In the constantly evolving eCommerce world where the speed of providing service matters, having multiple warehouses across the catchment areas seems beneficial. And with the options available at your disposal today, you don’t have to be the owner to operate your inventory from these warehouses. However, there are many factors that should be considered before making a final decision on the subject matter
Here we have discussed the pros and cons of multi-warehouse inventory management, the options available for multiple warehouse management, and factors you should consider before opting for a multi-warehouse strategy.
On that note, let’s take a look at the different options for multiple warehouse management.
3 options for Multi-Warehouse Management
Third Party Logistics (3PL)
Working with a 3PL or 4PL helps you mitigate risk to your service provider and reduce your logistics cost.
These fulfillment centers are managed by logistics companies who handle end-to-end business right from stocking the products, packaging them to taking care of the final product shipment.
A 3PL deals directly with the service providers. On the other hand, a 4PL arranges the same services for their clients, however, instead of directly handling these services, 4PL service provides engage 3PL companies and other service providers who use their network of carriers and warehousing providers.
Here is an infographic that explains the difference between the two:
Advantages of 3PL
- Saves time and money
3PL streamlines your logistics and thereby reduces the time involved in order shipment. Since 3PL service provides work with multiple carrier partners, they can leverage better shipping rates by utilizing their collective order and volume frequency, thereby reducing your shipment cost.
- Improve Customer Experience
3PL service providers have an established distribution network that ensures a
faster delivery of customer orders, hence improving customer experience.
- Helps Global Expansion
With their expertise in the distribution network and partnership with multiple carrier partners, 3PL can help you expand globally without making a heavy investment in local warehousing or worrying about the documentation process.
- Mitigate Risk
In case of any delays or unforeseen activities, the 3PL providers are responsible for finding alternatives and solutions. As providers, they are also insured against the loss or damage of your products.
Disadvantages of 3PL
- Loss of Control
Relying on an outside party to manage your order shipment can prove to be a wrong decision if the 3PL service provider can not fulfill your customer orders in the agreed-upon SLAs. This simply means a negative customer impression, that can eventually reduce future sales and affect business profitability.
Besides this, sharing proprietary company information like order information, sourcing data, etc. can always have the chances of a data breach.
3PL expertise and a strong distribution network can help you save time and money involved in logistics, however, external factors like tariffs, over-regulation, etc, can eventually lead to cost escalation. As your business grows, 3PL can cost you more than in-house logistics operations.
3. Meeting Business Requirements
In case you deal in a highly regulated industry or have product-specific needs like cold storage, temperature-controlled delivery, etc. investing in a 3PL service provider may not be the best idea.
Why? 3PLs manage hundreds of business logistic operations at the same time, and hence may not be able to give the special attention required to meet your requirements.
Advantages of 4PL
- Streamlines end-to-end Supply Chain Management
A 4PL service provider handles complete supply chain management starting from procurement and warehousing to final distribution. Your 4PL service provider becomes your single point of contact for your supply chain operations, and also ensures that you can smoothly run your operations by implementing the correct systems, processes, and metrics throughout the supply chain.
- Focus on Business Core Competencies
As mentioned in the above point, a 4PL service provider can manage and streamline your supply chain operations. This eliminates the need for you to worry about inventory management, supplier relationships, etc., and thereby allows you to focus on your business’s core competencies.
- Cost Reduction
Engaging with a 4PL service provider increases your operational efficiency, this, in turn, means a reduction in operational costs.
You can save your cost in terms of labor cost, inventory costs, eliminating wasteful processes, etc. The cost-saving improves cash flow and helps you expand your business.
Disadvantages of 4PL
Engaging with a 4PL service provider implies outsourcing your entire supply chain operations. This increases your dependency on an external party for a long-term basis, and an unsuccessful partnership with a 4PL can cause significant damage to your business.
For small and medium-sized businesses, 4PLs are a very expensive strategy
2. Company-owned warehouses
As the name suggests, these distribution centers are owned and maintained by the respective organizations.
The advantages and disadvantages of company-owned warehouses are:
- 100% Control
One of the most important benefits of in-house warehouse operations is that it provides you complete control over your physical inventory and allows effective utilization of warehousing data to manage storage and distribution facilities.
- Meeting business specific requirements
If your product line requires special warehousing requirements, opting for company-owned warehousing will be the best strategy for you. Also in case, your business performs various in-house activities that add value to products and service offerings, it is suggested to keep inventory items at your own warehouse rather than outsourcing.
- Lack Expertise
Warehouse Management may not be the core competency of your business and in such cases, manage warehouse operations in-house can lead to poor inventory management, procurement management, etc.
- High Capital Expenditure
Managing multiple warehouses leads to high fixed costs and incremental overheads that are incurred in managing daily operations.
- Risk involved
Managing warehousing activities implies that you can not transfer the risk associated with managing warehouse operations and logistics. If in-house operations are not implemented effectively, they can leave you with under or over-utilized facilities and workforce, thereby affecting productivity, increasing costs, delaying order fulfillment, etc.
Fulfillment centers operated by channels (e.g., Fulfilment by Amazon, Flipkart Advantage)
These warehouses are owned by the channels that store and sell these products. They work in the SOR (Sell or return) model. The marketplaces own the warehouses and manage end-to-end logistics on their own. The merchant has to pay for the warehousing fees, logistics charges, pick-pack fees, and commission on sales.
