Distributed inventory is an ecommerce inventory strategy that entails splitting product stock between multiple fulfillment centers. Products are stored in two or more facilities in different geographic regions. The opposite of distributed inventory is centralized inventory, where all products are stored in one place and fulfilled from that distribution center.
Many 3PLs who provide fulfillment support for ecommerce brands will have a distributed inventory option. It’s a great fulfillment method for some, but not all businesses. It certainly costs more to split your inventory, so it’s wise to analyze your overall costs to see if it’s an effective strategy for you.
Ultimately if you’re a high-growth brand, you’ll want to distribute your inventory at some point, here’s how you’ll know it’s the right time.
Factors that Affect Distributed Inventory Costs
Before deciding to distribute inventory across multiple warehouses, it’s worth noting the major costs that you’ll incur by doing so.
Storage and stock levels—one of the biggest costs of splitting inventory is additional storage costs. You may have too much or too little inventory in storage for a while before you start optimizing your order flow from multiple locations. If your warehouse facilities charge a lot for these anomalies, you might end up paying extra.
Inbound shipping—first you’ll need to pay for transportation of your products to the new facilities. if international freight costs are low, it may be advantageous to import products to multiple ports (East and West Coasts, for example) to cheaply move inventory closer to multiple distribution centers. Distributing inventory will increase your inbound shipping costs, whether it’s to ports, or domestically to your multiple warehouses.
Domestic shipping—the costs of last-mile delivery is a big factor in any ecommerce brand’s inventory strategy. The shorter the distance, the cheaper your overall domestic shipping bill. Distributing inventory will generally help lower last-mile shipping costs.
Inventory tracking—having safety stock on hand is imperative to eliminate stockouts and backordering. Distributing inventory will mean re-evaluating your inventory formulas—including safety stock, reorder points, and inventory on hand—to ensure you don’t lose money on lost customers due to backorders or being out-of-stock.
Technology infrastructure—managing two or more warehouses of products is much more complex than managing one. Keeping an optimized amount of inventory on hand is no easy task, multiply that by more locations and you’ll need to make sure your inventory tracking technology can handle the task. You may need to upgrade your technology systems, which might be a big upfront cost.
The Advantages of Distributed Inventory
There are many advantages to splitting inventory to be fulfilled in multiple warehouses. Before getting swept up in the benefits, it’s important to fully analyze the costs you’ll incur in doing so. Distributed inventory can be a lot to manage administratively—don’t forget to factor in your time to the overall costs.
Here are the factors to consider when weighing the cost benefits of distributed inventory.
- Faster delivery times to the end-customer. The biggest advantage is fulfilling products closer to the customer. This goes for all types of customers—retail, B2C, marketplaces. If your products require any customization (a colored case, software update, size and fit, etc.) you can do this and still ship to customers within 2-day or same-day shipping.
- Reduction in last-mile shipping costs. As stated above, the closer you are to your end-customer, the cheaper it will be to ship products. This is particularly helpful if you are shipping primarily direct-to-consumer. You’ll be able to offer a wider range of shipping options for your customers, potentially even free shipping because you won’t have a lot of costs to absorb.
- Inventory redundancy as a buffer for any issues. With inventory split in multiple locations you’ll rest assured that you always have a safety stock to send out if there are issues. This may be due to inclement weather, carrier issues, WMS failures, or ordering problems.
Why Your Fulfillment Center Location Matters
When setting up split inventory, the location of your distribution centers is one of the biggest considerations. If your products can be fulfilled closer to your customers, that’s the end goal. If your 3PL’s warehouses aren’t near your customer base, then it won’t make sense to move inventory to those locations.
Some questions to ask your 3PL
- Are your distribution centers in a big city or are they rural?
- How close are your distribution centers to major shipping hubs (airport, port, transportation centers)?
- How many customers can you reach with 2-day or same-day shipping?
- Are the distribution centers close to your business in case you need to view your products in person?
- Are the distribution centers close to your manufacturer, assembly center, or other storage facilities?
The key to understanding where to send inventory is an ongoing process. Continuously analyze your inventory data for insights into where your products are going. This includes monitoring any shifts or growth in specific regions that may indicate a need to move products from one fulfillment center to another.
Signs it is Time to Split Your Inventory to Multiple Distribution Centers
Here are some business characteristics that work well with a distributed inventory model.
- High volume DTC
- High-growth businesses looking to scale quickly
- Brands offering a subscription service (monthly curated boxes)
- Products that are heavier in weight than they are large in dimension (DIM factor can add up quickly)
- Packages that are large/irregular in sized or need additional handling (Furniture)
- Shipments that will incur many surcharges (Anything requiring specialty shipping services)
- Clustered customers that are not near each other (Golf equipment in California and Florida)
- Fast shipping is necessary (products that require cold storage like medicine or food)
- Brands offering free, 2-day, or same-day shipping.
These are not the only types of businesses that will do well with distributed inventory, but they are some of the more common.
If you are seeking a fulfillment provider who can help you navigate distributed inventory, reach out to DCL Logistics for a quote. We have a wide network of locations across the US that can help your brand grow and scale.
Tags: warehouse management