owner for that matter) to predict the future and know where your company is heading. But how do you predict the future without a fancy crystal ball? That’s the domain of sales or demand forecasting and I’m going to explain what it is all about in this article.

What is Sales Forecasting?

There are several definitions of sales forecasting, but I like the one from Hatchbuck so I’ll borrow it to help you better understand it:

A sales forecast allows you to determine what your estimated sales (Revenue, New Customers, etc.) will be for a given time period. The forecast is generated from an analysis of previous data about your sales, the sale of similar products by your competitors, and market response to your offerings.

There are basically two types of forecasting, depending on how long it takes:

  • Short term forecasts are for a period of 1 year. These types of forecasts are mainly used to make certain tactical decisions and focus on seasonal cycles and growth patterns.
  • Long term forecasts are for longer periods, of more than a year. These are necessary for establishing the company’s long term vision and setting up new locations and business units.

What Steps You Need to Take in Forecasting?

Forecasting sales demand should never be done ad hoc. The wrong forecast will easily lead you to the wrong conclusions. It’s best to avoid it, naturally.

Here are 4 steps that you need to take in forecasting your demand:

  1. Appraise your past sales

“You have to know the past to understand the future”, as Carl Sagan once said. If you don’t know your old sales and haven’t learned from them, how do you expect to improve your future sales?

For an already established product, look at your previous sales, going back 3-4 months or even more if possible. Evaluate every part of those sales, including monthly sales, sales rep, distribution and price. The more data you have, the better. However, even if you only have one location, one product and one sales month, you can still earn a lot from this.

  1. Talk with your sales reps and retailers

Who knows the sales better than those directly involved such as sales reps and retailers. Their input will be extremely valuable in forecasting future sales. Get them in the room and let them tell you their insights from talking with customers. You might not even realize that you’re using a wrong distribution channel or have set your prices too high. But if you have sales reps that keep their ear on the ground, you can learn this sooner and correct accordingly.

  1. Pay attention to industry trends

Forecasting can’t be done in a vacuum. If you don’t follow up with your industry’s trend, you risk  being left behind. Websites of your industry’s trade associations are the first step you need to take to learn about the latest trends, new competition, whether a competitor has left the market, new competing products and services and more.

Industries and markets change all the time. If you are not paying attention, others do and will have a head start.

  1. Forecast

Once you’ve evaluated your past sales, had a face-to-face meeting with sales reps and retailers and have picked up on the latest trends in your industry, there’s only one thing left to do. Create your forecasts.

Typically, you want to create as many forecasts as you can, but you should create at least five. One for each quarter and one extra for the next year. You should also create forecasts based on your current price point. Create one lower and one higher as well as best-guess scenario that you get from analyzing your current performance.

Finally, create one optimistic and one pessimistic forecasting scenario, but in the end, stay realistic with your forecasts.

Conclusion

Don’t expect success if you don’t accurately forecast. Forecasting can help you learn what mistakes you’ve made in the past and how to move in the future. This makes it crucial for any small business.

And speaking of things t important for a properly functioning business, you need to make sure your purchase orders are always in order. This is where our Purchase Order Plus add on software for Xero can help. If you are looking for a way to easily create, approve and send POs on any device, sign up for a free trial of Purchase Order Plus.

components of supply chain management

6 Must-Have Components of Supply Chain Management

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There are two things that your supply chain needs in order to be effective. First, it should be able to deliver results on time , second, it should be cost-effective. How do you accomplish those two? Well, depending on your business and industry, it could be more or less difficult, but you always need to make sure that the following 6 components of supply chain management are working for you.

1. Planning

Planning, as it relates to SCM isn’t just about sitting down and thinking “this is what we’re going to do”. Yes, there’s that as well, but much more beside. Planning is not just one activity, it’s a whole specter of them and it starts with the decision whether to manufacture the components yourself or to buy them from a supplier. This decision needs to be weighed carefully.

But even when you opt for one or the other, there are still nuances for each choice. Will you manufacture domestically or internationally? Buy from a domestic or international supplier? Make goods to stock or to order?

