How To: Improve Inventory Allocation and Last-Mile Logistics

December 3, 2019

We’re in the throes of the holidays and 2020 is right around the corner. Is your supply chain ready for next year?

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eCommerce and omnichannel retail have up-leveled the role of the supply chain and its impact on the business. Logistics underpins everything now.

We’re in the throes of the holidays. Many businesses, from their stores to their websites to their warehouses, are experiencing peak volumes and some of their busiest days of the year.

As we get through Q4 peak and head into the new year, are you asking yourself how you can build or create a network that is more efficient in 2020? How can you improve delivery times, better manage and allocate inventory, and get through peak smoothly?

One thing is clear: The world has changed. As consumers, we have so many choices when it comes to how, when, and where we shop. All of which has put incredible pressure on retailers and brands to meet high consumer demands for better delivery promises, including reconfiguring their logistics networks, inventory allocation plans, and transportation strategies to improve last-mile logistics.

eCommerce and omnichannel retail have up-leveled the role of the supply chain and its impact on the business. Logistics underpins everything now.

If you’re ready to expand your network, you must know:

  1. Who your customers are and what they want—from where they are to product selection to delivery promise
  2. The benefits of prioritizing your SKU set and optimizing for fast-moving SKUs
  3. The cost tradeoffs of expanding your logistics network
  4. How to offset expansion costs with on-demand warehousing and fulfillment

Building a logistics network that improves last-mile delivery #

Customer demand is often variable and not predictable across A/B/C SKUs. One-day shipping is costly and fulfillment centers and 3PL contracts are expensive and can be risky if demand does not materialize in the long run.

In the best case scenario, your company has:

  • Highly flexible production capabilities at a low and competitive cost
  • Customer demand that is predictable
  • Fulfillment centers that can cost-effectively meet short lead times
  • Inventory that does not tie up large amounts of working capital and is not perishable

Sounds easy enough, right?

In reality, most businesses are stuck in long-term leases, forecasting and available capacity doesn’t match up, and creating flexibility in the network is near impossible. Here are a few things to consider as you expand your network.

1. Understand your customers #

As you consider expansion, the best place to start is deeply understanding the needs of your customers. Sounds obvious. But, where are they located? Do they want fast delivery, free delivery, or both? Are some products more popular than others and does popularity vary by region?

For most businesses, not every single product needs to be available for fast, free shipping, nor does every product have to be evenly distributed across your network. For example, if you sell snow shovels, you may not need (as many of) them near Florida, but you will need a lot of them in northern states and the midwest.

Consider this: Amazon is the leader in fast, free delivery, but not every product being sold in the marketplace qualifies—only Prime-approved products are available for one-day shipping.

2. Prioritize your fast-moving SKUs #

eCommerce has given retailers an incredible amount of data to know what is being sold and where. Retailers and brands looking to expand their fulfillment network can use that data to identify their fast-moving SKUs (“A” SKUs) and then their slower-moving SKUs (“B” and “C” SKUs).

Consider the Pareto principle, or the 80/20 rule. Eighty percent of your sales comes from 20% of your best-selling inventory, and vice versa: 20% of your sales comes from 80% of your inventory, or your slow-movers. Identifying your A SKUs can help inform the type of fulfillment network you can create and what your inventory management strategy will be.

For example, with your demand pattern and SKU profiles, you can put your A SKUs closer to your end consumers by adding smaller fulfillment nodes near your high-density areas. That way, you can provide better delivery times and costs to your customers on the best-sellers they’re after.

80% of your sales comes from 20% of your best-selling inventory, and vice versa.

3. Know the distribution costs tradeoffs #

Adding more fulfillment locations changes the cost structure of your logistics network. With traditional solutions for warehousing and fulfillment, inventory and warehousing costs go up, but transportation costs and lost sales go down as you shorten the last mile of delivery.

The below chart depicts the traditional model for cost tradeoffs when expanding your fulfillment network. In total, your costs decrease initially as you reduce transportation costs and recover lost sales, but eventually increase again as your inventory and warehousing costs continue to rise.

Traditional distribution cost tradeoffs

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Offsetting costs with on-demand warehousing and fulfillment #

Flexe changes a key part of the competitive landscape when it comes to expanding your logistics network in three ways:

  1. There are no long-term commitments or fixed-cost investments: Flexe uses a variable cost model, meaning you only pay for the capacity and services you use, which can be in support of a promotional event like Q4 peak or for longer-term activities like ongoing fulfillment
  2. You can enter the tightest real estate markets: Flexe has one of the largest networks of distribution and fulfillment centers with available capacity in even the most difficult regions for finding industrial real estate
  3. Expansion costs less: Using Flexe eliminates start-up and implementation costs as you expand your network because every warehouse is established and uses the Flexe Logistics Platform to manage projects, which decreases times and gives retailers and brands access to one of the largest network of providers to a single platform

As you can see in the chart below, using Flexe transforms the equation by providing your business infinite options to expand your network footprint without taking on the high fixed costs. You can choose regional and local options and scale your fulfillment footprint.

Last-mile delivery times and costs are greatly reduced, which drives increases in conversion, satisfaction, and repeat purchases. It can truly be a game-changing component of your business’ growth strategy.

Distribution cost tradeoffs with Flexe

2019 distribution cost tradeoffs flexe

Improving inventory allocation and management in 2020 #

Again, it isn’t an even distribution of products across your network and growing into new locations and facilities can increase the complexity of inventory levels. Keep in mind the following:

  • Demand forecasts will be more variable and uncertain: With demand being more decentralized, uncertainty and variability of demand increases.
  • The mix of inventory at each location may look different across nodes: Regional and local preferences may force a different mix of inventory per location.
  • Transshipments and inventory rebalancing: With an increased number of locations, fulfillment from secondary locations, transshipments between locations, and periodic reallocation may occur.

Whether you’re experiencing peak now, or gearing up for your own seasonal peak outside of Q4, Flexe can help. Flexe on-demand warehousing and fulfillment gives you the flexibility to expand your network and better optimize your inventory strategy.

Through a network analysis, we can help you identify your best-sellers by demand pattern and then source the right warehouse providers to optimize the movement of goods.

With Flexe, you can start small and grow. You’re not beholden to traditional terms and leases—enabling you to test, adapt, and grow into a larger fulfillment footprint over time.

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