Shipping has grown dramatically in the past two decades with container shipping volumes rising from 102 million tons annually in the 1980s to over 1661 million tons by 2015. A large chunk of this growth comes from eCommerce. The seller’s location is becoming increasingly irrelevant with websites like AliExpress and Amazon shipping products to buyers from across the world.
However, the increasing complexities of international shipping do not necessarily temper down the buyer’s expectations. Regardless of the logistics involved, customers continue to expect amenities like free shipping, short delivery times and low product costs from international sellers and this can apply a great deal of pressure on the seller’s bottom line.
Understanding the Challenges
Let’s begin with the simplest scenario possible; your supplier and buyers are in the same geographic location. The most you need in this scenario is a central warehouse to stock inventory and take care of fulfillment across this location.
But what if your buyers are spread across a larger geographical area? If you still source your products from suppliers that are at close proximity to each other, then it makes sense to lease a warehousing space closer to the supplier’s location. But this decision again depends on where you are sourcing from.
For example, if you are sourcing from China for the Canadian market, then warehousing and shipping from Hong Kong may be a really cost-effective option that is worth considering. Of course, you will need a different warehousing strategy for a supplier market that does not provide the same cost advantages as Hong Kong.
All of which brings us to the most complex, and the most common eCommerce model — geographically dispersed suppliers as well as buyers. This calls for a complex distribution optimization strategy that covers your warehouse network, inventory, SKUs and shipping. This is absolutely critical to maximize business performance and value in a multi-supplier, multi-warehouse environment.
Optimizing the Network
An effective optimization strategy takes into account historic and projected supply and demand figures together with operational performance to make decisions on the number of warehouses you will have, their locations, which markets each of them will service, what SKUs you will hold at each of these warehouses, and so on.
Warehouse optimization: Optimizing the number of warehouses is critical. Too many warehouses bring down your individual product shipping costs. However, they increase your holding costs quite significantly. At the same, too few warehouses have low holding costs, but can increase shipping costs of each order dramatically. In short, warehouse optimization is essentially a trade off between cost and service levels.
The first step would be to determine the optimum number of warehouses required to cover all territories within a geographic location, and the required capacity of each of these warehouses to service demand in their catchment. Warehouse numbers will be the function of a number of variables including current and projected sales, targeted service levels and acceptable operating costs. The decision of individual warehouse capacities will primarily be a derivative of the sales and service levels defined previously.
Inventory optimization: The next step is to optimize inventory to each warehouse location. Steady demand makes inventory optimization simple and straight-forward. But that may not always be the case. In many cases, it is difficult to gauge the demand for a product. This is especially true in the case of emerging product categories (like fidget spinners). In such cases, it is difficult to determine if demand will sustain, and also whether your orders will continue to come from one geographic location or can change over time.
Take the example of the drones industry that is still emerging and according to some estimates could be worth $127 billion by 2020. There are niche product categories within this segment like selfie drones, that have no clear established demand pattern. It may be difficult to narrow down a warehouse location until the market matures. In such cases, it may be a good idea to dropship your product directly from a supplier so that you may not have to invest capital in holding inventory. While margins could be lower in such cases, they also make inventory optimization simpler.
SKU rationalization: An important aspect of inventory optimization is rationalizing your SKUs. As a seller, it is important to acknowledge that all SKUs do not equally contribute to your top line. It is thus important to prioritize SKUs that are important for your business. The most popular technique is based on the Pareto Principle, which states that 80 percent of your profits come from 20 percent of the merchandise. Identify these high worth SKUs to establish where your warehouses need to go, and what products get stocked in each of these warehouses.
Shipping optimization: Once you have the list of most vital SKUs in your business, you could dig deeper into your sales history to identify patterns. Would it, for example, be possible to know what percent of a high worth SKU gets sold in each of your different geographical markets? This way, you could optimize shipping costs by spreading your inventory across various warehouses.
One important component of shipping optimization is your logistics partner. Signing up with one partner can allow you to use your volumes to bring shipping costs down. At the same time, your partner may not have great service across all your markets. A good strategy is to choose your logistics partner based on their service at the customer’s location, and not where your inventory is stocked. Signing up with a service like eShipper can help you coordinate your shipping across all your carriers from one platform
End-to-end synchronization of the distribution chain delivers significant benefits to the multi-supplier multi-warehouse model. It can help reduce costs, enhance service levels, increase margins and optimize performance across the entire network. Retailers can further enhance the value of their network with the strategic use of outsourced solutions and dropshipping services. The resulting hybrid fulfillment model will have the perfect combination of geographic reach, inventory depth and operational agility to respond to even the most challenging demand of today’s eCommerce customers.
This piece is a guest blog written by Anand Srinivasan, founder of Hubbion, a project management app that helps individuals and businesses organize their tasks and collaborate better. Hubbion has been ranked among the top 20 collaboration apps for 2017 by Capterra. Anand has been published on Entrepreneur, GoDaddy and Business.com.