Many omnichannel and e-commerce businesses use a single fulfillment center to ship orders off to customers nationwide. At first glance, operating one fulfillment center seems like it would cost less than operating two fulfillment centers—but does it? The answer is not as simple as it might seem. Making the best decision for your business requires analyzing a few key aspects of your operation.
Factors That Impact Your Fulfillment Costs
On the surface, your picker grabs an item from a bin, boxes it, and ships it out to your customer. If those costs and processes were all fixed, then determining a need for more fulfillment centers would become a simple matter of volume. Unfortunately, fulfillment costs are rarely that simple. Here are some circumstances where a single distribution location may eat into your profit margin:
A Bad Location
If your only fulfillment center is in Seattle and you’re selling high volumes of product to customers on the East Coast, your shipping costs can get quickly out of control. Parcel carriers use distance-based shipping zones to determine the cost of moving your package from your fulfillment center to your customer.
Most carriers use an eight-zone model for standard parcel shipping services. Your Seattle fulfillment center can ship very affordably in Zone 1, which would be within 50 miles of the point of origin, covering Seattle and various suburbs. Conversely, shipping a package across the country to a customer in Orlando would be considered a Zone 8 shipment, which might cost four or five times as much. A $5 local shipment turns into a $20 cross-country shipment, which can be especially detrimental when the profit from the shipped item is less than the shipping cost.
If the majority of your products are small, such as jewelry, then a single fulfillment location may not impact your shipping costs much. If you sell heavy or bulky products, like furniture or exercise equipment, the cost to move them long-distance rises exponentially.
Parcel carriers will charge you for the higher of two weights—the actual weight of your shipping box or a dimensional weight calculated based on the room your box will take up in a truck. Either way, moving oversized or weighty items over long distances becomes very expensive because of shipping zones, making it important to have fulfillment locations near your major customer markets.
The Amazon Effect
Amazon rode to prominence on the back of its two-day Prime shipping promise, creating an expectation for all online sellers to ship all products fast and free. Going back to the Seattle/Orlando example above, moving products across the country in one or two days tends to be prohibitively expensive or outright impossible for many e-commerce and omnichannel businesses. If your customers expect you to ship their goods fast and free, you’ll need to find ways to make move products quickly into your busiest markets without breaking the bank.
Options for Expanding Your Fulfillment Footprint
The costly issues above can be overcome by expanding your fulfillment center network in a way that will grant you fast and easy access to customers in any domestic location. In some cases, the reduction in shipping costs achieved by using a larger fulfillment network will largely offset the cost of the additional facilities. Most sellers do this in one of two ways:
- Buy or lease additional facilities. Some retailers and e-Tailers prefer to run their own distribution and fulfillment networks, which leads them to lease and operate a network of strategically located facilities around the United States. This method gives the retail brand full control, though it also incurs the full operating cost of each facility.
- Use a fulfillment 3PL. An experienced third-party logistics (3PL) provider will have an existing national network of multi-tenant fulfillment facilities in place, allowing their customers to expand quickly into new markets as needed. The 3PL spreads the operating costs across all tenants, helping sellers to lower their upfront costs.
Both of these methods are viable, and which you should choose depends entirely on the details of your business model and the expertise of your staff. Some sellers also use a combination of the two methods. Discussing your needs with a 3PL or a real estate broker will give you additional insight into the ideal fulfillment model for your needs.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.