When e-commerce first emerged, most retailers were able to use a small section of an existing distribution center to fulfill online orders. As demand grew, many retailers opened fulfillment centers dedicated to picking and packing individual orders.
To clarify, a distribution center traditionally ships orders in bulk to retailers or wholesalers, while fulfillment centers are designed for packing single orders shipped to an individual end user. On the surface, each has a much different type of operation (and cost structure) than the other, as a distribution center typically handles pallet and case quantities and a fulfillment center handles individual piece pick and small parcel orders.
The retail approach today referred to as omnichannel integrates all of a retailer’s channels, creating a seamless shopping experience no matter how the shopper is accessing the product.
As a result of an omnichannel strategy, some retailers, such as Gap, American Eagle and now Target, are experimenting with consolidating their distribution and fulfillment centers into one facility, often requiring a new warehouse management system (and material handling systems) intended to better integrate their distribution and fulfillment operations.
In Target’s case at least, at a test facility in Perth Amboy, NJ, their goal is to take their replenishment cycle from days to hours and reduce inventory at stores. This requires sending shipments to stores more frequently and in smaller lots to more precisely meet to demand rather than shipping big cases of products, allowing Target to expand its use of stores to fulfill online orders with less inventory held at stores, dedicating more room to digital fulfillment.
Before embarking on such a strategy, one must consider the advantages of traditional separated facilities versus combined omnichannel systems. Some of the advantages of combined facilities include: potentially lower operational costs as less facilities generally equate to lower duplication and therefore lower operating costs, shared inventory, and more immediate control and flexibility.
On the other hand, there are many advantages of having separate facilities, such as lower capital costs since a new shared infrastructure requires significant investment, having more options when dealing with order fulfillment challenges, omnichannel facilities handle a lot more SKUs than brick-and-mortar retail locations, giving the potential to run out of space due to future growth in omnichannel retail.
Obviously, there’s a lot to consider here before making such a huge, long-term strategic decision, but it is one that will have to be made at some point (and sooner rather than later).