At an early stage in a business, it usually makes sense for inventory stock to be kept at and managed from one location, whether that location is a small warehouse or a stockroom behind a brick and mortar shop. But at some point in your business’ growth cycle, operating multiple warehouses becomes a much more sensible proposition as it offers a way to spread risk, reduce fulfilment times and, counterintuitively, reduce costs. Let’s look at why and how your business might run multiple warehouses.
Why Operate Multiple Warehouses?
Multiple warehouses were traditionally the province of distributors. Amazon, for example, operates one of the most advanced fulfilment networks in the world, with more than 80 fulfilment centres globally. Large multinational companies also operated multiple warehouses, reflecting the fact that they effectively had an in-house distribution function. More recently, slightly smaller businesses (although still larger than a typical SME) have begun competing directly in other markets, creating a practical need for on-the-ground fulfilment operations in each of these markets.
Shipping orders from a central warehouse becomes inefficient once a business reaches a given scale. Shipping costs decrease as shipment size increases, so moving large volumes between key fulfilment hubs is typically preferable to shipping small orders directly from a centralised warehouse. Delivery from a local fulfilment centre is almost always much quicker than cross-continental shipping. Customers tend to place significant weight on quick and cheap delivery, so operating multiple warehouses can also improve the customer experience.
Another key reason to maintain multiple warehouses is to spread major supply chain risks. Eliminating the risk of fire, theft or natural disaster is essentially impossible; in the event of a catastrophic event, your business will rely on supply chain redundancies to continue trading. Without a second warehouse, your ability to continue to trade will depend on the ‘slack’ left in your supply chain. Unless your business operates a ‘lean’ model (in which case you are unlikely to rely on large warehouses), this ‘slack’ is unlikely to be sufficient to continue trading at full capacity. With multiple warehouses, you can draw on a buffer of inventory stock kept in reserve in another location.
It’s worth remembering that operating multiple warehouses is expensive what with warehouse rent (or capital costs), insurance, utilities and staffing really adding up. For this reason, operating multiple warehouses is only really an option for businesses who can afford to spread the additional cost over a large volume of sales.
Tips to Juggle Multiple Warehouses Effectively
Given the significant expense associated with operating a warehouse, carefully consider the likely costs and expected savings before opening a second or subsequent warehouse. If your business already has multiple warehouses, carry out a review to identify which warehouses continue to be a worthwhile investment.
Key factors you should consider when evaluating a warehouse include lease or purchase costs, location and accessibility, transportation options and costs and local regulations. This process will involve a compromise between these factors. That said, if a warehouse is expensive to operate, is far away from ports and rail and is in a relatively small market for your business, then that warehouse is unlikely to be a good investment.
Once you have a portfolio of well-located warehouses, the next step is to manage the inventory stocked at each of them. The products in stock at each warehouse should reflect local demand. For example, an appliances distributor should hold relatively few heaters in a hot climate. However, as one of the key advantages of operating multiple warehouses is risk spreading, make sure that each product category is stocked in at least several warehouses.
Managing inventory stock on a warehouse level is critical. In a smaller business, it is often possible to keep across the business inventory records, balancing stock during an annual or quarterly stocktake if necessary. In larger businesses, keeping track of inventory transactions on a per-warehouse basis is critical. The efficiency and risk-spreading benefits of operating multiple warehouses are lost if almost all of a particular product’s inventory stock ends up at one, isolated location.
Confused between warehouse management and inventory management? Check out this article!
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.