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Drop shipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer. As in retail businesses, the majority of retailers make their profit on the difference between the wholesale and retail price, but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.

Drop shipping can occur when a small retailer (that typically sells in small quantities to the general public) receives a single large order for a product. Rather than route the shipment through the retail store, the retailer might arrange for the goods to be shipped directly to the customer. Drop shipping is also very common with big ticket items like steel buildings, where the retailer will take a deposit and have the steel shipped directly to the buyer’s building site from the supplier’s manufacturing facility.

Many sellers, including those on online auction sites, also drop ship. Often, a seller will list an item as new and ship the item directly from the retailer or wholesaler to the customer or highest bidder. The seller profits from the difference between the sales of the product or winning bid and the wholesale price, less any selling and merchant fees, or shipping fees. On eBay there is not a clear rule about drop shipping. According to their policy, this practice should be avoided, as sellers should always own the products before publishing them. This is to prevent bad buyer experiences and to guarantee safe transactions. However, it seems that eBay is tolerating drop shipping as long as the seller can guarantee good service.

One effect of drop shipping is that customers who receive a drop-shipped package will realize that they overpaid for the item on eBay, return the item to the manufacturer, then reorder the identical item directly from the manufacturer. The cost of processing the return and the loss of the unsellable returned product can result in significant losses to the manufacturer.

 

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