Last week I was asked about dropship, specifically, why it isn’t enjoying a high level of adoption among retailers.

To be able to answer that question requires digging a little deeper into dropship’s context. First, a definition: dropship is when a retailer appears to carry an assortment of merchandise, but never actually takes possession of the inventory. When a consumer buys the item from the retailer, it is the vendor who picks, packs, and ships the item directly to the consumer’s specified destination. Theoretically, that could include shipping to a consumer’s local store.

In the early days of eCommerce land-grabbing, dropship experienced something of a surge, particularly among pureplay retailers, though not exclusively. I remember talking to the head of eCommerce for a large retailer, who was in the middle of replatforming the online systems. He said part of the effort included a strategic review of products, and even he was shocked at the diversity of products they sold, primarily through dropship relationships. In his view, the company had strayed too far down the road of dropship, selling items that didn’t have much to do with the retail brand promise to customers.

On the surface, the economics of dropship make sense. The retailer can present a much deeper assortment to customers without taking on any inventory risk. The vendor can expose a broader assortment to shoppers, with the intent of hopefully selling more. And the consumer gets access to products that might stand out in a “sea of merchandising sameness ” that over time has seemed to plague traditional brick & mortar stores.

However, dropship is not so simple as it seems. It requires inventory visibility between vendor and retailer, and it requires, for the vendor, the ability to manage multiple retailers potentially laying claim to the same inventory. RSR consistently hears from retailers that they have a hard time seeing inventory in their possession with any accuracy. Trying to include vendor-provided inventory levels into that mix is yet another integration, and from an external source (thus, a less trusted source).

The vendor must also be able to do “eaches ” fulfillment, which incurs additional supply chain costs – a separate fulfillment location that is geared toward picking and packing for consumer fulfillment, with all of the associated assets (including inventory) to support it. By its nature, eaches fulfillment is not as efficient as the kind of fulfillment that vendors are used to: case and pallet loads shipped in truckloads to retailer distribution centers. So vendors have to be willing to take on the required investments in order to make dropship possible.

For retailers, it also means outsourcing ownership of the fulfillment experience. Since they never take possession of the inventory, the retailer has to rely on the vendor to provide the kind of packaging and customer service care that the retailer would normally require. This might mean using special boxes unique to the retailer, and stuffing the box with retailer-specific inserts, and printing a packing slip that reflects the retailer’s unique branding. It means negotiating up front with the vendor around who will handle customer service complaints, and who will take charge over inventory damaged in transit as well as handling any returns or replacements. The retailer has to figure out how to handle situations like if a dropship item is returned to a store. Does it get marked down and placed on the floor for sale even though it’s the only item like it in the store? Does it get returned to the vendor? To the eCommerce DC?

And what happens in those rare (or as Best Buy proved over the holiday season, not so rare) occasions where the retailer takes the order, but the vendor suddenly doesn’t have the inventory?

There are a lot of serious questions that both the retailer and the vendor need to answer in order to put dropship on the table.

The good news is, some things are getting better. It’s getting easier to exchange inventory data between vendors and retailers, and systems (and service level contracts) are getting more sophisticated about handling multiple competing orders for the same inventory by holding virtual pools of committed inventory to certain retailers, but applying rules governing that inventory, so that held items can be freed up to meet demand in other places – thus giving retailers some peace of mind that they won’t be going back to a customer with “sorry, but I’m actually out of stock ” and giving vendors the flexibility that allows them to sell items that might have been committed to one retailer but aren’t moving there, in order to meet demand from another retailer. And vendors aren’t necessarily adding more costs to the operations to enable dropship fulfillment. Many of them have moved into a direct to consumer model, where dropship is merely incremental orders, rather than half-a-DC investment.

So why isn’t dropship more of a “thing ” than it is today? Mainly, trust. Vendors look to dropship as a way to expand how much of their assortment a retailer carries – increasingly, as a way to encourage merchants to take a little more risk in the products they select for their assortment. But retailers shy away from anything that increases risk, especially when it comes to dropship. They have to trust that the vendor’s inventory levels are accurate, and that the vendor is going to take not just the same level of care, but the same exact care in the fulfillment process, to make sure that when the consumer opens the box, it’s the retailer’s brand experience that leads, and not the vendor’s.

So while vendors see dropship as opportunity, retailers tend to see it as reward – a reward for a long-term relationship that has demonstrated over and over again that trust between parties is deserved. And unless retailers’ trust can be extended to the various technologies that make dropship (and inventory and process visibility) possible, it’s very unlikely that they will embrace dropship to any larger degree than they do today.

What’s most interesting about this story to me, however, is that vendors especially seem to be looking in the wrong place for dropship’s greatest opportunity: with the smallest retailers. And not just the pureplays. I’ve seen time and again where a small retailer gets locked into a deal with a vendor that involves, for example, buying a $10,000 slug of a “prepackaged ” assortment. This is the same slug that the vendor offers to every single retailer under a certain size, virtually guaranteeing the sameness of assortment across stores. And if a small retailer sells out of one a handful of items in that slug, they can’t reorder individual items until they hit a minimum threshold of order size, also guaranteeing that the products that are actually selling will be out of stock, while the products that aren’t selling hog up that small retailer’s very precious cash.

To me, the bigger question about dropship is, if more vendors are selling direct, why are they forcing these smaller retailers into such ridiculous positions? Why not treat them as a power-buying direct to consumer purchase (with a reseller’s discount), and actually help them both build a unique and curated assortment, as well as explore with consumers the full depth of assortment that the vendor provides, all while helping the small retailer preserve cash, avoid inventory risk, and ultimately avoid the markdowns and discounts that vendors hate and work so hard to constrain? And, by the way, if some long-tail items in the assortment suddenly see a much brighter light of day with small retailers, isn’t that data that vendors can use to try to wedge some of those items onto larger retailers’ shelves? Seems like everyone could win in that scenario.

I’m not sure that dropship will ever be the answer to a plug-and-play model of testing out new relationships between large vendors and large retailers. But in helping small retailers tell unique brand stories – that finally seems like the right kind of question that dropship can help answer.