What’s the Cost-Benefit of Adding a Distribution Center?
Would an additional distribution center help your business to meet customers’ increasing demands for quick delivery? The ability of companies like Amazon to deliver certain items within sometimes just two hours is ramping up the pressure for other retailers to do the same. And in a domino effect, these expectations have carried through to the B2B world.
This distance that goods must travel is a key factor in both delivery time and cost. So, having many distribution centers should enable a company to service its customers more quickly than the competition, right? Maybe, but that solution itself might come at an insupportable cost.
Deciding whether and how to expand the distribution network is not a simple matter. There are many variables and costs that need to be analyzed. Ideally, a company wants to have adequate inventory levels in every warehouse to be able to deliver to customers as soon as possible. However, this is not always the most cost-effective way to handle delivery.
Benefits of adding a DC
The most obvious benefit of an additional facility is the ability to ship items faster. If your company is experiencing exponential growth, it may be a good or even necessary move to add a distribution center so as to maintain a certain service level and reasonable delivery window.
Other benefits of new warehouses or distribution centers come in the form of operational advantages. Relieving capacity issues at existing facilities and lengthening the window of time in which your company is able to ship each day improve the fulfillment and distribution processes.
In addition, improvements such as being able to handle temperature-controlled items or hazardous materials, or being able to offer specialized packaging or labeling need to be taken into account. New locations can help a business with a good distribution strategy to grow its capabilities.
Need for new technological capabilities
Additional centers result in more complex processes and operations, which in turn leads to the need for additional technological capability. Factors that need to be taken into account include:
- Inventory management
- Which products will be stocked at which center?
- How will safety stock levels for each location be determined and managed?
- how will inventory be made visible across the sales channels?
- Order management and shipping
- how will orders be shipped from different facilities?
- how will those costs be allocated?
To properly manage multiple centers, a detailed technology plan must be put in place.
Is a new DC the right decision for your business?
Adding facilities comes with many considerations, such as inbound transportation costs, taxes, and labor availability and costs, in addition to all the factors outlined above. The situation for your company is unique. You might find after doing the analysis that adding a DC would be the right move . . . but not yet.
When considering whether and where to add a new distribution center or warehouse, it’s critical to consider both the opportunities and the potential risks that are specific to your company. It can seem that the imperative is location, location, location — but it’s also important to remember, timing is everything.