- Reduce Cost
Engaging with a fulfillment center can free up your cost earlier involved in managing warehousing and logistics.
- Business Scalability
You have more time (and money) to focus on your business growth. Also as your business grows, you do not have to worry about managing the shipment of your orders.
- Fast Delivery
Like the name suggests fulfillment centers only focus is on order fulfillment. This in most cases, means they are better equipped to manage your fulfillment rather than your in-house team. Hence provide faster order delivery, and eventually lead to repeat purchases and help you grow your business.
- Loss of Control
Like 3PL and 4PLs, engaging with a marketplace fulfillment center implies losing control over your order fulfillment. In this case, you will lose the opportunity for providing a customized shopping experience to your buyers.
- Missed Branding Opportunity
If you partner with a marketplace fulfillment center like FBA, you lose out on branding opportunities. The only branding options available to you are adding your product photos and descriptions, everything else (product packaging for example) is Amazon-branded. Therefore the customers’ loyalty is toward Amazon and not your brand.
You need to pay the marketplace for the fulfillment services they provide. This includes storage fees, order fulfillment fees, pick-and-pack fees, weight handling fees, etc. It is important that you estimate these costs beforehand, to avoid a loss on sales.
Deciding upon a warehouse management strategy can become a quite challenging task. Here we have listed down the major factors that you should consider discussing with your team before opting for a multi-warehouse management strategy.
Criteria 1: What are the additional operating costs for opening additional warehouses?
Starting a new warehouse leads to the following incremental costs:
• Warehouse Maintenance Expense
• Inventory cost
• Transfer Expense (in case of backorders)
• Manpower Cost
• Opportunity Cost
Criteria 2: How many products do you sell, and do you work with multiple vendors?
Managing multi-warehouses becomes a complex process, in case you deal in a wide product category and source the inventory items from multiple suppliers.
Here is a simple example to explain this point:
Let us assume, Mr. Adam, owner of a jewelry brand, deals with 6 suppliers and sells over 1500 products.
To reduce his national transportation cost, he decides to store the products in 3 warehouses. However, the costs incurred in managing 3 warehouses exceed the difference in logistics charges, and thus he derives no monetary benefit from operating 3 warehouses.
This implies, that Mr. Adam or any business owner should also factor in the order volume before finalizing a warehouse management strategy.
Criteria 3: What is the monthly order volume?
It is very crucial data. You need to crunch some numbers to segregate the sales volume in terms of geographic location and specifically by shipping zone.
Continuing with the example of Mr. Adam’s jewelry business, let us say 40% of his customer orders come from the northern part of the country whereas he has his warehouse located in the southern part of the country.
So if he considers having another warehouse in the northern part of the country, his logistics charges will come down by 30%. However, his difference in total logistics charges is less than the extra expenses incurred due to warehousing and inventory.
Another factor that might offset the savings is if you have to fulfill a backorder from the farther warehouse.
These scenarios do occur and to minimize these cases you need to have a robust inventory forecasting mechanism that can use past data analysis to restock.
Criteria 4: What is the weight of the product?
The average weight of your product plays a crucial role in logistics. For example, if you deal with very light items such as jewelry, toys, and accessories, it does not have a significant impact on the cost of logistics. The advantage you get is the faster delivery of your products which enhances customer satisfaction.
However, if you deal with heavy items such as electronic appliances or kitchen appliances and the order volume and number of SKUs are premising you to go for multiple distribution centers, it will save a lot of cost in logistics.
Criteria 5: What percent of SKUs are fast-moving ones?
Real-time data on fast-moving items can help merchants like you to operate in a smarter way and take advantage of multiple warehousing.
Let us understand this with Mr. Adam’s example. He identified 18% of his SKUs are regularly sold every month. So, although splitting his entire inventory was not feasible for him, he can still keep this 18% of the SKUs across multiple warehouses.
Criteria 6: ROI of additional expenses
There are multiple scenarios that can emerge from ROI calculation.
Let us understand this with two business cases.
With a new warehouse, the logistics charges go down by 20%, and the number of orders goes up by 20% due to better SLA & faster delivery. The net profit goes up by 27% after adjusting the extra warehouse expenses. Therefore it is recommended to have a second warehouse in this scenario.
As the products are lighter in weight and smaller in size, the logistics charges are negligible. With a second warehouse, the number of orders goes up by 12%, the average logistics charges go down by 10%, but the net profit goes down by 23%. So the savings in logistics charges and increased order volume offset the increased warehouse cost.
Criteria 7: Is the existing technology infrastructure adequate to handle complex multiple warehouse management?
With multiple warehouses comes the complexities of managing and tracking them. A lot of challenges arises such as:
- o Stock Loss
- Quality check
- Rerouting for backorders.
- Stock count
- Inventory forecasting
- Internal movement of goods tracking
- Lack of visibility of inventory across warehouses
- Time-consuming manual stock entries
- The probability of human errors in picking and packing
- The inefficiency of warehousing layouts
- Generating various reports for reconciliation.
To manage these challenges and many more, you require a robust cloud-based technical infrastructure such as EasyEcom that has a single platform for all users. It reduces your manpower cost, eliminates human error, reconciles stock information, generates real-time reports for managers, thereby streamlining the entire operation process.
Are you looking for an omnichannel inventory management solution with integrated B2B order management for your eCommerce business? Drop us a line at [email protected] or directly sign up for a demo here.