Five Questions Every Growing Online Retailer Must Answer
Part 2: How do we ensure our distribution network
maximizes service and flexibility while minimizing
operating costs, capital investment and risk?
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The explosive growth of online retailing has created opportunities for many companies. Companies come from
different backgrounds, but as they grow and distribution pressures increase sooner or later the following
questions need to be answered by all growing online retailers:
1. Should we outsource fulfillment or invest in distribution as a core competency?
2. How do we ensure our distribution network maximizes service and flexibility while
minimizing operating costs, capital investment and risk?
3. When should we automate and to what level?
4. How can we accelerate fulfillment within our DC?
5. How can we improve DC workforce performance?
In this series we’ll explore answers to these questions and others as they relate to growing e-tailers and offer
perspective on how companies like yours can enable growth and competitive advantage through distribution.
Part 2: How do we ensure our distribution network maximizes service and
flexibility while minimizing operating costs, capital investment and risk?
The design of your network requires a balance of service, cost and risk. The optimal number of facilities
minimizes costs and risk while meeting the service expectations of your customers. Changes in volume,
customer requirements, and geographic markets that are typically associated with high-growth
companies may necessitate a re-evaluation of the network strategy. But making a change to your
distribution network without understanding the impact on cost and service could result in additional
operating and capital investment costs and/or potentially decrease customer service levels.
Q: What are some of the impacts to cost and service that a change in network strategy
can enable?
A: Look at the chart below and you’ll see that changes in your network can shift the curve in one or both
directions (cost/service). For example, on the cost side of the equation, how you structure your network can
allow you to minimize transportation, space and labor costs, as well as reduce the amount of your tax burden
or fulfillment errors. Additional cost savings are possible with inventory rationalization across the network. On
the service side of the equation, you can improve your on-time performance, fill rate and or enable greater
flexibility – something all growing companies need.
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Cost Reduction Tactics
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Rationalize Inventory Investment
Minimize Transportation Costs
Minimize Warehouse Space Costs
Minimize Warehouse Labor Costs
Minimize Administrative Costs
Minimize Tax Burden
Minimize Fulfillment Error Rates
Service Improvement Tactics
 Increase On-time Performance
 Increase Fill Rate Percentages
 Increase Flexibility
Q: How can we design our network to better compete on rising service expectations around
speed/faster fulfillment?
A: With e-commerce expected to play a greater role this year in consumers’ holiday shopping than in any
previous year, online customer expectations continue to increase. In addition to a user-friendly website and a
seamless transaction, they want their products delivered quickly and predictably. In the early stages of a
growing enterprise, single facilities make the most sense from an operational scale standpoint, but the tradeoff in transportation costs to compete on service are higher as the business expands into new geographic
markets. Additional facilities may be required to balance speed and cost. Holding inventory at facilities nearer
to the customer until needed allows you to leverage your inventory in new ways. For businesses that compete
on speed, localized facilities can create competitive advantage by allowing same day or next day delivery to a
critical mass of customers.
Q: How can our network mitigate against rising transportation costs?
A: Many of the distribution networks in existence today were designed when gas prices were below $2 per
gallon. At that rate, the trade-offs between freight and warehousing were tilted heavily toward freight. And
many distribution-intensive businesses built large central or regional distribution centers for economies of
scale. As transportation costs continue to rise, the equation tilts back toward warehousing, leading distributors
to reduce total logistics costs by building smaller facilities closer to the customer base to minimize
transportation costs.
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Q: What about the business continuity risk of maintaining a single distribution center?
A: Companies typically start out with a single distribution facility. This makes sense for many reasons; but even
if economics do not justify adding facilities to the network, companies need to be mindful of the business
continuity risk of a single distribution facility. What happens when disaster strikes? A distribution center is no
match for a natural disaster like a tornado or hurricane. At the very least, you need to assess your risk and ask
“what if?” questions to help you plan for what to do if your business experienced a major disruption.
A network strategy is designed to help you do just that. It can be the key to unlocking competitive advantage
for your growing business. Fortna can help. With more than 60 years of experience in helping companies
develop the right network strategy for their growing business, we’ll help you find the balance of cost, service
and risk based on your unique requirements.
Summary
As high-growth companies experience changes in volume and service requirements, they need to consider a
change in network strategy. Balancing cost and service can be particularly challenging. At risk are additional
operating and capital investment costs and/or customer service levels. Fortna can help. We offer 60 years of
experience in designing and implementing distribution networks with benchmarking data and analysis tools to
guide you.
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How can we help?
Fortna helps companies assess their operations, develop a strategy and roadmap for future success and
build a business case for investment. If you want to learn more, please ask to speak to one of our
Associates.
800-367-8621
[email protected]
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Don’t miss these other articles in this series:
 Should we outsource fulfillment or invest in distribution as a core competency?

When should we automate and to what level?

How can we accelerate fulfillment within our DC?

How can we improve DC workforce performance?
And from our Insights Library:
 11 Key Questions When Adding a Distribution Center

11 Steps to Aligning Your Distribution Network for Competitive Advantage
ABOUT FORTNA
For over 60 years, Fortna has partnered with the world’s top brands – companies like J.Crew,
Gordmans and Vitamin Shoppe – helping them improve their distribution operations and
transform their businesses. Companies with complex distribution operations trust Fortna to help
them meet customer promises and competitive challenges profitably. We are a professional
services firm built on a promise – we develop a solid business case for change and hold
ourselves accountable to those results. Our expertise spans supply chain strategy, distribution
center operations, material handling, supply chain systems, organizational excellence and
warehouse control software.
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