To Split or Not to Split

Hey y’all,

40 degrees in Chicago this past week. Felt like summer after 2+ weeks of snow and sub zero degree weather. Almost broke out the shorts.

Had a bunch of great conversations with 3PL owners about their sales & fulfillment strategies. It’s been really insightful to listen to the various viewpoints about how to best leverage their individual strengths.

One of the big topics that was discussed was the merchant experience. At every interaction during the sales cycle, you have to be at your best. From the first needs discovery call to operational alignment to pricing calls.

One of the biggest ways to use the merchant experience as a guiding light is to understand what many e-commerce customers want today.

Fast shipping & accurate shipping.

That is where today’s newsletter will go into depth. Should brands be splitting inventory across multiple fulfillment centers? What if their 3PL only has one warehouse? All things we will go into more detail about.

This choice, pivotal in its nature, calls for a blend of strategic thinking and innovative approaches.

Let’s dive in.

The Groundwork: Setting the Stage for Your Decision

Before deciding to distribute your inventory across various fulfillment centers, it's important to understand your specific business needs and capabilities. This involves a comprehensive understanding of your customer base, sales volumes, and product characteristics.

Sales Data Analysis

Your sales data is a goldmine of insights. Use it to track SKU velocity – a measure of how quickly items are moving. A simple calculation like 'Number of Units Sold / Number of Days in Stock' can reveal which items are hotcakes and which are slow movers. This insight is crucial for deciding inventory distribution based on demand patterns.

Analyze historical sales data to identify patterns. This could involve looking at year-over-year growth, seasonal trends, or even anomalies that disrupted regular patterns.

Employ predictive analytics to forecast future demand, especially for new products or during peak periods. This will help in anticipating which products should be more widely distributed.

Here are some calculations that you can leverage.

Inventory Carrying Cost Percentage:

Calculation: Inventory Carrying Cost / Total Value of Inventory x 100

Purpose: Helps evaluate how much the inventory is costing the company and can be a deciding factor if distributed centers can lower these costs.

Inventory Turnover Ratio:

To calculate this ratio use this simple equation.

Cost of Goods Sold (COGS) / Average Inventory Value

A high turnover ratio indicates efficient inventory use. Understanding turnover by region can highlight where distributed centers might be beneficial.

ABC Analysis:

Categorize inventory into three categories (A, B, C) based on sales volume or revenue contribution.

This identifies which items (A for high-value, C for low-value) should be more readily available in distributed centers to optimize sales and storage costs.

Service Level and Safety Stock Calculation:

Use historical demand and lead time variability to calculate safety stock levels needed to achieve a desired service level.

This will help you determine the amount of extra stock needed to prevent stockouts, crucial for understanding how much inventory to hold at each location.

In-Depth Customer Geographic Analysis

Customer Demographics: Thoroughly analyze the geographic distribution of your current customer base. Map out where your customers are located and cross-reference this with your sales data.

Delivery Time Expectations: Understand the delivery time expectations in different regions. For instance, urban customers might expect faster delivery compared to rural areas.

Shipping Cost Implications: Examine how shipping costs vary across different regions. You must evaluate the cost implications of shipping from a centralized warehouse versus multiple locations. For example, shipping bulky items over long distances might be costlier than distributing them closer to the customer base.

Product Variety & Seasonality Considerations

Seasonal Demand Fluctuations: Assess how demand for different SKUs changes with seasons or events (like holidays). For example, if you are a swimwear brand, talk about allocating more inventory to coastal fulfillment centers during summer.

Develop flexible inventory models that can quickly adapt to changes in product popularity and seasonality. This might involve dynamic allocation of storage space and resources in fulfillment centers.

Product Lifecycles: Consider the lifecycle of your products. For products with a short lifecycle, centralized inventory might be more manageable, whereas long-life products could benefit from distribution.

Storage Requirements: Evaluate the storage needs of different products, especially if they require special conditions like refrigeration or humidity control. This can significantly impact where and how you distribute your inventory.

Customization and Bundling: Delve into how product variety impacts bundling opportunities or customization needs. For instance, a brand offering customizable kits (like gift baskets) might need more centralized inventory to manage these special orders effectively.

Once you have your house in order you can start to talk with your 3PL about distributing inventory.

The better question is whether you should or should not split inventory?

Fork in the Road: Pros & Cons

Pros:

Enhanced Customer Satisfaction through Faster Delivery:

Speed of delivery is a critical factor in customer satisfaction. Distributed inventory places products closer to customers, significantly reducing delivery times. For instance, a brand with a fulfillment center in 5 major regions (West Coast, Midwest, South, Southeast, Northeast) could cut down delivery time from 6 business days to 1-2 business days.

This immediate gratification can lead to higher customer retention rates, positive reviews, and increased word-of-mouth referrals.

Reduced Shipping Costs and Environmental Impact:

Shipping costs can be a major operational expense. Distributing inventory allows for shipping over shorter distances, which not only reduces costs but also lowers the environmental impact due to reduced carbon emissions.

Even the largest brands in the world are prioritizing the limitation of their CO2 emissions. The world is on fire, did you know?

