Amazon, with ecommerce fulfillment centers in almost every state, offers its Prime Now same-day delivery service in 24 U.S. markets, covering a good swath of the population. CEO Jeff Bezos says Prime members now exceed 100 million globally, all eligible for “free” two-hour delivery.
Not to be outdone, Walmart says it is within 10 miles of 90% of the U.S. population, thanks to its vast store and fulfillment center network.
So how to compete and hold your own? Shipping cost and the speed of delivery affect many customers’ decisions to buy from you. As these trends continue, multiple fulfillment centers may be your best bet to reduce both.
We will discuss 11 critical analyses needed to determine if a multi-FC strategy will reduce shipping costs and speed time to customer for your ecommerce fulfillment operations. Most of this blog assumes an internal fulfillment approach. However, we have helped a number of clients add shipping points using third-party logistics (3PL) providers to augment their own assets. One west coast client established an east coast shipping point and a European center for wholesale using two 3PLs. Another client with $200 million in sales uses a 3PL to serve its Canadian customers.
We should also note that a multi-FC approach for ecommerce fulfillment isn’t right for every company because of the additional investment, inventory, operational expenses, and additional management required.
Perform Comprehensive Analyses
Coming to the right decision for your company takes detailed estimation and planning as you weigh these 11 factors:
Site Location Study
Another one of our blogs recommends a process for conducting these types of studies. We use the Bureau of Labor Statistics’ comprehensive labor and employment data to aid in projecting payroll expenses. BLS data is broken down by the 390 Metropolitan Statistical Areas (MSA) and includes data on wages for management and hourly employees by position in each market.
Additionally, this blog discusses partnering with a commercial real estate firm with online access to available warehouse stock for lease or purchase, as well as build-to-suit construction pads. These databases are a good starting point for understanding your options in a market.
Inbound Freight from Vendors
Evaluate how potential new site locations and your existing FC will affect this expense. Would receiving inbound shipments in more than one location decrease costs because they’re closer to the entry point into your supply chain? To analyze this, you need historical inbound freight costs for a year; point of origin and/or port of entry data; the number of shipments from all vendors and the weight and expense of each. From this you can analyze which locations have the biggest impact on this expense.
Outbound Shipping Costs
Evaluate how potential new site locations will impact this expense. Determine the impact on outbound shipping expense and time to customer for each location. The historical data required is detail on the trailing 12 months or the last calendar year of each shipment, the weight and the shipping costs, the carrier service level and the carrier zone.
For potential new FC locations, determine how the cost, the zone shipped and time in transit are positively impacted. You’ll want to see how the additional location cuts the shipping time and expense and what percentage of customers are served by each facility. This generates a lot of data; using maps displaying zones and percentage of orders shipped helps you visualize the changes.
Staffing the Facility
You’ll need to hire a new senior fulfillment manager, department managers and hourly workers. With multiple ecommerce fulfillment centers come major changes to purchasing and assortment planning, requiring an experienced planner. As mentioned earlier, use BLS data to determine the labor viability of each potential market. Budget the cost of new hire and employee relocation, if any.
Additional Inventory Required
The increase in inventory required is a major consideration. Determining the inventory strategy for any new FC is a complex topic but here are a few questions to consider:
- Will all products be replicated in all centers?
- Will best sellers be in all centers and slow or average sellers be in only one center?
- Would ship-alone, heavy products be in one center only?
Also, how much additional inventory is required to fill customer orders from multiple centers? Our experience is that a second FC adds 30% or more in inventory value compared to a single facility. A third center may add 50% to the total. Obviously, the increase doesn’t automatically correspond to the company being able to achieve 30%-50% higher sales without some major marketing and promotional changes. What is the risk of overstock and gross margin erosion? This blog expands on these key requirements.
Capital and One-Time Costs
These expenses will vary by potential sites including build-out expenses, installation of racking, MHE and conveyance equipment and moving expenses for product.
Loss of Productivity at Startup
There is always a start-up period with lower productivity at a new ecommerce fulfillment facility. Often there is higher-than-expected employee turnover. Plan the ramp-up realistically over the initial months. At some facilities it takes six months or longer.
System Functionality Required
Are your software systems set up for multi-FC functionality on order routing? Can you process orders from multiple centers? Are there sufficient business rules to assign customers to DCs and allocate inventory by proximity? Can business rules on back orders be set up so they’re not fulfilled from two locations, so you don’t spend more on shipping? Can your merchandise planning and purchasing systems record sales by location?
Are there state and local development incentives for bringing new jobs to a region? This should be a consideration only after you have decided on the right location, labor availability and wage rates, outbound freight costs and time-to-customer perspectives.
What state and county sales and inventory taxes must be factored into your location decision?
Evaluate all the risks for all strategic options (i.e. internal vs. 3PL; inventory strategy, etc.) and for each location considered (i.e. wage rates, sales tax, right to work, etc.). Estimate the potential loss and probability for each risk. Other risks include construction delays, incomplete hiring and excessive turnover, occupancy permit delays and unplanned expenses.
Expanding beyond your existing facility is a major step for any company and generates a lot of detailed discussion with management. But for many companies – whether internally managed or through outside partners – it’s the best long-term strategy for controlling shipping costs and shortening delivery times.
Brian Barry is President of F. Curtis Barry & Company