Why Distributed Inventory is a Game Changer for E-commerce

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1 Why Distributed Inventory is a Game Changer for E-commerce A

2 INTRODUCTION One of the biggest challenges faced by every business that deals with physical goods is the creation and maintenance of a supply chain/logistics network. Specifically, how to create a Triple-A (Agile, Adaptable and Aligned) chain that s capable of keeping up with the expectations that have been created by multinational megacorps like Amazon. As e-commerce and consumer expectations evolve, competition is no longer just on quality and price, but speed as well. Thus, the winning e-commerce companies have both the best products and the most efficient supply chain. Rapid globalization and liberalization in the e-commerce space has created all sorts of opportunities for retailers, but it has come with problems of its own. Undoubtedly, one of the biggest is the fact that traditional centralized supply chain networks simply aren t capable of delivering Triple-A performance. 1

3 THE ISSUE Traditional supply chains are quickly becoming outdated. Why? They are not agile enough to respond to short-term spikes in demand, they re too inflexible to meet structural shifts in the market, and they don t align with the objectives of all parties in the network. For example, a CEO might be thrilled with a marketing campaign that increases orders by 150 percent, but that sense of excitement will soon disappear when it becomes apparent that logistics is unable to meet that demand. This is due to a concept known as the Bullwhip Effect, where variance in customer demand can lead to bigger issues in supply chain. and not optimized for small and medium sized e-commerce businesses. This causes frustration for e-commerce business owners that are now dealing with slow delivery times, extra costs, and confusing technology platforms to support their business. The only other option is to self-fulfill, which is time-consuming and inefficient. Both of these approaches delay shipping times and increase costs. Because items are being fulfilled from one location and shipped across the country to the end customer, delivery times can reach five to seven days or cost a significant amount of money for expedited two to three-day shipping via air. There are multiple tools that can help with marketing and sales, but creating a supply chain/logistics network is a totally different ball game. Building a business and keeping things running smoothly often require two very different skillsets. While creativity and so-called blue-sky thinking are valuable in marketing, a rigid sense of efficiency and practicality are far more useful for supply chain management. It s not surprising that an increasing number of business owners are turning to third-party logistics (3PL) providers to take care of managing the logistics side of their business, which is a 3PL s core competency. Traditional Fulfillment Approach A lack of agility in traditional supply chains is most evident in fulfillment. E-commerce has grown so quickly that fulfillment companies and 3PL providers struggle to keep pace. Their technology and operations were designed for large enterprises, Traditional 3PLs and self-fulfillment significantly increase shipping times and costs, as items are sent from only one centralized location. To solve these issues, distributed inventory takes center stage. 2

4 DISTRIBUTED INVENTORY EXPLAINED Distributed inventory is a strategy utilized to keep inventory closer to the end customer. In practice, it s the spreading of physical goods across different fulfillment centers throughout the US (and potentially beyond) to achieve a lower transit time and cheaper shipping costs. This method is already employed by e-commerce giants such as Amazon. Distributed inventory uses a hub and spoke model to maximize efficiency. Fulfillment centers, or hubs, function semi-independently to fulfill orders cheaply and quickly. However, if there s a temporary spike in demand in a particular region, other centers can assist by either sharing inventory or fulfilling orders themselves. A major factor in choosing the appropriate fulfillment centers is to understand where the consumers (or buyers) exist and predict their demand. The closer the inventory is to the consumers, the faster the product can get to them. In addition, costs are significantly lower, as items can be shipped via ground (rather than air) and achieve two-day or next day delivery. By utilizing fulfillment centers that are located around the US, there is an added efficiency for inbound shipments from manufactures. Businesses can choose fulfillment centers to replenish stock based Distributed inventory spreads physical goods across different fulfillment centers throughout the US (and potentially beyond) to achieve a lower transit time and cheaper shipping costs. on the manufacturing location. For example, a company that manufactures goods on both the east and west coast of the continental US (or even internationally) can use a fulfillment center that is closer to the manufacturing origin, saving on first-mile transportation cost and transit time. 3