2. Sourcing

You know what the worst kind of plan is? The one that is never executed. Even completely bad plans are better than that. So the next component of supply chain management that you need to take care of is sourcing.

This means identifying, evaluating and bringing suppliers that will provide you with goods and services and it depends heavily on your business needs. This is why you should carefully evaluate your material, service and financial requirements before before you even attempt to reach potential suppliers and start a formal bidding process.

3. Demand and Inventory

No SCM can survive without a well-maintained inventory. You need to have items, components, raw materials and such always at the ready if you are to deliver products on time. Without a proper inventory, you won’t be able to manufacture, let alone sell your products.

Your inventory will first and foremost depend on the actual demand. If the demand is high, your inventory should be high as well, if it is low, cut the inventory. How do you bring the two together? By bringing in demand planning at the early stages of your product development process. Accurate forecasting is the key here.

4. Production

There’s not much  to say about this element of SCM that you already don’t know. At the end of the day, if you don’t produce something, you can’t sell it. It’s simple as that. In a way, this is the central component of supply chain management. Everything before leads directly to it and everything following picks up after it.

5. Warehouse and Transportation

Warehousing and transportation are another two important components of supply chain management. First, you need somewhere to store your product, which is where the warehouse comes in and y second, you need to be able to transport and deliver goods from point A to point B or from your manufacturing centre or warehouse to the store and the customer.

We already touched a bit on the warehouse part when we talked about inventory, so let’s turn our attention for a moment to transportation instead. On time transportation is incredible important for an uninterrupted business process, but beside fast, it should also be safe. The customer wants to get his order in one piece after all.

6. Return of Goods

The three words that no business owner wants to hear is “return of goods”. Yet sometimes you can’t escape from them. Well, since it’s like that, why not make what seems like a defeat in something that can work for you and at least increase your reputation with the customers?

Not all of your products will be in pristine condition and some may, for one reason or other, reach the buyer in a defective state. Of course, they will want to return those. Unfortunately, I’ve seen plenty of companies that make return of their goods a complete nightmarish process. That’s not how you should do things. How do you think the customer will feel when they not only receive damaged goods, but now they can’t return them either?

Admit your mistake, apologize for the inconvenience and accept the return.  Of course, you should have clear rules for what can be returned and what not and how your returned goods should be managed.

Conclusion

There you have it. With these six components of supply chain management, you will be able to accomplish those two main task of an SCM that we talked about at the beginning of this article – deliver results on time and be cost-effective.

Do you have any thoughts or questions about this? Let me know in the comments below and don’t forget to sign up for free for Purchase Order Plus.

Logistics management tips for SMBs

6 Important Logistics Management Tips for Small Business Owners

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It may start like a dream, but to many business owners, it can quickly turn into a nightmare. Despite what they say, there is more to it than “hustling” and working long hours. If you want your business to succeed and to sell your product, you need to pay attention to a lot of things. One of them is certainly logistics. Here are 6 logistics management tips that will help your small business thrive and keep your customers happy.

1. Set Your Objectives

Okay, this one is easy, right? The objective of logistics is to move the product from point A to point B. Easy. Except there is more to it. Your logistics objectives first need to align perfectly with your business objectives. Second, you need to determine what is your primary target. Do you want to have cheap delivery or fast delivery?

If you are going for cheap delivery, you will probably have to find some non-essentials that you can remove from the equation. On the other hand, if you’re aiming to provide fast delivery, then your transportation and shipping costs are likely to increase. In the end, you need to find that perfect balance between these two and find out what the customer wants.

2. What’s the Plan?

Once you know what your logistics objectives are and they are aligned with your business and marketing objectives, it’s time to work out a plan. Now, keep in mind that you can’t plan only based on your expectations. That will be just one thing that you will need to look at, but there will be different areas that will demand your attention as well.

You should have a plan for full shipping ready in advance, of course, but also don’t rely on just one plan as it might easily fail you. Always set up contingency plans in case things don’t work out as you intended. For instance, if there are delays, the truck breaks down or has to take another route to reach the customer.

