What should your ecommerce fulfillment network look like to compete in a market that values fast delivery?
It’s a question that seems to be on the mind of every online retailer. It’s also a question that doesn’t have a one-size-fits-all answer. While it might seem smart to add on fulfillment locations to match the speed and reach of Fulfillment By Amazon (FBA), that’s not always realistic.
Here are a few of the most important questions to ask yourself to help determine whether adding fulfillment centers makes sense for your business.
How much do your customers care about fast delivery?
Are your customers happy with the speed of your 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. The next time they need something you sell, they’ll buy it elsewhere.
Is your product unique, or is it a commodity?
Consumer demand for fast delivery is less of an imperative for one-of-a-kind or hard-to-attain items. Consider, for example, the case of the ecommerce vendor that sells a wide array of sports jerseys with team logos under a proprietary licensing agreement. Although Amazon sells similar fan jerseys, this vendor offers the only authentic and authorized versions.
As a result, the business really doesn’t have to offer ultra-aggressive delivery timelines in order to be successful, because it’s one of the only games in town. Today, the company is fulfilling nationwide orders from the Southeast, getting items to customers within 2–6 business days, and still growing strong.
On the other hand, if your product is as common as white tube socks, you’re competing directly with a large number of online merchants (not to mention your neighborhood Walmart and Target) and need to deliver as fast as the best of them.
What’s your SKU count?
Let’s 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, sweatpants, 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 SKU counts raise complex issues for e-commerce 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.
Even when other factors point toward a need for more distribution centers, inventory costs may push you in a different direction.
Will parcel savings from adding fulfillment locations offset expansion costs?
Generally speaking, when you add a second fulfillment center, it yields about 10% parcel savings by minimizing high-zone parcel moves. And when a third fulfillment center is added, the parcel savings can increase to 25% or 30%. Actual savings will depend on the number of shipping zones between your location and your customer base.
As an example, a Vermont company was shipping exclusively from its New England hometown and was spending an inordinate amount of money shipping across many zones for most of its orders. When the company added an Atlanta fulfillment center, it began to see significant savings, even after incurring the cost of a new distribution location.
Obviously, you’ll need to do the math for your own situation. But, in some cases, parcel savings could pay for the cost of warehouse expansion.
What additional facility costs are you equipped to take on?
As a company’s sales grow, it’s not unusual to need additional fulfillment center space. The question is, does it make more sense for that additional space to be in the same location/building—or would your company’s and customers’ needs be better served by adding that space somewhere else?
If it’s the latter, does your company have the financial and operational bandwidth to support a new facility start-up, which will include site selection analysis, lease negotiation, selection and installation of racking and material handling equipment, hiring of workers, and getting everything up and running?
Or, would you be better served working with a B2C fulfillment company that already has the necessary infrastructure, technology and people in place? In such cases, you’ll be able to start shipping orders from the new location without delay, and without capital investments.
What’s the right number of fulfillment warehouses for your online business? There’s no right or wrong answer. But your responses to the questions posed will make this decision clearer.
Amware Fulfillment is a national logistics company that serves direct-to-consumer brands and retailers.