Should You Combine Your Fulfillment and Distribution Operations?

With a lot of retailers announcing boosts in online orders this past year, it’s difficult to remember ecommerce in its infancy. At its start, most retailers were able to use a tiny section in the corner of their distribution center to fulfill online orders. But the orders quickly outgrew the corner and the growth of ecommerce pushed stores to open fulfillment centers dedicated to picking and packing individual orders.

The terms distribution and fulfillment are commonly used interchangeably but the two serve different purposes. A distribution center ships orders in bulk to retailers or wholesalers while fulfillment centers are designed for packing single orders shipped to an individual end user.

The continued growth of ecommerce and advancing technology capabilities ushered omnichannel retail into the picture. The omnichannel approach integrates all of a retailer’s channels to create a seamless shopping experience no matter how the shopper is accessing the product. Shoppers expect a fluid experience when jumping from one channel to another, including access to the same inventory numbers whether they’re browsing online or in-store. For some retailers, it’s challenging to meet this expectation when inventory is spread out between different facilities.

To combat this challenge, some retailers are making the move to consolidate their distribution and fulfillment centers into one. Companies like Gap Inc. and American Eagle are already implementing this approach to streamline fulfillment and shipping strategies and better meet omnichannel demands.

Advantages of Combining Your Centers

Combining your fulfillment and distribution operations in one building eases the undertaking of setting up an omnichannel system. While you may be able to make room in your existing distribution center to add your fulfillment operation, many retailers are building huge hubs to handle both systems efficiently. Some benefits of this combined approach include:

  • Lower operational costs

The most obvious cost reduction is you aren’t paying for two different facilities anymore. Although it might be costly upfront to build a new center, there are money-saving opportunities along the way. The location of your facility is key. It will be much cheaper to build in a small, rural area rather than in the middle of a densely populated metropolitan area. Many small towns also offer tax incentives by refunding personal and property taxes because they want to attract more businesses and employment opportunities. Additionally, you can eliminate the need of owning automation equipment throughout multiple facilities because you will only need one set in your combined center. This will not only lower your purchasing costs but will also reduce the amount you spend on maintenance.

  • Shared inventory

Many retailers have separate inventory-tracking systems in their fulfillment and distribution centers and their physical store locations. The data generally doesn’t synchronize correctly or quick enough, which makes tracking real-time inventory levels extremely difficult. This leads to frustrated customers. Inventory visibility is stronger when inventory is combined into one warehouse because the same system is used to unify your numbers. Improved inventory management can also result in less overstock because you can easily see what is and isn’t moving from the shelves.

  • Immediate control

In a single facility, you have a birds-eye view of the entire operation and can immediately pinpoint potential issues and resolve them before they have a negative impact. For example, if your fulfillment operation is experiencing an unexpected influx of orders, you can easily move a worker from the distribution side to help the fulfillment team. Conversely, if your physical stores experience inventory shortages, you can easily move product from the fulfillment side to the distribution area to alleviate the shift.

Advantages of Separated Fulfillment and Distribution

Combining both operations under one roof may not make sense for every retailer. There are clear advantages to centralizing your fulfillment and distribution, but some might find it more advantageous to keep them in separate facilities. Although combining the two is becoming more popular, there are some considerations to think about:

  • Capital investment

While operating one large facility can yield long-term cost savings, you do need the upfront capital to invest in this shared infrastructure. This may not be a smart financial move for younger retailers focused on growing their bottom line.

  • Order fulfillment challenges

Retailers that operate separate facilities have the advantage of using centers in a different location to fulfill an order if the item is missing or out-of-stock.

  • Stock Keeping Units or SKUs

SKUs are a standard way to track inventory levels. This system becomes more complicated when you combine distribution and fulfillment inventories since online stores offer a wider selection of products, and therefore hold more SKUs, than physical stores that are serviced by distribution centers.

  • Future growth

You risk running out of space in a combined center if future growth occurs. Even if your distribution center currently has enough space to house your fulfillment operation, you could quickly outgrow that space and need to reinvest in a larger facility sooner than you anticipated.

Staffing Considerations

Along with assessing the size and location of your facilities, there are staffing considerations you’ll need to evaluate as well. The type of work and skills needed to successfully operate a distribution center differ from those for a fulfillment center.

On the fulfillment side, you’ll need dexterous workers with strict attention to detail since customer orders need to be accurately picked and packed and ready for shipment almost instantaneously. Additionally, unless your fulfillment center is highly sophisticated, you’ll have to trust your workers to determine what box size to use and how much cushioning material to add. These end decisions greatly impact how high your operational costs will be because most shipping carriers now charge based on box size rather than weight.

On the distribution side, there is more tolerance for delayed or incomplete shipments since orders are much larger and the end user is not an individual customer. For example, if a store needs 100 units but you only have 99 on hand, the packer has a decision to make: they can decide to ship the order and substitute the last item with another that the store needs, hold the 99 for an extra day or two until the additional item arrives or ship the incomplete pallet out and send the missing item at a later date. While this scenario is common in a distribution center, shipping an incomplete or inaccurate order in a fulfillment center would not be acceptable.

The Bottom Line

To be successful in the competitive ecommerce space, retailers need distribution and fulfillment centers that are flexible and can manage inventory for their physical stores and individual online orders. Combining your fulfillment and distribution centers may not be the most strategic option for your company, but others may find it advantageous. When deciding whether to centralize these functions or continue to operate separately, you’ll need to take the following factors into consideration: cost, inventory management capabilities, facility location, future growth and staffing needs.

For more info about how these factors affect your distribution and fulfillment operations, check out our blog, “Cost, Quality, Speed: Balancing the Triple Constraints of Your Supply Chain” >