Like smoke and fire, commerce and inventory have been intrinsically linked since the early days of business. The beginning of business, in fact, started with a product that was exceptionally hard to keep tabs on: cattle. They were the first item recorded to be sold for a fixed value, rather than as a bartering item.
For early traders and merchants, tracking inventory such as cattle was physically demanding, complicated and inaccurate. Beyond livestock, these early traders needed to transport large swaths of inventory across oceans and deserts, all the while keeping track of how many products they’d sold, acquired and produced, monitoring prices and costs to boot. So how did they do it? How did they remember what they’d sold, what they had, what they’d be acquiring, and where it all was?
The answer is simple, yet staggeringly complex: inventory management.
At its core, inventory management is defined as “the process of ordering, storing and using a company’s inventory. This includes the management of raw materials, components and finished products, as well as warehousing and processing such items.”
Depending on the size of the business, inventory management can be anything from a deep web of complexities, to a simple list of stocked items. For growing ecommerce businesses, the options for and challenges of inventory management become big issues as stock grows. Increasingly, ecommerce merchants scaling their businesses are faced with a new spin on the age-old question of “where do I keep my inventory?”
Historically, merchants simply stored goods in a single warehouse or fulfillment center. Orders were placed and shipped directly from that location, regardless of order details or where the customer lived Today, merchants must consider whether their inventory should remain in a single location, or if it should be distributed across multiple locations. This is known as decentralizing inventory.
Centralized vs. Decentralized Inventory
To understand the difference between this and centralized inventory, just think of the old adage, “putting all your eggs in one basket.”
1. Centralized inventory.
Centralized inventory means everything a merchant sells is stored in the same location. This simplifies things on a number of levels. First, anything produced or manufactured goes to the same place and ships out from there. This simplifies shipping rate and speed calculation. For centralized inventory, there are three major considerations:
- Shipping: When you’re shipping everything from the same location, you quickly learn how to optimize operations. On the plus side, you’ll have foolproof lead time, transit day and rating data to ensure accuracy in customer pricing. The down side, however, is that with just one location, you’re stuck with slow shipping speeds to many customers.
- Costs: With a centralized warehouse, merchants only need to pay operating costs for a single location. This might include rent, utilities, wages for skilled workers, surcharges and other expenses. Consolidating these expenses to a single place can also increase margins on high-value items, making it an ideal option for oversized product sellers.
- Customer service: Centralized inventory can potentially help or hurt your customer service. While you are providing customers with a single source of truth and centralized service location, you also sacrifice the agility to ship items to them quickly if they are outside your region. With centralized inventory, you’re putting all your eggs in one basket. A shoe retailer, for example, might hold all inventory in a single location to simplify operations and keep things tidy. With a single warehouse in New York, everything ships from the same place.
Pros of centralized inventory:
- Lower operating costs thanks to a single location
- More control over warehouse processes and personnel
- Potentially higher margins
Cons of centralized inventory:
- Slow shipping speeds to some customers
- Liability of all inventory in one location
- Lack of agility and adaptability to serve customers
2. Decentralized inventory.
Decentralized inventory means you have distributed your inventory across multiple locations. Retail giants like Amazon typically rely on these multi-channel distribution processes. There are also many benefits to this system. Merchants can reach customers in more locations in less time when products are located in warehouses closer to them. It also mitigates the risk of holding all inventory in one place, in the unlikely event of mismanagement of catastrophe. Let’s check back on those three considerations:
- Shipping: Fulfilling orders from multiple locations means faster shipping speeds and happier customers. Customers expect speedy shipping and easy returns and exchanges. With multiple locations, merchants can deliver this and lessen frustration with slow transit.
- Costs: With inventory across multiple locations, merchants have to consider storage and management costs of each warehouse. Expenses like rent and utilities may be significantly increased. Of course, the expectation relies on the savings incurred through shorter-distance shipping, thanks to multiple locations.
- Customer Service: The sooner an order is delivered, the more satisfied the customer. The closer an order is shipped from, the sooner it will arrive, and the happier customers will be. With multiple locations, merchants should consider the need to manage operations and personnel in several places, a task which can be challenging without the right tools in place.
With decentralized inventory, you’re spreading eggs across multiple baskets. For example, that same shoe retailer, after shifting to multi-warehouse management, could add a warehouse in LA. They might decide to hold some styles at one location, and others at a different one. All the while, if that retailer were wise, they’d likely hold their most popular styles at both (or all) locations, giving more customers quick shipping times on those items.
The difference between shipping from a single warehouse, and multiple warehouses. More locations mean shorter transit times to more customers.
Pros of decentralized inventory:
- Faster shipping speeds to more customers
- Less risk with distributed inventory
- Increased customer satisfaction
Cons of decentralized inventory:
- Margins on certain products may be reduced
- Costs of multiple locations
- Higher transportation costs
How Can a Decentralized Inventory Help Your Ecommerce Business Grow?
