This article originally appeared in the 2018 September/October issue of PARCEL.
We live in a world that demands instant gratification. What this means to companies – retailers, distributors, and suppliers – is that the pressure has never been greater to provide ever-faster and cheaper delivery.
Everyone understands the effect Amazon has had on delivery expectations in the B2C world, but many of those same expectations have spilled over to B2B today, too. Customers don’t want to wait, and they expect shipping to be free or close to it. The challenges for businesses to remain competitive and meet these expectations is self-evident.
It’s also well understood that shipping costs and delivery time are largely determined by the distance a company is from its customers. This leads many companies to the obvious conclusion that adding a second (or more) distribution center to their delivery network should be a straightforward way to decrease transit times and shipping costs, and as a result improve their overall service to customers.
And for many, it may well be, but the decision can bring complications. Operating from multiple distribution points creates a lot of challenges and costs that need to be clearly understood and considered.
In an ideal world, every company would have enough inventory in all the right places to deliver anything their customers want exactly when they want it — whether that means delivery in an hour or a week. There are a lot of obvious — and not so obvious — reasons this is not practical. Somewhere, however, is a balance that optimizes the expectations your customers have for delivery with the lowest possible cost to do so.
Improving time in transit and lower shipping costs, especially to distant customers, are the primary benefits to adding a distribution center we’ve already highlighted — but there are many more.
An important one can be as simple, yet valuable, as allowing for later shipping cut-offs, which can extend the time that orders can be shipped each day. Adding new warehouses, distribution, or fulfillment centers to a network — whether as company-operated locations or through a third-party relationship — creates other operational and business advantages, too.
These can include things like relieving capacity issues at existing facilities, whether these issues are space or labor related. It can also create the opportunity to add specific capabilities, like temperature-controlled storage, the ability to handle certain hazardous materials, or equipment that can perform wrapping, labelling, or other specialized packaging. The point is, with the right strategy, adding locations can alleviate stress within a network.
Although the common goal is to optimize the location of products relative to customers, along with the ability to provide the fastest and cheapest delivery, the real opportunities to benefit from adding locations to a network are company-specific — as are the potential costs and risk.
This is a nuanced and complex equation, unique to every business. The only way to solve this equation is by modelling the costs for running additional facilities. This includes not just shipping, but the additional labor, infrastructure, and inventory management costs that come with it.
Over-simplification of the decision is a mistake, too. One basic, but wrong, assumption many companies make is thinking they should locate their distribution centers to serve the population distribution of the US. Yet, few companies’ own customer distribution patterns mirror the country’s. The point is that poor assumptions and generalizations will lead to bad decision making.
Making the right determination for a company can start by considering the right questions and considering the right things.
Do You Have the Technology?
Storing and shipping product from multiple locations requires very different processes and technology than doing it from just one. The details required to effectively manage basic functions like inventory management and the operation of fulfilling orders become much more complex. When considering adding locations, it’s important to start with simple questions to find the right solution, such as:
- Which SKUs should be stocked at which facility?
- How do you determine safety stock?
- Do you have inventory visibility across your different sales channels?
Order Management and Shipping:
- How do you calculate and allocate the cost of split shipments?
- What if an order must be shipped from multiple locations due to inventory; are the orders consolidated or shipped separate as two deliveries?
- Can you combine multiple orders going to the same location to optimize shipping costs or enable dropshipping?
Other important considerations that need to be part of the decision include finding the optimal location for any additional facilities (again, based on your actual customer distribution and not averages). The effect of (for better or worse) different inbound transportation costs, taxes, and labor availability are all considerations.
In the end, however, all these factors still boil down to performance. You need to be sure any changes you make to your distribution network are really improving your delivery time in transit and/ or reducing costs, depending on your objective. That’s the whole point.
Expanding a company’s network of distribution centers can improve customer satisfaction but is not a decision to be made without a lot of consideration and analysis. The risks can be as great, or greater, than any potential upside to a company’s distribution operation. Asking the right questions that help you create the right plan and consider the costs accurately — for facility management, inventory management, and shipping — should be the first step in making this decision.
Norm Pollock, VP of IT for Transportation Impact, will be presenting on the topic of how to know if your company can benefit from adding to its DC network at the PARCEL Forum in Chicago in September. He can also be contacted at email@example.com.