Calculation Example: Shipping a product across 350 miles (zone 3) instead of 1,100 miles (zone 6) can reduce shipping costs by up to 30-40%, depending on the carrier and shipment size.

Risk Mitigation and Business Continuity:

Distributed inventory mitigates risks such as regional disruptions (natural disasters, severe weather, strikes, etc.). If one center is compromised, others can pick up the slack, ensuring business continuity.

Every year at ShipBob, there was a winter storm that shut down one of the Northeast warehouses for a day or two. It is inevitable nowadays. For the brands that were in only one warehouse, they were in a tough spot.

Brands should create contingency plans based on various risk scenarios, ensuring a swift response to any disruption.

Cons:

Increased Complexity in Inventory Management:

Managing stock levels, order processing, and communication across different locations requires robust systems and meticulous oversight.

Ensuring real-time, accurate inventory tracking across multiple warehouses can be challenging. Discrepancies in inventory records can lead to order fulfillment errors or stockouts, impacting customer satisfaction.

Maintaining consistent quality control standards across different 3PL centers can be difficult. Variations in handling, storage, or packaging procedures can affect product quality and brand reputation.

Potential for Increased Costs in Logistics and Handling:

Inbound Shipping Costs: Distributing inventory often involves higher inbound shipping costs as products need to be transported to multiple locations.

Handling and Storage Fees: 3PLs may charge different rates for handling and storage, which can vary based on location, warehouse capacity, and specific services provided.

You could be working with a single 3PL with multiple FC’s. They will most likely charge a separate load balancing or inventory placement fee if they handle the inventory placement.

I would argue to let the 3PL manage inventory placement on your behalf.

Inventory Imbalance and Stockouts:

Demand Forecasting Difficulties: Accurately forecasting demand for each location is challenging. Misjudging demand can lead to surplus inventory in some centers and stockouts in others. That is a huge problem that impacts cashflow.

Rebalancing Inventory: Transferring stock between warehouses to address imbalances can incur additional costs and lead to delays, impacting the agility of the supply chain.

This was one of the biggest drawbacks I heard from people using ShipBob or ShipHero when using their automated inventory placement type programs. IMO, still great programs.

Lost Sales Opportunities: Stockouts, particularly in high-demand regions, can result in lost sales and negatively impact customer relationships.

But Aaron, what if my 3PL only has one warehouse? Should I be looking for a different 3PL?

Hold your horses.

Single Warehouse 3PL’s : Catering to Brands’ Needs

Streamlining Inventory Management:

Brands should work with their 3PL to identify the most popular or fast-moving SKUs to be prioritized in the single warehouse. This involves deep analysis of sales data to ensure that high-demand products are readily available for quick processing.

Implement collaborative forecasting methods where the brand shares sales projections, market trends, and promotional schedules with the 3PL to anticipate demand spikes and ensure preparedness.

Cough cough marketing team. Help your operations team, please.

Enhancing Warehouse Operations:

Encourage the 3PL to adopt advanced WMS that facilitate efficient picking, packing, and shipping processes. This can significantly reduce order processing times.

There are some great WMS products out there. I personally have seen ShipBob, ShipHero, Logiwa & Packiyo.

These WMS platforms were built in the 21st century. You may want to leverage one of theirs.

Next, prioritize SKUs based on sales velocity, ensuring that high-turnover items are more accessible and continuously restocked.

Lastly, adopt lean inventory techniques to minimize waste and streamline operations. This includes just-in-time inventory practices to reduce holding costs and increase warehouse space efficiency.

JIT inventory is back in action after what felt like a 2+ year challenge with covid.

Optimizing Transportation and Logistics:

Brands should collaborate with their 3PL to establish strong relationships with reliable carriers. This could involve negotiating better rates or priority services for faster delivery.

Pro tip - Implement zone skipping strategies where feasible. By consolidating shipments and skipping intermediary shipping zones, brands can reduce transit times and shipping costs.

Regular Communication and Feedback:

Maintain open lines of communication with the 3PL for regular updates and rapid problem-solving. Additionally, establish feedback loops with customers to continually gather insights on delivery performance and areas for improvement.

Working with a single-warehouse 3PL doesn't have to be a constraint for brands seeking fast and accurate shipping. I would make the argument that in many cases, brands need just one centrally located warehouse (Chicago, Kansas City, Dallas) to get very balanced shipping times to everyone in the USA.

The Future of Inventory Distribution

Deciding whether to distribute your inventory across multiple fulfillment centers is a multifaceted decision that requires a deep understanding of your business and the evolving logistics landscape.

Does it make sense for everyone to distribute their inventory?

No.

The decision to split inventory is not a one-size-fits-all solution. What works for one business may not necessarily work for another. Therefore, it's crucial to make an informed decision based on your unique business needs and circumstances.

Stay informed and more importantly, be adaptable.

Well, that’s it for this week!

Any topics you lovely people would like to see me discuss in the future?

Feel free to email me or DM on good ole LinkedIn.

Until next time.

Cheers,

Hodes