For ecommerce businesses on the rise, decentralized inventory may be a worthwhile investment. With smaller, regional facilities, they can get products into customers’ hands, sooner.
Additionally, depending on the location of warehouses, these locations may be able to serve as a pickup spot for customers as well, an option growing-in-demand by the day.
1. Reduced shipping costs.
When you add even a single warehouse location for your products, you instantly double your distribution opportunities. Depending on the strategic location of your warehouses, you may be able to seriously cut down on transit times and shipping costs thanks to closer proximity to more customers.
When warehouses are located closer to delivery locations, shipping costs go down.
2. Reach a wider customer base.
Much like the benefits you get from reduced shipping costs, having more locations can increase your reach to customers spread across a larger area.
A customer interested in a pair of shoes from our trusty shoe retailer is much more likely to order if their purchase will be delivered in just a few days. If that retailer had just one location, shipping might take a few weeks, giving customers a reason to shop elsewhere.
Expanding your footprint will expand your potential customer base, earning you more business.
3. Manages warehouse risk.
Remember the analogy about putting all our eggs in one basket? Managing risk is the central reason for that egg distribution.
One example that illustrates this in action is the case of two banana suppliers that were hit hard by Hurricane Mitch in the 90s. With more than 80% of the region’s banana crop washed away, both companies faced major obstacles with distribution. Dole lost 70% of its crop, ultimately reducing revenue by 4% overall. Chiquita, its competitor, held inventory and had relationships with multiple suppliers. Thanks to this preparation, the company increased its revenue by 4%.
While this is a somewhat dramatic display of the difference in strategies, it’s a lesson to apply to businesses everywhere, that putting all our eggs – or bananas – in one basket is risky.
With inventory across multiple warehouses, retailers are less likely to suffer a total loss because of mismanagement or catastrophe.
4. Faster local deliveries.
Especially in the age of curbside pickup and same-day delivery, having multiple warehouses increases a local customer’s ability to pick up orders themselves, or give them access to same-day delivery. With these options in place, customers can potentially buy and receive items on the same day.
With just one warehouse, you only give customers in one area the chance for immediate pickup. Distributed warehousing, however, puts your products closer to more customers.
Issues that Face Having a Decentralized Inventory and Multiple Warehouses
With so much management science supporting decentralized warehouses, we’d be remiss to not mention the challenges it brings. Between multi-warehouse communication, management, inventory visibility and personnel issues, there are a few aspects we need to consider.
1. Inventory management.
With inventory spread across multiple distribution centers, supply chain management becomes increasingly complicated. When everything is in a single central location, management is centered around that location, streamlining operations and costs.
With goods in multiple places, retailers sometimes feel like they have to sacrifice inventory control because of a lack of clarity. While ERP systems should theoretically support these operations, they’re not perfect and can sometimes result in inventory shortages or mistakes.
2. Cross-warehouse standardized procedures.
Managing multiple locations is, understandably, more complicated than handling a single one. With several warehouses in the mix, more personnel, inventory and management is required.
If warehouses are shared, work as distribution centers, or operate as drop shipping locations, warehouse procedures can quickly become convoluted and messy. While everything may work smoothly in one location, adding inventory locations complicates processes and can become a liability for everyday operations.
3. Managing shipping rates between warehouses.
When shipping out of one location, calculating a rate or lead time is virtually always consistent. Shipping from the same place every time means clear cut rates and transit times, providing transparency customers want in their shopping experience.
When you add locations to the mix, you suddenly have many more factors to consider. Which warehouse will the order ship from? Does your warehouse closest to the customer have the range of products they require? Do you have high inventory at one location, and dangerously low supply at another?
Decision making with more than one location is more complex than with multiple ones, of course. But how will this affect your inventory decisions? It’s important to develop a strategy for these considerations before expanding locations.
When it comes to managing shipping rates between warehouses, having the right tools in place is vital.
Using Multi-Warehouse Management to Combat Challenges
Despite the challenges, a multi-location distribution system has many benefits that can’t be replicated by other methods. Merchants struggling with long lead times, customers unsatisfied with transit times, or a lack of flexibility in distribution should take a hard look at multi-warehouse management and how it can solve these problems.
Ecommerce stores that benefit from a decentralized supply chain also get the benefit of the flexibility of using smaller or fewer warehouses. These warehouses can be managed nimbly and flexibly, giving merchants clearer insights into inventory replenishment needs, levels and shortages.
At the end of the day, the flexibility gained from multi-warehouse inventory management nearly always proves beneficial for merchants.
Best Practices for Managing Multiple Warehouses
Ready to dive into the world of distributed inventory? It’s a smart decision, and one that will pay off. In the meantime, you’ll need to set up your distribution the right way to reap all the benefits. Here are a few of our tips on managing multiple warehouses smoothly.
