Multiple Locations vs. Central Location for Warehousing and Shipping

Blog, location, News, Shipping, Warehouse

August 23, 2016

iStock_61069700_SMALL.jpgA common question merchants have when looking for a 3PL is “Can you store and ship from multiple locations?”

Amazon.com has set a high expectation for fast two-day delivery, and many other merchants are following suit. They assume that, because Amazon has many warehouses across the country, other retailers must do the same in order to guarantee the same level of service.

This is not always the case. There are pros and cons to using multiple locations, as there are for using a single central location. Which option is best for your business depends on many factors, including your size, number of SKUs, and what you are trying to achieve. Of course, customer satisfaction is paramount…but there are different ways of achieving it.  

Let’s run through those pros and cons to illustrate what considerations should go into that decision:

Multiple locations for warehousing and shipping

The Pros:

With multiple locations, all areas of the country can be covered in a two-day shipping window. Items can ship out from the location closest to a customer, provided that location has the items needed. This means that shipments spend shorter time in transit, on average, and customers receive product more quickly.

The Cons:

Having multiple locations means having redundant stock at each location. This means keeping more inventory on hand overall. It also means that inventory can easily run out at one location, necessitating an alternative shipping arrangement or restock from another location. To avoid this, most businesses will keep an extra 15% to 20% of stock at each location as a “buffer stock” in case demand spikes for any one warehouse.

Multiple locations also mean a more complex picture when it comes to inventory management. Data from each warehouse will need to be integrated to get a full picture of your inventory, manage receiving, and so forth.

Some companies use multiple locations to save on shipping rates, because these can depend on distance the package has to travel. Too often, though, these savings are illusory. What is saved in shipping rates is often offset by increased expense in inbound shipments: Each location must receive shipments from each supplier, as opposed to all suppliers shipping to a central location. A company with just a few (less than 10) SKUs might see some savings, but companies with many SKUs will likely break even, or end up spending more on inbound freight.

Taxes are part of the equation as well. Having more warehouses in more states can potentially mean creating NEXUS in those states, which puts sellers under more sales tax obligations in those states. (Basically, NEXUS just means having a presence in a state that requires your company to comply with that state’s sales tax laws. In nearly all cases, a warehouse counts as a “presence” in a state.)

Centralized warehouse and shipping location

The Pros:

A centralized location means a single inventory for all orders, making the management of receiving, storing, and shipping goods easier. The inventory can more accurately reflect demand, and projections of that demand can be made more quickly and easily. And if you have many SKUs (more than 10), there will be savings over multiple locations when it comes to the inbound shipment of goods.

If the location is truly central, goods can reach 80% of the continental United States in just two days—the standard set by Amazon. Customers outside of this area can be given the choice of faster shipping methods (air, for example) or a slightly longer wait. Your own customers might be willing to wait a little longer for products if it means the cost of shipping is significantly lower.

And it can be lower, as single locations often achieve an economy of scale. 3PLs in particular can offer a competitive rate when using a single location, which means that savings can be passed along to the consumer.

The Cons:

Shipping from a single location does mean longer transit times on average, because areas farthest from the warehouse will need additional transit time, bringing up that average. This can become a problem if that location is not suitably close to “customer knots”—areas of the country with high concentrations of repeat customers. Thus, choosing a truly central location is key.

The Verdict:

Using a single, central location requires less of organizations, and so is ideal for growing companies. It allows them to “walk before they run,” perfecting their processes and building their customer base. Switching to multiple locations is always an option for the future—paring back to a single location after employing multiple ones is much more difficult.

A single location also makes sense for larger organizations with many SKUs (more than 10), or that wish to avoid keeping a lot of “buffer” inventory.

Multiple locations only make sense if fast, two day-shipping is an absolute necessity. Determining if this is the case will require conversation with your customers. Some industries might need this kind of fast shipping. Many customers, however, simply want a choice in shipping options. Cost savings enter the calculation only if your company has fewer than 10 SKUs.

As with any business advice, there can easily be other factors at play that are unique to your industry and business model. For example, how damaging is it to your business to have backorders? Is climate control an issue? Insurance? Do you have international vendors? What are cut-off times, and can you meet them to ensure 2-day delivery? Given the complexities involved, the best thing to do is to have a candid conversation with your 3PL (or your 3PL candidates). This way, you can get a realistic sense of costs and service before committing to a plan of action.

Materialogic helps merchants and eCommerce companies achieve their best when it comes to customer service and fulfillment. If you would like to discuss which option, multiple locations or single central location, is right for you, contact us.

 

Milton Cornwell - Chief Operating Officer - Materialogic