3. Keep an Eye on the Costs

Former Secretary of Treasury of Great Britain, William Lowndes (1652-1724) once said: “Watch the pence and the pounds will take care of themselves”. The quote was latter attributed to Benjamin Franklin (falsely), but whoever first said it was right to the point.

You should know how much each element of the logistic process costs you, and not just focus on the major ones like shipping or packaging. That way, when you know where each dollar, euro or pound is going, it is much easier to find things where you can save on costs and keep your cashflow in check.

4. Track Every Inbound Supply

Don’t just track the shipment. Track all inbound supplies that you have. For example, if you are selling furniture, you need to make sure that you have all the needed materials to make it. If just one piece is missing, you can’t make that desk or chair.

Knowing when your material will arrive makes it much easier for the workers to assemble the final product and start delivering it to the end user.

5. Improve Your Customer Service

You can never have a too good customer service. Always work on improving your customer’s satisfaction. One sure way of doing this is to keep them informed about their order. That means from start to finish. Hopefully, that finish is at their doorstep, but if there are any delays or other problems, you need to keep them informed about those as well.

The customer will much more appreciate your honesty and your commitment to rectify it (and if need be, you can always give them something extra as an apology) than if you keep your mouth shut and keep them in the dark about the shipment.

6. Try 3rd Party Logistics Companies

As an SMB you might not have the luxury of having your own logistics. That’s perfectly fine as there are plenty of 3rd party logistics companies or 3PLs out there. Don’t go for the first one you find though, or the cheapest one either. Get at least 3-4 quotes from different 3PLs and compare what they offer.

Even then, don’t settle for the first price. Always negotiate to get the best deal possible for your company.

Conclusion

Logistics is a crucial element in the supply chain and your business operations as a whole and it can make or break it. These 6 logistics management tips can help you make sure things run smoothly.

Do you have any thoughts or questions about the article? Let me know in the comments below and don’t forget to sign up for Purchase Order Plus.

supply chain management vs logistics

Supply Chain Management vs Logistics: What Makes SCM Different from Logistics

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Supply chain management includes many different elements. One of them is logistics. Despite this, there’s often a lot of confusion when talking about the two and even wrongly considering them as one and the same. They are not. In this article, we’ll get into the difference between supply chain management vs logistics and why it’s important not to think of them as the same thing. One reason is certainly not embarrassing yourself in a conversation.

SCM and logistics have many similarities, but they have different meanings. The biggest difference is in what each one represents. Logistics covers the flow of goods and their storage within the SCM On the other hand, supply chain management itself is a much wider concept and consists of several processes, of which logistics is but one.

To understand the difference between supply chain management vs logistics, we need to understand them better individually.

What is SCM?

Supply chain management includes connecting customers, suppliers and partners and that way offering value for the end user and improving efficiency within your own company.

Think of supply chain management as being the central thing that connects the manufacturer of the product, the wholesaler, supplier, retailer and finally the customer and making life easier for them all. As you can guess, that includes a number of functions and people in order to work well (like a well-oiled machine), logistics is just one of those functions.

What is Logistics?

Logistics, according to the Council of Supply Chain Management Professionals is a “part of the supply chain process that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer’s requirements.”

The goal of logistics is that the customer gets the product they ordered at the right price, the right quality and at the right place and time. To achieve this, logistics itself includes warehousing, packaging, transportation and more.

Logistics itself can be divided into two sub-categories:

  1. Inbound logistics includes activities and processes such as acquiring, handling, storing and transporting goods.
  2. Outbound logistics deals with collecting, maintenance and finally getting the product to the end customer.

Supply Chain Management vs Logistics: Key Differences

SCM and logistics need each other, but don’t fall into the trap of using the terms interchangeably. Here are the key differences you need to keep in mind:

  1. Logistics is one of many activities in the supply chain
  2. SCM connect the supplier, wholesaler, retailer, manufacturer and customer, improving business efficiency and getting the product to the customer.
  3. Logistics involves the flow and storage of goods within and outside the business
  4. The end goal of SCM is competitive advantage
  5. Logistics is focused on meeting the customer’s requirements.