One of the first steps you’ll need to take is to research and implement a warehouse management system or an ERP. With a software solution in place to manage things, your job will be much easier, and operations much smoother.
1. Keep stock levels balanced.
This may be a bit of a learning curve. Our shoe retailer with warehouses in New York and Los Angeles will need to understand which warehouses need how many of which product. Trends will certainly play into this, perhaps customers in LA order high-tops by the dozen, but New Yorkers are all about the slip-ons. With purchasing data, you can keep stock levels consistent and lessen the chance of inventory shortages or delays.
2. Keep a close eye on your bestsellers.
Your most popular products will be the most important ones to manage. It’s a good idea to set up minimum inventory levels of these products at each location to ensure you can quickly ship them out from every warehouse. Because they’ll sell out regularly, it’s important to get ahead of these trends and have excess inventory of these products.
Our shoe retailer might see trends differing from NY to LA, but sales of their signature trainers are consistently sky high. Keeping stock levels at each of these locations high will ensure customers expecting those popular items won’t be disappointed by slow delivery speeds.
3. Count product stock in each warehouse separately.
Never consider your inventory as a singular entity. Separate warehouses have separate inventories, and it’s important to not convolute these differences. For example, if you’re monitoring levels of those popular trainers and see that you’ve got 6,000 pairs on hand, you may be able to breathe easily. However, if 5,000 of those are located in NY and just 1,000 in LA, you’ve got a serious problem. Be sure inventory is counted by warehouse rather than as a business overall. This will provide clarity and inform inventory distribution.
4. Use wave picking and cross docking.
Wave picking, or picking items for more than one order at a time, is crucial to your warehouses’ efficient operations. Rather than an employee walking through the warehouse to select specific items for a single, also known as “batch picking,” wave picking has that employee select multiple items from the same area of the warehouse, reducing picking time.
Cross-docking is an under-utilized strategy that can avoid inventory handling completely. With cross-docking, products shipped to your warehouse are immediately relocated to a delivery vehicle. Effective cross-docking requires a lot of planning and purchasing insights to understand where to send products as they come in. Despite the required logistical coordination, cross-docking offers many benefits including reduced warehousing costs and less risk of inventory damage.
Things to Consider Before Opting For (Decentralized) Multi-Warehouses
In our rapidly evolving ecommerce landscape, a decentralized inventory system may seem like a silver bullet for a struggling ecommerce business. However, there are certain factors that can affect its efficacy, and might mean it’s not the right strategy for everyone.
Before taking the leap into decentralized inventory control, consider a few factors that may affect the way it works for your business.
1. How heavy are my products?
If you sell heavy products – think furniture or fitness machines – arranging inventory holding in more than one place may not be worthwhile. Because shipping costs for items like this are so high to begin with, it may not be a good investment to first send inventory to a warehouse, rather than shipping directly from the manufacturing or import location.
2. Where do I ship my orders?
If you’re a heavily regional company, it may not be smart to distribute inventory beyond your normal customer base’s location. An umbrella seller, for example, probably doesn’t need to expand from Seattle to Arizona, and may suffer financially from taking a step like this.
3. What are the operating costs for many warehouses?
If your products require special care like refrigeration or regular quality checks, it may not be beneficial to spread them across more than one location. Because storing inventory like this is so costly to begin with, doubling the costs of warehousing them may make it a bad investment.
4. What is the monthly order volume?
If you’re shipping just a few high-value products a month, it’s probably not necessary to use multiple warehouses. While ecommerce stores are in initial or growth stages, it may be wiser to keep things simple and central with a single location. Once you’re ramped up and receiving a higher influx of orders, it may become necessary.
5. Is there a business need for more warehouses?
Decentralized inventory is a hot topic in the ecommerce world at the moment. With so much chatter about it, it may seem like it’s required to successfully grow your business. But if your shipping challenges don’t involve inventory location, it may not be the time to pursue decentralizing your inventory.
6. Is the existing technology infrastructure ready for multiple warehouses? Do you need a multi-warehouse management system?
Do you have an ERP in place? A warehouse management system? What software is helping you run your business as of now? Before taking the leap to distributing your inventory, be sure your systems are powerful enough and equipped to handle the change. Being well prepared will be the single most vital step to take before beginning the shift.
Summing It Up
For ecommerce merchants, handling inventory is an everyday challenge that’s only getting more competitive. Those who take steps now to implement a smart inventory strategy will be the ones who continue to thrive. It’s important to understand the pros and cons of this style of management, and whether it’s right for your business. With the right tools, people and strategies in place, decentralized industry can prepare your business for future success, while making for happier customers and lessening risk.
You can handle your decentralized inventory effortlessly with ShipperHQ’s comprehensive shipping management platform. Speak to a shipping expert now to understand how it can benefit your business.
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