According to a recent report from the National Retail Federation (NRF), 75% of consumers expect free shipping, and 39% expect two-day shipping to be free. As the pressure to deliver goods cheaply and quickly continues to increase, more and more retailers are looking for ways to get their goods closer to their customers.
For most businesses, that means adding on to your warehouse and fulfillment network. If you’re ready to expand your network, you need to take into consideration:
- How it will impact your sales
- Freight savings
- Inventory management
- Demand pattern
- WMS compatibility
- Execution strategy
Why would you want to expand your logistics network?
Before you decide on whether or not expansion is the right move, it’s important to get clear on why you’re doing it. There are a few different reasons that would make a retailer consider expanding their network.
Better customer experience
Customers appreciate faster delivery, and in many cases, demand it. If your goal is to improve your delivery promise, then you may need to add more nodes in your warehouse network. But not as many as you may think. You can reach 84% of your market with just three strategically placed warehouses.
If done efficiently, expanding your fulfillment footprint can be a real cost saver for businesses. And with the recent additional costs of tariffs, it’s more critical than ever for retailers to reduce costs wherever they can.
Adding additional distribution centers can help get your product closer to your customer, increasing delivery speeds while reducing the last-mile of delivery. And seeing as the last-mile of delivery can comprise up to 28% of a product’s total transportation cost, that can really add up.
If you’re a growing business, expansion is a natural choice. Whether you’ve already maxed out capacity at your existing fulfillment centers or are planning ahead for future expansion, the need for extra capacity is a common reason to expand your network.
6 things to think through when considering a network expansion
1.) What’s the potential for increased sales?
To offset the costs of opening a new node to your warehousing network, you need to make sure it will address current increases in demand and also support ongoing growth. With 65% of consumers looking up delivery times before adding an item to their cart, it’s clear that delivery speed is an important factor in buying decisions.
If you currently offer a selection of different shipping times, you should be able to get a good sense of how much your sales will increase with a stronger delivery promise. If you look at sales by time in transit and see a significant increase in with one and two-day optionality, you’ll know it’s the right call.
2.) Freight savings
A major factor in your decision to expand your distribution network is how much it will save you on freight costs. By getting your inventory closer to your customers, you’re shortening both the distance goods have to travel, and you’re also able to take advantage of the most cost-efficient carrier options and ground delivery. Lull mattress was able to save 30% on carrier costs and reduce delivery times by 51% by using on-demand warehousing for their network expansion.
3.) Inventory management
Inventory management is a challenge to begin with, but it’s made even more complex as you expand your warehouse network. When you add a second fulfillment center, there’s typically 30-40% more inventory because of carrying costs related to safety stock.
Because of this, it might not be cost-effective to split all of your inventory between multiple distribution centers. But one way businesses can manage this is by splitting inventory of their top-selling products. If you know that certain products consistently sell, you can confidently place those in multiple locations to save on transportation costs, while also increasing your delivery speeds.
4.) Demand pattern
Opening up a new distribution center, in most cases, isn’t cheap. In order to make this decision a profitable one, you need to ensure you’re going to overcome that expense in reduced freight costs. To do this, you need to understand your demand pattern.
What percentage of your customers are in each zone? What is the average weight of orders? You can either undergo this process yourself, or work with a partner like FLEXE to do a network analysis and discover the optimal number of warehouses and the best locations for your business.
5.) Warehouse management system (WMS) compatibility
It might not be top of your list, but WMS compatibility could be a major factor in your decision making. If you’re considering working with a 3PL for your network expansion, you need to be sure your systems talk to each other. In some cases, businesses may be working off a custom-built solution that isn’t designed to manage multiple sites. That then makes your expansion initiative an IT project—adding time and costs.
Once you’ve made the decision to expand your network, then you have to decide how you’re going to execute on that. You must identify the location and type of warehouse that fits your needs, and also how you're going to manage it: Outsource operations or bring it in house.
How you choose to manage it can be a tough call. A warehouse is a massive fixed cost. If you decide to bring it in house, that’s expensive and it takes time. If you go with a 3PL, there’s still a large CAPEX burden that offsets management, but changes the fundamental economic construct of operating a new facility.
So, how do you know when you’re ready? Even if your forecasting department does an amazing job, growth can be unpredictable. To mitigate the risk of being short on space and services, you have to be willing to make some pretty hefty investments: the facility, the systems, and the inventory. You run the risk of either having excess capacity you’re not using if you overestimated your growth, or you could rapidly outgrow it and be stuck.
Expand your network with on-demand warehousing
You’re ready to expand your network, the demand is there and the business value is clear, but the investment and lack of flexibility doesn’t quite fit. That’s where on-demand warehousing comes in.
With a variable-cost model, we’ve eliminated the fixed cost burden of standing up new infrastructure. This combined with our massive network, single technology platform, and a team of experts to support your business on an ongoing basis make it a really viable solution.
3 components of on-demand warehousing
A vast network of on-demand warehouses
The industrial vacancy rate is at a record low 7%, but on-demand warehousing taps into capacity that’s already under lease, but going underutilized. As a result, businesses can find capacity and services in even the tightest of real estate markets. Our network is comprised of more than 1,000 warehouses. So, in addition to finding the right capacity for your project, you’re also able to find providers with the right specifications.
A single integrated technology platform
WMS compatibility becomes a non-issue when all of your warehouses are connected through a single software platform. Implementation is quick and only needs to be done once. After implementation, it is incredibly simple to add more locations as you grow.
A team of experts ready to help
Last but not least, with FLEXE you gain access to a team of people dedicated to sourcing the right warehouse for your needs, providing you with end-to-end logistics support from go-live to expansion, and ongoing monitoring and support to ensure all your SLAs are met.