Conclusion

There you have it! Hopefully this helped you better understand the difference between supply chain management and logistics and getting more efficient with them. If you have any thoughts or questions, we’d like to hear them in the comments below. Also, don’t forget to sign your email to get a free trial for our Purchase Order Plus. Purchase Order Plus is a mobile app for Xero that allows you to get better control of tour POs.

most common supply chain management mistakes

5 Most Common Supply Chain Management Mistakes You Need to Avoid

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It’s never a good idea to make mistakes in business. But while some mistakes are not that big of a problem, other mistakes can really hurt your business. Mistakes in the supply chain management fall into that category. Here are the five most common supply chain management mistakes that you should avoid.

1. You are Rushing with the Launch

The idea of launching their new product “now or never” has hurt numerous companies. In their zeal to put their shiny new product in front of the customer, they neglected a number of things, while entangling themselves into huge deals.

Before you launch a new product or protocol, be sure to check if your ordering and distribution system can cope up with it, especially if you expect a high demand, like during big holidays.

2. You are Prioritizing by Spend

Prioritizing or quantifying functions by spend made sense back in the 1990s, but not any more. At the time, it was common to have a single supplier for a certain product or item, but that’s no longer the case.

Today, supply chain managers realize that means that having 1 supplier for 1 item means walking on thin ice so to offset any disruptions, they bring in additional suppliers. The bottom line here is never put all your eggs into one basket.

3. Your Risk Management is Short-Sighted

Supply chain management is nothing if not full of risks. This is why you need to prioritize risk management and make sure your managers are ready and able to deal with all kinds of risks in a proactive and efficient way.

This way, you’ll be able to better react to any problems that arise, whether they have to do with increased demand, not having enough items in stock, poor quality, vendors or something else.

4. You Don’t Know Who is Responsible or Accountable

Who is responsible for the disruptions in the supply chain? The upper management will hold the Chief Procurement Officer or CPO accountable, but who can the CPO hold accountable? When no one is accountable, it creates confusion and lack of clarity when actions are needed.

5. Lack of Security

Security breaches are no uncommon, especially if you are operating online. These days, newspapers are filled with news about one company or other that got hacked. Your supply chain is at no lesser risk in that regard than other areas of your business and you need to ensure that you have sufficient security control. This goes for not just physical, but also (and perhaps more importantly) cyber security.

Additionally, make sure that your vendors don’t disclose sensitive information about your company or customers or do anything else that can harm your business. As well, be sure to monitor the security of your product throughout the entire chain to prevent any theft, or tampering, all the way to the end user.

Conclusion

These were just 5 supply chain management mistakes that you should be aware of. Of course, there are many others, so if you know of any that you think should be included here, let us know in the comments below and don’t forget to sign up for a free Purchase Order Plus trial.

supply chain management tips

5 Supply Chain Management Tips to Get You On the Right Track for 2019

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A supply chain is only as strong as its weakest link. To develop one that works for your company, you need to take a lot of things into account. That’s not as easy as it might sound, so here are 5 supply chain management tips that will help you streamline your SMC and be ready for 2019.

1. Don’t Rely on Just One Supplier per Product

“Don’t put all your eggs in one basket” is a really nice saying and more than applicable here. You should never rely on just one supplier per product. No matter how good they are or how good of a raport you have with them, there is always a chance that something will go wrong.

For instance, perhaps you have a supplier in a country overseas and that country gets hit with a natural disaster or war. In that case, they will be unable to deliver your product. This is why you need to have a plan B or a backup supplier.

2. Integrate Supply Chain Management with Other Systems

Adding an integration layer to your SMC, will allow you to share vital information between systems owned by yourself, your partners, suppliers and finally  customers with much more ease and efficiency. As every transaction goes through a number of systems, such as finance, ERP, manufacturing and sales forecast, integrating it will make things quicker.

3. Be Sure to Train Your Personnel Accordingly

Don’t assume that your employees will know exactly what they need to do. Often, you’ll be in a situation where you are introducing a new software suite or welcoming a new team member and you won’t be able to just point them in the right direction and say “go”.

