Should Your Warehouse Be Closer to the Factory or the Customer?

The location of your warehouse can play a significant role in your store’s profitability. Consider the example of an e-commerce store selling licensed NBA jerseys. In this case, an L.A. Lakers jersey is more likely to be sold in and around Los Angeles than anywhere else. Stocking this inventory at a warehouse close to Los Angeles is common sense. On the other hand, let us consider a store that sells licensed Disney merchandise online. In this case, the buyers come from all across North America, and even the world. Would you identify your major markets and stock your inventory close to these locations? Or would you stock your inventory close to your manufacturer’s location and ship them to the customer on demand? There are no easy answers here, especially considering that rival stores like Amazon ship their products overnight. Housing your inventory close to the manufacturing location could dramatically increase shipping time, and this puts your store at a disadvantage. At the same time, if your products are made in a country like China, your holding costs here are significantly lower than what it would cost to stock inventory in the U.S. Here are a few factors to take into account when determining the location of your warehouse.

Number of SKUs

One of the most important factors to consider is the number of SKUs you sell. Going back to the example of NBA jerseys, there are currently 30 teams in the NBA and considering that you sell jerseys of three sizes for each of these teams, you have close to 90 SKUs. While you may ideally want to lease warehousing space close to each of the 30 markets, it is more cost effective to find your biggest customers and stock inventory close to these locations. For instance, you may lease two warehouses on the West Coast and the East Coast of the U.S. This way, you may stock the jerseys of teams like L.A. Lakers in the warehouse located along the West Coast while jerseys of the New York Knicks may be stocked in the warehouse along the East Coast.

Number of Suppliers

Another factor to consider is the number and location of your suppliers. If your products come to your customers from multiple countries, then stocking these products close to the manufacturer may not be ideal. This is further complicated if your customers come from multiple markets. In such circumstances, you could do one of two things. You may either identify your biggest markets and then stock inventory close to these warehouses, or find warehouses that are centrally located to all your manufacturers and ship them to your customers from there. Both strategies have their pros and cons. One of the biggest drawbacks is the potential inefficiency with shipping. Transporting your goods several times from your manufacturing center to the warehouse and then to the customer could increase logistics cost and thus erode your margins. The optimal solution can only be worked out based on how your business is set up and where you are sourcing from.

Tariffs and Taxes

Tariffs and taxes, by far, have the greatest impact on your logistics and warehousing strategy. We are not only talking about import duties, but also sales taxes that one has to pay when a product has to be shipped between states. In the U.S., states like California and Massachusetts do not impose a tax on shipping charges if it is included with the price. On the other hand, states like Florida and New York consider shipping a taxable activity regardless of whether sales tax is part of the price or not. Accounting for all these factors before determining the right location for your warehouse involves doing a lot of math. But there are a few ways to ease your warehousing burden. Here are a couple of popular strategies. Drop shipping: One of the most popular ways to ease logistics challenges is to outsource the task of shipping your product to your supplier. As an e-commerce store, your responsibility here is to just market the product and pass on the orders to the right supplier. This is, however, not entirely without problems since an unreliable supplier could pose a problem for your reputation. E-commerce platforms like Shopify have their own validated list of suppliers who have good reputations when it comes to drop shipping. Shopify’s service Oberlo could come in handy here. FBA: If you sell on Amazon, you could consider the Fulfillment By Amazon option. This allows businesses to stock their inventory in Amazon’s warehouses. While this feature does come at a cost, it eases the shipping burden on you and also ensures that products reach your customers on time. Amazon also has an option to stock inventory of businesses not selling on Amazon. The Multi-channel Fulfillment option is technically the same as FBA, except that you could use Amazon’s logistics to handle shipments made through your website. At the end of the day, the right answer to this question depends to a great extent on the product you are selling, the warehouse manufacturing location, where it is sold, the cost of shipping (including taxes), and your order volume. Taking all these points into consideration could give you the most practical, if not ideal, solution to your warehousing challenge. Image credit: Avalara