Are you evaluating your warehouse and distribution strategy? If so, one of your biggest decisions will be whether to use a single warehouse or a decentralized warehouse strategy. In a centralized warehouse model, a company chooses to have all of their inventory in a single warehouse or a few “hubs” that cover large regions. A decentralized option allows smaller inventory quantities spread across many different warehouses. Each scenario has its own benefits – and drawbacks. Keep reading to see what our experts have to say.
Pros of Using a Centralized Warehouse Model
Let’s start with the good news! Many organizations like a more centralized warehousing model because of increased control. In particular, a centralized warehouse model offers:
- Enhanced inventory control – Inventory management is a critical component of a product-based business. If things don’t go well, the company can’t get products to customers, which means they’ll lose revenue. With a centralized warehouse, you’ll have a single inventory system that makes tracking much easier.
- Lower operation costs – Every warehouse building is going to have rent (or a commercial mortgage payment), utilities, personnel, and material handling costs. Operating from only one business will naturally lower these total costs. By leveraging these cost savings, companies can have more flexibility in their pricing as well as a more stable inventory management system. These benefits translate to higher margins and lower prices for customers.
- Reduced inbound costs – When you can bank larger inventories, you can lower shipping and transportation costs. There is also less need to dispatch trucks to replenish inventory than with a decentralized system. Many retailers enjoy having less stress around shipping fees.
- Increased focus on quality control – By limiting the number of facilities, a company can spend more time on quality standards and customer service. A single facility is likely to have more skilled workers, updated technology, and better materials handling equipment. Retailers can spend more of their time and resources overseeing quality standards in one place.
Cons of Using a Centralized Warehouse Model
After reading about the benefits of a centralized model, you might be wondering why anyone would use multiple distribution centers. A centralized model does come with some challenges, including:
- Potential high shipping costs (for outbound shipments) – Typically the costs of inbound shipments will be lower with a centralized system, but outbound costs can actually increase. With only one location, your products may need to travel farther to reach customers. The more complex the route to reach end users, the faster your shipping costs will add up.
- Longer shipping timelines – Shipment times can also increase when depending on a single facility. When it comes to direct-to-consumer order processing, there can be a significant disadvantage if customers are used to two-day shipping.
- Vulnerability to disruptions – If you only have one facility where most of your distribution takes place, your company will be more sensitive to unforeseen circumstances. Things like a natural catastrophe can shut your warehouse down or cause you to lose inventory, which can add up quickly and cost millions. A decentralized model provides more of a “backup plan” and gives you more options should something go wrong.
- Impact from labor shortage – We’ve all seen the headlines about the recent lack of workers. If your facility is in an area where there is high unemployment, you’re likely to struggle getting enough staff. A decentralized strategy would also be sensitive to labor needs; it really depends on your location.
Every business is different, and there’s not a one-size-fits-all approach. The benefits of a centralized warehouse strategy might be ideal for your organization, whereas the downsides might be things that you don’t want to deal with. If you’re not sure which model is right for you, consult your 3PL partner for some guidance. We can offer logistics advice and support on how to grow your business.
