Everyone's Got Warehouses - But Why?
Have you ever watched the TV series "Outnumbered"? If so, you'll know that one of the recurring jokes is the knack the children have for asking apparently simple questions that are almost impossible to answer. (And if you haven't seen it, I recommend it!)
This is particularly amusing because there's a lot of truth in it. Often the simplest questions are the hardest - but it's also these questions that give you the most useful answers. I was reminded of this recently when someone asked me this:
"I've got a chain of shops - but why do I need a warehouse as well?"
It was very tempting to say: everybody has a warehouse, of course you need one - just get on with it! But it's a good question isn't it? Why does almost everyone work this way - and what are the benefits?
Here's the answer I gave.
REASON #1: Less Stock If You Centralize
Every store has display stock. That is, the stock you need to attract customers in and allow them to spend their money. All the rest of the stock in your store - let's call it your working stock - is there to replenish your display stock in between deliveries from your suppliers.
So the faster and more frequent your deliveries, the less stock you need in each store.
If these come from your own warehouse, you can usually provide faster and more frequent deliveries than your suppliers can themselves. So if you have a central warehouse, you have less working stock in your stores.
Of course, the working stock you take out of your stores doesn't disappear - it just moves from your stores to your warehouse. But here's why you gain - it's a rule of inventory control that if you hold stock in fewer locations, you need less of it. So when you take your working stock out of, say, 20 stores and put it in a central warehouse you reduce the total amount of stock your business needs.
But this is the important point: this benefit depends on your warehouse giving your stores a better service than your suppliers can.
REASON #2: It Costs You Less To Store In A Warehouse
This reason is easy to explain. If you hold your stock in a warehouse it costs you around £5/ft2 to £8/ft2 in rent. If you don't have a warehouse, and hold your stock in your retail stores, it costs you anything from five to fifty times as much. And that's before you take into account the fact that you can store your stock much more densely in your warehouse than you can in the store-room of a retail unit. (How many narrow-aisle trucks have you seen in the back room of a store!)
So why hold your working stock in a store when it's so much cheaper to hold it in a warehouse?
REASON #3: Transport Costs You Less
Imagine you have 20 suppliers delivering to 20 stores. That's 400 deliveries. But if these 20 suppliers deliver to a central warehouse, and then you deliver from the warehouse to your 20 stores, that's only 40 deliveries - for the same volume of product. Large deliveries cost less per pallet than small deliveries, so the cost of transporting your product from supplier to store is less if you go through a central warehouse.
There are two other things you should take into account. Because you have to tranship the product at your warehouse, you add labour cost - and you need to check that this doesn't outweigh the reduction in transport cost. And now you're taking on the cost of transport from your warehouse to the store, you have to negotiate a reduction in cost from your supplier - otherwise they get all the benefit.
So Is Centralization Always Right For You?
So there you are - three reasons that explain why centralisation is a good thing, and why so many businesses work that way:
- you can reduce your investment in stock
- you can reduce your total space costs
- you can reduce your total spend on transport
But the good thing about asking such a simple question is that it also tells you under what conditions you wouldn't benefit.
If your suppliers can deliver as frequently and with the same lead time as you can from a central warehouse; if (somehow) you pay much less than typical retail rent; and if your suppliers don't actually save any transport cost from increasing their drop size - then maybe centralisation isn't the right way for you.
But now you know how to decide!
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