In the retail industry, success hinges on a merchant's ability to balance inventory and sales. Holding too much inventory while experiencing weak sales can result in cash flow problems, while low inventory levels in the face of strong demand can lead to lost sales. Achieving this balance has become increasingly challenging in today's cutthroat retail environment, where high inventory-to-sales ratios can cast a shadow on a company's financial health and overall resilience.
Current retail demand volatility has a lot to do with the pandemic, which introduced unprecedented levels of uncertainty in the market. The rapid and unpredictable shift in consumer behavior in the last three years created significant challenges for merchants trying to maintain optimal inventory levels. With retail demand plateauing over the first half of ‘23 at the wake of historically high demand, a retail inventory buildup became an inevitable reality for merchants.
Tech and Automation are Gaining Steam in Improving Warehouse Efficiency
Optimizing warehouse space is a critical aspect of maintaining a healthy retail business. Even when accurately forecasting demand proves challenging due to volatile consumer trends, companies can still find ways to optimize their existing storage space and reduce operational expenses. By doing so, businesses can minimize the negative effects of excess inventory and ensure they are better prepared to adapt to changes in the market.
An increasing number of merchants are turning to software and technology solutions to help them optimize warehouse space and enhance the efficiency of their teams. ShipEngine's study found that 30% of merchants plan to introduce warehouse automation this year, with the primary goal being to help their teams work faster (45%). Advanced inventory management systems, warehouse automation, and data-driven analytics are just a few tools for modern retailers seeking to improve their operational effectiveness. These technologies allow businesses to track inventory levels in real-time, streamline warehouse operations and minimize human error, thus contributing to overall resilience.
By investing in process technology and automation, retail businesses can optimize inventory management workflows and build more agile and flexible operations. With these improvements in place, companies can better navigate the uncertainties and fluctuations inherent in the retail industry, ultimately ensuring long-term success and profitability.
Multiple Warehouses are Crucial to Running Cost-Effective Operations
Retail businesses can reap significant advantages by operating from multiple warehouses rather than relying on a single facility. One primary benefit is the potential to save time and money by reducing the distance between warehouse addresses and end consumers. By strategically placing warehouses in various locations, merchants can optimize shipping routes, expedite delivery times, and improve customer satisfaction.
Experts, including McKinsey and Company, have found that the higher rent and labor costs associated with warehousing products closer to consumers in urban areas are often offset by reduced costs of last-mile delivery. Last-mile delivery expenses can be substantial, accounting for up to 20% of total logistics costs. Some reasons for this include shorter distances to cover, fewer fuel expenses and the ability to consolidate shipments more efficiently.
ShipEngine’s data reveals that 57% of surveyed merchants operate out of a single warehouse. However, merchants increasingly recognize the value of shipping from multiple warehouses to save on shipping costs and improve overall resilience.
Operating from multiple warehouses enhances flexibility, allowing businesses to adapt to fluctuating demand and changes in the market more effectively. In addition, this approach enables companies to mitigate the risks associated with potential disruptions in their supply chain, such as extreme weather events or global trade disputes. By adopting a multi-warehouse strategy, retail businesses can build a more resilient operation, better positioned to thrive in an increasingly competitive and unpredictable market.
Third-Party Fulfillment Options Help Level the Playing Field
While leasing multiple warehouses across strategic locations is workable for a business that operates at scale, it can be quite out of reach for smaller businesses with a less dense network or those lacking the financial wherewithal. Even for larger enterprises, finding suitable warehouse space and efficiently overseeing operations in multiple locations can be time-consuming and resource intensive. Moreover, several merchants may lack the necessary expertise or infrastructure to manage multiple warehouses effectively.
In such cases, businesses can turn to third-party fulfillment options and third-party logistics providers (3PLs) to optimize their inventory management and shipping processes. Additionally, merchants can leverage manufacturers and suppliers as fulfillment options, creating a more streamlined supply chain and reducing the need for extensive warehousing infrastructure. Utilizing suppliers as a fulfillment option can allow businesses to achieve greater efficiencies and reduce their physical footprint, all while maintaining a direct connection with their end customers.
By utilizing suppliers as a fulfillment option, businesses can maintain a smaller footprint and achieve greater operational efficiencies. This approach allows companies to focus on their core competencies while ensuring that their end customers receive timely and efficient service. Embracing third-party fulfillment options and leveraging supplier relationships can give retail businesses the flexibility and resilience necessary to thrive in a highly competitive and dynamic market landscape.