3 Ways to Measure the ROI on a Pop-up Distribution Center

Mike HoniousHoliday peak season. New product launches.  Flash sales.

Does the mere mention of these make you anxious?

In a supply chain, the balancing act of supply and demand can be tricky and at times costly. Forecasting, previously accepted as an art, now demands near science in order to succeed in today’s dynamic retail environment. However, your supply chain can only prepare for and react to the volumes based on the resources readily available within a fulfillment operation. If there is not enough space for the inventory, or enough labor to fulfill the increased order volume, then you can’t react to the shift in supply and demand in order to capitalize on revenue.

How can a business overcome this conundrum?
Operating similar to stores or kiosks that pop-up in malls during the Christmas season, pop-up fulfillment centers are becoming the must have gift for any retailer who has severe surges in order volume. Pop-up distribution centers are operations where warehouse space is leased for a temporary amount of time, usually 4-6 months, in order support peaks in order volume. These peaks in volume could be driven by marketing promotions, holiday sales, or even the reaction to a competitor being out of stock of an item. When planned in advance, a pop-up fulfillment center can increase your inventory capacity and labor operations to capitalize on the sales growth from these peaks.

A “pop-up” fulfillment center is no longer a luxury you can’t afford to have during the spikes in your business. A pop-up fulfillment model is an investment in the improvement of a supply chain to better support your revenue goals and customer satisfaction metrics. The return on this investment shouldn’t be measured on only costs saved but rather revenue gained and risk adverted.

Here are three ways to look at the return on investment of a pop-up:

1. Measure the ROI through an increase in throughput.
How does a pop-up accomplish this? One purpose of the pop-up distribution model is to increase fulfillment resources, such as space, labor, and inventory, in order to process higher order volumes in a single day, week, or even month. Doing so creates an increase in throughput and enables a network of fulfillment operations to process more orders throughout the length of a peak cycle.

What does this mean for decision makers of a company? The measurement of throughput can directly impact sales and marketing driven revenue. Should marketing have a promotion that will increase sales significantly over the holiday shopping season, the fulfillment operation needs to be capable of supporting this growth. If the product development team has a new product that needs to be launched on a large scale, the operation is expected to handle this temporary increase in order volume. A pop-up distribution center allows a business to temporarily scale (rent) their fulfillment operation to support its sales growth with significantly less risk to the company.

2. Measure the ROI through a shortened tail.
How does a pop-up accomplish this? In logistics, the term “tail” is used to describe the number of orders that carry over from the previous day. During peak seasons, if you carry over 500 orders from Monday; you are heading into Tuesday with 500 orders already in the queue with more being added that day. This can be a common, yet unwelcomed, event during a peak cycle. However, by opening up a pop-up distribution center, an operation can allocate orders across both the regular fulfillment center and the pop-up site in order to shorten or even eliminate the tail.

What does this mean for decision makers of a company? A shorter tail means one thing for a brand – maintaining, or even improving, customer satisfaction. Consumers ever-increasing demands are making it more and more challenging for brands to deliver on the expectation. By decreasing the number of orders that are carried over from the previous day, i.e. shortening the tail, an operation can meet the consumer’s service expectation and keep them coming back for more.

3. Measure the ROI through fewer back orders and ship shorts.
How does a pop-up accomplish this? High quantities of back orders and ship shorts are not ideal for an operation, particularly during peak cycles. By increasing your storage capacity through the use of a pop-up distribution center, back orders and ship shorts can be reduced. Products that are forecasted for high order volume can be fulfilled on time and picked to complete more frequently.

What does this mean for decision makers of a company? This means a lower risk of lost sales by reducing the number of cancelled orders and cart abandonment, further driving brand loyalty and customer retention. During peak cycles, such as new product launches and holiday seasons, it is very common for consumers to provide feedback on their experience through social media.  An investment in a pop-up fulfillment operation can prevent your brand from being involved in a negative social media firestorm.

What does all this mean?
The success of a peak season is crucial to both a fulfillment operation and to a brand. Leveraging a pop-up distribution center alleviates a lot of the pressure associated with these sporadic, high volume periods. For a brand, the ROI is significant in terms of revenue growth, customer satisfaction, and lower risk of lost sales.

Mike Honious joined OHL in November of 2005 and currently oversees the Contract Logistics and Warehouse business. Mike’s previous responsibilities at OHL included executive oversight of engineering, operational excellence, project management, IT implementation, and the Nashville based forklift company Material Handling Resources. Prior to joining OHL, he spent thirteen years with Gap Inc. serving in various management capacities. He was Senior Director of Campus Operations, responsible for 2.2 million sq. ft. of warehousing operations and served as Director of Global Engineering Services for the specialty retailer. Mike earned a BS degree in Industrial Engineering Technology from the University of Dayton, is an active member of WERC, and has attended supply chain and executive leadership courses at Tennessee, Penn State, and Vanderbilt Universities.

 

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