Viewpoint: Optimizing inventory key for SMBs to beat shrinking warehouse landscape

A 20-year supply chain veteran, Domby has worked in supply chain management at Georgia-Pacific LLC, Unisource and Accenture. He holds degrees in supply chain management from the University of Tennessee and California State University.

In an omnichannel retail environment, consumers expect fast shipping no matter the channel they’re shopping on and no matter the size of the retailer. Merchants, on the other hand, face margin-eroding cost increases in tight warehouse markets. 

A recent survey revealed that 79% of merchants experienced increased warehousing costs in 2022, while 39% reported that labor management became more time consuming. Merchants, then, need to find a warehousing and fulfillment solution that meets their consumers’ expectations for fast delivery without damaging their margins in an already uncertain market.

Consequently, warehouse placement and inventory distribution have never been more important to fulfillment strategy. Forward-stocking inventory as close as possible to the end customer enables one- to two-day ground shipping that strikes a balance of margin protection and speed. 

SMBs, especially, should consider moving from a single warehouse or fulfillment center model to a distributed warehousing model. The same model that works for some of the most sophisticated retailers in the country is accessible for merchants of any size with the right tools, partnerships and strategies.

One of the biggest roadblocks that holds SMBs back from adopting a distributed warehousing model is simply not knowing the practical where and how much of warehouse placement and inventory distribution. Fortunately, with access to historical shipping data and market trends, new fulfillment technology can quickly map consumer demand and make recommendations for optimal warehouse placement. 

However, the volatile state of the warehousing market may make actually securing space in the optimal markets decidedly more complicated.

Emerging warehouse hot spots 

While warehouse capacity is improving, vacancy rates are still at record lows and labor costs continue to rise. Top-tier warehouses and 3PLs in high-demand areas can afford to be selective about the merchants they take on. Ongoing capacity constraints here make finding the best warehouse locations challenging, especially for SMBs.

The traditional warehousing hot spots may be out of reach or cost prohibitive. But with the right business intelligence, SMBs can find emerging hot spots with comparable ground shipping coverage to legacy markets.

Finding the right warehousing markets is a balancing act, and the following factors must all be taken into consideration when:

• Proximity to the end customer is key for balancing delivery speed with affordability.
• Proximity to ports or your manufacturer helps optimize time in transit (TNT) on inbounds to offset freight costs.
• Space availability is key for negotiating rates and avoiding long-term commitments.
• Storage and labor rates will have a significant impact on operating costs and margins on a per-shipment basis.

Ultimately, the goal of any supply chain solution is resilience and cost efficiency. Warehouse placement is key to managing costs by lowering TNT and ensuring the best possible rates.

Beyond just knowing where to stock inventory is the question of how much and when, or inventory management. A successful distributed warehousing strategy depends on effective inventory management, which hinges on a few key functions, including:

• Balancing inventory carry costs against performance. Stocking additional warehouses means higher inventory carry costs. There’s no need to stock five warehouses if you can reach most of your customers in one to two days from three locations. Strike the right balance of speed and cost.
• Analyzing at the SKU level. There’s no one-size-fits-all inventory distribution strategy for most product catalogs. You probably won’t be selling many snowshoes in Florida, so there’s no need to stock them in the Southeast.
• Demand forecasting. Your demand forecast should include not only the amount of inventory but the product profiles, down to the SKU level. Your forecast should be based on a combination of past sales data, wider industry trends and your own promotional schedule.
• Fast inventory replenishment. With a solution like a hub-and-spoke network, you can replenish fulfillment centers from larger distribution centers quicker and more efficiently to respond to changes in demand.
• Order orchestration. Leverage an advanced fulfillment technology that will automatically route customers’ orders to the warehouse closest to them to cut down on manual processes.

For SMBs, their average daily shipping volume (ADV) can hold them back from adopting a distributed warehousing model. 3PLs often won’t take on merchants below a certain ADV, and when you split that volume up among multiple fulfillment centers, negotiations become even more difficult. However, in a co-warehousing model, merchants are able to aggregate their volume to negotiate better rates and service level agreements with top-tier 3PLs.

In a recent survey, 74% of merchants agreed that the future of fulfillment was shared, co-warehousing models. Merchants indicated that co-warehousing models offered the following benefits:

• Cost savings (60%).
• Optimized inventory distribution (39%).
• Scalability (38%).

As merchants shore up their fulfillment strategies to improve margins and increase resilience, they cannot ignore consumer expectations for delivery speed if they want to compete in today’s market. 

Distributing inventory to optimize for one- to two-day ground delivery is not only highly effective, but thanks to cutting-edge fulfillment technology and flexible co-warehousing agreements, it’s also accessible to merchants of all sizes with the right technology and partnerships.

Chris Domby is chief supply chain officer at Ware2Go. He has over 20 years of experience in the supply chain with expertise in fulfillment, inventory management and transportation. Before Ware2Go, he worked in supply chain management at Georgia-Pacific LLC, Unisource and Accenture, and has degrees in supply chain from the University of Tennessee at Knoxville and California State University.