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To DC Or Not To DC? That is the Warehouse Design Question!

The fast growing E-Commerce channel makes it an attractive avenue for most companies to participate in.  The tremendous amount of investment required to participate in online product sales requires explicit decision making as to how a company is going to fulfill those orders.  You need a warehouse design strategy to provide your fulfillment solution.

The E-Commerce Fulfillment solution you choose must take into account your customer’s demands, your competitive pressures, and the financial constraints that most companies have to deal with.


Amazon’s strategy is to locate their Distribution Centres as close to customers as it can enabling the fastest possible delivery of the millions of products that they carry.  Further Amazon Prime, though it comes with a fee, offers “free” shipping.  The combination of fast delivery, low to no cost shipping, and an endless selection of products all set the competitive benchmark for E-Commerce Fulfillment.  So how do you compete against that Supply Chain machine?

However Amazon’s Fulfillment Cost as a percentage of Net Product Sales has continually increased year after year after year.  In the first quarter of 2017 Amazon’s Fulfillment Cost was 19.8% of Net Product Sales, a record high for them.  And their Shipping Costs continue to far exceed their Shipping Revenue.

Most companies can not afford to have their Fulfillment costs and their Shipping costs consume such a large portion of their sales. Further most companies can not fund the cash required to invest in such an extensive distribution network.

Distribution Centre

Using the Fulfillment by Amazon service is certainly an option for any company.  They provide a geographic distribution centre presence that no other company can currently match.  This allows fast delivery of your products to your customers as well as access to the Amazon brand and website and customer reach.  And your costs, and cash outlay, are largely variable.  But are your products unique enough to ensure that your business is not cannibalized by Amazon in the future?

Are you a Startup?

If you don’t want to use the Fulfillment By Amazon service then how do you define what your E-Commerce Fulfillment solution should be?  Virtually no other company has the financial resources to put Distribution Centres everywhere.  So how you choose to fulfill your E-Commerce orders obviously depends on your starting point.

If your company is a startup you are most likely best served by outsourcing fulfillment to either a Logistics company or a service such as Fulfillment by Amazon.  Leveraging the existing infrastructure, processes, systems and resources of an existing operation may be expensive but it is less costly than trying to do it yourself from scratch.

Plus you will get to market much faster which is what you really need as a startup.  Again this keeps your costs variable.  And you don’t have to tie up your precious cash in Distribution Centre capital and operating costs.

Brick-And-Mortar Retailers

Brick and Mortar Retailers will already have at least one Distribution Centre supporting their physical stores.  The options for expanding their fulfillment network include adding more Distribution Centres, leveraging the physical stores as fulfillment hubs, or having suppliers drop ship products directly to your end consumers.  The existing store footprint as well as your supplier’s distribution network are tremendous assets in terms of getting online orders to customers faster, and cheaper.

But even if you have a Distribution Centre there is always the question as to whether you should expand geographically.  I faced this question constantly during my time in Retail.  The cost of adding a Distribution Centre in terms of capital expenditure, operating costs, inventory breakage, systems, and organizational support can be extensive.  But being closer to your customers holds the promise of greater sales to the extent that customers value faster delivery over all else.

As proof note again that Amazon’s Fulfillment costs as a percentage of Net Product Sales have continued to go up year after year.  Even though they run a highly efficient operation with phenomenal economies of scale their costs continue to escalate.  No one else can afford that.

In the end the answer to the question of adding another Distribution Centre always became a financial one.  Would the addition of a new Distribution Centre add enough in incremental sales, by virtue of its greater proximity to customers in those markets, to offset the increased costs of setting up and running it?  Will customers buy your products instead of your competitor’s products because you can deliver faster?  The answer was typically no!

The better strategy I believe is leveraging other, existing operations.  If you have Brick-and-Mortar stores then turn them into local distribution hubs.  Enable your suppliers to receive your customer’s orders and fulfill them directly to eliminate the wasted time transporting goods to your Distribution Centre only to turn around and ship the goods back out again.

This is a lower cost solution than adding a new Distribution Centre.  Plus it has the advantage of faster delivery.  You should have lower shipping costs.  Your ability to scale these operations up or down should be relatively easy.  And if it doesn’t work you have added very little risk to your operation.

Warehouse Design Strategy in Conclusion

With the growing pressure to expand in accordance with the demands of the E-Commerce space companies must intelligently consider all Warehouse design and fulfillment options.  This may involve outsourcing, insourcing, or leveraging your existing Supply Chain.

You must take into account all factors: customer requirements, financial impacts, cash flow and risk.  In some companies there may be a high tolerance for risk and less concern about short term profitability and cash.     That environment will certainly lead you to make decisions that are riskier than other companies can afford.

Whatever your situation, consider all Warehouse design options as you seek to define the E-Commerce Fulfillment Strategy that will best suit your company’s current and future needs.

Originally published on July 27, 2017.

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