Canadian retail companies depend on their warehousing and distribution capabilities to effectively meet the needs of their business operations, and when those capabilities become stretched too thin, it can have a significant impact to the entire organization. When evaluating options for improving the capacity and effectiveness of warehousing and distribution, it’s essential to understand the differences between dedicated operations and shared operations, and the advantages that each option brings to a business.
When determining whether to choose dedicated or shared operations, there are many factors to consider regarding the nature of the business, the types of products, and the other areas of the company that will be affected.
This article explores the differences between using the dedicated warehousing and distribution model versus the shared warehousing and distribution model, as well as describe some of the various advantages and disadvantages of each.
Dedicated Warehousing & Distribution
Dedicated warehousing and distribution is the more straightforward of the two options, as it essentially means that the entire facility, and all the functionality and resources within it, are solely dedicated to one company. Since the focus of these operations is entirely on one retailer, dedicated operations are able to achieve very high levels of efficiency and quality control. Dedicated facilities are often customized and altered to provide enhanced ability to move and manage the exact types of products that are produced by the company that owns the facility.
Dedicated operations have advantages in the levels of efficiency they are able to achieve, since they can be customized and altered to the needs of one particular company and one set of products. If you require specialized equipment or processes with which to handle your products, or precise environmental storage conditions, these changes can be incorporated with a dedicated warehouse & distribution operation.
Other advantages of dedicated operations include the ability to incorporate additional functions in to the facility, such as customer service, technical service, and more as the needs of the company change. In addition, costs related to warehousing and distribution are more predictable under a dedicated model, since the entire operation is focused on one single organization.
While predictable costs are seen as an advantage for many businesses, there are certain instances where the fixed and higher overhead costs associated with a dedicated operation may be detrimental. For example, when order volume ebbs and flows with the conditions in the market, perhaps for seasonal reasons, the general costs of maintaining the operation stay consistent. While this is an advantage in peak sales periods as greater activity means higher overall ROI, it has the opposite effect when sales are slower. Companies may need to look at other ways to manage costs during these slower periods, as the cost of warehousing and distribution space remains constant (and higher), under a dedicated model.
Shared Warehousing and Distribution
If the needs of a retailer are smaller in scale or are unpredictable in nature, shared warehousing and distribution may be the preferred method of operations. In this model, a 3PL sets up multiple companies to utilize the same warehouse and distribution resources by sharing floor space and transportation as needed. Inventory space and labour are allocated based on the individual requirements of each company sharing the facility.
Shared warehousing and distribution operations have many advantages for retailers who are in need of a solution for unexpected surges or seasonal business cycles, as they can be increased or decreased proportionally to the needs of the company at any given time.
Cost is another factor that proves to be an advantage for many retailers, since the shared model means that costs are divvied up proportionally to each retailer sharing the space. During those time periods where your business is occupying fewer square feet, and utilizing fewer personnel for product handling, your costs will decrease accordingly.
Since shared operations are ideal for businesses with unpredictable inventory requirements, this can lead to situations where more than once company competes for the necessary floor space if a shared warehouse happens to reach maximum capacity. This can be a challenge due to the short time frames that many retailers deal with in their seasonal sales cycles.
In addition, while cost savings can be achieved during low volume sales periods, it’s also possible that costs can increase beyond expectations during unexpected sales surges. While increasing sales are a good problem for a company to have, if the cost of warehousing and shipping begins to erode profit margins the result is an ROI that has not been maximized to its full potential.
Retailers are faced with difficult choices when it comes to how to approach their warehousing and distribution needs. On the one hand, having the efficiencies and predictability of a dedicated space provides significant stability for many retailers. On the other hand, shared operations allow companies to be more nimble in meeting the demands of a market that doesn’t always behave as expected.
Each retailer will need to evaluate the needs of their business, and weigh the pros and cons of each model against their goals. With some careful planning and analysis, the answer normally becomes clear quite quickly.
If your company is considering expanding its warehousing and distribution capacity, and is torn between dedicated and shared operations offered by your 3PL, the experts at SCI can provide the insight and guidance you need to make the best choice. Our team of logistics professionals can help you analyze all the aspects and determine which approach makes the most sense for the success of your business. Contact us today, and see how SCI can take your retail operations to the next level.