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.
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.
A quick look at the pros and cons of centralized and decentralized distribution models:
Pros of a central warehouse
- Storage costs are lower
- Highly efficient warehouse organization and management
- Increased automation
- Lesser personnel needed
- Higher availability of goods
- Optimization of warehouse equipment
- Centralization and increased standardization of warehouse processes
Cons of a central warehouse
- Decreased flexibility of deliveries upon high demand
- Increased transport costs due to longer transport routes
- Lower frequency of deliveries
Pros of a decentralized warehouse
- Increased flexibility of deliveries upon high demand
- Lower transport costs
- Dispatch of goods faster with a shorter delivery time
- Higher frequency of deliveries
Cons of a decentralized warehouse
- Greater investment and operating costs
- Increased expenditure on processes like warehouse management
- Complicated inventory management
- Stocks to be replenished frequently at different locations
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.
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
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.
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 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 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.
5. Smart or Automated Warehouse
Smart or Automated warehouses are places where the storage and fulfillment processes are automated with devices powered with artificial intelligence, robots and drones. These smart devices can undertake 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 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 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!