Sometime ago I started an Internet retail business. I won't go into what that business was as I have since sold it but what I will relate are the mistakes I made and the lessons I learnt with respect to stock holding and supplying products.

Every day thousands of people have ideas for new Internet based businesses that they are sure will make them a fortune. Some of them actually take their ideas to fruition and some of them succeed. Unfortunately, the vast majority fail or never even get started.

If you are planning to start an Internet based business that supplies a product you should know what the supply chain for that product will be before you start.

This may sound obvious but for a large number of businesses, they will build their web site and then start to worry about where the stock will come from.

This is very dangerous as they may find that nobody will supply them or that the practicalities of the supply chain make their business unviable.

There are basically three ways in which stock can be handled. Which one is most applicable depends on a number of factors.

• Firstly, the value of the product dictates the cost of stock holding. Holding a large stock of diamond rings is much more costly than holding a stock of stationary products.
• Secondly, the cost of getting hold of the product may make small orders uneconomic. Many suppliers have minimum order quantities and will apply surcharges if they are not met. Such charges eat away at profit margins.
• Finally, the volume of turnover determines how long products stay in stock and how much capital is tied up.

Taking the above into account our three stockholding options are:

• Hold No Items in stock. When customer orders come in the stock needed to supply them is ordered from wholesalers and manufacturers.

  Advantages

  • No stock holding costs
  • Greater variety of products can be offered
  • Good for high value products
  • Good for high sales volumes
  • No capital tied up

  Disadvantages

  • High delivery charges for small orders
  • Easy to get caught in out of stock situations
  • Slow turnaround time.

  Suitability: Businesses that are turning over enough stock to avoid small order surcharges and wish to offer a wide product range. Product supply must be reliable otherwise the business will not be able to source products to fulfil its orders.

• Hold All Items In Stock

  Advantages

  • Quick turnaround
  • Full control
  • Good for high sales volumes

  Disadvantages

  • Harder to have a broad range
  • Expensive if not selling quickly

  Suitability: Businesses that have a small product range or enough sales volume to keep their stock moving. Generally this applies to more established businesses.

• Drop Shipping

  Advantages

  • Broad range
  • No stock holding costs/capital tied up
  • No fulfilment problems
  • Quick turnaround

  Disadvantages

  • Can’t easily have multiple suppliers
  • Costs more per product
  • Loss of branding

  Suitability: New buisinesses who have a low stock turnover and wish to offer a large range of products.

Which of the above options is most applicable depends on the type of business and the stage it is at.

As a general rule of thumb, new businesses are more likely to succeed with drop shipping, established business can hold stock and businesses of of any size can order stock as required if the product they are selling is high value.

Now back to what brought me here. My own experiences that will serve as an example. My business sold a product line with an average cost of £20 per unit and an average sale price of around £40. In order to have a decent Web site and offer enough variety to be a player in the market I needed to have around 300 product lines on sale.

When I launched my site I thought that I would achieve a good sales volume and that the easiest thing to do would be to order stock once every day or so to satisfy my orders. I was under the mistaken belief that I would make sales because my Web site was better than my competition. While this was true they had one thing I didn't have, TRAFFIC!. Nobody knew I was there and consequently my sales volume was low. Every time I made a sale any profit was taken up by delivery charges and small order surcharges.

After a short time I decided to hold stock on all of the lines I was selling. The problem here was that sales did not magically increase and I just tied up capital that I should have been using for marketing. By the end of the season new product ranges had been launched and I was still selling the old stuff.

Eventually I moved to drop shipping which allowed me to stock a larger range with no financial risk. I stuck with this model until sales increased enough to make stock holding viable again.

Martin Charlesworth runs Venture Web Design, a UK company specialising in Web site development and Ecommerce.

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