Amazon and other large retailers are bringing forth a new warehousing framework that deploys interconnected regional networks. Let’s discuss the background, pros, and cons of this strategy.

Parcel shippers use warehouses to satisfy customers and keep costs low. A warehouse network is two or more distribution centers that have a mission governing what products flow through it and when.

Often warehouse missions cover a specific geographic territory. These territories can range from very large (North America, Latin America, EMEA, etc.), down to regions, states, ZIP Codes, and individual customer locations.

Where a company decides to set its territorial boundaries depends on product attributes like weight and density, shipping costs, customer urgency, procurement economics, and inventory stocking strategies. Shippers avoid shipping from out of territory warehouses to save freight and to serve customers faster.

Traditionally, customer territories were pre-established on shortest distance to customers or on highest (least time in transit) service levels. These fixed territories matched up well with high package volumes, sales rep territories, operating budgets, and the need for organizational simplicity.

Warehouse networks are routinely optimized to account for customer locations, lead times, transportation costs, labor rates, and the price of fuel. This optimization leads to ongoing market competitiveness and ensures cost and service leadership.

Amazon’s Bombshell: Interconnected Regional Networks

Since its inception, Amazon has invested billions in automation, stood up a last-mile delivery fleet, and increased its network to include over 1,000 locations. Amazon routinely shipped items across the country no matter where an item was stored. This provided a high level of customer satisfaction but added significant cost when out-of-territory shipments were necessary.

Further complicating Amazon’s operations was the computational complexity of rebalancing and managing inventory across an increasing number of warehouse locations. Realistically, all items can’t be stored in the same warehouse, and multi-item orders often require multiple shipments from multiple warehouses to fulfill an order.

Recently, as post-pandemic demand decreased and inflationary pressures grew, Amazon decided to overhaul its network. Its goal was to aggressively cut costs, better serve Prime members with same day service, and optimize its delivery infrastructure while leveraging its massive warehouse footprint.

Amazon’s first step was to carve the US into eight regions, storing many commonly ordered items in each region so shipping can stay as localized as possible. In a letter to shareholders, Amazon CEO Andrew Jassy said, “Each of these regions has broad, relevant selection to operate in a largely self-sufficient way, while still being able to ship nationally when necessary.”

Secondly, Amazon is placing inventory closer to the customers. This slotting initiative is improving regional depth and breadth while addressing seasonality and obsolescence. This greatly diminishes out-of-territory shipments.

Thirdly, by making out-of-territory deliveries the exception, parcel zones can be shaved, re-handling minimized, and more internal local delivery resources utilized. So far, Amazon has seen a 15% reduction in the distance items travel from warehouses to customers and a more than 12% decrease in handling “touches.”

Lastly, regional network retailers and e-tailers like Amazon will begin prioritizing in-region items on their websites. These items may be promoted directly through search results, by the resulting lower price of a regional-only shipment, by lead time, or, in the worst case, no availability. This will further limit the supply and demand for out-of-territory shipments.

Together these changes allow regional warehouses to operate autonomously. Shorter travel distances will lead to lower cost to serve, less impact on the environment, and customers getting their orders faster.

Which Is Better?

An interconnected regional strategy shares many similarities with warehousing best practices. Many companies strive to have a one order, one box or a single warehouse fulfillment strategy. This doesn’t differ based on the underlying warehouse network.

In-region shipments will decrease the distance to the customer due to a tighter geographic service territory and expanded stocking breadth. For shippers considering this strategy, cost analysis should be performed and the zone savings documented.

A primary flaw of a regional strategy is the heavy dependence on more accurate forecasting and the resulting inventory strategy. Customer service and lead-times will be negatively affected if companies strictly follow in-region fulfillment policies that are coupled with poor fill rates. In today’s competitive environment, this will lead to customer attrition and defections.

A second flaw of a regional strategy is serving customers on the borders of a territory. For these customers, it may be cost advantageous to ship from a warehouse in another territory.

Current best practice allows for dynamically determined warehouse territories on an order-by-order basis. This order fulfillment innovation solves for more complicated fulfillment decision factors such as minimizing total order cost, low local inventory availability, order criticality, and customer satisfaction.

Recommendation: Benchmark and Improve

Amazon’s switch to interconnected regional warehouses shows the importance of having a sound warehouse network strategy that balances cost and service. Shippers should perform the following steps to determine the benefits and costs of switching to this approach:

First, shippers should identify hard and costly to serve customer regions. Drill downs should be performed to identify root causes such as item breadth and depth, customer demands, poor fill rates, carriers, etc.

Next, parcel shippers should benchmark KPIs and leverage customer feedback to regularly assess their network operations. Inventory performance (fill rates), zones, split shipments, and cost to serve are ones to focus on.

Next, shippers should quantify the economics of operating multiple warehouses and the dependency on other warehouses to satisfy a customer order. Shippers should also evaluate the feasibility and value of regionally segregating inventory.

Finally, parcel shippers should understand customer lead times and their ability to generate additional sales. Amazon’s move to regional networks was driven by a desire to reduce the average zone and lead time to customers.

While interconnected regional networks are still in their infancy, they have important cost and service merits. Shippers should routinely assess their ability to compete against and adopt this new approach.

Jeff Haushalter is a Partner at Chicago Consulting. He designs supply chains for manufacturers, distributors, and retailers that reduce cost and improve service. He can be reached at jeff@chicago-consulting.com