5 DISTRIBUTED INVENTORY IN PRACTICE Consumer expectation around delivery times are continuously shifting. To meet their expectations in a realistic and cost-effective manner, a ground fulfillment network is needed (even over expedited air). In comparing the transit times of using one central fulfillment center to two strategically located fulfillment centers, the distribution among two centers saves an average of 1.1 days. 1 When adding a third fulfillment center into the mix, the average time in transit is reduced by two full days. 1 Furthermore, there are savings in shipping costs. Let s say, for example, there s a business manufacturing cosmetics products at a facility in New York. The company pays $14.50 for two-day shipping from New York to San Francisco. By using distributed inventory, they can deliver from a San Francisco fulfillment center, instead of New York. This can potentially reduce the transit time to one day, and also reduce the cost to be below $ The closer a company is to its customers, the quicker and cheaper it is to deliver to them. Just one of those factors would be a boon on its own, but when they are put together, the impact on improving customer experience is huge. The level of savings associated with distributed inventory depends on a couple of different factors, the most obvious of which is weight. Let s take a look at the projected savings for a few broad categories using ShipBob: 2 Category Weight Saving in shipping cost per package Annual saving in shipping cost Packaged Snacks Nutrition Packets 1 Lbs. - 2 Lbs. $2.00 $8,000 2 Lbs. - 3 Lbs. $4.00 $15,000 Children s toy >20 Lbs. $7.50 $20,000 Because distributed inventory fundamentally changes the ways in which a company delivers its products, it has a cost impact when dealing with transit times and carrier services. Current order distribution overall and forecast order distribution by fulfillment center as shown in the ShipBob application. 1. These numbers are based on a sampling of the average ShipBob customer and are not representative of all ShipBob clients. 2. The assumptions made are based on inventory split across four fulfillment centers, the weight includes packaging (item and package), shipping costs is not specific to a carrier, and shipping costs are based on ground shipping costs. 4

6 DISTRIBUTING INVENTORY Figuring out how to best distribute inventory and where to hold products can induce headaches, but that doesn t need to be the case. ShipBob, for example, offers advanced analytics tools that provide insight into order history, help map customer destinations, and determine the best fulfillment centers to use to reduce the overall shipping cost for customers. Once the store and inventory are connected to the application, the merchant s existing sales data can be used to make recommendations on the ideal inventory distribution across ShipBob fulfillment centers. Current inventory distribution can be seen across products, and inventory can be forecasted based on previous business by fulfillment centers. From there, it s just a matter of deciding on which inventory (SKU/ SKUs) to distribute, where to send it, and what quantity to send. Customers can override suggestions made by algorithms if there were certain factors that contributed to anomalies in data (e.g., a high demand in a certain area last year was related to a targeted marketing campaign or some other presence there). While business owners maintain control over how and where their inventory is distributed, ShipBob s application provides impactful insights based on past data to inform decision-making and future outcomes. CONCLUSION With traditional supply chain processes, it is impossible to create the Triple-A (Agile, Adaptable and Aligned) chain that is needed to succeed in today s marketplace. Successful e-commerce businesses rely on speed, efficiency, and viral reach critical factors that are missing from most fulfillment solutions. It is clear that a new approach is needed. Current inventory distribution overall and forecast inventory distribution as shown in the ShipBob application. If founders want to become winning players in the e-commerce space, a winning supply chain is necessary, and distributed inventory is the way forward. Its simplicity, decreased transit times, and reduced cost, with the tenets of a Triple-A supply chain at its core, make it perfect for today s needs. More than that, it s the future of e-commerce. ABOUT SHIPBOB 5

7 Based in Chicago, ShipBob is a privately held technology company that streamlines shipping and fulfillment for e-commerce businesses. As an end-to-end fulfillment solution, we provide warehousing for customers and enable package delivery in 1-2 business days. Our software combines order and inventory management, customer communication capabilities, predictive data and insights, as well as optimized shipping. We integrate with online e-commerce platforms like Shopify, WooCommerce, Magento and many more. Simple, fast, and affordable, we are your one-stop shop for direct-toconsumer fulfillment. Learn more at shipbob.com. 6