One Warehouse or Two?

A multichannel marketer based in Southern California needed help. A thriving company with 30 stores, a catalog, and a Website, it was ready to expand to the East Coast. It had two West Coast warehouses, one for retail and one for catalog and Web sales, each with its own order processing and inventory management system. But this arrangement wouldn’t suffice once the company began generating significant business in the East; shipping alone would be too costly.

So the company had several options to consider: creating one large multichannel warehouse on the East Coast; investing in two identical full-line multichannel distribution centers (DCs), one on each coast; or building a full-line multichannel East Coast DC and a limited-line facility on the West Coast for partial replenishment of fast-moving items and best-sellers.

As this example illustrates, gone are the days when the distribution of product from warehouses was fairly straightforward. Many large catalogers are dabbling in retail, while major retailers increasingly experiment with Internet and catalog sales. The different channels require different warehouse layouts, systems capabilities, inventory allocation methods, forecasting procedures, and distribution policies.

Once you get into multiple channels, you must decide whether all channels will be able to operate out of one warehouse or several, how to allocate inventory among channels, and how to handle the innumerable tasks involved in getting merchandise to stores and customers. Ultimately, the decisions you make will determine how well you serve your customers, how quickly you replenish your channels, how efficient and cost-effective your distribution system is — and how much profit you make.

Multichannel distribution options

As the company cited above quickly learned, there are many ways to set up the multichannel distribution of product, and no single way is right or wrong for all businesses. Variables such as product characteristics, retail locations, vendor locations, and customer demographics all affect how and where you set up your warehouse (or warehouses). Here are a few of the possible scenarios and some of the advantages and disadvantages of each.

  • ONE FACILITY FOR ALL CHANNELS: Many successful multichannel marketers keep their entire inventory in one location. Some of them use the same inventory pool for all channels, while others use different physical or logical pools for each. This arrangement usually requires a lower overall capital expenditure, and many believe that it allows the company to keep less inventory on hand; companies that select this option are typically driven by the inventory investment. In addition, this option enables managers to more tightly control distribution. When opting for this approach, however, you must have systems that can allocate and reserve inventory by channel.

  • DIFFERENT FACILITIES FOR DIFFERENT CHANNELS: Other marketers separate the retail and direct-to-customer operations to ensure that they do not interfere with each other’s order flow. Often they take this approach because their channels sell different product lines or offer different service levels. In other instances, the company’s regional headquarters is not in a good location for shipping orders for a particular channel. For instance, you’d want your DC to be fairly close to your retail locations. In still other cases, the growth of a channel has been so great that you need more room and decide to split the channels between the original DC and a new one. Reallocating inventory in this scenario can be costly and time-consuming if the warehouses are far apart.

  • MULTIPLE MULTICHANNEL FACILITIES: Larger business-to-business companies have long opted for multiple warehouse locations, and this approach is gaining acceptance in the multichannel arena. Generally order turnaround is quicker in this kind of operation, but costs are higher as well. And forecasting product geographically is a challenge; it can be difficult to ship complete when you get down to smaller quantities in various DCs. The systems requirements for this scenario are usually the most complex of all.

  • ONE CHANNEL FULFILLED INHOUSE, ONE CHANNEL OUTSOURCED: In this scenario, the dominant channel is usually handled internally, while the other is outsourced to a third-party fulfillment center. For companies doing 90% or more of their business in one channel, this is a smart option to consider. Performing system modifications, buying new systems, realigning your warehouse flow, and purchasing specialized materials-handling equipment can be expensive undertakings for a company that may only be testing a new channel. This option allows you to avoid the capital expenditures necessary to support a smaller channel until the volume is in place to justify bringing it inhouse.

With all these possible scenarios, how do you decide which will best suit your needs? The key is to review your overall business needs, factoring in all aspects of your operations. You’ll need to look at forecasting and inventory allocation, your systems capabilities, and your warehouse layout.

Multichannel forecasting and inventory allocation

The goal of preseason planning is to project item sales and to coordinate deliveries with the projected selling cycle. The goal of in-season forecasting is to adjust the preseason plan based on actual results and to take appropriate action, such as reordering, moving stock among channels, or investigating liquidation alternatives. Here again, each channel has different needs and processes.

In retail, for instance, inventory is typically planned using a six-month process, by season, department, class, store, and item. Stores also map out cycles of planned sales, purchases, markdowns, and end-of-month inventory, with appropriate open-to-buy (the amount of merchandise you can order during a given period) controls. Once the season is under way, retailers compare each item’s sales to the initial projections before deciding how to proceed.

Catalogers, on the other hand, base their forecasts on the planned circulation of their book, using history to estimate response rates and order volumes. And because e-commerce is still in its infancy, its merchandisers do not have huge databases of customer history on which to base their projections; nonetheless, many Web merchants are adopting the planning and measurement systems of catalogs.

