Within the world of warehouses and supply chains, the debate of which is the better model — a centralized warehouse distribution system or a decentralized one, has been raging right from the existence of warehouses. However, recent developments since businesses impacted by ecommerce, technology, and Covid-19 were rocked around the world reveal that decentralization is swiftly getting an upper hand.
What is Warehouse Decentralization?
Warehouse decentralization refers to the strategic distribution of multiple warehouse facilities in various locations, as opposed to centralizing all inventory in a single, large warehouse. This approach is designed to optimize logistics and supply chain management by placing inventory closer to key markets or points of demand, thereby reducing transportation times and costs, improving delivery speeds, and enhancing overall service levels to customers.
Decentralized warehouses enable organizations to be more responsive to market changes and customer needs, as they can dispatch goods from the nearest location, reducing lead times and increasing customer satisfaction.
The Dynamics of Decentralization
Warehouses at the beginning of their evolution were essentially centralized, which means holding the entire inventory in one large central warehouse and distributing products to customers all over. As industrialization and globalization boomed, and consumerism backed by the technological revolution set in, sellers had to pander to their customers’ logistical demands lest they be out of the race. This led to the setup of multiple smaller warehouses in close proximity to customers which sped up delivery significantly - heralding the era of decentralization.
Advantages and Disadvantages of Centralized and Decentralized Warehouse Distribution Models:
Pros of a Centralized Warehouse
Lower Storage Costs
Central warehouses often benefit from economies of scale, as they can leverage larger storage capacities and negotiate better deals with suppliers. Bulk storage in a central location allows for efficient space utilization, reducing the overall cost of storing goods.
Highly Efficient Warehouse Organization and Management
Centralization enables better control and coordination of inventory management. With a single location, it becomes easier to implement streamlined processes and advanced inventory management systems. This efficiency can lead to faster order fulfillment and reduced lead times.
Increased Automation
Central warehouses are more likely to invest in advanced automation technologies, such as robotics and automated storage and retrieval systems. Automation enhances speed and accuracy in various warehouse operations, reducing errors and increasing overall efficiency.
Lesser Personnel Needed
Automation not only improves efficiency but also reduces the need for manual labor. With centralized warehouses relying on automated systems, businesses can minimize labor costs, decrease dependency on human resources, and mitigate the risks associated with labor shortages.
Higher Availability of Goods
Centralized warehouses facilitate better control over inventory levels and distribution. This ensures a higher availability of goods as stock levels can be monitored and restocked more effectively. Consequently, businesses can meet customer demands more consistently.
Centralization and Increased Standardization of Warehouse Processes
Operating from a central hub allows for the standardization of processes across the entire supply chain. This standardization promotes consistency, reduces the risk of errors, and facilitates easier adaptation to changes or improvements in warehouse management practices.
Cons of a Centralized Warehouse
Decreased flexibility of deliveries upon high demand
Decreased flexibility of deliveries upon high demand is a significant drawback associated with centralized warehouses. In a centralized model, all inventory is stored in a single location, making it challenging to quickly adapt to sudden spikes in demand from specific regions or markets. When demand surges, the centralized facility may struggle to flexibly allocate resources to meet the increased requirements in a timely manner.
This lack of agility can result in delayed deliveries and potential stockouts, negatively impacting customer satisfaction and the ability to capitalize on market opportunities. In contrast, a more decentralized approach with strategically located warehouses could offer greater flexibility to respond promptly to varying demand patterns in different regions, ensuring a more adaptive and responsive supply chain.
Increased transport costs due to longer transport routes
Increased transport costs due to longer transport routes are a notable disadvantage of centralized warehouses. When goods are stored in a single central location, the distribution network must cover longer distances to reach various points of sale or end consumers. This results in higher transportation expenses, as longer routes typically entail increased fuel consumption, maintenance costs, and potentially additional tolls or fees.
Longer transport routes not only lead to higher direct costs but also contribute to extended lead times, which can impact overall supply chain efficiency and customer satisfaction. As a consequence, businesses must carefully balance the benefits of centralized operations with the added expenses and logistical challenges associated with transporting goods over extended distances.
Low frequency of deliveries
In a centralized model the frequency of deliveries to individual locations or customers may be reduced. This infrequency can lead to longer lead times, particularly for businesses serving diverse or geographically dispersed markets. Customers accustomed to more frequent deliveries may experience delays, and this can impact overall service levels.
Additionally, the lower delivery frequency might result in larger shipment sizes, potentially leading to increased inventory holding costs and storage requirements. Striking the right balance between centralized efficiency and meeting the delivery expectations of diverse markets is crucial to ensure customer satisfaction and competitiveness in the marketplace.
Longer Lead Times
The centralized nature of the warehouse can lead to longer lead times for deliveries to different locations. This delay may impact customer satisfaction and could be a disadvantage in markets where quick order fulfillment is crucial.
Vulnerability to Disruptions
A single central warehouse creates a vulnerability in the supply chain. Any disruptions, such as natural disasters, accidents, or other unforeseen events, can have a significant impact on the entire distribution network, leading to delays and potential stockouts.
