In the U.S. alone, Amazon operates around 150 large-scale distribution centers, many over 1 million square feet. And that number is growing rapidly. This footprint translates to super-fast delivery – even same-day in many locales.
To keep your online business competitive, you may believe you need to match the reach and speed offered by Amazon’s logistics arm, Fulfillment By Amazon.
But do you, really?
Well, a lot depends on your consumer base and the kinds of products you sell.
This paper looks at eight questions to ask when deciding how many fulfillment warehouses you need to strike the perfect balance between delivery time and cost.
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A crisis like COVID-19 can take a supply chain down in a heartbeat. If a virus hits a warehouse workforce hard and the facility must shut down, can you keep orders flowing if you ship exclusively from this DC?
To be clear, this is not a COVID-19 issue alone. Power outages, floods, earthquakes and other disasters also create risk if all your inventory is in one location.
Beyond risk mitigation, a multi-location strategy also brings the following benefits:
Faster delivery time. Many consumers have been conditioned to expect delivery in 2 days. That’s simply not possible, nationwide, with a single shipping fulfillment warehouse.
Reduced parcel costs. Since carriers use zones to come up with shipping rates, it’s cheaper for E-retailers to fulfill orders from a zone that is nearest to the customer. The parcel savings typically outweigh the cost of an added location and inventory.
Scalability. If you are a growing business, you’ll need an expanded warehouse footprint to accommodate the increased order volume.
These are difficult times, with risks we’re not even sure how to deal with. But if you operate a business with a single eCommerce fulfillment warehouse, that’s one risk with a pretty straightforward solution. Spread your inventory across more than one location – either by managing this expansion yourself or partnering with a fulfillment provider that has nationwide network.
Are your customers happy with the speed of your eCommerce order fulfillment? If you’re not sure, then they probably are.
People who think your shipping takes too long will tell you loud and clear, with their wallets. Next time they need something you sell, they’ll buy it elsewhere.
Consumers who subscribe to Amazon Prime get free two-day shipping. Prime members who order the right items, and live in the right zip codes, can get even get their orders delivered the same day. According to a recent study, 63 % of Amazon’s customers—85 million in all—were Prime members as of June 2017.[i]
So, a good chunk of America has been conditioned to expect two-day delivery. The question you need to ask customers and former customers is whether your current service levels have resulted in lost or limited sales.
A single warehouse in the middle of the U.S. will allow you to reach most of your customers in three days or less, on average. That might be fine. But if you sell a commodity product where delivery speed might be a deciding purchase factor, then a multi-location network may help boost sales volume.
On the other hand, if they keep buying more, and your sales keep increasing—your warehouse count right now might be exactly right.
Some products are unique. One e-commerce vendor based in Florida sells a wide array of sports jerseys with team logos under a proprietary license agreement. Amazon sells fan jerseys, too, but the company in Florida has a license that Amazon can’t get. So for some products, at least, that merchant doesn’t compete against Amazon at all.
Obviously, Florida isn’t the greatest location for a DC shipping all across the country. But this merchant is filling orders from that state, taking four to seven business days for standard shipping, and doing just fine. Customers can get their goods in three days or fewer, but they have to pay more.
Some products carry the cachet of a great brand. There’s an e-commerce merchant in New York that sells premium-quality socks, and for every pair you buy the company donates a pair to homeless shelters. With a brand like that, customers don’t really care if an order takes three days to arrive. The company fulfills from a single warehouse, and it continues to grow rapidly.
Some products are commodities. Say you don’t want high-grade hosiery, but ordinary white tube socks. You can get them at Walmart, Target or Dollar General. You can order them from Amazon or eBay. If your product is as common as white socks, you’re competing directly with a large number of merchants. So you need to deliver as fast as the best of them. To match Amazon Prime, you must deliver in two days or less. That situation makes you a good candidate for a multiple fulfillment warehouse strategy.
One note, though. The 37 % of Amazon customers who don’t belong to Prime wait longer than two days for their orders. Not everyone is motivated by fast delivery, especially if it means paying $8 extra to expedite a $20 order of socks. When it comes to commodities, most of us are happy to wait.
