The customer is not local anymore – we are all now fully aware of the global opportunity. However, in the pursuit of trying to address our distributed customer, we often forget that our inventory planning needs to be tuned to this new business model.
Is the goal of this article to convince you to buy warehouses in multiple cities/countries? Not really. We’re here to discuss and evaluate models and figure out what kind of model works best for each context. Hopefully, once you have identified your distribution model, you will know where exactly to store your inventory and how to make the largest cost savings for your size of business.
Please note that by the nature of the topic – we will assume that the highest cost saving achieved will be the general indicator of success for any model.
To start with, let us clearly define the variables that contribute to building your model.
1. Supplier Proximity
Transport costs from your single supplier to your stock location can be an important factor. However, since you are expected to purchase in bulk, you can always optimize for purchase logistics cost. If you are selling something which is a commodity by nature, it is recommended to have a distributed supplier network.
2. Customer Proximity
Your model can vary depending on whether your customers are:
- Evenly distributed over a large geographical area
- Highly localized to a single area
- Localized to a bunch of clusters which contribute to >80% of your business
3. Nature of the Product
- Is it perishable? If your product has an expiry date then you better stock only what you can sell within 50% of the average expiry period.
- Is it volume intensive or weight intensive? A roll of bubble wrap sheets can be more expensive to ship based on volumetric weight as compared to a heavier dumbbell.
- How fragile is it? Can you transport individual items over long distances without breaking them?
- Does it have components? If so, do they all come from the same supplier or are they from different locations?
Each question regarding the nature of the product will weigh in while deciding your inventory structure.
4. Carry Cost
This is the cost of carrying a single unit of product for a month in your storage location. If you have a diverse catalogue, you can take the weighted average. This factor is impacted by local rental rates as well as your sales cycle. Seriously, you cannot fathom the savings from having a smooth running Just in Time (JIT) inventory plan for this factor.
5. Absolute Margin
This determines the leeway you have in accommodating for logistics as well as storage costs. Shipping costs and carrying costs need to be built into your margin – so do packaging and labor costs.
Let’s now check how these variables impact models that are used globally.
The Central Warehouse Structure
This should always be the starting point because the goal is to start simple and stretch yourself before your graduate to the next model. Without a reasonable forecast of high volume sales in a distributed geography, deviating from this model can be suicidal.
You can always optimize for the location of the warehouse/store basis location of your suppliers or basis the carrying cost, whichever provides you with the maximum cost savings.
Hub and Spoke Model
This is a standard age old model which is best suited for centralized suppliers and uniformly distributed or clustered consumer segment.
However, this model has been the death of many enterprises. One doesn’t realize the perils of the overheads of running a multiple warehouse structure till they have been nearly bankrupted. This model must be chosen only for extremely scaled enterprises with no other option but centralized procurement.
For the others, let’s look at other models which have become more popular than before due to online sales:
The Supplier Drop Ship Model
The Supplier Drop Ship model is simple and elegant and lets you have a stable business without ever touching your products. You simply route all orders to your suppliers with a shipping address and collect the payment online directly from your customers.
However some important questions to ask are – Are you sure you want to introduce your supplier and customer? Can you control the process? Can you control quality control?
It is really important to make sure you have a watertight agreement with your retailer on customer interaction and on who is held accountable for defects. It is, after all, your brand that is on the line. However, if executed well, this is one of the most popular distribution models for an omnichannel business.
The Business Customer Drop Ship Model
This model requires you to diversify to Businesses as well as Consumer target markets if you haven’t done it already. Let’s say you make $20 on every sale to a consumer and $10 on every sale to the business. But your bulk sales lets you optimize on shipping costs and your business customers could be closer to come consumer clusters than you are. This could lead to a saving of greater than $10 on each product – neat way to scale.
In this case, your business customer becomes your distributor. This is a pretty interesting model because it enables you to build a deep relationship with your business customer by giving them more consumers to sell to while at the same time you are making awesome savings on your carry costs as well as individual shipment costs.
Again, this needs to be done with the right training to each of your business customers about consumer shipping and a lawyer drafted agreement to ensure a stable long term business.
The Fulfillment Agency model
The emergence of Amazon FBA has been one of the most significant drivers of retail sales globally. The fact that you can store your products at an external warehouse and they power your fulfillment has given birth to a slew of sellers across the world who work on arbitrage. The trick is to buy a product where it is cheap, ship to Amazon FBA and have it resold on a channel where you can price it higher.
Even for your own manufactured stock, FBA really brings down the pains of managing a distributed business. There are others like Aramex, Rakuten, ShipBooster and Shipwire who provide similar services.
Which model should you choose? It’s hard to force fit a model and assume all the items on the checklist are satisfied. However, we hope that by referring to the models above, your thought process and decision making regarding your inventory would be more structured and well thought out.