Foreword: According to market research firm Insider Intelligence, the last-mile delivery fee typically accounts for 53% of the overall cost. According to data previously published by Statista, the average last-mile delivery cost per package is $10.1. With carriers increasing parcel shipping fees, sellers are under constant pressure to find ways to reduce the cost.

Buyers are becoming less eager to pay for delivery fees as “free shipping” has become the norm, which forces merchants to cover the expense. In response to sellers’ requests to lower the last mile delivery fee, distributed inventory model using third-party warehouse has also developed.

A. Distributed Inventory Model

Distributed inventory refers to products being stored in different warehouses, after in-depth analyses based on products, sales orders, and population distribution to distribute sellers’ products across various warehouses. Each package will be sent from the warehouse that is closest to the buyer to lower last mile delivery cost as well as to shorten delivery time.

B. The Advantages of Distributed Inventory

As mentioned above, the biggest advantage of distributed inventory is to reduce the last mile delivery fee and to improve delivery efficiency, so how much can the distributed inventory model save logistics cost and improve delivery time?

1) Reduced last mile delivery costs

Carriers such as FedEx, UPS and USPS use shipping zones to determine the shipping cost of parcels. Under the FedEx and UPS billing models, the U.S. mainland is divided into a total of seven shipping zones (zones 2-8), while USPS divides that into eight shipping zones (zones 1&2-9). The shipping zones start from the origin address, and the higher the shipping zone number is, the higher the shipping cost is: zones 2(1&2)<3<4<5<6<7<8<9. If a seller does not use the distributed inventory model, parcels are all sent out from the same warehouse. It is possible that they will be traveling across thousands of miles from east to west, and the shipping zone numbers are bigger with higher costs. If the seller adopts the distributed inventory model and stores the inventory in multiple warehouses, each package can be sent from the closest warehouse to the buyer, and the shipping zone numbers are smaller with lower cost. The difference is obvious if you look at the following two images that show shipping distances of the parcels under the model of one centralized warehouse vs. multiple warehouses.

Straightly looking at last mile delivery cost, distributed inventory model can save at least 30%. The heavier the billing weight of the product, the higher the saving it is. Let’s use ShipSage warehouse as an example, the cost of sending a 20-pound parcel to Zone 5 is about $20.7, and the cost of shipping to Zone 8 is about $30.3. After adopting the distributed inventory model, shipping zones will be limited to Zone 5. The logistics cost saving (%) of a single parcel compared with direct shipping to Zone 8 without distributed inventory = (30.3-20.7) ÷ 30.3 × 100% = 32%. Under the same condition, if it is a 40-pound parcel, the logistics cost savings (%) = (47.0-29.7) ÷ 47.0 × 100% = 37%.

2) Improve the efficiency of last mile delivery

Besides saving from delivery fee, another major change is to increase the delivery efficiency. After the seller has adopted the distributed inventory model, inventories are stored in different warehouses in the U.S.: West, East, Central and the South, etc. The orders from San Francisco consumers are shipped from the West Coast warehouse, while the orders from New York consumers are shipped from the East Coast warehouse. If a seller only has one warehouse in the West, then the package delivery to the East Coast may take 4-5 days or even longer, hurting the consumer shopping experience.

C. Notes on Distributed Inventory

Although distributed inventory can save last mile delivery fee and improve delivery time, this model is not applicable to all sellers. Companies should consider the following factors while they are deciding whether they should use distributed inventory model:

1) Product weight

Large and heavy products should have their inventories in different warehouses, whereas there won’t be too much advantage for lighter and smaller products. This is because the former often takes up more loading space with heavier dimensional weight. When these packages are transported long distance, fuel consumption increases and logistics costs go up, and these costs will eventually pass down to the sellers. As a rule of thumb, any product less than 15 pounds should not use distributed inventory model, but we recommend this model for products that are over 15 pounds.

2) Product Category

Different products are sold differently across various geographic areas, such as swimwear, surfboards and other water activities-related products are popular items sold in the southeast of Florida and Hawaii. On the other hand, these items are not as popular in other states that are away from the ocean. If the seller’s main business is water activities-related products, then there is no need to distribute inventories to another warehouse in the MidWest.

3) Population Distribution

Population distribution is somewhat similar to product categories, as both are related to the size of the consumer market. Distribution of the U.S. population is characterized by: the northeast (northeast coast and the Great Lakes region) is densely populated; the south and west coast is more populous; the vast inland areas are sparsely populated. In addition, U.S. population is highly urbanized, with an urbanization rate of nearly 83% in 2020. For sellers, higher population means bigger consumer market, and it is necessary to do distributed inventory. For sparsely populated regions, consumer market is small, and there is no need to have distributed inventory.

4) Headway Freight

After considering the above 3 factors, if a seller feels that the product is suitable for distributed inventory, they will also have to combine the headway shipping costs to calculate the overall logistics costs (i.e. headway shipping costs + last mile delivery fees). They need to ensure the combined logistic costs for distributed inventory is less than combined costs for using a centralized warehouse.

