Centralized Inventory vs Decentralized: 5 Pros and Cons

By
Nicole Georgiev
Table of Contents
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    Opening a business, such as an eCommerce business, will require you as a business owner to make a lot of decisions. One of the most important decisions is in regard to inventory storage and how you will store your products. Two options include centralized inventory or decentralized inventory.

    Your inventory management strategy will affect different parts of your supply chain, including the food supply chain if you’re in the restaurant industry. It’s essential for warehousing management practices, order fulfillment, and operational efficiency. 

    For ideal performance, it’s best for you to choose an inventory distribution system that works for your business. This blog post covers the difference between centralized vs decentralized inventory, so you can choose between the two.

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    Centralized Inventory Meaning

    The meaning of centralized inventory refers to having a single hub that manages your inventory in a single and main location. In other words, a single warehouse manages all inventory that comes in and out. 

    Within this warehouse, there are different parts that are used to store various items. All the inventory is stored in the same way and handled by the same methods of transportation and people. 

    Having all of your inventory in one location means that you can be more consistent with the employees you have working in your warehouse. Aside from this, shipping and handling companies that deliver your products and the employees that manage the inventory are all in the same place. This results in an increase in regularity and steadiness. 

    If you decide to have multiple warehouses, it’s likely that your employees will receive different training. It’s also possible for the locations to function differently from one another. 

    Centralized inventory models allow businesses to have more control and transparency over their inventory management processes. This includes practices for holiday inventory management and phantom inventory.

    Businesses can streamline processes such as taking inventory when they operate from a central control point or single location. It also minimizes the chance of error in terms of communicating between the different warehouses. 

    Key Takeaway: Each business will have to consider whether they want centralized or decentralized inventory management processes in order to streamline their operations. 

    Centralized vs Decentralized Inventory

    All businesses that sell products have a supply chain. In order for a supply chain to function effectively, it must be managed and optimized on a regular basis. 

    Most supply chains have the following steps:

    1. Source raw materials (raw materials inventory)
    2. Manufacture the materials into parts
    3. Assemble the different parts into finished products (finished goods inventory)
    4. Ship the finished goods to a distribution center
    5. Store products until they’re sold 
    6. Follow order fulfillment practices once products are sold
    7. Ship products to the customers

    Supply chains will differ based on the industry they refer to. For example, some companies use centralized distribution methods while others choose a decentralized distribution process. This will directly impact their order fulfillment and shipping processes.

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    5 Pros and Cons of Centralized Inventory

    Storing all of your inventory in one location is known as centralized inventory. It is where businesses can store and ship products out to customers. All packages come from the same distribution center regardless of where the products are being shipped to. 

    Pros of Centralized Inventory

    The pros of using centralized inventory are:

    • Cost efficiency. A centralized inventory will reduce operating expenses. This is because the company only has to pay for a single warehouse to store inventory. If you choose to use multiple warehouses, operating expenses would be multiplied. 
    • Inventory management. Having all of your inventory in one location makes inventory tracking easier. It is also simple to conduct inventory audits. Multiple warehouses will just add stress to your supply chain and cause you to manage multiple order streams. 

    Altogether, these benefits enable distribution centers to offer customers better prices and superior service.

    Cons of Centralized Inventory

    The cons of using centralized inventory are:

    • Slower shipping speeds and higher average shipping costs
    • No backup inventory in case a disaster occurs at the warehouse or storage facility
    • Tough-to-scale operations

    Overall, centralized inventory methods are best for small eCommerce businesses that ship to their local customer base or sell through multiple channels. This will require multichannel inventory management

    5 Pros and Cons of Decentralized Inventory

    Some businesses may choose to use the decentralized inventory approach instead of centralized inventory. This method uses multiple distribution centers that are strategically located in areas that can properly serve the customer base at hand.

    The multiple distribution centers stay connected using cloud computing software. However, each distribution center has its own staff, inventory control managers, and warehouse managers. Due to this, business operations can differ across each center.

    Pros of Decentralized Inventory

    The pros of using decentralized inventory are:

    • Customizable inventory. Businesses can adjust the inventory levels at each distribution center according to the local customer demand.
    • Fast shipping. Storing inventory in multiple distribution centers means businesses can reduce the overall shipment distances. This is because they can ship from the distribution center located closest to the customer. This can improve customer satisfaction.
    • Backup inventory. Your business will have backup inventory in case a disaster strikes one of your distribution centers.

    Cons of Decentralized Inventory

    The cons of using decentralized inventory are:

    • High operational costs. More warehouses mean an increase in inventory, storage, and maintenance costs. 
    • Excess inventory. Multiple distribution centers increase the risk of businesses failing to optimize their inventory. This can lead to excess inventory, overselling, and stagnant inventory. 
    • Lower margins on specific products. Some products may have lower margins due to inventory counts and customer demand.

    Decentralized inventory methods are best for growing eCommerce businesses that have customers located all across the country or in other countries. Having multiple warehouses makes it possible for businesses to provide affordable and expedited shipping methods, including overnight shipping

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    Frequently Asked Questions About Centralized vs Decentralized Inventory

    The main difference between centralized vs decentralized inventory is the number of warehouses or inventory storage centers a company has. Centralized inventory is inventory located at a single center whereas, with decentralized inventory, the inventory is located across multiple centers. 

    To better understand the difference between the two inventory storage methods, read the following commonly asked questions. 

    Is It Better To Have a Centralized or Decentralized Inventory?

    This depends on the kind of business you have. A decentralized inventory system will allow you to respond better in the event of an emergency. This is because all of your inventory isn’t at a single location. Using an inventory scanner can ensure the accuracy of your items regardless of the warehousing method you choose.

    How Does Centralization Affect Inventory Management?

    Centralization affects inventory management because it allows businesses to have more control and transparency over their processes. Operating your business from a single distribution center allows you to streamline processes such as stocktaking. This way, businesses can stay on top of each inventory report and metrics such as days inventory outstanding and weighted average cost

    What Is a Centralized Order System?

    A centralized order system is having a single person or department handle the order fulfillment and inventory management processes. This way, the business can streamline stockroom operations and control its budget. 

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