Does warehouse location matter?
We have long struggled with the importance of location when advising e-commerce brands who are looking for a new fulfillment partner.
When thinking about how best to tackle e-commerce fulfillment it’s hard to resist advice along the lines of the following:
Customers want fast shipping!
You need to reduce your shipping costs!
Put your product where your customers are!
These are compelling arguments. No e-commerce brand wants to disappoint their customers and cost is always something you should at least be conscious of.
The last statement is key: often e-commerce brands start with warehouse location when thinking about fulfillment. The problem with this is it ignores some, less obvious, but no less significant, consequences of warehouse location.
Our goal is to provide a framework for how to think about warehouse location when developing a fulfillment strategy and outline what to consider when making this decision.
The importance of shipping times
The Amazon Standard
The closer a product is to a customer the shorter the time it takes to ship it to them. This is indisputable and the driver behind the “put your product where your customers are!” argument.
No one does this better than Amazon, the gold standard in e-commerce. They have made 2-day delivery ubiquitous and have pushed the limits further to same-day and even 1-hour delivery. It’s an incredible experience for the customer.
The question is, are e-commerce brands expected to compete with Amazon? Amazon has spent billions of dollars over decades developing the infrastructure to make these shipping times possible. While e-commerce brands can leverage the infrastructure Amazon has developed (along with UPS, FedEx, and others) it comes at a steep price.
Managing Expectations
While all customers want fast delivery, it’s not necessarily something that they need. Most e-commerce brands are selling a story. The customer buys the story and desires the product that comes with it. The catch is they cannot get this product anywhere but from the e-commerce brand. They want the product and will be satisfied just being able to get it.
With this in mind, the goal shifts from getting the product to the customer as fast as possible, to managing their expectation as to when the product will arrive. As long as you deliver the product the customer desires and do it by the delivery date you communicate, they will be satisfied.
Most e-commerce brands are not competing with Amazon. The customer cannot get the product they desire from Amazon or anywhere else. Instead, they are competing with customers' expectations of when they will get the product.
Costs impacted by warehouse location
The cost of shipping customer orders
Shipping costs account for 20-30% of a typical e-commerce brand’s profit margin, and that’s using the most cost-effective shipping solutions. Shipping orders using express services (2-day, next day, etc.) can be 5x more expensive than the economy level services most e-commerce brands leverage.
This brings us back to the “put your product where your customers are!” argument. If the warehouse where the product is is closer to the customer who orders it, then an e-commerce brand doesn’t have to pay for the express shipping services to get it to them quickly.
This is true, but it ignores the costs associated with maintaining multiple warehouses, which for most e-commerce brands, will usurp any savings realized on shipping.
The cost of multiple warehouses
The geographic distribution of the population of the United States is roughly 70% east of the Mississippi and 30% west. This means to reach customers in 2 days or less without using an express shipping service, e-commerce brands must have inventory in at least two locations.
Modern fulfillment providers (often referred to as Third Party Logistics providers or “3PLS”) providers picked up on this and have promoted this service heavily, promising to optimize inventory across their multiple locations to enable 2-day delivery at economy prices.
Compelling. The problem is (1) allocating inventory is extremely difficult, even for the most sophisticated brands, and (2) it requires purchasing more inventory to hold in multiple locations to avoid split shipments.
Ordering more inventory is not only costly in and of itself, it has multiple downstream costs associated with it.
Inbound Shipping
The more inventory that is ordered, the more it costs to ship that product from the manufacturer to the warehouse. Further, the best way to lower inbound shipping costs is to ship as much product together as possible. Multiple warehouses means smaller, more frequent inbound shipments.
Split Shipments
The biggest challenge e-commerce presents to fulfillment is how dynamic it is. Customers place orders at various times for various products. There is little to no consistency until a brand reaches a certain scale (typically 20,000+ orders per month). Even then, customer behavior can be influenced by a number of unpredictable factors.
This means having the right inventory in stock is a challenge all e-commerce brands face. Having multiple warehouses adds another variable to the mix: having the right inventory in stock at the right locations.
Getting this wrong results in “split shipments,” where a customer order is divided into multiple shipments. This is not only a poor experience for the customer (multiple shipments to track, different delivery days), but it’s expensive for the e-commerce brand as it doubles the cost of shipping the order.
Managing Multiple Warehouses
There is a cost to managing multiple warehouses. This is hard to quantify, as it essentially involves time that you or your team could spend on other activities besides monitoring and managing warehouse operations.
Even the best fulfillment partners require some level of input from their customers. They are in essence an extension of the e-commerce brand. This means providing updates on new products, marketing campaigns, product changes; working together when problems arise (the one guarantee in fulfillment); and monitoring performance to proactively identify any issues.
This is not time wasted, it’s time well spent to maintain a healthy partnership. However, having to do this for multiple warehouses increases this time requirement which can be challenging for e-commerce brands that are already functioning with limited resources.
Impact of location on fulfillment provider search
Despite the costs outlined above, there can still be good reasons to prioritize location when looking for a fulfillment partner. It’s a variable that should not be ignored as there are real consequences to where you store your product.
That said, we often see e-commerce brands focus almost entirely on location mostly because it’s a tangible variable for those who do not have a ton of experience working with fulfillment providers. The risk is, if prioritized for the wrong reasons, location can lead to picking a less than ideal fulfillment partner.
Overlimiting
Quite simply, focusing on finding a warehouse in a specific location limits the number of fulfillment partners available. This is especially true if focused on metropolitan areas as warehouses tend to be located where real estate is cheaper, which means less populated areas (although this has started to change).
Location does not make a good match
Where a fulfillment partner has a warehouse has little to no impact on how that fulfillment partner will perform fulfillment services for an e-commerce brand. Performance is based on the fulfillment partner's ability to develop effective operational strategies, manage labor, communicate, implement the right technology, and do all of this efficiently.
Best practices when considering location
Location matters. You will have to ship products from your manufacturer to this location, travel there, monitor the weather and geopolitical conditions, and be aware of sales tax implications and regulatory factors. Location must be considered, but how and when is key.
Find the best match for your brand
When possible, start by finding the right fulfillment provider for your brand. At Third Person, we consider variables such as the size of the provider, their typical customer, and the services they offer. This drives the “match score” we calculate for each provider.
Treat location as a filter
Once a match score has been established, then add location filters and see if there is a significant variances between regions, states or cities. Decide what (if any) concessions you are willing to make for a specific warehouse location. Understand the risks of picking a provider with a desired warehouse location who may not be the optimal match for your brand.
Consider the impact of different warehouse locations
When evaluating a warehouse location consider the following:
Shipping route between your manufacturing partner, both in terms of time and cost
The logistics of your internal team to travel to the warehouse
The distance from the warehouse location to various shipping carrier hubs
The regulatory and tax requirements of the state the warehouse is located in
Be flexible
The best piece of advice is to be as flexible as possible. A fulfillment provider who acts as a true partner to your business is exceedingly more valuable than finding the optimal warehouse location.
So, does location matter?
Yes, location matters but it should not be the basis for deciding which fulfillment partner is right for you. Prioritize finding the right partner and then consider warehouse location.
And use the Third Person platform, it does all of this for you.
