The Pros and Cons of Inventory Decentralization

Utilizing multiple warehouses usually means improved order fulfillment abilities. However, it also increases the potential for mistakes.

Weighing the needs of today’s consumers is something that all retailers struggle with in some regard. Modern customers are used to the creature comforts that multiple online options. However, they don’t want to pay for this luxury. 

To combat this common issue, those who operate warehouse or inventory storage facilities take the issue to their fulfillment solutions. Generally, many fulfillment centers opt for a single, centralized inventory control system. But, more and more are quickly embracing the idea of inventory decentralization.

Whether you choose to have a single facility or spread your network to a geographic or regional decentralized platform, each has pros and cons to consider. 

In this blog post, we’ll take a quick peek at both centralized and decentralized inventory strategies and see how they stack up against one another.

Centralized Inventory

When a manufacturer, retailer or distributor operates out of a single warehouse, this is referred to as maintaining a centralized inventory system. With the centralized system, the company can maintain fewer warehouses, keep everything in-house, and has fewer opportunities for mistakes.

This system also allows them to manage people in a closed network, does not require duplication for equipment or positions, and can save a company on non-controllable expenses such as utilities, taxes, and more. 

What are the Pros of a Centralized Inventory System?

A centralized inventory is perfect for those with smaller inventory needs. For example, if a manufacturer has limited SKU’s, they can ship all products from a single facility, or partner with a 3PL fulfillment center that can allocate all shipments from an individual location.

With a centralized inventory system, since there are a single facility and limited employees, mistakes in communication or differences in operational philosophies can also be reduced. 

Additionally, when orders are processed, the centralized facility that is ‘centrally’ located in the middle of your customer's shipping lanes can have more consistent delivery commitments.

For example, if a retailer operates an e-commerce fulfillment center located in Denver, they can ship with similar commitment levels at roughly the same price to San Diego or Atlanta. A centralized inventory system is also most cost-effective typically, allowing a company to allocate funds to grow their business. 

What is Inventory Decentralization?

The decentralized inventory system is used by shippers with customers spread throughout a large area. They use smaller, regionally-based facilities to expedite the process of shipping products to their customers.

For example, let’s say that you have frequent customers in Southern California, Chicago, and New York City. Instead of operating a single facility, you choose to maintain regional fulfillment centers in each of these three large metro areas. 

By having multiple locations, you’re able to ship products to these larger metro areas quicker, cheaper, and with improved service. Additionally, these local distribution centers can also serve as customer pick-up locations. This adds another growing customer request to the multi-channel marketing machine. 

Comparing Centralized and Decentralized Inventory

All inventory strategies have pros and cons that all shippers should consider before implementation. Let's take a side-by-side look at some of these... 

Transportation Costs

Overall, the cost of shipping products into and out of your centralized or decentralized warehouses tends to balance over time. With inventory decentralization, a shipper will have to distribute loads between multiple facilities. Depending on volume, this means having to opt for more expensive LTL shipments. On the contrary, the centralized warehouse can order FTL supplies, as it’s more likely to have the storage to accommodate the increased volume. 

Where the balance of power tends to shift to decentralized inventory is local shipping. 

Responding to Customer Changes

It’s becoming more common for customers to change shipping details, such as the address for delivery, shipping windows, and other details. The decentralized inventory system gives shippers enhanced flexibility to respond to these customer changes. The regional fulfillment center simply decreases the distance to customers. This alone makes ground shipping a viable and affordable option for many customers. 

Operational Costs

Obviously, having more than a single facility to manage and maintain comes with additional operational costs. To offset this, many companies explore the advantages that 3PL fulfillment offers. 

A professional 3PL such as Redwood Logistics can help a shipper determine if their network is better served to maintain an in-house, single warehouse fulfillment or outsourced.

If you’re struggling with choosing between a centralized or decentralized inventory or fulfillment system, contact Redwood Logistics for guidance.