As a merchant, is it more cost effective to fulfill your orders from multiple distribution centers? For some, yes. For others, no. Let’s discuss.
The world of commerce is changing. Not just in terms of how and where consumers can buy products, but also how they receive those products. Technology has created a link between online purchasing and offline order fulfillment, and that link is now smarter, faster and more flexible than ever before, enabling merchants to more easily do business on a global scale, and meeting increasing consumer demands for fast, reliable delivery of products.
Technology has become the backbone of order fulfillment, and it plays a crucial role in a merchant’s ability to effectively fill orders from multiple distribution centers. In large part, technology determines if a merchant can utilize multiple fulfillment centers. We’ll talk more about that, but for now, let’s discuss whether or not you should have more than one distribution center. Here are 5 things to consider…
Number of SKUs
Logistics is complicated. The more products and suppliers you have, the more complicated it can get. Consider the following scenario.
Bob sells toys online. He has over 500 different products, or SKUs, and uses more than a dozen domestic and international suppliers. Currently, Bob outsources his fulfillment operations and all of his U.S. orders are shipped from one fulfillment center on the east coast. He’s considering a west coast facility to cut residential shipping expenses, but the problem is, those savings may be largely offset by the additional warehousing and freight costs incurred relative to west coast order volume and revenue.
In general, the larger your inventory, the more it will cost you to maintain adequate inventory for multi-warehouse distribution. In some cases, it won’t be cost effective to distribute from multiple locations, and your added or diminished profitability may ultimately come down to order volume.
If you’re considering multi-warehouse distribution, it’s important to analyze your average order volume by destination, or more specifically, by shipping zone.
For example, let’s say in Bob’s case that 30% of his U.S. orders are shipped to Zone 5 or higher. By adding a distribution center closer to the west coast, he finds that Zone 4 would be the furthest zone for any U.S. order. This move would take Bob’s average shipping cost from $9 per order down to $7 per order. In Bob’s case, however, the problem is that, while the per order shipping cost savings are significant, his average monthly order volume does not support multi-warehouse distribution, given that the shipping cost savings are less than the added inventory and warehousing expenses.
In Bob’s case, one fulfillment center is more cost effective. In others, however, the order volume is great enough for merchants to pursue multi-warehouse fulfillment. But merchants must also keep in mind back orders. If a merchant runs out of stock in one location and is forced to fill back orders from a different location, any cost savings resulting from zone skipping can quickly be canceled out. Likewise, if a merchant sends inventory from one warehouse to another in order to minimize back orders, the cost savings can be eliminated.
The average weight of your orders also plays a role. Let’s say for example that you sell lightweight products, such as nutraceuticals. Your average order weight is just 9 oz., and nearly all of your orders are shipped via USPS First Class Mail. In this case, there will be little to no cost savings when it comes to shipping from multiple distribution centers, and the main benefit would be cutting your average delivery times.
If, on the other hand, you have a high average order weight and utilize multiple shipping carriers, you may see big cost savings with multiple warehouses, which again, can depend on the size of your inventory and the number of orders you ship each month.
One way that some merchants can make multi-distribution work in their favor is to split inventory of their top selling products. Let’s get back to Bob again as an example. Of his 500+ products, 15% consistently sell on a monthly basis. Bob did some number crunching and determined that, while it’s not cost effective to split his entire inventory, it is cost effective to split inventory of that 15% of products in order to ship his top sellers from multiple locations.
This is an option that can work well for some merchants, especially those that have higher SKU counts, but only a portion of which sell on a regular basis. This can, however, get a little tricky from a logistical standpoint, so let’s get back to the technology aspect.
To facilitate multi-warehouse order fulfillment, a merchant needs to have access to the right technology. This often means that multiple systems have to interface in order to properly handle orders coming in from a variety of channels, and then making sure those orders go to the right distribution center based on inventory counts and shipping destination.
Many drop shippers and outsourced fulfillment companies will integrate on some level with your shopping cart and/or order management system. But when multi-channel selling combines with multi-warehouse distribution, there is often a need for a greater level of technology and integration, which can be an additional investment.
Shipping your orders from more than one fulfillment center, whether being considered for U.S. or international orders, ultimately comes down to whether or not the numbers work in your favor, after factoring in all of the cost savings and added expenses involved, including added labor, packaging and working capital to keep enough stock on hand to prevent back orders.
As such, it’s generally a good idea to have a significant amount of order history built up to base your decision on. For startups or merchants that haven’t been selling long, that typically means starting out with one distribution center and reevaluating after six months or a year. For more established merchants, figure out what makes the most sense for your business by looking at your order history, forecasted sales, and your long-term plans.
This article was originally published in 2012 and is frequently updated