Many small and medium sized businesses are searching for a warehousing and shipping company to store and ship their goods for them. But determining where the warehouse or fulfillment company should be located can be a great challenge.
The first decision to be made that will help you determine the ideal location is the number of locations needed. Specifically, the decision is between:
- A single warehouse location
- An outsourced warehousing and fulfillment solution with multiple warehouse locations
The Case for a Single Warehouse Location
Despite the media attention geared towards multiple warehouse solutions in order to deliver goods to customers within hours, the vast majority of businesses and online merchants will be more than satisfied with a single warehouse location solution. In a single warehouse location strategy, all receiving, storage, fulfillment, and shipping are done using a single warehouse in one physical location.
A single warehouse strategy is the best case scenario in the following circumstances:
- Lower sales volumes that do not warrant carrying additional inventory and splitting the inventory over multiple locations. Unfortunately, there isn’t a hard and fast minimum volume that would warrant multiple warehouse locations for all business. However, companies shipping less than 1,000 orders per month or a few thousand orders per month are more than likely best suited towards a single warehouse location strategy.
- The majority of orders are shipped to a specific region or area. If most orders are shipped to a specific region, then it would simply be overkill to operate a multiple location strategy.
- There is no time sensitivity to shipping. In many cases, as long as orders are delivered within a reasonable timeframe, customers don’t need the goods immediately. In fact, most consumers would prefer to receive lower or FREE shipping in exchange for shipping speed. Certainly, there are some products that need to be delivered quickly, such as perishable items. However, in most cases, receiving an order a day or two later isn’t the end of the world.
- A single location will suffice for minimizing shipping transit times and costs for most customers. In other words, in many cases a single, centrally located warehouse and shipping operation will best suit most business because it will produce an acceptable level of timely deliveries for most orders and minimize shipping costs for most orders. In the US, this would be executed using a central US warehouse operation, for example.
The Pros of Using a Single Warehouse Location
The greatest pro of using a single warehouse location is “ease of use” and availability of options. A single warehouse location, such as a single US warehouse, requires a single set of resources to implement the strategy. Your company will only have to utilize one warehouse and one cohesive staff for operations, be it through an in-house operation or an outsourced operation.
For most businesses, not only is this strategy the most effective, but it is also the most cost effective.
The Cons of Using a Single Warehouse Location
The main drawback of using a single warehouse location is that customers will not receive orders as quickly, and they may pay slightly more for orders to be shipped, on average. Especially for larger weight orders, this could become challenging, forcing some customers to “pass” on orders from your business because the shipping barrier is too high.
Furthermore, in times of varying demand, there won’t be excess inventory in other locations to shift and flex as needed. These are usually rare events, but they can come into play at different points in time.
To summarize, a single warehouse location for warehousing and shipping is the perfect solution for most businesses. However, it isn’t the best approach for everyone, especially as volumes increase and shipping delivery time expectation escalate.
Are Multiple Warehouse Locations the Answer?
Once a business reaches a certain scale, or a company’s customers require a higher level of delivery service, looking into multiple warehouse locations is a requirement. This strategy is best suited for the following scenarios:
- Companies that have achieved a certain level of order volume per month – usually greater than 1,000 orders per month but potentially even more than that. It’s important to achieve a certain level of order volume because the cost savings associated with lower shipping per order have to be outweighed by the cost of carrying inventory in multiple locations. This is a unique calculation that has to take place on an individual business basis, and is highly impacted by product costs.
- Customers’ expect orders to reach them in fewer than a few days. If expectation are this high, the only way to achieve them is by utilizing multiple shipping locations.
- Products will be damaged in transit if delivery times extend over a few days, or if the product itself is so time sensitive that it must be received by the customer in a short time window. Examples of these types of products are perishables and time sensitive medical products, such as patient shots.
- Performance on a given platform or for a given business partner require less than a few days delivery time per order. The most common example of this scenario is achieving the Amazon Prime status. In order to do this, a business most certainly needs a multiple warehouse operation to meet the requirements.
- Products that are extremely heavy. In these cases, customers may not order from your business if the shipping costs are too high. By locating goods in multiple warehouses, the shipping costs per order can be dramatically reduced.
It’s important to make one main point about multiple warehouse operations. There has been a huge media push, largely coordinated by a few multi-location warehouses and networks, to make it seem as though this is the expectation of ALL customers and that every business should implement this approach. This couldn’t be further from the truth. In fact, it’s important to note that most multiple warehouse operation and platform has a certain order volume minimum before they will even work with you! So take the “news push” with a grain of salt, and season your strategy with a healthy amount of skepticism and wisdom!
The Pros of Multi-Location Fulfillment Companies
The top benefit of having a multi-location company is that you can decrease the time it takes to deliver orders to each customer, and the shipping costs per order are reduced as well.
Next, you can have a more unified technological infrastructure. You track packages and know exactly when they arrive at each location. You anticipate the movement of goods from one place to the next with much greater accuracy. Your ERP system has more data inputs which creates more accurate predictions in the future.
