The word “dropshipping” has been so thoroughly colonised by consumer e-commerce that most B2B distributors flinch at it — the mental image is a teenager selling phone cases from an Aliexpress listing. That association is unhelpful, because direct-from-supplier shipping is a completely ordinary structure in industrial distribution, and has been for decades. It just gets called something else: direct shipment, factory-direct, third-party delivery.
The real question a distributor faces is not philosophical. It is per-SKU: for this specific item, is it better to buy it, hold it, and ship it from my building — or to take the order, pass it to the manufacturer, and have it delivered directly to my customer with my paperwork on it?
Both models have a legitimate answer, and the correct answer is different for different parts of the same catalogue. The distributors who struggle are the ones who apply one model to everything, usually because the building already exists and the stock is already in it. This is how to decide item by item, what the maths actually says, and why the hybrid is the structure most small distributors should end up with.
What Each Model Really Costs
Stockholding: the costs that never appear on the invoice.
The obvious cost of holding stock is the purchase price. That is not the cost that matters. The carrying cost — the annual cost of owning a euro of inventory — typically lands somewhere between 18% and 30% of stock value per year once you count everything:
- Capital. The money is in the racking rather than the bank. Whether that is an interest cost or an opportunity cost, it is real.
- Space. Rent, heating, insurance, and the racking itself.
- Handling. Receiving it, putting it away, counting it, moving it, picking it.
- Obsolescence and shrinkage. The single most underestimated line. Anything with a version number, a specification revision, or a shelf life is depreciating on the shelf.
- Insurance and finance charges on the stock itself.
If you hold €300,000 of stock at a 24% carrying cost, you are spending roughly €72,000 a year for the privilege — before any of it sells. Owners routinely know their stock value to the euro and have never calculated the carrying cost at all.
What stockholding buys.
It buys three things, and they are worth money:
- Speed. Same-day or next-day delivery, which for a maintenance or breakdown part is frequently the entire basis of the sale.
- Margin. You buy at volume price and sell at unit price. The spread is wider than the direct-ship commission on the same item, usually substantially.
- Control. You know what condition it is in, you know it exists, and you can promise a date you actually control.
Direct shipping: the costs that are not zero.
The pitch is that it costs nothing. It does not.
- Lower margin. Suppliers price direct shipment as a lower-effort transaction and take a share of the difference. Expect a materially thinner spread than on stocked volume.
- Loss of control over the delivery experience. Your customer’s receiving dock now interacts with someone else’s driver, someone else’s packaging, and possibly someone else’s paperwork with someone else’s name on it.
- Longer and less certain lead times. You are quoting a date you cannot verify.
- Administrative overhead per order. Placing the supplier order, tracking it, chasing it, and handling the exceptions. On a small order this can exceed the margin on it.
- Returns become expensive and slow. A return that would take one hour in your own warehouse becomes a three-party negotiation.
What direct shipping buys.
Zero carrying cost, zero obsolescence risk, unlimited catalogue breadth, and no capital tied up. For a slow-moving, high-value, physically awkward item, that combination is decisive and no amount of service-level argument outweighs it.
The Decision Framework — Four Questions Per SKU
Run every SKU through these. Most items answer themselves in about ten seconds once the questions are explicit.
1. What is its pick frequency?
Not units sold — order lines. An item that appears on 200 order lines a year belongs in your building. An item that appears on four belongs on the supplier’s shelf. The velocity classification you use for warehouse slotting is the same classification that drives this decision, and it is the same twelve-month order-line export. Build it once, use it for both.
Rough rule: your A items (top ~15% of SKUs by pick frequency) are stocked, no argument. Your C tail is a direct-ship candidate by default.
2. Is speed the reason they buy it?
This is the question that overrides the maths. Some items are bought under duress: a line is down, a machine has failed, a job is blocked. For those, “in stock, on your dock tomorrow” is the product. The part is incidental. If you direct-ship a breakdown item on a five-day lead time, you have not saved carrying cost — you have exited that market, and your competitor down the road has entered it.
Conversely, planned purchases with a project date attached tolerate lead times fine. Nobody ordering fit-out material for a March installation cares whether it ships from your rack or the factory.
3. What is the value density and the physical awkwardness?
High value, low volume, high obsolescence — direct ship. Holding €40,000 of a component whose manufacturer revises the specification annually is a slow way to lose money.
Low value, high volume, stable specification, cheap to store — stock. A pallet of fasteners that has looked the same since 1994 has essentially no obsolescence risk, and the carrying cost on cheap stable goods is dominated by space, which is the cheapest component.
Awkward items — very heavy, very large, hazardous, temperature-controlled — are strong direct-ship candidates because your handling cost is disproportionate and the supplier is already equipped.
4. Is the supplier actually capable of it?
This one kills more direct-ship programmes than economics. Before committing, verify concretely: will they ship on your documentation, with your branding, without their price list in the box? Can they confirm a real dispatch date? Will they notify you, not just the customer, of delays? What is the escalation path when it goes wrong on a Friday?