Don’t think of internal training as a waste of time. Think of it as an investment instead. By investing a little time and effort here, you’ll be saving a lot of time and money in the future.

4. Use the Latest Technology

Stuck in the stone age? Don’t be! Look at all the successful supply chains companies use today. They all use the latest technology to help them handle their inventory, logistics, manpower and more. So, while you’re stuck there, doing things “the good, old way”, they are using the latest technology and software to be miles and miles ahead of your company.

In other words, if you are still using spreadsheets, stop. You know how we talked about the weakest link in the supply chain management? Much too often that’s the humans and their guesswork. Good technology can help you eliminate that (guesswork, not humans, of course).

5. Make Sure Your Business and Supply Chain are in Perfect Alignment

Your supply chain should take top priority in your business. Unfortunately, too often the upper management has other things in mind and forgets about the supply chain. A good supply chain manager is there to remind them and to put them back on the right track as far as an effective supply chain goes.

Do you have any other supply chain management tips that you’d like to share? Let us know  about them in the comments below and don’t forget to sign up for a free Purchase Order Plus trial and improve your PO processes.

what is LIFO inventory valuation method

LIFO Cost Flow Assumption Method – How Does it Work?

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In the previous post we explained one specific method for cost flow assumption called “first in, first out” or simply FIFO. In the same article we also touched on another method called LIFO. It’s time to explain what it is.

LIFO stands for “last in, first out” and it differs from FIFO in that it expenses the most recent (latest) cost of items bought as the cost of sold goods. What this basically means is that the oldest cost of goods are in turn reported as inventory.

For example, the company buys three air conditioners. One for $200, another for $250 and the last one for $300. Under LIFO, the company will ship the item bought for $200. However itt it can report the cost of sold item as $300 (under FIFO it would be $200). This will be the first cost the company reports. The inventory will report the older ones of $200 and $250.

What are the Uses for LIFO?

LIFO is a very popular method, particularly in times of price inflation. That’s because it works under the assumption that the inventory cost gets bigger over time. In that case, the cost of the newest purchase is always higher than the ones before it. This means that the cost of goods sold will be shown as the most recent cost, while the final inventory balance will be calculated at the earlier cost.

For a company, LIFO allows it to report a lower profitability and postpone its recognition of income taxes. This leads us to probably the biggest issue with LIFO. As it is only allowed for income tax deferral, LIFO is banned under the International Financial Reporting Standards (IFRS), but it is still in use in the US. However, you need to get the International Revenue Service (IRS) approval. Otherwise, companies might use it for tax evasion.

Another problem with last in, first out method is that such a scenario rarely happens in practice, only in theory. For instance, if a company is using LIFO, that likely means that a good portion of its inventory is old or even obsolete.

Conclusion

Despite its problems, LIFO is still a popular cost flow assumption method (although probably not as much as FIFO). I hope this post helped you better understand it. If you have any questions or comments, let me know in the comments below and don’t forget to sign up for a free Purchase Order Plus trial.

FIFO method explained

A Look at FIFO (First in First Out) Inventory Valuation Method

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Among the many inventory valuation methods you can use to determine your cost flow, one method stands out. This method is called First in First Out or FIFO for short. In this article, we’ll explain what FIFO is and how it works.

What is FIFO?

FIFO is a cost flow hypothesis that the first item bought should also be the first that gets sold. This is in fact in theory the most accurate inventory valuation method as for most companies, this matches their actual flow of goods the most.

According to FIFO, the first item that the company buys (first in) is also the first to be sold (first out). What this means is that the cost of older inventory gets assigned to the cost of sold goods, while the cost of newer inventory gets assigned to the ending inventory. As a result, the items left in the inventory are accounted for at the cost they were last obtained for and the asset recorded on the balance sheet will most closely match the actual cost for which it could be purchased in the market.

How does FIFO Work – an Example

So how does FIFO work in practice? Let’s take a company, we’ll call it Gothic and how they might estimate their inventory value for the period between 1st and 30th September.

