Delivery speed: the value of proximity

For the customer speed is worth money: goods that arrive tomorrow sell better than goods that arrive in a week. So a natural question occurs to a manager: what if we open one more warehouse closer to the region? The answer cuts both ways. A nearby warehouse speeds up delivery and may cut transport cost, but splitting stock across several sites raises the total stock, and also rent, staff and management. The value of proximity has to be calculated.

The hidden price of splitting stock

In one central warehouse the demand of all regions is pooled and the swings partly cancel out: demand rises somewhere, falls somewhere else. Split the stock and each warehouse must cover its own swings. A rough rule: if demand at the sites is independent, total safety stock grows in proportion to the square root of the number of sites.

An example, with illustrative figures. A central warehouse needs 400 units of safety stock for one item. Split it among 4 equal regional warehouses and each needs 200 units, 800 in all, twice as much. With nine warehouses it is 1,200 units, three times as much. If a unit costs 300,000 so'm, the extra 400 units for one item come to 120 million so'm. Across 100 such items that is 12 billion so'm of extra stock. The real figure shifts with how closely demand is linked, but the direction is clear: more warehouses, more stock.

What proximity gives and what it costs

On the benefit side: faster delivery, a lower transport cost for each delivery, and a customer who orders more because goods arrive sooner. On the cost side: extra stock, rent, staff, a system, and moving goods from the centre to the region.

An example, hypothetical. One region receives 120 orders a day. Delivery from the centre costs 45,000 so'm, from a regional warehouse 28,000 so'm, a difference of 17,000 so'm. Over a year (312 working days): 120 × 17,000 × 312, about 636 million so'm saved. Costs: rent, staff and system 420 million so'm a year; extra stock of 300 million so'm, with a holding cost (money, loss) of 20 percent, or 60 million so'm; moving goods from the centre to the region 90 million so'm. A total of 570 million so'm. Net result: 636 − 570, about 66 million so'm. That is very little: on transport savings alone the decision sits on the edge.

The deciding factor is the effect of speed on sales. If faster delivery raises orders by 3 percent and each order yields 60,000 so'm of margin, about 67 million so'm more is added each year. So the decision depends on what customers are willing to pay for speed. Check that figure by trial, not by guesswork.

Do not put everything closer

A regional warehouse does not have to hold the whole range. The most requested items, often 10 to 20 percent of the range, produce most of the orders. Bring only those closer and the extra stock is several times smaller. The rest comes from the centre, and the customer is promised a clear time such as "in two days".

Promise speed selectively too: one-day delivery only for the most requested items in nearby regions, two or three days for the rest. Such a distinction reduces the extra stock and does not mislead the customer.

Alternative routes

You can gain proximity without opening a warehouse of your own:

• an intermediate sorting point in the region together with a carrier;
• pick-up points from which the customer collects the goods;
• pallet-by-pallet rental in a partner's warehouse: you pay only for the space you use;
• a clear delivery promise by region: tomorrow to a nearby city, in two or three days to a farther one.

Steps to a decision

1. Look at the last 12 months of orders on a map by region: where is the density of orders highest?
2. Calculate the current delivery time and cost for each region.
3. Write down the full cost of extra stock, rent and staff.
4. Find out what customers are willing to pay for speed.
5. Run a trial and judge the result against indicators set in advance.

Conclusion

The value of proximity is real but not free: by splitting stock you raise the total stock. A calculation and a trial make the decision sound. The OmborExpert specialists can help analyse the map of orders, assess the effect on stock and draw up a trial plan.