Why you should operate multiple warehouses
You’ve started your business recently, maybe with a small warehouse or a small storage room in the back of your shop. Everything is doing great, your business is growing steadily, so what now?
At one point, you realise that your warehouse is starting to get crowded and full. It’s not enough to store all of your products anymore.
So, what are your options?
You can either stop using that smaller warehouse, and move to a larger one. Or, even better, you can start using multiple warehouses.
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.
Yes! Let’s take Amazon, for example. It 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.
Shipping orders from a central warehouse becomes inefficient once a business reaches a larger scale. This is because 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. As such, operating multiple warehouses can also improve the customer experience.
Another reason is supply chain risks. What are those? Well, in a nutshell – redundancy. Eliminating the risk of fire, theft or even natural disaster is basically 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.
There is a small downside to this redundancy, however. Keep in mind that running multiple warehouses will cost more rent, utilities, more staff to hire, etc. As such, you have to make sure that your business has reached a large enough scale to be able to afford running multiple warehouses.
Given the significant expense associated with operating a warehouse, you should carefully consider the likely costs and expected savings before opening a second or subsequent warehouse. If your business already has multiple warehouses, you should do an analysis and see if they are bringing enough profit and/or customer satisfaction.
When evaluating if a secondary/tertiary warehouse is worth it, keep the following key factors in mind:
-How much does it cost to lease/purchase the warehouse(s)?
-What is the location of them? Are they easily accessible?
-The products stored in the new warehouse – are they in demand locally?
Potential challenges of operating multiple warehouses
Although a multi-warehouse strategy has its advantages, using more than one fulfillment center can also pose some serious challenges.
If you’ve already split your stock between two or more warehouses, you’re likely aware of the most common frustrations of this strategy. Some of the biggest obstacles a business can face include:
-Maintaining stock counts: When you have more than one warehouse, ensuring that all your products stay stocked can be a challenge. Stock levels and sales can quickly fall out of sync. When you’re working in one warehouse, it’s easy for the others in your supply chain to be “out of sight, out of mind,” which can lead to low inventory counts before you know it. Out-of-stock products can lead to supply chain inefficiencies and lost revenues.
-Cross-warehouse communications: Because warehouses tend to be some distance apart, it’s impossible to have employees who run those warehouses jammed into one office. With remote employees managing each warehouse, companies often run into communication issues. Missed or mixed messages can cause errors or bottlenecks. And a lack of face-to-face interactions can curb spontaneous discussions around streamlining or improving processes.
-Mixing up files for different warehouses: When companies don’t maintain separate file systems for each warehouse (like inflow, outflow and invoices), it’s easy for orders and shipments to get mixed up between warehouses — especially if you use a centralized filing system.
Opening a secondary warehouse can, and most likely be, profitable for your business, as long as it’s done right. Don’t forget to keep the previously shown key factors in mind when considering a secondary warehouse.
We can say that managing inventory stock on a warehouse level is extremely important. Especially in a smaller business, where it is often possible to keep across the business inventory records. Balancing stock during an annual or quarterly stocktake if necessary is also critical. In larger businesses, keeping track of inventory transactions on a per-warehouse basis is also very important. 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.