The third benefit is that you can get more creative in managing inventory with many different locations. While demand is low, you can keep inventory in low-cost locations or not order it at all. When demand is high, there is flexibility to move the goods much closer to the end customer for faster turnaround. That increases cash flow and ultimately gets to the bottom line. If carefully managed, your debt will also be lower as a percentage of the overall business.
The Cons of Multi-Location Fulfillment Companies
The drawbacks of a multi-national or multi-state fulfillment companies are many. Firstly, fixed costs are much greater. Each location has its own contract for rent, it’s own general manager, it’s own staff and it’s own equipment. These require a large upfront and ongoing cost. Without sufficient business to cover these expenses, the business will face grave difficulties. Even in cases of outsourced warehousing, inventory carrying costs are increased significantly by using a multi-location warehouse approach.
The second issue is bridging the cultural gaps between the locations. If your two warehouses are in Illinois and Indiana, this won’t be a huge problem. However, if they are in Oregon and Ohio you may have different work cultures. If they locations are in Maryland and Mexico you are sure to have language, legal and financial challenges that are tough to bridge. Management must place special emphasis on common, shared goals and east to understand principles for everyone in the organization to follow.
The last issue is logistical. As mentioned earlier, more locations improves the capability of your ERP system. However, that also mean putting effort, manpower and attention to the back-end coordination. Without careful coordination, responsibilities may be lost as managers in different locations expect their counterparts to take care.
Similarly, customers are putting greater trust in you to move goods from one location within your firm to another one. At a minimum, you will have a much larger web of relationships to manage with logistics firms, distributors, manufacturers etc. that will all have to be managed.
The unifying feature is that the more capital you have, the more you can expand and the less it will impact your business. On the other hand, if you are like most businesses and have a limit to your capital, you will have to weigh the trade-offs of growing to many different locations. Ambitious companies that want to grow their revenue eventually will have to expand to more locations in order to acquire more customers and better serve existing ones.
When Should You Consider Warehouses in Multiple Countries?
One final thought in terms of deciding between a single warehouse location and multiple warehouse locations – and it involves the global nature of your business. As businesses expand and sell at a higher frequency in international locations, there may reach a tipping point that requires the business to open up or expand into a warehouse in another country (for example, a US company using a 3PL fulfillment center in Canada). Between import timeframes and costs, international customers may have aversion to purchasing if the times and costs are higher than the perceived value.
When you start receiving international orders, it doesn’t mean that you have to immediate shift to a multiple country approach. However, once orders achieve a certain scale in a given country, and once the pain points get high enough for customers ordering and receiving timely shipments, then this approach may be necessary.
The Final Decision About Warehouse Locations
After you decide whether a single or multiple warehouse location strategy is best, the final decision to be made is what location to pick for the warehouse operation. This decision is impacted by a number of factors:
- Inbound shipping costs – is it more important to lower inbound shipping costs and timeframes from your manufacturer or supplier? Or is it more important to lower overall outbound shipping costs and timeframes for your end customers?
- Location of your customers – if your customers are geared towards a certain region, this is an easy decision. However, if they are scattered across the entire country or globe, some thought has to be given to the destinations that receive the highest order volumes. If it is truly spread equally, then perhaps a centralized location is best.
- Personal preference on whether or not you are physically close to the warehouse operation.
Someone Close to You Isn’t Necessarily the Best Option
Many businesses would prefer for a fulfillment company to be located right down the street. This way, they can easily travel to them to check on stock and in case there are any issues. In some cases, it might be best:
- If you simply have a difficult time letting go of the control and ‘psychologically’ need the warehouse to be close.
- If you want to maintain a very close and personal, face-to-face relationship with your warehouse company.
While this isn’t a bad strategy to employ, looking at the world this way could also lead to missed opportunities.
First and foremost, finding a warehouse company right down the street doesn’t necessarily mean that they’re going to be the best fit for your business. There are so many other factors that mean a great deal when considering who to choose to perform your outsourced warehousing and distribution.
Other things could have a big impact such as the specialty of the fulfillment company and their pricing. For example, most people wouldn’t know this because most third party fulfillment firms tell you that they can do “any” project, but the reality is that most fulfillment vendors focus on certain types of clients. Some are really good at e-commerce fulfillment, while other are really good at retail fulfillment to retail stores. Furthermore, there are some really good fulfillment companies that offer great service and some of the most competitive pricing, but if you won’t consider anyone outside of your city, you might miss on these potential cost savings.
Second, a huge indicator of costs involved in any fulfillment project is shipping. If you choose a fulfillment company right by your company, it may or may not be the best decision to lower your overall shipping costs. Two factors come into play when making this determination – where your product is manufactured and where your customers are. For example, if your product is produced in China and most of your customers are in California, then it would make sense to located a company in or near a major port in California. And for many companies that ship to customers all across the US, finding a fulfillment company that is centrally located may be the best option.
What is the Best Location for Your Warehousing and Fulfillment?
Obviously, the answer to this question is highly individualized and very specific to a business. What works best for one business may not be the best strategy for every company. However, knowing the thought process required to make a good decision will increase the chances of a successful strategy being implemented. By looking at whether or not you need a single or multiple warehouse locations, and then by thoroughly examining the ideal location for your individual company’s needs, you’ll be well on your way to meeting and exceeding your customers’ shipping and delivery needs.
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