Blog postsMay 12, 2017
Fulfillment, Network Expansion, and the Implications on Inventory Management
We live in a time where customers prefer, expect, and demand immediate fulfillment of their orders. Two decades of growth from Amazon, FedEx, UPS, DHL, and others have given rise to an expansive network of multi-modal shipping options and world-class information systems. Now more than ever, the advancements in the shipping industry can level the playing field for growing businesses that seek to compete on a national and international stage.
What should my supply chain look like to optimally compete?
In the best case scenario, your company has:
- Highly flexible production capabilities at a low and competitive cost
- Customer demand that is predictable with manageable variability
- Fulfillment centers that can cost-effectively meet short lead times to the end customers
- Inventory that does not tie up large amounts of working capital and is not perishable
Most early-stage companies design supply chains out of pragmatism, not strategy. Many companies produce in large lot sizes in offshore locations with limited flexibility. Customer demand is often variable and not predictable across A/B/C SKUs. One-day shipping is costly and fulfillment centers and 3PL contracts are expensive and can be risky if demand does not materialize in the long-run. Finally, investing in large amounts of inventory is often required to offset offshore production and shipping, and it exhausts a large percentage of a company’s working capital.
The above chart depicts the traditional model for cost tradeoffs when increasing fulfillment nodes to build your network. Your total costs decrease initially as you reduce transportation costs and recover lost sales, but eventually increase again as your inventory & warehousing costs continue to rise.
FLEXE changes a key part of the competitive landscape….warehousing.
FLEXE’s network dramatically transforms this part of the equation by providing your business infinite options to expand your network footprint without taking on the high fixed costs. You can choose regional and local options and scale warehouse capacity as your customer footprint grows while not being locked into long-term contracts. Final-leg shipping times and costs can be greatly reduced, which drives increases in conversion, satisfaction, and repeat purchases. It can truly be a game-changing component of your business’ growth strategy.
The distribution cost tradeoffs with FLEXE are markedly different than with traditional models. Due to the variable cost nature of the model, even as you increase fulfillment nodes your warehousing costs stay flat; allowing you to absorb higher inventory costs without increasing overall costs.
You’re not out of the woods yet, inventory management becomes a bigger part of the equation.
Imagine having the flexibility to create fulfillment centers within one-day of most or even all of your customer base. You have moved from one or two distribution centers to a handful or dozens using FLEXE. So what does that mean for how you plan for inventory?
- Demand forecasts will be more variable and uncertain. With demand being more decentralized, uncertainty and variability of demand increases.
- The mix of inventory at each location may look different across nodes. Regional and local preferences may force a different mix of inventory per location.
- Transshipments and inventory rebalancing. With an increased number of locations, fulfillment from secondary locations, transshipments between locations, and periodic reallocation may occur.
Start with three steps in mind to you grow your network, grow your business, and keep your inventory in check.
1. Understand the needs of your customer
FLEXE can help you move to next-day fulfillment to all of your customers, but is next-day shipping really their expectation for all of your products? In addition, what is the impact of backorders on conversion and satisfaction? Thoughtful analysis of the customer impact/satisfaction of historic inventory backorders can guide a rough understanding of the importance safety stock. Moreover, A/B testing of fulfillment times can help quantify the improvements to conversion associated with shorter shipping cycles. You can use this information to help guide how much and what inventory needs to be close to the customer.
2. Follow the “No B/C strategy” and only stock fast-moving items at smaller distribution nodes
The intuition seems simple and the academic research around this spans back a couple decades, but companies often get themselves in trouble when they distribute slower moving SKUs to local and regional nodes. The thinking is that they’ll sell sooner or later, but the reality is that they are much more likely to have slow-moving items misallocated and will end up having inventory become obsolete on the shelves or having to ship them to the customer from a distant distribution center. Keep it simple. Start by positioning fast-moving and predictable items to the new nodes.
3. Proactively manage your inventory
In the early stages of scaling up your network, you may need to spend more time managing inventory. Simple inventory planning spreadsheets become more complex. You’ll need to account for a relative increase in variability and uncertainty of demand given the new network design.
FLEXE can help you build an inventory management plan
Not an expert in network design and inventory optimization? FLEXE can partner with you to:
- Analyze and forecast demand and demand variability
- Establish the right mix of A, B, and C items
- Plan safety stock across the network
- Generate different scenarios and iterate on network designs
With FLEXE, you can start small and grow. With a dynamic supply chain solution, you’re not beholden to traditional terms and leases—enabling you to test, adapt, and grow into a larger fulfillment footprint over time.
This blog was co-authored by FLEXE CEO Karl Siebrecht and Ben Van Roo. Ben is a FLEXE advisor, operations and data science executive who was most recently VP of Supply Chain, Analytics and Data Science at Chegg, Inc. Ben holds a PhD in Operations Research and an MBA with a concentration in Supply Chain from the University of Wisconsin.