Pros and Cons of a Centralized Warehouse

An integral aspect of a product based business is its inventory control. If mishandled, a business will not be able to move any products, and may lose capital. One key question surrounding this topic is if the warehousing should be centralized or decentralized? With centralization, a company elects to keep its entire inventory in one, or it opts to utilize few major hubs that focuses on a large region. Decentralization on the other hand utilizes numerous warehouses that would concentrate on smaller geographic areas, and would be much smaller than a centralized warehouse. If you are unsure about which would be more beneficial, here is a list of pros and cons of a centralized warehouse.

Centralized Warehouse

Pros and Cons of Centralized Warehousing/Distribution

Pros:

  • Lower operation costs- By choosing to centralize warehousing and distribution, the need to pay rent or utility expenditures for different warehouses is reduced. In addition to paying more for rent, the need to spend more on new equipment and technologies for each warehouse is also eliminated. With these reductions in costs, retailers can now set pricing strategies with more ease due to the more stable nature of its inventory management. This will allow for higher margins or lower prices for customers.
  • Reduced Inbound Costs- A centralized warehouse would also decrease the cost of shipping and transportation because of the ability to bank larger inventories. The need to dispatch trucks to replenish the inventory will be less than a decentralized warehouse system. This in turn would protect retailers from having the constant concern of high chipping fees.
  • Better customer service- By choosing to limit the number of warehouses or distributors, a company can now focus its resources on fewer facilities. This means the facility will have the highly skilled workers, the latest technology and the best equipment. If all of these are in one facility, the highest quality of service could then be offered to customers.

Cons:

  • Potential high cost of rush delivery- Everyone makes mistakes, even inventory control managers. However, those mistakes could potentially have a grave impact on a centralized warehouse system. If there is a miscalculation in how much product is needed or how long it should last, then the retailer would have to pay additional fees for rush deliveries to compensate for that mistake. If these mistake happen regularly, then the money saved from opting to use a centralized warehouse will balance out.
  • Lack of Preparation for Emergencies- Natural catastrophes are often unforeseen, and it can cripple a retailer. If most of the inventory is in one centralized warehouse, a retailer could lose millions of dollars if a fire were to break out and decimate the entire stock. In 2007 for instance, a fire at an Illinois warehouse, owned by the Kable News Company, destroyed the entire inventory belonging to Jackson, Wyoming-based Alpinist, which was a quarterly high-end magazine dedicated to alpine style mountain climbing. The magazine’s inventory included back issues and merchandise including hats, shirts, water bottles, stickers and coffee mugs.  It was reported that the Magazine lost an estimated $4 Million worth of merchandise at a peak time. If the company had not utilized a centralized warehouse system, it could have saved millions of dollars.
  • Problems with Local Managers- By electing not to distribute warehouses, problems may arise with local managers. In general, local managers have a strong bias for high inventories being visually present. They would feel more secure because natural catastrophes or inventory mismanagement would not impact them as much.

The System That Suits Your Needs
The drawbacks of a decentralized inventory are the opposite of the advantages of having a centralized inventory. There is however, no one size fits all solutions. The advantages of a decentralized warehouse may not be beneficial for you, where they may be great for someone else. It ultimately comes down to the uniqueness of your situation. A simple strengths, weaknesses, opportunities, and threats (S.W.O.T.) analysis would be helpful in deciding which system suits your needs. If you are not able to decide however, contacting a 3PL for help is a great option.

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