The business models of the various channels often seem contradictory, but they all have the same goal: making sure that the right inventory is in the right place at the right time. To accomplish this, you have to develop your operating procedures up front. If you have orders in one channel but no inventory, and at the same time you have inventory in the other channel but no orders, you need to be able to move the inventory from one channel to another quickly and cost-effectively.

Systems set-up

At this point, you shouldn’t be surprised to learn that setting up your software systems for multichannel distribution can be complicated. Some prepackaged systems on the market can handle multiple channels on a limited basis, but many growing companies use a best-of-breed approach instead.

Whatever warehouse management system you choose, do not underestimate the complexity of controlling inventory and orders across channels. And keep these system requirements in mind:

  • Determining “inventory ownership,” or how the system recognizes which channel has claim to the merchandise. The system should track perpetual inventory status by channel, so that if, say, retail uses up its allotment of a given SKU, a manager can authorize stock from the catalog unit to be released until a shipment comes in.

  • The ability to reserve and allocate inventory across channels. Being able to route certain order types to targeted warehouses will be important in this process. Your system should also be able to handle multiple order types — catalog, Web, retail — in the most efficient manner possible.

  • Labeling and barcoding requirements by channel. Labeling and tracking inventory by case and pallet may be important in the retail environment, but not in the catalog business. Conversely, providing small-parcel order labels with the correct indicias and barcodes is important to catalogers, but not for retailers using “less than a load” (LTL) truckers and truckload carriers. You’ll need separate labeling and pricing systems for products by channel. Additionally, the tracking of inventory at different units of measure and SKUs will come into play if you store in cases for retail and in “eaches” for consumers.

  • Real-time order and shipping confirmation. The e-commerce mentality has speeded up the demand for information in all channels. It’s important to note that many systems cannot simultaneously perform the multiple types of order processing that multichannel retailers require (for instance, single-piece picks and packs vs. truckloads).

Warehouse layout and space allocation

As you bring on new channels or expand existing ones, be sure to lay out the various areas of your warehouse and see where certain functions will need to interact. After all, distribution models for the retail/wholesale and the direct-to-consumer fields are very different animals.

For example, returns processing for direct-to-consumer marketing will likely require more physical space than retail. By contrast, order staging for retail will require more room than direct-to-consumer because retail orders are larger and not delivered as frequently.

For similar reasons, the level of automation needed may also be different for each channel. In some cases, conveyors will be more appropriate than forklift trucks; in others, the warehouse will have to accommodate both conveyors and forklift trucks for the different channels. Ditto for pick carts and pack tables vs. palletizers.

The processing of returns and receipts also has different requirements in the different channels; therefore, each may necessitate different equipment. Catalog workers will need computer terminals to process returns and put the salable goods back into stock, as well as conveyor systems to haul away the cartons and dunnage from individual customer returns.

So what of our West Coast company? After evaluating factors such as inbound and outbound freight, labor, occupancy cost, and inventory-carrying cost against the intricacies of forecasting and inventory allocation, systems, layout, and space allocation, the company decided to develop a full-line multichannel warehouse on the East Coast. At the same time, it opted to keep one West Coast facility specifically for fulfillment of catalog/Internet orders as well as retail replenishment of a limited number of faster-selling items.

This arrangement accommodated the differences in the distribution requirements for the different channels while lowering overall costs and increasing customer service levels. Creating one large East Coast facility with separate operations and additional volume certainly justified a more automated and efficient layout. Where possible, common functions and space were used, but the channels’ different requirements were recognized. This led to the development of separate pick/pack layouts and order processing flows, such as order sortation and picking procedures for the catalog and easier flow-through and larger accommodation for retail orders.

As you can see, effective multichannel distribution is no simple matter. Many companies try to align all of their distribution channel functions with their major channel as the primary driver, but this is a recipe for confusion. To achieve success in multichannel distribution, you really need to look at the individual components of the process and draw up a distribution plan that takes all the complexities of your business into account.

Curt Barry is president of F. Curtis Barry & Co., a Richmond, VA-based consultancy specializing in e-commerce and direct marketing operations strategies and systems.

Retail Distribution vs. Catalog/Internet

RETAIL DISTRIBUTION

  • Large orders
  • Preset order scheduling
  • Order-staging area
  • Close or centrally located to stores
  • Full assortments of SKUs
  • Large return-to-vendor areas needed
  • Full truckload and LTL carriers with bills of lading
  • Set up for inventory flow-through
  • Limited back-stock of products
  • Item pricing and ticketing functions
  • Deal in cases and pallets of items

CATALOG/INTERNET DISTRIBUTION

  • Small orders
  • Large volume of smaller receipts
  • Immediate order turnaround
  • Large volume of returns
  • Small-parcel carriers
  • Subset of SKUs
  • Pick-and-pack-type processing of orders
  • Order manifesting function
  • Item-driven order processing
  • Personalization and special functions such as gift wrapping
  • Special packaging required