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LEGAL CENTRALISED OR DECENTRALISED DC? Comparing warehousing models according to their suitability for a retailer’s business. EBy eStore Logistics founder and CEO Leigh Williams. commerce was already rising ahead of the pandemic: Australia Post data shows online retail sales were growing 20 per cent annually and were projected to reach $33.2 billion by the end of 2020. Covid-19 has catalysed this shift, with recent research from McKinsey revealing more than 40 per cent of surveyed Gen Xers increasing general shopping habits amid the pandemic. Similarly, eStore Logistics’ own data shows year-on-year increases in customer orders of 73 per cent in April, 99 per cent in May, 81 per cent in June and 87 per cent in July. When stores had to close, brick-and- mortar retailers were forced to adapt, while consumers were transitioning and, in many cases, embracing the convenience of online retail. Consumers were also demanding a faster, more efficient online shopping experience. Many brick-and-mortar retailers have thus switched up their inventory approach, reducing their floor space and converting stores into decentralised ‘micro’ distribution centres (DCs) – or fulfilment centres – to meet demands. Leveraging automation, this model has benefits. However, it’s not all good news. Of course, the best inventory management and order fulfilment approach depends entirely on the retailer’s needs, business models and objectives. So first, let’s look at common warehousing models – centralised and decentralised DC models – to determine which is most suitable for a business. Understanding the different warehousing models Here, we’ve broken down the models and profiled the type of retailers that are most suitable for them. The centralised model Inventory profile: retailers with a wide SKU range, and shallow quantities on hand. Under the ‘centralised’ model, inventory is stored in a minimal number of large, centralised, optimised warehouses. This model is most suited to retailers that have large product ranges, hold small quantities of each product in inventory and where each product is of low shipping weight. Significant benefits of this model include reduced logistics costs, simpler inventory management, and an optimised workforce, among many others. For those that engage a third-party logistics provider (3PL), the economies of scale they may gain, including capability in robotics and other recent technological advances, may outweigh the cost and complexity of running one’s own operation. This is also a cost-effective option for retailers, which pay consolidated fees to 3PLs or rent to industrial property landlords. An example of a retailer with this profile is an apparel brand that sells many products in various sizes, colours and designs. In contrast, if a retailer with the same profile were to decentralise, it would be forced to deploy scarce capital to duplicate inventory holdings across multiple locations. There would also be a requirement to manage the increased inventory complexity, adding to the costs of supporting resources. The decentralised model Inventory profile: retailers storing large volumes of only a few distinct, fast- moving items. A decentralised model aims to store goods in many locations, closer to the customer, to fulfil orders faster and at a lower delivery cost. This can increase customer satisfaction and drive return purchasing behaviour. In this instance, consumers may receive their order split across multiple deliveries rather than the preferred ‘single delivery’. A retailer with this profile would typically have deep inventory holdings in each product. It would be cost-effective and less complex to distribute quantities of each product across multiple warehouses. This model is better suited to businesses such as a bed-in-a-box retailer that sells only a few types of bulky products, such as mattresses – which are large and expensive to ship long distances – but manufactures them in large quantities. For anything outside of a narrow SKU range, duplication of stock means higher warehousing costs. It also makes stock forecasting very complicated, where small variances outside of the margin for error can have expensive consequences. Retailers may also find their costs increasing if they get inventory dispersion wrong, leading to inefficient deliveries. One example is when inventory that must be sent to customers in Sydney or Melbourne is in Perth. The hybrid model Inventory profile: a combination of both. In a select few cases, there may be value in a hybrid model, where most stock is held and distributed centrally and a select, small number of SKUs distributed via decentralised DCs. An example of a retailer with such a profile is an online retail variety store that holds a combination of both stock profiles. Knowing which model works for you No one-size-fits-all approach applies to logistics and warehousing. To deliver a great customer experience, retailers must establish a strategy that suits their business profile while reducing delivery times and lowering costs. Other considerations to factor in would include rent and labour market costs, which vary among states and territories. For most small to medium online retailers, cost-effective and fast order delivery and customer satisfaction can only be achieved through advanced centralised logistics. Warehouse robotics, only just taking off in Australia, cost- effectively enables same-day-order fulfilment as late as 4pm. The centralised model also means less commitment to expensive inner-city commercial space. In eStore Logistics’ instance, warehouse space can be dialled up and down as customers require, hence retailers pay only for the space they need. Retailers considering a decentralised model should carefully consider whether scenario modelling supports these changes to their distribution model, considering factors such as optimal SKU holding depth and breadth, fulfilment complexity, inventory management, rent differential, logistics costs, working capital requirements and delivery speed. In many cases, the most optimal outcome is rarely delivered through a network of micro fulfilment centres. 68 RETAIL WORLD SEP, 2020