Higher Initial Investment
Establishing a centralized warehouse with advanced automation and technology requires a substantial initial investment. This upfront cost can be a barrier for some businesses, particularly smaller ones with limited capital.
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Pros of a Decentralized Warehouse
Increased Flexibility of Deliveries upon High Demand
A significant advantage of decentralized warehouses is the increased flexibility to respond swiftly to high demand in specific regions or markets. With inventory strategically distributed across multiple locations, businesses can adapt more efficiently to spikes in demand.
This allows for quicker allocation of resources, faster order processing, and the ability to meet customer needs promptly. The decentralized model enables a more agile response to varying demand patterns, reducing the risk of stockouts and enhancing overall customer satisfaction.
Lower Transport Costs
Decentralized warehouses often result in lower transport costs compared to centralized models. By storing inventory closer to end consumers or retail locations, transportation distances are reduced. This leads to decreased fuel consumption, lower maintenance costs, and potentially fewer tolls or fees. The overall efficiency gains in the transportation process contribute to cost savings, making the decentralized model economically advantageous for businesses.
Dispatch of Goods Faster with a Shorter Delivery Time
The decentralized warehouse model facilitates faster dispatch of goods due to the proximity of inventory to end destinations. With goods stored closer to the point of demand, the time required for order processing, picking, and shipping is significantly reduced.
This results in shorter delivery times, enhancing the overall customer experience. Businesses can capitalize on the speed and responsiveness of the decentralized approach to gain a competitive edge in markets where quick order fulfillment is crucial.
Higher Frequency of Deliveries
Decentralized warehouses support a higher frequency of deliveries, offering businesses the ability to maintain regular and consistent shipments to various locations. This is particularly advantageous when serving diverse markets with varying demand patterns.
More frequent deliveries ensure that inventory levels are continually replenished, reducing the likelihood of stockouts and optimizing supply chain responsiveness. This increased frequency also aligns well with the expectations of customers and retailers who prefer a steady and reliable supply of goods.
Cons of a decentralized warehouse
Greater Investment and Operating Costs
One of the major drawbacks of a decentralized warehouse model is the potential for greater investment and operating costs. Establishing and maintaining multiple warehouse facilities can be more capital-intensive than a centralized setup.
This includes expenses related to acquiring or leasing additional real estate, implementing infrastructure, and investing in technology and equipment for each location. Moreover, the ongoing operational costs, such as utilities, security, and maintenance, are multiplied across multiple sites, contributing to a higher overall cost structure.
Increased Expenditure on Processes like Warehouse Management
The decentralization of warehouses may lead to increased expenditure on warehouse management processes. Each facility requires its own set of management personnel, systems, and processes, leading to duplicated efforts and costs.
Coordinating and managing multiple warehouses can be more complex and resource-intensive, requiring sophisticated software and communication systems to ensure efficient operations across all locations. This added complexity can contribute to higher administrative and managerial expenses.
Complicated Inventory Management
Decentralized warehouses often face challenges in managing inventory efficiently across multiple locations. Coordinating stock levels, replenishment schedules, and order fulfillment processes can become more complicated, leading to potential discrepancies and inefficiencies.
Complex inventory management may require sophisticated software solutions to ensure accurate real-time visibility into stock levels, which can add to the overall technology investment and operational complexity.
Stocks to be Replenished Frequently at Different Locations
In a decentralized warehouse model, stocks need to be replenished frequently at different locations to maintain optimal inventory levels. This requires a well-coordinated and efficient supply chain to ensure timely restocking and avoid stockouts.
The need for more frequent replenishments may increase transportation costs and pose challenges in managing supplier relationships and logistics across various regions. Businesses must carefully plan and execute replenishment strategies to prevent disruptions in the supply chain.
The Growing Market Trend towards Decentralization
Earlier centralized distribution had the upper hand over decentralized distribution. It was characterized with greater bargaining power over suppliers, as they had to just ship products in bulk to one central location in one go. Costs associated with the storage of inventory were also minor. There was a lot going for centralized distribution as it had a favorable total annual cost centered around warehousing, inventory, transport, reloading, and lost sales.
However, today’s consumers are tech savvy and they now choose the player who guarantees the fastest service. The trade-off is that a long-drawn shipping time from a single, central warehouse to the customer is no longer worth the cost savings of a centralized system; as it results in higher costs of customer churn.
Right now, a decentralized warehouse network is the trending fulfillment solution. That said, leading industry players like Amazon are now promising the fastest delivery practices - such as 2-hour delivery - as they have the capital to invest in multiple smaller warehouses across geographies. According to recent research reports, 96% of consumers in mature markets expect delivery on the same-day or even same-hour of placing the order. However, only 51 percent of retailers offer this choice and the remaining are scrambling to get there. It is absolutely critical for enterprises to now cater to faster shipping times with a special focus on last mile deliveries.
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This is not the case with smaller ecommerce players who are finding it hard to transition to a decentralized form of distribution. Thus, the small and medium enterprise community are hiring the services of third-party logistics (3PL) providers as they are a cheaper option to handle warehousing and fulfillment needs. In fact, right now, all sizes of companies are turning to outsourced logistics like fish to water as they can scale upwards easily without humongous investments.
