Shipping costs are a primary cost differentiator when shopping online. Customers may choose not to shop with you if they think they can get your products at the local shop and avoid shipping costs – or worse, purchase from a competitor due to better shipping rates. Needless to say, online merchants are always on the prowl for ways to reduce shipping costs and up customer service.
Since shipping rates with the large carriers are negotiated based on volume, smaller retailers are at a significant cost disadvantage compared to the bigger guys. Higher volume translates to better economies of scale and lower negotiated shipping rates. Those lower rates get passed on to customers, or make it easier for mega retailers like Amazon to simply waive the shipping costs entirely.
So what can brands do to compete? Since shipping rates are calculated based on distance and weight, one way to reduce costs is to move your inventory closer to your customers. All things being equal, the ability to reduce the number of zones traveled and days spent in transit can result in a significant cost reduction even without renegotiating your rates.
One of the benefits of selling online is that you are not limited to a local audience for your products. Thus the geographic distribution of your products will likely follow the population density: heavy density in New England and the East Coast, followed by the West Coast, and the smallest density in the Midwest. Regional specific products are obvious caveats – you don’t sell as many snowboards in New Orleans or surfboards in New York.
The challenge for companies with heavy bi-coastal distribution is where to best locate a warehouse to serve both sides of the US. A more sophisticated solution is to use more than one warehouse. By reducing the number of transportation zones, you reduce your shipping cost and get packages to your customers in less time.
With so many obvious benefits, why aren’t more brands using this strategy?
Increasing the number of warehouses also exponentially increases the complexity of managing inventory. Brands need to have accurate information on what quantities are available in each warehouse, and implement rules to manage incomplete orders and split orders.
Is a multi-warehouse strategy right for your brand? Start by asking the following questions.
- What percentage of my orders are in each shipping zone?
- If I shift my inventory to different warehouses, what percentage of orders will be serviced from closer warehouses?
- Will the expected savings offset the costs of managing multiple warehouses?
- Can my technology platform handle the complexity of inventory management in multiple warehouses?
Earlier this year Symphony completed multi-warehouse analysis for an interested client. From the diagram, you can see that the client has a heavy concentration of customers in Central (32%), Southern (26%), and Northeast (25%). The original warehouse was based in South Dakota and could serve the entire US, but did not offer optimal 1 – 2 zone delivery to either coast.
We examined two different scenarios and compared the results to the current single warehouse solution. The analysis was performed on 7 different weight breaks and based on actual transaction volume. In the first scenario, we examined the cost savings of adding two additional warehouses in Ohio and California. The second scenario examined the costs savings with only one additional warehouse in Ohio.
Scenario 1 had the most savings with an estimated transportation cost reduction of 8.7%. Three warehouses would decrease average transit time by 1.69 days.
Scenario 2 would also yield an estimated transportation cost reduction of 7.2%. Two warehouses would decrease the average transit time by 1.31 days.
In the battle to control shipping costs, a multi-warehouse strategy can have a significant impact reducing operational costs. This is still a relatively new technique due to the significant technology and integration complexity required. However, the upside of faster delivery at a lower cost is worth the time investment to find out if a multi-warehouse strategy is right for your brand.