In the modern supply chain, there are two types of operations, centralized vs. decentralized distribution models. Each type has strengths and weaknesses, which means one might be better suited to a particular operation depending on its needs, customers, and physical location.
What are the differences between these two paradigms, and why would an organization use one over the other?
What Is Centralized Distribution?
Centralized distribution is the more traditional practice, and the one that more people are familiar with, both professionals and otherwise. As the name suggests, a central location or hub acts as the physical heart of the organization.
The hub is responsible for nearly all logistics operations, and may or may not serve smaller locations like stores. There can be multiple hubs, especially for international companies doing business in multiple regions. But the general organization and structure remain the same. A central location handles the bulk of the organization’s responsibilities.
All executive decisions are made from a headquarters, which may or may not be close to the central hub — it usually is.
Centralized Pros
●Lower storage and facility costs
●Simpler and more efficient warehouse management
●Easier to implement new solutions and technologies
●Better product availability
●Lower upstream shipping costs (when in bulk)
Centralized Cons
●Much higher downstream shipping costs
●More limited growth opportunities (when moving to new markets)
●Longer transport and shipping times for outliers
●Limited disaster preparedness
What Is Decentralized Distribution?
Decentralized distribution is, in fact, more spread out and not organized around a central hub or warehouse. The goods are instead moved as close to the consumer as possible. That means there are many warehouses scattered across a country or region that serve a local area instead of a much larger one — these are referred to as nodes. Because of this, the business can also benefit by choosing strategic warehouse locations, as some are better than others.
Executive decisions are still made from a headquarters, but each warehouse does have some degree of autonomy to make decisions and react as necessary to market events and beyond.
The nodes are smaller parts of a much larger network, which can collaborate whenever necessary. If there’s an inventory shortage at one node, for example, a nearby or remote node can share. They can also take advantage of reduced transport costs, because the distance between nodes is smaller, as opposed to a central location which may be farther from some mission-critical service areas.
Decentralized Pros
●Much shorter delivery times with on-demand possibilities
●Better customer service and order fulfillment
●A high degree of operational flexibility
●Significantly better disaster preparedness
●Much lower transport costs between nodes
Decentralized Cons
●Increased operational costs and for multiple facilities
●Greater risk of goods misallocation
●Operational controls are diluted as more nodes are added
●Less efficient inventory management and higher minimum stocks required
Centralized vs Decentralized Distribution: Which Is Better?
The centralized vs decentralized distribution debate is a bit silly.
Why?
Because both models can be ideal depending on the business, its geographical location, and regular operations. Some companies will benefit from a centralized distribution strategy, while others would see more benefits from a decentralized one. Moreover, both strategies can include advanced automation to improve efficiency, and they also offer outsourcing opportunities.
With a decentralized strategy, for example, a business could rent or lease a warehouse, or even a small segment of one. They might even share the warehouse with other businesses, while a service provider handles inventory management and order fulfillment.
At the same time, a decentralized strategy could cause serious problems during events like COVID, where online orders are through the roof, and having more inventory on hand is necessary. Central warehouses tend to be much larger, capable of holding much more inventory, and include more resources like hardware and machinery to do the work — including advanced warehouse automation systems.
In both models, strong communication between the executive headquarters and the warehouses, whether distributed or central, is crucial to successful operations.
There Is a Third Option: A Centralized/Decentralized Combination
It’s also possible to establish a mixed system that incorporates both strategies. A central warehouse serves as the focal point for operations, and all the inventory or product is typically stored there. That warehouse supports many nodes, closer to the end customer, and they are called either branch warehouses or decentralized warehouses.
The branch warehouses only store and manage high-demand goods, with optimal distribution following market demand and real-time analytics. In other words, the smaller warehouses serve customers the most popular goods with shorter delivery times and better customer service. The central warehouse contains all inventory the organization manages, including more niche goods. It also supplies the branch warehouses when they need to be replenished.
Modern technologies like IoT, and advanced computing — machine learning, AI, and big data — make the centralized and decentralized combo possible, and more efficient than it would be without them.
Warehouse automation goes a long way towards creating a seamless and efficient network, distributed or otherwise. Some forecasts predict as many as 50,000 warehouses will use autonomous warehouse robotics by 2025.
The Evolution of Consumer Needs
Due in part to the pandemic, but also thanks to modern technologies and new distribution strategies, online customers now expect their goods to arrive on their doorstep quickly. It has changed the supply chain, order fulfillment, and distribution fields, for better or worse.
It’s why companies like Amazon, Target, Wal-Mart, Best Buy, Costco, and many others are now offering same-day delivery or instant pick-up.
The shift is forcing supply chain players to rethink their operations and restructure to accommodate faster fulfillment and delivery cycles. That’s also why the centralized vs decentralized distribution debate is silly — customers are a big influence on which strategy is more valid for a company.
What to consider when choosing a distribution model:
●What budget can you allocate to distribution?
●What do your customers want?
●Where is the bulk of your customer base located?
●What shipping times do they expect?
●Do you have plans to expand into new markets?
●Are you prepared to overhaul transport and inventory management operations?
●Can you reduce inbound costs by partnering with local suppliers?
●Will you need to change suppliers to accommodate a new strategy (decentralized vs centralized)?
●Do you have the infrastructure and manpower to manage a decentralized network?
Understanding these questions and their answers, can help you decide if a change is right for your distribution model. Bear in mind, it may not be ideal to swap to a new model depending on the age, size, and location of your business.
Centralized vs Decentralized Distribution: Summary
Essentially, the two major warehouse distribution models are centralized and decentralized. There is a third option that bridges the gap between the two, but all models are relevant and necessary. Choosing one for a business means understanding your customers, geographical presence, fulfillment capabilities, and so on.
With a central warehouse, inventory management is easier and more efficient, costs tend to be much lower — because it’s a single location, not many — however, transport costs can be quite high depending on how far shipments need to go. Not all customers or clients will be close to the central hub.
With a decentralized model, the warehouses are spread out and remain much closer to the end customer. Order fulfillment, delivery times, and customer service tend to be vastly improved over the centralized model. Transport costs are much lower too, with less distance to travel between nodes. Yet, operational costs are significantly higher and increase with the number of established nodes (locations).
Both models offer outsourcing opportunities, as well as advanced automation to create a more seamless and efficient operation.
It often comes down to the average customer and his or her needs. Which model will they benefit the most from, and how can the organization support it?
Emily Newton is the Editor-in-Chief of Revolutionized. She regularly covers trends in the industrial sector.
