E-commerce fulfillment: When do additional distribution centres make sense?

David Kang has led fulfillment strategies across a variety of organizations and knows the ins and outs of moving warehouses, increasing efficiencies, and managing storage capacities. His strength lies in working with retailers who have experienced exponential growth in their e-commerce business.

Now more than ever, today’s online shoppers care more than ever about when and how much it’ll cost them to receive their online purchases (hint: ideally little or nothing). As the need for speed intensifies in e-commerce, effective fulfillment can be a huge advantage for e-commerce merchants looking for that competitive edge.

Looking to expand? Experiencing more cross-Canada demand from an impatient customer base? Perhaps it’s time to look at extra warehouse space in specific geographic growth areas as a springboard. Broadening your footprint this way can help build your brand by shortening delivery windows and cutting down on shipping costs. After all, the closer you are to key target markets the easier it will be to create value for your customers.

Sure, having one location for all of your warehousing and fulfillment means a single inventory for all orders, easing the management of receiving, storing, and shipping. Inventory can also more accurately reflect demand, thus freeing up cash. Plus, you save money on inbound deliveries since there’s only one destination receiving products. Overall, it’s simpler.

But that doesn’t necessarily make it more effective, says fulfillment expert David Kang. Businesses experiencing rapid growth that’s expected to continue into the future should at least consider other options, particularly if they’re looking to move products from coast to coast, or across the border.

Here are some considerations and tips to help evaluate expanding into a secondary fulfillment location as you grow and think nationally – or even globally:

What are your expectations for growth?

There are pros and cons to using multiple fulfillment locations, as there are for working out of a single central location, Kang explains: “Which option is best for your business depends on many factors, including your size, your region, the number of SKUs you handle, and your expectations for growth,” Kang explains.

That’s why it’s generally a good idea to have a significant amount of order history upon which to base your decision. For smaller operations, or merchants that haven’t been selling long, that typically means starting out with one distribution center and assessing the possibilities after a year or so. For more established merchants, what makes the most sense for your business can be determined by looking at your order history, forecasted sales, and your long-term expansion plans.

Broader reach and reduced shipping costs

One clear benefit of having multiple fulfillment locations, Kang suggests, is reduced shipping costs and improved delivery times. “Orders can ship out from the location closest to the customer. This means that purchases spend less time in transit and, on average, customers receive their purchases more quickly.”

Organizing your operations across multiple locations also presents your business with the opportunity to be more accurate in its deliveries. Your shipping partner can help you develop a plan that suggests from which location each package should be shipped from. The ultimate goal is to strategically place goods closer to the end-buyer, and shorten the last leg of the parcel delivery. For e-commerce merchants that are selling nationwide, or even globally, this can be critical.

Improved routing of orders

Multi-location order fulfillment means you’ll need to implement technology that can structure a cohesive system for inventory management between all centers. There will surely be an initial cost to making this work, but don’t try to go it on your own, suggests Kang: “You’re looking for trouble if you try and adapt what you’re doing now across several locations. It can really hurt the business.”

Instead, look for scalable warehouse management systems, designed specifically for e-commerce fulfillment, to help you manage the selection and routing of orders.

“An important part of a multi-warehouse workflow is ensuring that the right facility is shipping the right orders,” Kang says. “Done properly, this will ensure that your customers receive their goods as quickly as possible while saving you money on shipping costs.”

The biggest consideration in using multiple fulfillment locations, of course, is the cost. Each location will have its own contract for storage and services, for instance, increasing handling costs. Multiple locations will also mean a more complex picture when it comes to inventory management. In order to keep your shipping costs at an absolute minimum, it’s essential that you don’t run out of stock at any of your multi-warehouse locations, causing you to ship extra inventory from another location. Data from each warehouse will need to be integrated to get a full picture of your inventory.

Searching out experienced fulfillment partners

Another factor that can have an effect on the business is working with different fulfillment providers in each location. You’ll quickly end up dealing with different systems, business cultures and potential service levels. Using different warehouses means you’ll have multiple people handling your processes, for instance, making it a bit tougher to track down orders and get in touch with the right support at each location.

That’s why it’s so important that you find the right 3PL partner, Kang notes. For the best results, look for one experienced with brands and products that are similar to those you sell. Start slowly, comparing performance reports for all potential partners based on the same metrics. Specify the benchmarks, and how they’ll be monitored, and then ensure these are formalized as part of any subsequent agreement.

A further consideration in utilizing multiple warehouses is the amount of products that you’re going to have to carry. Inventory can easily come up short at one location, requiring an alternative shipping arrangement or restock from another warehouse. You can also end up with redundant stock clogging the aisles if a product line is faltering.

One way that you can make multi-distribution work in your favour is by splitting inventory and concentrating on your top-selling products. While it’s generally not cost effective to split your entire inventory, it can makes sense to keep the best-selling products (perhaps 20 per cent of SKUs representing 70 to 80 per cent of total sales) housed in all locations, Kang says. This way you’re getting the biggest bang for your shipping dollars – provided your forecasts are accurate.

Increased inventory can trim profits

Otherwise, particularly if you carry a high number of SKUs, the cost of maintaining your inventory could cut into any shipping-related cost savings since it will need to be stretched to occupy all warehouses. If you run out of stock in one location, and are forced to fill back orders from a different warehouse, any cost savings resulting from more efficient shipping can quickly be cancelled out.

“It’s tough enough managing the inventory for one distribution center; opening up another location only magnifies that challenge. But it can be the right move for many merchants,” says Kang says. “It’s all about being able to anticipate purchasing patterns and then ensuring that orders leave the right distribution center as smoothly as possible.”