“What channel do you want to watch?” Some of us can remember the days before on demand and IPTV. Luckily, discussing the channels for your distribution centers doesn’t have to be as emotional as those evening family “discussions”. For purposes of this post we’ll discuss retailer supply chains. We’ll refer to a single channel retail distribution center (DC) as a facility that receives product from vendors and assembles only orders to ship to stores – think Target or Walmart. Similarly, we’ll refer to a facility that receives product from vendors and picks and packs orders to ship to only customer homes as a single channel Ecommerce fulfillment center (FC) – think Amazon. I bet you can guess what a multi-channel facility does. Correct, it’s a center that receives product from vendors and fulfills both store orders and direct to consumer orders. So if you’re a large retailer with both brick and mortar stores and web storefronts, which centers should you have? Should you have regional DCs to supply your stores and one, maybe two, FCs to process direct to consumer orders? The answer is easy. The answer, as always, is “it depends”. After that though, the rest of the answer is more difficult.
The Inventory Question
Many executives will think they should have a multi-channel building because they can reduce inventory and use that working capital to generate revenue elsewhere. In the extreme, I’ve seen companies with stores across the USA consolidate all distribution for stores and Ecommerce into one multi-channel building. Well, mission accomplished. Inventory is minimized. However, it takes days to reach the farthest stores and customers from one centralized building.
The Transportation Question
With customers demanding shipments with at least the option to receive next day, often times same day, providing only multiple day deliveries is not sufficient for most retailers. So then the question becomes how to reach all customers within 24 hours. The answer now is many dedicated fulfillment centers for Ecommerce as well as leveraging the brick and mortar stores for Ecommerce deliveries. The problem with this strategy is that the inventory question pendulum just swung all the way in the other direction, meaning you’ve likely maximized inventory. Further, it is a pragmatic impossibility to have all product available at all times for all customers. And so you will find yourself with unsustainable amounts of working capital tied up in inventory, excessive inventory write-offs, and only partial success in next day deliveries. And let’s face it, the customers talk about the items that they don’t receive, not the items that they do.
Closing Thoughts
And so, the answer is “it depends”. As a retailer, you understand your business better than any outsider. You need to determine the best mix of inventory availability, product offerings, and delivery promises – both for your Ecommerce customers and your stores. After you establish who you want to be and what you want to offer, you can then determine the proper mix of distribution and fulfillment centers to support your strategy. If you are a retailer of significant size, your first step should be to determine where you are at today so that you have a point of comparison and a means to demonstrate and communicate progress. If you haven’t already, you should complete a supply chain network model and DC/FC facility assessment to determine the total landed cost of all nodes within your supply chain. Once you determine your “best” network you will take months, possibly years, to transition. This will include exploring consolidations, new construction, and automation opportunities. There has never been a more exciting time to be in the supply chain business. Good luck!
—Matt Kulp, St. Onge Company
