When it comes to inventory management, there is one important choice that all companies must make: centralized vs decentralized?
While both styles have their upsides, they have unique downsides as well. The right system for your company will be determined by your strategic goals and budgeting priorities.
Centralized vs Decentralized Systems in Order Fulfillment
Any business that sells products has a supply chain. For this supply chain to function efficiently, it must be managed closely and continuously optimized.
Supply chains feature the following steps:
Sourcing raw materials
Manufacturing these materials into parts
Assembling various parts into finished products
Shipping finished products to a distribution center
Storing products until they’re sold
Fulfilling orders after products are sold
Shipping products to customers
Each supply chain will differ slightly. For instance, some companies centralize their distribution, while others keep it decentralized. This decision directly impacts the ensuing order fulfillment and shipping process.
As a result, the important question arises: Is it better to keep all of your inventory centralized in one warehouse? Or is it better to store inventory in multiple locations, positioned amongst your dispersed customer base?
What is a Centralized Distribution System for Order Fulfillment?
As the name suggests, a centralized system stores all of your inventory in one location. From there, products are shipped out to customers.
Some customers may be nearby, whereas others may be far away. Either way, they’ll receive a package from the same distribution center.
The Pros of Centralization of Inventory for Order Fulfillment
Here are the benefits of using centralization in your inventory management:
Cost-efficiency – When you choose a centralized model, you significantly reduce your operating expenses. That’s because you only have to pay for one warehouse location of inventory being stored. If you had several warehouses, these operating expenses would also be multiplied, placing a greater financial strain on your business.
Inventory management – With all of your business’ inventory in one place, it’s easier to keep track of and audit your inventory. Multiple locations only adds to the stress of your supply chain with having to manage multiple order streams and where to ship products from to your customers. Less than 5% of brands need more than one location. Of those 5%, they are heavy items or items needing cold storage. For others, there is no benefit.
Altogether, these benefits enable distribution centers to offer customers better prices and superior service.
What is Decentralized Inventory Management for Order Fulfillment?
A decentralized approach uses several distribution centers, strategically located in areas to serve a dispersed customer base.
These centers stay connected with cloud computing software. However, they each have their own staff, led by different managers. As a result, business operations may differ slightly across distribution centers.
The Pros of Decentralization for Order Fulfillment
Here’s why a decentralized model is a worthwhile option:
Fast shipping – When you have inventory stored in multiple distribution centers, you can reduce shipment distances overall. Simply ship from the distribution center closest to the customer.
Customized inventory – When you have multiple distribution centers, you can adjust each one’s inventory according to nearby customer demand. You will, however, incur more storage costs overall by having multiple warehouses. This means more inventory costs, storage costs and maintenance costs.
The Cons of Decentralization of Order Fulfillment
While these benefits of a decentralized organizational structure are appealing, they don’t come without their downsides. Here are a few to take note of:
High operational costs – Multiple warehouses mean more inventory costs, storage costs and maintenance costs. These costs can quickly outweigh the savings you experience from cheaper shipping.
Excess inventory – If you fail to optimize your inventory at each distribution center, you may experience buildups of certain products. This stagnant inventory will cost you a lot to store. If you choose to ship it to another distribution center, the transportation costs can also be expensive.
Is Decentralization Better Than Centralization?
When you compare each of these organizational structures, you see that they both have a lot to offer. However, if you value saving on operational costs and enhancing standardization, centralization is the clear winner.
While decentralization has its perks, it falls short in these important areas and lacks the economies of scale found with centralized centers.
Distribution Center vs Warehouse
Within supply chain discussions, you’ll hear about distribution centers and warehouses. Many people use these terms interchangeably. However, they differ in a few notable ways:
Distribution Centers – Distribution centers store inventory temporarily, but their primary purpose is to process orders and distribute products to customers. They are essentially the bridge between your supplier and your customers. As a result, they need staff to fulfill orders, package and ship products, and provide customer service.
Warehouse – In contrast, warehouses are primarily used to store inventory, often for longer time spans. For instance, you may house your seasonal products in a warehouse until they’re available for purchase during the holidays. Warehouses don’t carry out all of the same functions that distribution centers do, so they require fewer employees.
Just like distribution centers, warehouses can be centralized or decentralized, depending on your preference.
Verde Fulfillment USA: Centralization at its Finest
Verde Fulfillment USA is a third-party logistics expert that runs a top-notch, centralized distribution center. As an expert in e-commerce order fulfillment, the Verde Fulfillment team prides itself on offering outstanding customer service and excellent order fulfillment services.
By partnering with Verde Fulfillment USA, you will gain access to our brand new 168,000 sf building that is insulated better than most new homes. It's beautiful, clean, energy-efficient, powered by green power and will soon be carbon neutral by the end of 2021. Consider it a home away from home for your inventory!
82 different shopping cart integrations
2-day nationwide shipping
International order fulfillment expertise
Eco-friendly packaging
State-of-the-art software
Due to Verde Fulfillment USA’s offerings, you’ll be able to compete with any brand or reseller. See how Verde Fulfillment can enhance your inventory management today!