When choosing whether or not to have one single warehouse – centralized inventory – or multiple warehouses – decentralized inventory – you should know that each side has both pros and cons. Even then, knowing the pros and cons doesn’t necessarily make the decision easy, or black and white. If you have five inventory locations, for example, downsizing to two is still a form of decentralization. Your own particular situation will determine which option is right for you, so you must analyze your data before making any decisions.
So how do you decide whether centralization or decentralization is best for you? By careful consideration of their advantages and disadvantages as discussed below:
A centralized inventory, or having fewer warehouses, requires a less complicated infrastructure, and less or no duplications of equipment, warehouse staff, managers, and bills such as rent and utilities. Fewer bills and fewer employees to pay mean that you can put more money toward other business ventures, such as marketing.
A centralized base of operations is most advantageous if that warehouse is centrally located among your customer locations. When it is, transportation can be handled efficiently because a single truck can be routed to deliver goods to multiple customers in one go.
Then, since the inventory services all customers, orders to suppliers to restock your inventory will be larger and will benefit from the discount that often come from buying in bulk quantities and receiving only one shipment.
Finally, the more centralized your inventory is, the less safety stock you need.
If you have a lot of customers spread out over a large are, a decentralized inventory arrangement allows for faster delivery times to customers. It can also improve customer service because local customers might enjoy picking up their order versus having it shipped.
Transportation costs between centralized and decentralized inventory tend to balance out, though, since although you’re shipping things shorter distances, you have to make more shipments more often. If geographical barriers such as oceans or mountains separate your customer localities, however, decentralized inventory locations will ultimately be less expensive.
Having decentralized inventory also allows you to respond better in emergencies – because all of your inventory “eggs” aren’t in one “basket,” a fire or natural disaster at one inventory location won’t be as devastating as a disaster at a centralized warehouse that services all of the customers.
The drawbacks of a decentralized inventory are essentially the opposite of the advantages of centralized inventory. What makes them advantages versus disadvantages in each setup is really up to you – your situation is unique and choosing to have only one warehouse versus several warehouses is something only a serious assessment of your data can help you decide.
Need help deciding? Have other inventory questions? Please don’t hesitate to contact Acumen Information Systems today – we’re here to help your business acumen!