3 Things to Consider When Expanding Your Fulfillment Network
Whether you're a Fortune 500 retailer or an emerging direct-to-consumer (D-to-C) brand, your customers expect ease and convenience when ordering online. The problem is, meeting these expectations can put a significant strain on your business.
Traditional logistics networks weren’t designed for D-to-C fulfillment because they were built to get goods onto store shelves. To meet these ever-growing consumer expectations, retailers need to reassess their fulfillment networks and see how they can move goods closer to customers to deliver products faster and reduce the costs of last-mile delivery.
However, expanding your fulfillment network is complicated. Traditional warehousing solutions present an array of challenges, including steep investments and a complex vetting process to select which warehouse providers are right for your business.
Thankfully, there’s a new class of flexible logistics options providing freight, warehousing and fulfillment services on-demand. As you look to improve your fulfillment network in 2020 and beyond, here are three things to consider:
1. Weigh your warehousing and fulfillment options.
There's no one-size-fits-all strategy when it comes to logistics network expansion, but the common options are to purchase or lease your own assets (e.g., warehouses, equipment, technology), sign long-term leases with third-party logistics providers (3PLs), or use on-demand warehousing and fulfillment to tap into a network of 3PLs that have existing capacity and resources. Each strategy makes sense for different businesses and different needs, therefore it’s important to identify which one is right for you.
For example, if you have a predictable demand stream, then owning your distribution centers (DCs) and fulfillment centers (FCs) or signing a fixed-term contract can be a great solution because forecasts are relatively certain and high utilization can minimize the risks of fixed investments.
However, if there’s a level of variability or uncertainty in your business — e.g., variable sales growth, a rapidly expanding e-commerce channel, new product releases, seasonality, or general supply chain disruptions — then fixed investments can quickly become unproductive and capital inefficient. In these scenarios, a flexible fulfillment option like on-demand warehousing can be a better fit. With on-demand warehousing, you can easily create an ongoing strategy to manage variability and lower total costs.
Of course, not every business will select just one of these options (owning/leasing/on-demand). For many large companies, it makes sense to deploy a mix of the three to accommodate different needs within their business. For instance, a number of large companies utilize owned assets for more predictable aspects of their business and look to on-demand warehousing and fulfillment for peak-season demand spikes, creating a “master nodes” and “satellite nodes” model for their networks.
2. Know what size network will meet customer expectations.
This year alone, Amazon.com is expected to spend more than $3 billion on its new one-day shipping initiative. Can you afford to do that? As you consider expansion, the best place to start is by deeply understanding the needs of your customers and matching those needs with a properly sized fulfillment network. If you’re not sure how much a faster delivery promise will impact your top-line sales, consider standing up additional flexible nodes in order to test and understand your specific speed-to-sales conversion rate dynamics.
For most businesses, not every single product needs to be available for fast, free (or affordable) shipping. For example, it might make sense to put your best-selling SKUs closer to your end customers by adding smaller fulfillment nodes near your high-density, high-demand areas. This helps speed delivery and reduce shipping costs, and perhaps even allows you to offer free delivery on your faster-moving inventory without significantly impacting margins.
3. Choose the right time to scale.
When planning a fulfillment network expansion, the “when” is just as important as the “how” given the long lead times required in standing up new nodes, particularly through the traditional lease or 3PL-operated models.
With Q4 peak in the rearview mirror, it’s a good time to reflect on how well you prepared for the holiday spike. What kind of planning went into your Q4 preparation, and what was your timeline for last year? As e-commerce sales continue to grow and with the industrial vacancy rate at a record low, the same level of preparedness and lead time may not suffice. Therefore, building some degree of flexibility into your network planning through modern, flexible solutions can go a long way this year. The flexibility can help your business prepare for planned peaks and hedge against potential supply chain disruptions throughout the year.
Bringing Logistics Up to Speed
Expanding your fulfillment network to place inventory closer to consumers through new fulfillment nodes and/or ship-from-store capabilities is no small feat. However, there's simply no other option to get your products to your customers more quickly and affordably, which is what they almost uniformly demand of retailers these days. Seasonal peaks with variable demand, increased inventory across multiple nodes, and external supply chain disruptions are just a few of the dynamic challenges that add further complexity and create additional stress across your network.
As you continue on this journey, remember to consider the full range of your warehousing and fulfillment options, including the new category of flexible, on-demand solutions. Also, be sure you evaluate and understand your delivery speed-to-cost ratio, including projected sales lift from faster delivery. If you don’t yet know this critical ratio, consider setting up tests to gather the facts and data necessary to make sound network expansion investments. Lastly, be sure to map out the timing of these tests and network expansion moves in the overall context of your business rhythm, while realizing that the lead times required for more modern, on-demand solutions will be significantly shorter than traditional solutions.
Karl Siebrecht is the CEO and co-founder of FLEXE, a provider of on-demand warehousing, fulfillment and logistics services to retailers and brands.
Related story: Supply Chain Disruptions: Preparing for the Unexpected