Posted On April 18, 2022
Warehousing is having a moment.
Between the supply chain chaos caused by the pandemic and increased demand across industries, warehousing has never been more in-demand. According to the New York Times, large independent retailers have been spending hundreds of millions on constructing new warehouses, while supply chain managers at small and medium-sized businesses have turned to third-party warehousing to stock up on inventory.
But while warehouses can play a vital role in your supply chain, implementing warehouse operations isn’t always simple.
The benefits of warehouses in supply chains
- Lower transportation costs. Warehousing plays an important role in maintaining supply chain costs. Generally, the shorter the distance a product needs to travel, the lower the transportation costs. So while utilizing warehousing services comes with some extra costs, they are often mitigated through lower shipping costs.
- Strategic inventory distribution. Storing products in locations around the country streamlines the supply chain process and increases customer satisfaction, as items are more likely to be delivered next-day or via two-day shipping.
- Access to backup inventory. When the pandemic began causing labor shortages and shutdowns, businesses had to reevaluate their inventory management. Whereas companies used to prioritize lean supplies of goods, many companies have shifted to focus more on larger quantities of storage to prepare for future disruptions.
When to implement warehousing
There are two main catalysts for investing in warehousing and warehouse management.
The first is growth. By setting up shop (in this case, setting up a warehouse) in a new market and getting closer to the customers nearby, businesses can be more competitive in that region. Warehousing and distribution centers allow for faster delivery times, which leads to increased customer satisfaction.
The second situation that often prompts companies to invest in warehouse space is cost. For example, a business that’s based on the east coast and imports goods from China has to transport products from the west coast to their headquarters on the east coast, only to send them back out to customers in the west. Setting up distribution warehouses in regions around the country prevents both the unnecessary transit costs and the extra time it takes to ship items back to those regions.
When warehousing isn’t beneficial
Don’t be fooled—there are certainly situations when adding distribution warehouses to your supply chain isn’t helpful to the bottom line. For bulk commodity or low-margin products, storing the items in warehouses might not add enough value to offset the costs.
How to add warehouses to your supply chain
Step 1: Find the right location.
So, you’ve decided your supply chain could use some warehouses. The big question now is where to have them.
The answer lies in your supply chain data. When onboarding new warehouse clients, Flat World analyzes the most recent six to 12 months of supply chain data. We look for a few different things, including regions with large numbers of customer orders and areas where the company isn’t currently achieving its delivery time goals.
For example, data for a company based in Dallas might show a significant customer base in the Pacific Northwest—but because the company doesn’t utilize order fulfillment in that region, those customers typically wait a week to receive their products. We might also recognize that shipments going from the company’s warehouse in Dallas rarely make it to their final destinations in the northeast on time. Adding warehouse space in Baltimore to their supply chain would solve the issue.
Once you’ve narrowed in on a general geographic region, you’ll also need to consider the features and specifications you need to safely store your products. Some raw materials and food products need refrigeration to meet FDA regulations, for example, while oversized machinery often requires larger loading docks.
Step 2: Find the right warehouse management partner.
While finding the right supply chain management partner is listed as step two, depending on your situation, you may want to focus on this first. A warehouse management company with expertise and technology can help you determine the best location for your new supply chain operations. Just make sure you don’t commit to a warehouse management company that only offers limited location options. They’ll steer you toward one of their existing facilities, and you may miss out on setting up a warehouse somewhere more beneficial for your company’s needs.
Here’s what to look for in a partner:
Any warehouse management team your company employs should serve as an extension of the company, executing business operations the same way your in-house teams do. That includes all the processes involved in fulfillment, from inventory management to packaging to quality control.
At minimum, the third-party distribution services team should meet the performance levels of in-house teams. In most cases, third-party teams should improve productivity. Let’s say, for example, the warehouse workers at your company fulfill orders the same day for 85% of shipments. The company you partner with for supply chain management should be fulfilling orders same-day for at least that much, if not more.
You’ll also want to evaluate technology when evaluating a potential supply chain management vendor. A WMS, or warehouse management system, allows companies to track inventory in real time, either by logging in themselves or getting a report upon request. If a prospective warehousing partner doesn’t have one, that’s a major red flag.
Product damage will always be an unfortunate fact of supply chains. However, a good-quality warehousing partner will be able to minimize damage and provide footage from security cameras when it does happen.
In addition to your immediate supply chain needs, you’ll also want to consider what your supply chain is likely to require in the future. After setting up a distribution center with a partner, you won’t want to have to re-do the process after a few years because the partner couldn’t automate processes or meet demand.
Step 3: Determine the appropriate footprint and SKUs.
Once a partner is brought on and a location secured, companies next need to decide how much warehouse space they’ll need and which products (or SKUs) they’ll want to store there.
Most companies start with a modest amount of space and handful of SKUs—maybe 10,000 square feet and enough of the top 20% of best-selling products for one to two months of inventory. As time goes on and the model is justified, the company can add space and SKUs to increase productivity.
Step 4: Communicate and train on processes.
Like we said earlier, your supply chain management vendor should be an extension of your business. We recommend communicating expectations with written documentation about picking, packing, inventory accountability and any other processes. The team can then refer to the documentation to train workers and ensure your business’ standards are being upheld.
Step 5: Review new carrier options.
This next step represents a common mistake companies make when adding warehouses to their supply chain. Entering a new region means companies have access to more carrier options—but they don’t always realize it. Instead of getting quotes from those carriers, they continue to rely on their existing partners for inbound and outbound shipments. The result? Paying too much for shipping and missing out on opportunities to reduce costs.
Your supply chain management partner is likely well-versed in local carrier options and should be able to guide you in finding the right carrier for various shipments.
Step 6: Evaluate and optimize warehouse supply chain management performance.
Once the operations are up and running, it’s time to refine. Warehouse partners should provide performance reports on a weekly or monthly basis. The reports should include supply chain KPIs like order accuracy rate and same-day shipment rate, allowing you to compare performance between owned facilities and partner facilities. A strong partner will also evaluate this data to uncover actionable insights and develop innovative solutions.
If you’re curious about how warehousing could improve your supply chain, let’s talk. We can analyze your supply chain data to find opportunities to grow and provide recommendations on how to get started. Contact us to learn more.