Whether you’re an online and offline merchant, warehousing has always been integral to successful retailing. When you first launch a business, the question of where and how you’re going to store your SKUs is one of your first (and biggest) priorities.
If you get this right, your orders will be able to reach customers quickly at low carrier rates, which means higher customer satisfaction and lower operating costs for your business.
But get it wrong, and you could end up with slow, inflexible fulfillment processes that cause your growth to stagnate.
So, which is a better approach for your business: Centralized or decentralized warehousing?
That’s exactly what we’re here to talk about today. We’re taking a deep dive into the pros and cons of both strategies so that you determine which is right for you – and how a nationwide fulfillment provider can help!
Centralized warehousing is when a retailer elects to store their inventory either at a single location or a handful of large facilities dedicated to serving one region, such as the West Coast or the Northeast. Centralizing inventory is a traditional method of distribution that’s commonly used by large-scale retailers to reach their store locations effectively.
When you’re only investing in utilities, rent, technology, and staffing for one location, this dramatically reduces your operating costs as a retailer. Not running an extensive fulfillment network also reduces the odds of costly mistakes occurring, because the complexities of shared inventory are avoided. This means higher profit margins per order and a healthier bottom line.
Managing warehousing and inventory is far easier when you only have one facility to keep track of. You can maintain a high level of oversight concerning administration, order fulfillment processes, and warehouse safety, and also spend more time testing new technologies and workflows to maximize efficiency.
Because less of your time is spent juggling the logistical puzzle of multiple fulfillment locations, you can give more attention to ensuring that customers are having positive experiences with your brand. If problems do occur during the fulfillment or shipping process, it’s much easier to track where the issue originated from – and to correct it quickly.
Because all of your orders are shipped out of the same location regardless of the end destination, this can mean shouldering much higher shipping costs. For example, if your warehouse is in New York and your end customer is in Oregon, this will require a costly cross-country shipping method. Furthermore, this makes it very difficult to estimate your shipping costs accurately because they can vary hugely from customer to customer.
The so-called ‘last mile problem’ is something every retailer has to grapple with – and this is much more challenging if your inventory is centralized. To ship affordably to distant customers, longer delivery times via economy ground shipping are often necessary. As two-day shipping becomes the norm in e-commerce, centralized warehousing makes it difficult to meet these expectations.
When you’re running a business, you always need to prepare for unexpected events that could disrupt your operation. But if your only facility is out of action due to a power outage, fire, or natural disaster, or this makes it impossible for you to pivot and continue fulfilling orders – lack of flexibility that has been keenly felt by some retailers during the pandemic.
A single or reduced number of facilities is often the best strategy for small retailers with low order volumes. But you need to keep in mind that centralized fulfillment makes the location of your facility critical to your responsiveness – especially if you’re serving a nationwide customer base.
It’s ideal to choose a region where shipping costs will be fairly even across the country. For example, if your warehouse is based in Colorado, this gives you two-day shipping capabilities to both the East and West Coasts. However, these regions experience high demand for industrial real estate for precisely this reason – meaning that your cost savings could be reduced.
In contrast to holding inventory in one place, decentralized warehousing takes advantage of multiple strategic locations to store inventory closer to the end customer. Facilities are selected according to a variety of factors, such as being located close to key transportation routes or metro areas. Each ‘node’ of this warehouse network can also be customized to suit the regional needs of customers in that area, such as storing certain SKUs.
By allocating your orders to whichever facility can deliver to your customer the fastest, you can lower last-mile delivery times and improve customer satisfaction. This is especially valuable during peak season, as it allows you to be more adaptable in how you manage orders during periods of high demand.
Having multiple warehouses reduces the need for cross-country shipping practices that lower your profit margins. By using facilities that are close to key customer hubs, you can gain the advantage of two-day or even same-day shipping – without shouldering a massive cost burden to do so.
Unsurprisingly, running multiple fulfillment operations can come with a big price tag depending on the specifications demanded by your products. This is something important to be aware of regardless of whether you’re self-fulfilling or outsourcing to a 3PL that has a network of facilities.
When there are multiple locations responsible for storing your inventory or fulfilling orders, it means investing considerable time in periodic audits at your facilities to monitor quality control and staff training. Because the more warehouses you have, the more personnel, machinery, and procedures you need to keep things running smoothly.
When your inventory isn’t stored in one place, stock takes and SKU rationalization require far more time and coordination across facilities. Moreover, having increased storage space can create a tendency to order more SKUs than necessary, which can make SKU management more difficult.
If you process a large volume of orders to a widely distributed customer base, you’re likely to benefit from a decentralized warehousing strategy that puts your product much closer to customers. However, it’s important to weigh up your savings in carrier fees against increased running costs, including the use of advanced inventory management or ERP systems to ensure that SKUs are in the right place at the right time. In short, it might not be cost-effective for your business to pursue until you’ve scaled a bit more.
So, what should be your main takeaway from this breakdown of centralized vs. decentralized warehousing?
It’s important to bear in mind that neither approach is a magic bullet to the complexities of inventory management. Both strategies have their own list of pros and cons, and your business will need to figure out how to capitalize and mitigate these as you grow.
When retail is such a fast-evolving landscape, you also need to appreciate that what works for you right now might not be fit for purpose in two years’ time – or even two months’ time, as the pandemic has so starkly demonstrated.
That’s why it’s essential to keep analyzing warehouse performance, shipping costs, and delivery speeds as your business grows to answer the critical question: “Is my warehousing strategy still working for me?”
If the answer is no, now could be a good time to start working with a fulfillment provider who can put a nationwide network of facilities at your disposal. This is the perfect solution for retailers who would benefit from a hybrid warehousing strategy that gives them the best of both worlds. For example, you can deliver much stronger peak season logistics if your partner can provide you with temporary warehousing space to accommodate higher than normal order volumes.
By gaining access to high-quality infrastructure and expertise, your 3Pl can assist you in finding scalable warehousing solutions that are both cost-effective and able to exceed customer expectations for fast and effective delivery.