Sep 1 Beginning Inventory 50 items @ $20.00 per unit
5 Sale 15 items @ $17.50 per unit
11 Purchase 25 items @ $16.00 per unit
17 Sale 30 items @ $22.00 per unit
23 Purchase 20 items @ $17.50 per unit
26 Purchase 50 items@ $20.50 per unit
29 Sale 75  items @ $21.00 per unit

Okay, let’s take a look at what we got here:

Units Available for Sale = 50 + 25+ 20+ 50 = 145
Units Sold = 15+ 30+ 75 = 120
Units in Ending Inventory = 145− 120 = 25
Cost of Goods Sold Units Unit Cost Total
Sales From Sep 1 Inventory 50 $20.00 $1,000
Sales From Sep 11 Purchase 25 $16.00 $400
Sales From Sep 23 Purchase 20 $17.50 $350
Sales From Sep 26 Purchase 50 $20..50 $1,025
145 $2,775
Ending Inventory Units Unit Cost Total
Inventory From Sep 29 Sale 25 $20.50 $512.5

Difference Between FIFO and LIFO

A comparison between FIFO and another inventory valuation method called LIFO presents itself automatically. So, what is different here?

Unlike FIFO, which, as we already explained, looks at the oldest items first for expense, LIFO does this with the most recent ones instead.

We’ll get more into LIFO and how this method is calculated another time. For now, just remember that FIFO and LIFO methods will give you different inventory and cost of goods sold (COGS).

Problem with FIFO

The biggest issue with FIFO is that, since it starts to expanse at the beginning of the inventory, it doesn’t match the income statement quite so well. This results in the revenue from the sale being often matched with a cost that is outdated.

For instance, if our company would purchase two trucks, one at $75,000 and the other at $90,000, under FIFO the sale of one of them would lead to an expense of $75,000, which is an outdated cost.

Conclusion

First In First Out method is the most natural inventory valuation method there is, which is why so many companies (including imaginary ones like ours) use it. That being said, it is not without it’s flaws, as we’ve seen.

What do you think of FIFO? Do you use this method or some other? Let us know in the comments below and don’t forget to sign up for a free Purchase Order Plus trial.

pros and cons of dropshipping

Does Dropshipping Work? Pros and Cons of Dropshipping

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If you are looking to start an online retail business one option you have is to start dropshipping. However, dropshipping is not for everyone and it comes with both advantages and disadvantages. Here are the main pros and cons of dropshipping you should know about before embracing this business model.

Pros of Dropshipping

First, let’s hear the good news and what are the pros of dropshipping.

  1. Lower Overall Risk

As a retailer the biggest problem for you will be the need to sell all of the inventory you have in stock. What you don’t manage to sell just becomes an expense and you don’t want that. With dropshipping, these risks are gone as you get to aling your store with what your customers really want and you pay only for what you sell.

  1. Low Inventory Cost

If you own a warehouse you’ll find the cost of keeping your own inventory to be one of your primary money-suckers. But in a typical retail fulfillment model, there’s no way around this. Dropshipping enables you to focus more on building your brand and strengthening your connection with the customers instead of wasting time and money on these issues.

  1. Lower Startup Costs

Starting a retail business is not cheap.Even before you really have customers, you need to have a significant inventory and that requires a good deal of capital. This means you are getting into a big risk. What if the customers don’t like or want or need what you are selling? You’ll end up with a full warehouse of items you can’t do anything with. With dropshipping you don’t need to have starting inventory. Once you find customers, you can start thinking about inventory.

  1. You can Offer a Wider Variety of Products

With dropshipping you can offer a larger variety of products to your customers and not worry about warehouse space and overhead costs. Think about it. What do customers want the most? More choices.

Okay, those were the pros, now let’s talk about the cons of dropshipping to give you a full picture.

Cons of Dropshipping

  1. It’s Highly Competitive

You didn’t really think you were the only one to think about this did you? Dropshipping has been around for years now (since 2006) and dropshippers come and go all the time because it is so highly competitive. It all comes down to lower entry capital. True it’s lower for you, but also for everyone else, so get ready for some tough competition.