The closer a warehouse stands to a big block of customers, the lower your delivery costs. If you sell surfing gear, for instance, it will probably cost you less to ship orders from a warehouse in New Jersey and another in California than to serve all your customers from a building in Illinois.
Of course, the cost of inbound shipping also figures into the equation. Say you make your product in Arizona and currently ship from a warehouse nearby. Open a second warehouse in Pennsylvania, and you’ll need to move part of your inventory east, adding a new expense.
But the money you save on outbound parcel delivery will far outweigh added costs for inbound freight. When you add a second fulfillment warehouse, in our experience the parcel savings minus added facility, inventory and labor costs, can result in a 5%–10% savings. Adding a third center can bring the savings to 25%–30%.
But you can’t necessarily apply these estimates to your situation. It comes down to geography and math. Where are your customers concentrated? Where are your products made? What does it cost to move your products along the whole supply chain, from factory to one or more fulfillment centers and into your customers’ hands?
When Richmond, Va.-based consulting firm F. Curtis Barry & Company works with a business-to-consumer (B2C) eCommerce merchant to choose the optimal number of distribution centers, the consultant starts by asking the merchant to define the service level target it’s trying to hit.
“Say you want 90 % of all customers to receive their orders tomorrow,” says company chairman Curt Barry. “We analyze the customer files for some reasonable amount of time—say, four months to a year—so we know what percent of the shipments go to the various states. And then we ask, ‘Where do you place those DCs, or where do you contract to have a DC, so you can hit that 90 %, or whatever number you decide on, for the least cost.’”
Say you sell wooden toys. Your current catalog includes 50 items. It’s not hard to divide your inventory equally among three locations.
But say, instead, you sell women’s “athleisure” clothing—t-shirts, sweat pants, leggings, sports bras and more. They come in all different styles, and each style comes in different colors and sizes. You could easily have 5,000 stock keeping units (SKUs).
High e-commerce SKU counts raise several complex issues for merchants with multiple warehouses:
How much of each item should you keep in each location? Do all items sell at the same rate everywhere? Or does the extra-large yellow tank top sell at twice the rate in the Southeast as it does in the Northwest? You’ll need good data and a strong forecasting process to balance inventory effectively among several facilities.
How much buffer stock do you need? If one item is a very slow mover, you might want to keep just one case on hand at a time. If you run three warehouses, that means keeping three cases. You just tripled your inventory and carrying charges for that one item. When similar inefficiency extends across your entire SKU base and volume, you’ve got trouble.
What happens when a customer orders five items, and two of them are out of stock at the local warehouse? Do you have systems in place to fulfill orders from multiple locations? How are you managing the shipping costs?
Even when other factors point toward a need for more distribution centers, inventory costs may push you in a different direction. “You have to sit down and calculate how much inventory you’re going to have in each of those centers to support the service level you’re aiming for,” says Curt Barry. “That gets really expensive.”
You might be operating comfortably from one warehouse today. But to keep pushing orders out at greater and greater volume, you’ll need more space. Should you expand your current warehouse? Or should you seize the chance to expand to an additional fulfillment warehouse location?
If a new location seems like the right choice, then think about this: can you stand up a new facility on your own? You’ll need to choose the right region of the country, find a building, negotiate a lease, buy racking and material handling equipment, hire workers and get everything up and running.
Are you ready to take on this work while still serving your expanding customer base?
Once you’ve set up in the new warehouse, of course, you’ll face ongoing costs, such as lease payments and a bigger payroll. Most brands prefer to invest their time, energy and capital on their core business, rather than fulfillment. For that reason, they engage with a third-party logistics and fulfillment company (3PL).
An asset-based 3PL will have the necessary infrastructure, technology and people already in place. You’ll be able to start shipping orders from the new location without delay, and without capital investments.
Most 3PLs allow some sort of variable cost structure. When business picks up, you’ll pay for more service. In slow seasons, you’ll pay less. That’s a huge economic benefit for brands with seasonal or sporadic demand.
Consumers who shop on line are becoming less patient: they want quick delivery. But they also want free delivery, and many are willing to make a trade.
