Advantages and disadvantages: centralized and decentralized warehouse

In distribution logistics, the determination of warehouse locations represents a strategic decision. A basic distinction is made between centralized and decentralized locations, which can have different effects on logistics costs (see also warehousing costs) and delivery service (see also Perfect Order Fulfillment); however, a combination of both variants is also possible.

A central warehouse bundles the entire assortment (see also Assortment Dimensions) of one or more manufacturers. As a rule, customers are supplied from a single location, while decentralized solutions have several strategically and geographically distributed warehouses that do not hold the entire product range in stock.

Characteristics of a central warehouse

Since, as already mentioned, ‘all’ orders and thus all shipments are handled exclusively from a central location, there is a high turnover within a central warehouse; this often requires an equally high degree of automation. The high level of automation of a central warehouse is also facilitated by the fact that it is easier to implement article-specific warehousing and standardization; the administrative effort is also lower. However, not all customer wishes/orders can be fulfilled equally quickly, since, for example, the distances to the customer vary greatly at a single location.

Advantages of a central warehouse

  • Lower storage costs / lower location costs
  • More efficient warehouse organization and management
  • High degree of automation possible
  • Low personnel costs
  • If centrally located, relatively short transport distances
  • High readiness to deliver (high availability of goods)
  • Lower minimum stock level
  • Usually optimal warehouse equipment
  • Bundling of high-performance auxiliary equipment (high-bay warehouse, FTS, sorter,pocket sorter)
  • Centralization of warehouse processes (high standardization)

Disadvantages of a central warehouse

  • Reduced supply flexibility
  • High transport costs (if location is not chosen optimally)
  • Longer transport routes
  • Delivery to the site as a rule once a day

Characteristics of a decentralized warehouse

An optimal distribution can also lie in operating several decentralized warehouses. These do not necessarily have to be operated by the company itself, they can also be operated by logistics service providers, as is the case with central warehouses. Decentralized warehouses are used to ensure that the right goods are already relatively close to the customer, which enables greater delivery flexibility and shorter delivery times. If, for example, a company’s sales market is located abroad, it makes sense to position a decentralized warehouse at the airport.

Communication and coordination between the corporate headquarters and the warehouses and between the warehouses themselves is an important factor, especially in a decentralized warehouse. It must always be known exactly how much and which goods or which material is in which warehouse in order to be able to plan the optimal transport routes and save costs; professional recording and communication of warehouse stocks and stock movements are therefore indispensable (see also Inventory Management).

Advantages of a decentralized warehouse

  • High delivery flexibility
  • Lower transport costs
  • Shorter delivery time (dispatch)
  • Delivery to the site as a rule up to three times a day

Disadvantages of a decentralized warehouse

  • Risk of misallocation (goods ordered are not stored at a more convenient location)
  • Higher investment and operating costs
  • Higher control expenditure (warehouse management, material flow)
  • High effort for inventory management
  • Higher minimum stocks

Combination of central warehouse and decentralized warehouses/branch warehouses

If you operate a central warehouse in which the entire product range is stored, not only end customers can be supplied, but also decentralized warehouses, so-called branch warehouses, regional warehouses or transshipment warehouses (see also Store Logistics). These decentralized warehouses usually do not contain the entire assortment, but are strategically optimally distributed in the delivery area and thus closer to the customer. This enables faster delivery and increases the delivery service. With such a combination, short delivery times are guaranteed by storing articles with a high turnover rate mainly decentrally (i.e. closer to the customer), while the central warehouse mainly stocks articles with a low turnover rate.
Editor’s note: A distinction can also be made between warehouses that are used for production and thus affect the company’s own production view (warehouses for materials, raw materials, finished and semi-finished parts) and warehouses that stock goods that are sold and shipped to customers and thus have a customer-centric focus (see also Materials Management in Production and Logistics).

Important: Balancing inventory costs and transport costs is a fundamental challenge in logistics. In distribution logistics, there is also the contradiction between the cost and performance perspective, and the framework conditions can also change (corporate strategy, legal, social, etc.). For this reason, distribution logistics should be regularly reviewed in order to question the selected type of warehouse or the selected warehouse location accordingly and to continuously optimize it for new circumstances.

Decentralized or central warehouse? This question cannot be answered in general because it depends on many influential company characteristics and ideas. […] Customers have the greatest influence on the decision.

Magazine: Lagertechnik direkt

Warehouse problems in e-commerce

In the course of the ever increasing online trade,the end customer has developed high logistic demands. For example, the goods should be delivered to the front door as quickly as possible (usually the next day), while expectations for environmentally friendly shipping have also risen -for example through a reduction in delivery vehicles of CEP service providers and packaging materials. Retailers are attempting to do justice to this by identifying stationary retail outlets as quasi-decentralised warehouse locations and using these stocks to make even more efficient use of the immediate proximity to the customer (keyword: same day delivery).More and more, for example, offers such as Click and Collect (Cross-Channel)or special software solutions for dealer integration are being found.

Summary of central and decentralized warehouse

Basically, two types of warehouse differ from each other: central warehousing on the one hand and decentralized warehousing on the other. In a central warehouse, storage costs are usually low, while transport costs are high. In decentralized warehousing, on the other hand, the opposite is true. A combination of both warehouse types is also possible; in this case, not only customers are supplied from a central warehouse, but also other warehouses that function as branch, regional or transshipment warehouses.Both warehouse types do not necessarily have to be operated by the company itself; they can also be outsourced to a logistics service provider. The decision for a certain type of warehouse is very individual and cannot be answered globally; ultimately, the customer and his satisfaction represent a particularly important influencing factor.

Teaser picture: Tim Reckmann / CC BY-SA 3.0

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