Some days I feel we’re caught between the proverbial rock and a hard place. Regularly as clockwork, carriers increase their charges. The competition is absorbing more of the shipping costs, if not offering “free” shipping. Customer expectations continue to rise, and their “point, click and deliver” mentality isn’t going away anytime soon.
The cost of shipping and the time to get the package to the customer affects many customers’ decisions to buy from your business. As these trends continue, multiple distribution centers may be the only way to control and reduce shipping costs and time to customer.
Everyone knows about Amazon’s commitment to DC investments with their facilities in every state. Most major retailers and big box merchants are multi-DC too. Yes, these companies are among America’s largest and best-financed businesses. However, in our consulting experience with site location studies, we have seen this strategy work for small to moderate sized companies too. Let’s explore some of the criteria in making a multi-DC decision.
Small to moderate-sized businesses may benefit
We have helped multichannel companies with sales of $30 million open a second DC to service their customers on the opposite coast instead of shipping across the country, and this has led to more frequent customer orders. Shipping from the second center reduced transit times considerably, cut shipping costs and increased sales. You may be able to reach 80% of your customers in 1-2 days via ground from two strategically placed centers.
Do a comprehensive study
Freight costs and time to customer can be calculated with reasonable certainty and accuracy. Other major factors to take into account in a comprehensive study include:
- Inbound freight from vendors: Will location significantly change this expense?
- Hiring new management staff and associates: Will some managers make the move to the new center? Are there state and local hiring incentives? Generally long-distance moves mean hiring a new workforce.
- Hourly workforce quality and quantity in the new location: There is always a start-up period with lower productivity with new employees, and often turnover. Plan this into your costs and study.
- OMS: is it set up to fill customer orders out of multiple centers? Are the information tools in place for merchandise planning and purchasing to distribute product to multiple centers?
- How much additional inventory is required to fill customer orders from multiple centers? Calculate the increase in inventory dollars required.
- Are there state and county sales or inventory taxes? It’s not just California anymore; some counties are now collecting taxes on inventory.
Use a third-party fulfillment initially rather than building
If you don’t want to invest in a second center now, use 3PF. We recently helped a west coast multichannel retailer (hybrid B2C/B2B) with selecting an east coast 3PF facility, and helped them move into Europe for wholesale orders. They chose to use their carrier’s 3PF facility/services in the Netherlands to service European wholesale accounts. In another client study a company with sales over $200 million used 3PF to serve Canadian customers.
When distributing merchandise to European Union countries you’ll need a fiscal value-added tax (VAT) representative for monthly reporting of merchandise sent into each of country. They all have different ceilings of merchandise value that can enter the country before VAT is charged. All of this has to be reported monthly to the EU; think of it as somewhat similar to Nexus in the United States.
You don’t always have to invest in and staff your own facility.
Use “boots on the ground” to validate and complete your due diligence
Site location studies involve external data sources and generate lots of data from Chambers of Commerce, county, state and federal government sources. While data is important, it can’t replace “boots on the ground” experience and working knowledge.
Calls and visits to companies that have moved operations to the cities you’re considering provide invaluable insights. What is their experience with the quality and quantity of the workforce and the hourly labor costs and benefits? How easy are local government authorities to work with? How did their actual experience differ from their planning assumptions and expectations? One client underestimated their new center’s hourly cost by a sizeable percentage. Don’t rely solely on data.
Be practical and objective
Is the strategy right strategy for your company? No one thing in business works well for everyone – not an IT system, social marketing program, merchandise plan, etc. Do your homework and your due diligence, as moving to multiple DC operations is a major step.
We have seen small-to-moderate-sized companies successfully evaluate and profitably implement this strategy. For many companies, multiple DCs – either owned or through partners – is the best long-term strategy for controlling shipping costs and shortening time to customer.
Curt Barry is president of F. Curtis Barry & Company