A 2016 survey by Alix Partners found that 83 % of consumers are willing to wait three days or more for their orders if that will get them free shipping. Sixty % said they are willing to wait five days or more.[ii]
With all the talk these days about lightning fast fulfillment, it appears that cost trumps speed for most people.
Expanding into multiple warehouses to decrease delivery times might be a profitable move if at least one of the following is true:
A large portion of your customers insist on shipping that is free and fast and might not buy from you if you don’t provide that.
You’re convinced that a lot more consumers would buy from you if only you could deliver faster.
You can charge enough for your products to cover the extra fulfillment costs you incur to reduce your delivery times.
If none of those statements fits your situation, a one-warehouse solution might be the best choice for you. You can still offer a faster option for last-minute shoppers—say, the customer who just remembered that tomorrow is his mother’s birthday. Most people in that situation will gladly pay extra for overnight shipping.
A B2C startup can be a very simple operation. If the business is really small, one person can run it from a guest bedroom with basic e-commerce software and a UPS or FedEx account. Even for a somewhat larger company, a single fulfillment center, a small staff and a simple inventory management system may provide all the support it takes to keep orders flowing.
As things scale up, the SKU count increases and order volumes climb, the company might add more people, multi-carrier shipping software and a warehouse management system with handheld bar code scanners. Take growth up a few more notches, and the business will need to grow even more sophisticated—maybe adding forecasting software and automated material handling systems.
Where does your business stand on the evolutionary curve? If the pace of growth isn’t yet putting a strain on your infrastructure, expanding into more than one ecommerce fulfillment warehouse might be too big a leap for you. Essentially, you need to walk before you run, and run before you fly.
Starting out in a single location, you have time to develop a history, so you can see patterns in your customers’ demand.
Which regions of the country generate which kinds of orders?
Which SKUs move the fastest?
How do order volumes rise and fall throughout the year?
Once you have this solid foundation, and your current operation starts straining at the seams, that’s a good time to consider geographic expansion.
For a B2C e-commerce merchants, there are some strong arguments for sticking with one fulfillment center.
It keeps your fulfillment operations simple, you’ll spend less on rent, equipment and labor, you’ll fulfill all of your orders from one inventory, and you’ll need less buffer stock to lower inventory carrying costs.
As long as you site your single warehouse in a central location, you can still reach 80% of the people in the lower 48 states in two days. Customers who want their orders faster than that are usually happy to pay a premium.
But there are also some sound reasons to add fulfillment locations
Putting inventory closer to your customer lets you ship fast without charging a premium. You’ll also cut your parcel shipping costs – your largest fulfillment expense.
If you operate just a single DC for national fulfillment, business continuity can be jeopardized in the event of a man-made disaster, like COVID-19, or a natural disaster.
Of course, every e-commerce business has different requirements. You’ll need to decide which strategy works best for your business.
One more thing. If fast delivery is essential to your business, you may have considered taking advantage of Amazon’s own Fulfillment by Amazon (FBA) service.
But remember that FBA comes with some distinct drawbacks—including a one-size-fits-all process, high storage costs, and shipping in Amazon-branded boxes. Read our eBook for more information: Amazon: Great Sales Channel, Poor Fulfillment Strategy. One solid alternative to FBA is to partner with a national fulfillment company to ship orders as part of Amazon’s Seller Fulfilled Prime (SFP) program.
If you are struggling to decide the optimal size of your fulfillment warehouse network and how to prepare for future growth, remember: the right fulfillment services partner can assist in conducting an analysis and providing the if/then cost implications of different options.
[i] “Amazon Prime Reaches 85 Million US Members,” press release, Consumer Intelligence Research Partners, July 6, 2017, https://files.constantcontact.com/150f9af2201/1ade4980-7297-467a-86b5-d6a4b93371e4.pdf
[ii] “Final-Mile Delivery: What Do Online Shoppers Want? And How Should Retailers and Their Logistics Partners Respond?” Alix Partners, http://legacy.alixpartners.com/en/LinkClick.aspx?fileticket=SPoYp2mECV4%3D&tabid=635