For example, two 40-feet high containers from Shenzhen, China are being transported to the United States. In the case of non-distributed inventory, both containers are sent to the West (or East), the overall logistics cost of non-distributed inventory is the U.S. West (East) first mile freight × 2 + last mile delivery fees. For distributed inventory model, one container goes to the U.S. West, another container goes to the U.S. East, the overall logistics costs = (U.S. West first mile freight + last mile delivery fees) + (U.S. East first mile freight + last mile delivery fees).

According to the headway quotation we got from the freight forwarder: the headway logistics cost from Shenzhen, China port to Los Angeles port (U.S. West) is $1,250, and to New York port (U.S. East) is $2,550. In addition to freight costs, we also need to know the last mile delivery fees. Let’s use the ShipSage warehouse delivering a 20-pound package as an example again. Without distributed inventory, the parcels may need to be delivered to zone 8, the last mile delivery fee is about $30.3; after splitting the inventories across different warehouses, the delivery area will be limited to zone 1-5, the highest delivery fee will not exceed $20.7. Because the final delivery charge is calculated by individual package, we also need to estimate how many products can be loaded in a 40-foot high container. So let’s assume again that a 40-foot tall container is loaded with 20 pounds of 12 x 13 x 13 (inches) coffee machines, then the approximate number of coffee machines a container can hold (pieces) = 4,700,160 (40-foot tall container converted into cubic inches) ÷ (12 x 13 x 13) (coffee machine volume) ≈ 2,317.

Assuming that each coffee machine needs to be packed into bigger master carton and the remaining corner space of the container cannot be fully utilized, etc., instead of 2,317, approximately 2,000 coffee machines are loaded into each container. So there are a total of 4,000 coffee machines in two containers. According to the above information, we can now calculate the overall logistics costs of distributed inventory vs. centralized warehouse.

Overall logistics cost comparison of two 40′ tall containers of coffee machines with and without distributed inventory.

(1) Centralized warehouse in the U.S. West: overall logistics costs = U.S. West freight cost of $1,250 x 2 + last mile delivery fee of $30.3 x 4,000 = $123,700.

(2) Centralized warehouse in the U.S. East: overall logistics costs = $2,550×2 for US East freight + $30.3 × 4,000 for last mile delivery = $126,300.

(3) U.S. West + U.S. East warehouses: overall logistics cost = (U.S. West freight cost $1,250 + last mile delivery fee $20.7 x 2,000) + (U.S. East freight cost $2,550 + last delivery fee $20.7 x 2,000) = $86,600.

By comparing the calculations above, the overall logistics cost is lower for distributed inventory model than one centralized warehouse. In reality, seller’s product quantities as well as the way inventories are distributed can vary. For example, the quantity might not be as high, and the inventory distribution might not be a 50/50 split between the U.S. West and the East, and these variations will lead to the differences in overall logistics cost calculations.

Please note that one basic logic does not change: the heavier the package is, the farther the delivery distance is, the bigger difference in the last mile delivery fee will be. The more packages you have, the more the delivery fee can be saved, and the savings can completely offset the first mile freight cost. In this case, distributed inventory will be a wise move. However, it is also necessary to remind sellers that distributing inventories to the U.S. East warehouse can save last mile delivery costs, but there is a time cost involved. Expedited shipping to the U.S. West port usually takes half a month, it takes about a whole month to the U.S. East port. If sellers want to know the overall logistics cost comparison of their own products, please contact ShipSage sales team for analysis.

5) Stocking quantity

Finally, the seller also needs to consider the inventory quantity on hand. If the seller only has small quantities, it’s not advisable to do distributed inventory. Distributed inventory model is only advantageous for sellers with high order volume, otherwise the extra first mile headway costs and additional warehousing and other costs are most likely offset by the last mile savings. Therefore, the distributed inventory model is more suitable for sellers with heavy products, stable and high order volume, and with relatively strong financial strength.

D. Sub-warehouse status

Currently, many sellers ignore the distributed inventory model. First, they may not realize the importance of this model; Second, they think it’s troublesome to split their inventories across warehouses. We have compared several sellers and found that the last mile delivery fees between distributed inventory vs. centralized warehouse can be quite significant. For example, Seller A has products in different warehouses and the highest package delivery fee is less than $35, while Seller B whose products are in one warehouse, his package delivery fee is more than $50. If the product sale price is not that high, your profits may be completely offset by the last mile delivery costs, it is important to deploy distributed inventory model immediately!

E. ShipSage Smart Distribution Technology

In response to the demand of distributed inventory from many sellers, ShipSage has four warehouses in San Francisco in the west, Chicago in central, Allentown (near New York) in the east and Memphis in the south. We can help sellers plan and allocate their inventories closer to their customers. With the support of a cloud-based supply chain management system and the API integration technologies, ShipSage can seamlessly connect to various e-commerce sales and logistics channels. According to the delivery address, our system will automatically choose the best warehouse location to ship from and which shipping method to use. The shipping zone is usually within zone 2 and 3 on average, which effectively reduces the last mile delivery fee. All our warehouses are connected, and compared to using one centralized warehouse for delivery, the average cost saving is 36%.

In addition, based on the U.S. population distribution and transportation network distribution, our four warehouses essentially can reach the entire United States 48 states with 2-day shipping and reach more than 95% of the U.S. population. Please contact ShipSage Sales team and we’d love to discuss further with you.