AutoZone has recently made headlines with its aggressive construction of new distribution centers (DCs) referred to as “mega hubs.” These mega hubs are designed to replenish nearby stores more efficiently and enhance inventory availability, and the retailer intends to build 200 of them over the next few years. While expanding a distribution network offers numerous benefits, it also raises the question: When does this expansion start to yield diminishing returns?
Many companies focus on their network-wide or “global” fill rate. For example, if a customer in California orders a product that is out of stock at a nearby DC but has availability in a DC across the country, you might think that you have successfully filled that order from stock. However, the customer experience (having to wait several days for a separate shipment) and the financial implications (an added shipment, with a high transit time or zone count) likely mean that the order didn’t add much to your bottomline.
Moreover, some sales channels, such as Amazon, won’t even display a product to customers (or will significantly downgrade its ranking) if it isn’t available at a location that can deliver within a target timeframe.
Keeping a focus on local in-stock rates is critical — and as those rates rise, network-wide in-stock rates will naturally increase as well.
With multiple facilities, you now have the option to replenish one location from another, larger location, rather than the supplier. Such a hub-and-spoke relationship can create substantial savings, especially for suppliers with high order minimums or incentive requirements.
However, internal freight and labor costs will increase, and the marginal change in these costs due to hub-and-spoke replenishment can be tough to isolate. Furthermore, high order or free freight minimums can make it impractical to use this model for some suppliers/facilities.
Ideally, you constantly monitor these factors and update your direct buy vs hub-and-spoke settings for each supplier in each facility.
Before committing to a new facility, it may make more sense to use a 3PL or other non-owned infrastructure to test the impact of stocking products in new locations. If the program is successful, a more substantial investment (in inventory, facilities, staff, etc.) can be scaled up over time.
A strategic, data-driven approach is essential for distributors looking to optimize their distribution networks. Hydrian has several tools to assist in network planning, transition into new facilities, and ongoing operation and replenishment.
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