Multiple Warehouses: Things to Consider Before Opting for it
In a fast-changing world where the speed of providing service matters, having multiple warehouses across the catchment areas always seem beneficial. However, many factors need to consider before making a final decision.
3 options for Multiple warehouse Management Solution.
– Third Party Logistics (3PL)
These fulfillment centers are managed by logistics companies who handle end to end business right from stocking to packaging, shipping, etc. These are beneficial if you don’t want a headache of running your warehouses.
– Company-owned warehouses
These distribution centers are owned and maintained by the respective organizations.
– Fulfillment centers operated by channels (e.g., Fulfilment by Amazon, Flipkart Advantage)
These warehouses are owned by the channels who store and sell these products. They work in SOR (Sell or return) model. Here the channels own the warehouses and manage everything on their own. The merchant has to pay for the warehousing fees, logistics charges, pick pack fees and commission on sales.
All these three options have their advantages and disadvantages. We will discuss them in details later.
There are few questions that you need to answer before you opt for multiple warehouses or multiple distribution points.
Q. What additional operating cost by opening additional warehouses?
There are various additional expenditures associated with opening a new warehouse.
• Warehouse maintenance Expense
• Inventory cost
• In case of back order, transfer expense
• Opportunity cost
Q. How many SKUs are there?
If you deal with a lot of SKUs and suppliers, it becomes more complex to manage multiple warehouses.
If we consider a jewellery seller Mr. Adam, who deals with 6 suppliers and has 1500 different SKUs. He keeps on adding new SKUs every month to stay updated with the latest trend. Now consider this, if he has to keep 1500 SKUs across 3 different warehouses to reduce on national logistics charges, his storage & maintenance charges for different warehouses might exceed the difference in logistics charges. So, he has to consider another factor that is his order volume.
Q. What is the monthly order volume?
It is a very crucial data. You need to crunch some numbers to segregate the sales volume in terms of geographic location and specifically by shipping zone.
If we consider Mr. Adam’s case, he found out his 40% of the order comes from the northern part of the country whereas his warehouse is 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.
Q. 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 jewellery, toys, 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. But 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.
Q. What percent of SKUs are fast moving ones?
This data of the fast-moving items can help the merchants to operate in a smarter way and take advantage of multiple warehousing. Consider Mr. Adam’s case; he identified 18% of his 1500 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. Inventory forecasting is very crucial in this case as well.
Q. ROI of additional expenses?
There are multiple scenarios that can emerge from ROI calculation.
Mr. X deals with Home appliances:
With One Warehouse:
Number of orders: 5000 Units
Avg ticket size: $300
Avg Logistics expenditure: $20
Warehouse Expenditure with 1 warehouse: $20000
Total Logistics Charges: 5000*20 = $100000
Gross Profit: 5000*45 = $225000
Net Profit: 225000-120000 = $105000
With 2 Warehouses:
Number of orders: 6000 Units
Avg ticket size: 300$
Warehouse Expenditure with 2 warehouses: $ 40000
Avg Logistics expenditure: $ 16
Increase in expenditure: $ 20000
Total Logistics Charges: 6000*16 = $ 96000
Gross Profit: 6000*45 = $ 270000
Net Profit: 270000-136000 = $ 134000
With a new warehouse, Mr. X’s logistics charges go down by 20%, and the number of orders goes up by 20% due to better SLA & faster delivery. Even his net profit goes up by 27% after adjusting the extra warehouse expenses. Mr. X can afford to have a second warehouse in this scenario.
Mr. Y deals with jewellery items.
With One Warehouse:
Number of orders: 9000 Units
Avg ticket size: $20
Avg Logistics expenditure: $3
Warehouse Expenditure with 1 warehouse: $10000
Total Logistics Charges: 9000*3 = $27000
Gross Profit (@30%): 9000*6 = $54000
Net Profit: 54000-37000 = $17000
With 2 Warehouses:
Number of orders: 10000 Units
Avg ticket size: $20
Warehouse Expenditure with 2 warehouses: $20000
Avg Logistics expenditure: $2.7
Increase in expenditure: $10000
Total Logistics Charges: 10000*2.7 = $27000
Gross Profit: 10000*6 = $ 60000
Net Profit: 60000-47000 = $ 13000
As the products are lighter on weight and smaller in size, the logistics charges make not much of a difference. 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 offsets the increased warehouse cost.
Q. 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 crop up such as
o Stock Loss
o Quality check
o Rerouting for back orders.
o Stock count
o Inventory forecasting
o Internal movement of goods tracking
o Lack of visibility of inventory across warehouses
o Time-consuming manual stock entries
o The probability of human errors in picking and packing
o The inefficiency of warehousing layouts
o Generating various reports for reconciliation.
To manage these challenges, you need to have a robust cloud-based technical infrastructure such as EasyEcom that is has a single platform for all users. It reduces manpower cost, eliminates human error, reconciles stock information, generates real-time reports for managers, streamlines the entire operation process.
Now let’s have a look at the advantages and disadvantages of having multiple warehouse system.
➡ Saving in Logistics Cost: Being close to your customers means lower expense on transportation and less time on the road for your shipping partners overall. Thar reduces a lot of costs.
➡ Faster Delivery: In today’s fast moving world, customers expect quick delivery of goods. It increases customer satisfaction and influence buying decisions in your favor.
➡ Increased Sales: With faster delivery and lower shipping cost, the chance of getting the buy button in marketplaces increases significantly. It reduces SLAs and in return improves sales.
➡ Peak Season Sales Management: During peak sales seasons like black Friday and Christmas sales, it is easier to handle high volume sales from multiple locations.
➡Increased Fixed Cost: With an additional warehouse there is an increase in the fixed cost such as additional infrastructure, manpower, rent/lease, etc. These extra costs will hamper the margin if the sales don’t increase significantly or the logistics expenditures does not go down significantly to offset the cost of an additional warehouse.
➡ Increased Cost of technology infrastructure upgradation: In order to manage the complexity arising due to multiple warehouses, increased technical infrastructure is required which costs a significant amount. Even with advanced infrastructure, another major challenge comes that of training the people to handle the software. It is a very tough task to upgrade the worker’s skill to use the software effectively.
➡ Inventory Cost: Additional cost is incurred in procuring stocks for additional warehouses. Although it is a part of the business expansion in the long term, managing those inventory, storing them incurs a maintenance expense.
➡ Seasonal Sales: For some sellers, it is during a particular season when they require an additional warehouse to manage the high volume. For them, spending on an additional warehouse round the year is not profitable. In that case, they can opt-in for a 3PL service provider for a particular time of the year.
If you want to improve the speed of delivery, reduce logistics charges by having more than one fulfillment center, it ultimately comes down to whether the numbers are favorable or not for you to expand. You need to factor in all the cost savings and added expenses including additional labor, packaging and inventory cost keep enough stock on hand to avoid back orders.
We always advise start-ups and new sellers to start with one warehouse and keep on evaluating after regular intervals to reach a decision. For more established and bigger players we advise to decide after asking the above questions to themselves and figure out what makes the most sense for their business.