A supplier who says yes to all four in a meeting and none of them in practice will damage a customer relationship you spent three years building. Test with a friendly customer before you put a strategic one through it.
The Margin Maths, Done Honestly
The comparison most distributors get wrong.
The instinct is to compare gross margin: “we make 28% stocked and 14% direct, so stocked is better.” That comparison ignores that the stocked euro is working for you all year and the direct euro is not tying up anything.
Compare return on the capital and effort employed, not the percentage on the line.
Consider two SKUs, both selling €20,000 a year:
- SKU A turns eight times a year. Average stock held: €2,500. At 28% margin it earns €5,600 a year on €2,500 tied up. That is a good business.
- SKU B turns 1.2 times a year. Average stock held: €12,500. At the same 28% it earns €5,600 on €12,500 tied up, minus roughly €3,000 of carrying cost — leaving about €2,600. Direct-shipped at 14%, the same SKU earns €2,800 on zero capital.
Same revenue, same headline margin, opposite answer. Stock turn is the variable that decides it, and it is a variable most catalogues have never been sorted by.
The threshold to compute for your own business.
Find the turn rate at which stocked margin, net of carrying cost, equals direct-ship margin. For most distributors with a 25%-ish carrying cost and a typical margin gap, the crossover sits somewhere around two to three turns per year. Below it, holding stock destroys value even at a higher headline margin. Above it, stock wins comfortably.
Sort your entire catalogue by turn rate, draw the line, and look at what falls below it. In a typical accidental catalogue, 40–60% of SKUs are below the threshold and are being held out of habit. That is the project.
Forecast quality moves the line.
Better demand prediction lets you hold less stock for the same service level, which lowers carrying cost, which pushes the crossover down and makes stocking viable for slower items. This is the actual commercial argument for demand forecasting in B2B distribution — not accuracy for its own sake, but a wider band of the catalogue that you can profitably hold.
The Hybrid Model — What Most Distributors Should Actually Run
Three tiers, one catalogue.
Nobody serious runs pure stockholding or pure direct-ship. Run three explicit tiers and let each SKU sit in one:
- Tier 1 — Stocked, always. Your A items and anything bought under time pressure. Deep safety stock, high service level, no exceptions. Maybe 15–20% of SKUs and 60–70% of order lines.
- Tier 2 — Stocked thin. B items. One or two units on the shelf so the common single-unit order ships today; anything larger goes direct or triggers a replenishment. This tier catches the “we usually sell one, occasionally twenty” pattern that ruins pure models.
- Tier 3 — Direct ship. The C tail. Listed, quotable, sellable, never held. Lead time stated honestly at quotation.
The point of the tail is not the tail.
Tier 3’s value is rarely its own margin. It is that a customer can source everything from one supplier. The buyer who can get 92% of their list from your shelf and 8% from your catalogue on a two-week lead time does not open a second supplier account — and the second account, once opened, is where they start comparing prices on your Tier 1 items. The tail defends the core. That is what it is for, and it is why measuring Tier 3 on its own P&L will lead you to kill something valuable.
Get the cross-border structure right.
Direct shipping across borders changes who is doing what, legally. If your Serbian company sells to a German customer and a Turkish manufacturer ships directly, you need clarity on who is the importer of record, who clears customs, who pays duty, and whose VAT treatment applies — and the answer determines the price you should have quoted. The EU Taxation and Customs Union publishes the rules; the commercial allocation of cost and risk between the parties is an Incoterms decision, and choosing the term casually is where the money quietly leaks. In a direct-ship triangle there are two delivery legs and two terms to get right, not one. This is precisely where direct shipping stops being simpler than stockholding.
Cash flow cuts the other way than people expect.
Direct shipping frees working capital, which is usually the headline benefit. But it can quietly worsen your cash position if your supplier wants payment on dispatch and your customer pays at 45 days — you have removed the inventory but kept the funding gap, and now you have no goods to show for it. Set the supplier terms and the customer terms deliberately, together, per tier. The cash conversion cycle maths in payment terms and cash flow in B2B is the calculation that tells you whether a direct-ship programme is actually improving your cash or just moving where the pain sits.
Review quarterly.
Tier membership is not permanent. Velocity drifts, suppliers change, a Tier 3 item becomes a Tier 1 item because one customer standardised on it. Re-run the sort every quarter. It is one export and an hour.
The reason this decision goes unexamined is that stock is inherited. The building is there, the racking is there, the stock is there, and each individual reorder is too small a decision to trigger a review. So the catalogue drifts toward holding everything, the carrying cost grows invisibly, and one day the answer to “why is there no cash” is standing in aisle six, gathering dust at 24% a year. The fix is not a philosophy about dropshipping. It is a sort by turn rate, a threshold calculated from your own carrying cost, three tiers, and the discipline to put each SKU where the maths says rather than where the forklift left it.
Sources: ICC — Incoterms rules · European Commission — Taxation and Customs Union