Drop shipping is a fulfillment method where retailers do not keep products in stock but instead transfer customer orders and shipment details directly to the supplier or manufacturer, who then ships the goods directly to the customer. Here's how it works step-by-step:
* Customer Order: A customer places an order with the retailer.
* Order Transfer: The retailer forwards the order and shipping details to the supplier or manufacturer.
* Supplier Fulfillment: The supplier or manufacturer prepares the order and ships it directly to the customer.
* Inventory Management: The retailer does not handle or store inventory, reducing warehousing and logistics costs.
* Benefits: This method can reduce inventory holding costs, minimize handling time, and improve cash flow for the retailer, as they do not pay for inventory until it is sold.
References
* Chopra, S., & Meindl, P. (2016). Supply Chain Management: Strategy, Planning, and Operation.
* Bowersox, D. J., Closs, D. J., & Cooper, M. B. (2013). Supply Chain Logistics Management.

The use of different costing methods by a manufacturer and a potential supplier can have significant implications for make-or-buy decisions. Here's the explanation:
* Standard Costing: This method involves assigning fixed costs to products based on predetermined standards. It simplifies cost control and variance analysis but may not capture all the activities involved in production.
* Activity-Based Costing (ABC): ABC assigns costs based on actual activities and resource usage, providing a more accurate picture of costs associated with specific products or services.
* Comparison for Make-or-Buy: When a manufacturer using standard costing considers outsourcing to a supplier using ABC, it must carefully compare the detailed activity-based costs with its own standard costs.
* Implications: Differences in cost allocation methods can reveal hidden costs or savings, influencing the decision to manufacture in-house or outsource. ABC may highlight inefficiencies in in-house production or justify the cost-effectiveness of outsourcing.
* Strategic Decisions: Understanding the true cost implications through detailed ABC can lead to better strategic decisions regarding resource allocation, production processes, and supplier selection.
References
* Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis.
Pearson.
* Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.

Section: Supply Chain Strategy, Design, and Compliance