  1. Profit Margins can be Very Low

Great, now need to stock inventory, low entry cost, low overhead. Sounds like a perfect deal. But guess what else is low. Profits. As a dropshipper, most of the money won’t go your way, but toward the wholesaler who supplies the goods. You need a lot of orders just to get above zero and make some profit. And then you need to start thinking about how to manage sales orders, marketing expenses, keeping your own website and all that stuff.

  1. You’ll Have Less Control Over the Supply Chain

You win some, you lose some. If you hand over the reins to someone else, you lose much of the control over the carriage and that’s exactly what happens here when you let someone else handle your shipping process. What if the supplier screws up the shipment? Who will the customer blame, you or him?

  1. Potential Legal Problems

Most new dropshippers think it all comes down to finding the cheapest supplier. But what if that supplier is not legitimate? A lot of wholesalers come from way of China and Asia and there’s usually no telling where they got their inventory from. Also, what if the supplier uses a trademark or logo that is not his? The moment you try to sell these items, you become complicit. The best way to avoid this is to use a Dropshipping Agreement Contract.

Conclusion

As you can see, dropshipping is not all black or white. It has both advantages and disadvantages, like any other business model. Hopefully, you now understand the pros and cons of dropshipping and what you’re getting into.

Do you have any questions or comments about the pros and cons of dropshipping? Let me know below the articles and don’t forget to sign up for a Purchase Order Plus free trial.

dropshipping explained

Here’s What You Need to Know About Dropshipping Before You Start

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If you are working in retail or have an online business, you probably heard of dropshipping. For the past few years, this has been a buzzword in the world of online business and retail (just take a look at Ecom Empires for refference), much like AI in programing or Khabib Nurmagomedov in MMA. But what is dropshipping (or drop shipping, however you want to write it)?

What is Dropshipping?

Dropshipping is a retail fulfillment method in which the seller doesn’t stock product it sells in a warehouse of its own. Rather, you buy the item you have an order from the customer from a 3rd party, usually a wholesaler. This wholesaler then ships the product directly to the customer.

You’ll probably agree that this is much faster than if the wholesaler sends the item to you and you to the buyer. In fact, as the seller, you never have any contact with the product itself.

Today, dropshipping is a highly profitable business (as you can learn from numerous success stories on the Internet, but it really became popular about 12 years ago when AliExpress gained a foothold in America. Before 2006, most people never even heard of this term, let alone considered that it might earn them a ton of money. Once people began to understand the benefits that this business model brings, such as low entry cost, it took on like wildfire to such an extend that huge ecommerce businesses such as Zappos are now basically dropshipping businesses or at least base their business around it.

What’s the Difference Between Dropshipping and Standard Retail?

The main distinction between a dropshipper and a standard retailer is that the first doesn’t own the product he sells, while the retailer does. That means the dropshipper doesn’t keep items in a warehouse or otherwise stock his inventory.

Instead, the dropshipper buys the product when he needs them from a wholesaler or directly from the manufacturer and fulfills orders that way.

Is Dropshipping for You?

You likely heard many successful dropshipping stories and thought “okay, if they did it, I can do it to”. But to every success story, there is at least one flop. You see, dropshipping is not easy, not quick and not for everyone. Think carefully before you jump the bandwagon.

If you are looking for a low-risk, low-investment way to earn money online, dropshipping could be the right choice for you. It’s also a pretty good starting business for novices or someone who already has a store, but wants to try selling a new item they typically don’t keep in stock. That way, the risk is significantly lower if it turns out the customers aren’t interested in that particular item.

On the other hand, if you are thinking about starting dropshipping because you are looking for a quick buck, then this business model is probably not for you. Another thing that might pull you away from it is the fact that you’ll have  much less say regarding customer satisfaction since they’ll be in as much contact with the wholesaler (who’ll send them the item) as they’ll be with you.

Conclusion

Okay, I hope this article helped you understand dropshipping a bit better and whether it is something you want to pursue. If you have any questions, please let me know in the comments below. Also, if you haven’t already, sign your email to try Purchase Order Plus software for free. POP will help you handle purchase orders much easier on  your mobile devices.