For most retailers, the last mile is a slow mile. Many would vouch for the fact that transporting goods to warehouses is easier than delivering it to a customer’s residence! This is due to unpredictable factors in play such as traffic jams on congested city roads, customers not being available at the door, and return of goods. The ensuing headache in managing these issues has prompted many companies to outsource last-mile delivery.
Technology and Decentralization of Warehouses
The right 3PLs providers bring with them tried and tested technology to solve choke points in the supply chain. According to Pitchbook’s recent Supply Chain Technology report, the global supply chain technology market is expected to top $6 trillion by 2025.
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This is good news for bolstering up the supply chain network. However, there is a major impediment to decentralization - a lack of land resources to set up distributed warehouses. CBRE, an American commercial real estate services firm, has stated through its market studies that in the U.S., supply of warehouse space is far lower than the demand since 2010. According to CBRE, in 2019, the available vacancy rates for warehouses in the U.S. dipped to an all-time low of 4.8 percent.
Technological innovation centering around ‘Supply Chain as a Service’ (SCaaS) is also driving the change towards decentralization. This has been ushered in with the availability of big tech like advanced transportation management systems, affordable cloud-based supply chain management (SCM) software, blockchain technology and effective data collection and integration tools.
Management of supply chain complexities resulting from holding inventory in several types of warehouses at different locations needs Enterprise Resource Planning (ERP) systems to ensure smooth customer service. Inventory locations can be fed into an ERP System to facilitate automation of important business processes like inventory replenishment and inventory accuracy. As several warehouses pop up in a decentralized supply chain, which are typically smaller than the primary warehouse in a centralized distribution system, the need to routinely replenish inventory with accuracy is critical.
A robust ERP system can manage the show here. Manual paper-based processes of stock taking are both time-consuming and error prone. Hence, it’s pertinent to automate capturing accurate receipts of goods and issues in real time using bar coding and handheld scanners linked directly to the backend ERP system. Thus, standardization is achieved with preciseness quickly.
With technology solving the perceived warehouse challenges linked to decentralization of warehouses, many enterprises have initiated an overhaul of their supply chain networks and are adopting a decentralized framework with strategic interests. With the reality of multiple warehouses being a game changer, the variety of warehouses in a decentralized network comes into focus.
Different Types of Warehouses
Put simply, a warehouse is usually a large building where goods or materials are stored temporarily before being sold or exported. There are different types of warehouses to choose from based on the nature of the goods stored or the functionality of the business in question.
Five Common Types of Warehouses are:
1. Public Warehouse or On-Demand Warehouse
Public warehouses are government entities that are rented out to private sector companies. Typically, the latter uses these warehouses to store inventory for a short period of time. Public Warehouses are preferred by new or growing businesses, like e-commerce firms and startups, due to their affordability factor. Seasonal businesses which are active during festivals or sales periods like Black Friday can benefit from public warehouses. These warehouses have just bare minimum features and few technological capabilities compared to other types of warehouses.
2. Private Warehouse or Proprietary Warehouse
Private warehouses are the property of a company division. Clients need to cough up a huge investment to use this facility for the long term which entails costs towards management and maintenance. These smart warehouses find favor with wholesalers, distributors and manufacturers. Private warehouses are more expensive than public warehouses, and they offer their clients a greater overall control of their inventory stationed in its premises.
3. Bonded or Customs Warehouse
Bonded warehouses store imported products and goods, which attract duties and taxes. They are also called ‘customs warehouses’, since they store international cargo under the purview of the government’s customs division; and hence are also situated in close proximity to borders, airports and ports.
4. Cold Storage or Temperature/Climate Controlled Warehouse
Climate or Temperature Controlled warehouses are designed to store fragile products like food, flowers, and fresh produce, which are perishable at room temperature. Medicines, cosmetics and even living organisms are stored in these temperature controlled setups. An advanced type of these warehouses is the cold storage warehouse where sensitive goods are deep frozen over long periods of time. A dust-free environment is also ensured along with the top-notch cold chain logistics.
5. Smart or Automated Warehouse
Smart or Automated warehouses are places where the storage and order fulfillment processes are automated with devices powered with artificial intelligence, robots and drones. These smart devices can undertake automated warehouse packing, weighing, transporting, and storing goods, as and when orders are placed. Accurate inventory management, advanced safety and security, and provision to embark on analytics are hallmark features of these smart warehouses. Large e-commerce firms like Amazon own smart warehouses to ensure faster order fulfillment.
The Decision to go Centralized or Decentralized?
The decision to adopt a centralized or decentralized warehouse management functionality boils down to the uniqueness of the enterprise in question. A proper soul searching of the business is to be done using SWOT analysis. Remember that currently, delays in getting your product to the customer in the time that they desire, is the funda that affects business sustainability. The online commerce world is veering towards decentralization. The decision is a hard nut to crack, so reach out to Hopstack’s Multi-warehouse Management Module to help you do that!
Schedule a demo with Hopstack today to learn more about how the right software can help you manage and execute your decentralized warehousing network better!
