A traditional warehouse is a large building that stores large quantities of products or e-commerce inventory.
More than just inventory storage is required for a business to grow and compete with other brands that sell similar items; they also require expertise, technology, and processes to help streamline their e-commerce supply chain.
For this reason, distribution centers will replace traditional warehouses. E-commerce companies rely on distribution centers that provide value-added logistics services to meet customer demand, rather than storing inventory in warehouses and processing fulfillment.
Distribution centers provide the fulfillment infrastructure and technology that allows online stores to offer low-cost, accurate, and quick shipping.
This guide will teach you how distribution centers work, what services they offer, and how they help direct-to-consumer (DTC) brands.
Distribution Center Definition
A distribution center is a specialized warehouse that functions as a hub for strategically storing finished goods, streamlining the picking and packing process, and shipping goods to another location or last destination. Distribution centers, which are frequently used interchangeably with the term fulfillment center, handle order fulfillment as well as other value-added services.
Distribution Center vs Warehouse
Many people confuse the terms “distribution center” and “warehouse,” but there are some important distinctions.
A traditional warehouse, at its core, only stores inventory (typically on a long-term basis), whereas a distribution center is a facility that temporarily stores inventory until orders are fulfilled and then sent to their next or final destination.
Here’s a more in-depth look at the key distinctions between the two:
- Storage Management
Warehouses are used to store inventory. When you think of a traditional warehouse, you probably envision a large industrial building filled with inventory shelves.
Some retailers will own or lease a warehouse to store stocks, while others will use a co-warehousing space, which allows multiple businesses to store inventory while only utilizing the space they require.
The distribution center is much more agile. These are typically run by third-party logistics (3PL) companies that offer both warehousing solutions and fulfillment capabilities. Inventory is stored in the distribution center (often not long), but the fulfillment process is streamlined and orders are efficiently shipped to customers.
- Customer-focused Procedures
Warehouses provide space but do not provide value-added services to customers. You pay for the amount of space you require, just like in a residential storage unit.
Beyond storage, distribution centers assist e-commerce businesses in optimizing their supply chain. They provide inbound and outbound logistics services, from receiving inventory to shipping orders directly to customers. This allows for a more customer-centric approach, as services such as packing orders for a good unboxing experience and managing returns can be performed.
3PL-operated distribution centers can offer customers dedicated support as well as the infrastructure, technology, resources, and best practices needed to save on both logistics costs and time by handling time-consuming logistics tasks.
- Workflows for Shipping
Typically, warehouses do not provide shipping solutions or services to ship each order to customers or other retailers. You may need to arrange your own freight to get inventory out of a warehouse.
Distribution centers work with major shipping carriers to pick up orders on a daily basis, allowing orders to be shipped as soon as possible.
Technology-enabled 3PL streamlines the transportation process reduces transportation costs and speeds up last-mile delivery. It provides direct integration with the e-commerce platform and automatically ships orders to your nearest distribution center. With this connection, each customer’s order is automatically sent to the fulfillment center for picking, packing, and shipping.
- Internal Procedures
Warehouses are usually designed only for storing things, so there are no internal processes. That is, it does not provide a way to save inventory costs or find other ways to optimize the retail supply chain by implementing automation and technology. In fact, in many cases, you don’t need technology, just charge based on the space you use.
Distribution centers prioritize efficiency, order accuracy, and speed by implementing best practices and technology, as well as collecting and analyzing aggregate fulfillment data to continuously improve the entire e-commerce fulfillment process.
Technology is important here because many 3PLs that operate distribution centers can be directly integrated with an e-commerce platform connected to the warehouse management system “WMS”. Automatically send your order to your nearest distribution center for picking, packing, and shipping.
Orders are automatically routed to the nearest distribution center where inventory is stored when your online store is linked to a 3PL’s technology. The retail fulfillment process then begins, with a fulfillment expert picking, packing, and shipping the order to your customer on your behalf.
Important Distribution Center Processes
The processes of a distribution center are designed to process orders quickly by picking, packing, and shipping packages to your customers in the most efficient manner possible. Here’s an example of a typical distribution center process:
- Inventory Receipt and Storage
Receiving and inventory storage refers to the delivery, unloading, and optimization of storage space at one or more locations in a distribution center.
A well-established receiving process makes inventory management and fulfillment cycles easier, cheaper, and more efficient. However, it requires a lot of effort as it contains some important steps, including the appropriate documentation that you need to perform properly to avoid the problem later.
The next step is to store the received inventory after it has been unloaded and inspected. Inventory can be stored on a palette, a shelf, or a bin, depending on the size and quantity of the products.
- Picking and Packing
Designed distribution centers managed by 3PL serve to streamline the warehouse picking process. In most cases, it is used to automatically assign orders similar to inventory in the same area of the warehouse management system “WMS” warehouse, reducing the number of steps a picker needs to select an order. This process creates a more efficient workflow by improving speed and job accuracy.
Following that, a picking list is generated, which includes the items ordered, the quantity, and the location of each product in the distribution center. Each unit picked is scanned from the inventory container or storage space, so inventory counts are updated in real-time, providing the business with up-to-date stock levels.
When all of the items in an order have been selected, the next step is to securely pack them and affix a shipping label to them.
- Replenishing of Supplies
Inventory replenishment, also known as restocking, is an important inventory management process. You want to ensure that you always have enough inventory on hand and ready to be picked and packed as soon as an order arrives.
Out of stock and backorders are common inventory problems that occur when inventory tracking, demand forecasting, and efficient replenishment of products to meet demand fails.
If you are using multiple warehouses, you must replenish items (especially high-demand products) at one location or split delivery (that is, orders that contain multiple items and are shipped separately) may occur.
3PL distribution centers use inventory management software and other inventory automation tools to help you avoid understocking (and overstocking). This gives you data and visibility into real-time inventory levels in various locations, allowing you to easily maintain inventory control, automate reorder points, and track inventory trends.
- Management of Returns
A good returns management process can increase customer satisfaction by 12% while decreasing logistics costs by 4%.
If you use a warehouse, you’ll need to set up your own system for processing returns and getting items back on shelves as soon as possible.
When you use a distribution center, you have the option of relying on a distribution partner or third-party logistics (3PL) partner to handle returns for you.