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Centralized vs Decentralized Logistic Distribution

  • Bhumika Dutta
  • May 04, 2022
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Supply chains have also adapted the concept of decentralization along with the already existing centralized system. The modern-day supply chain works on two types of operations: Centralized and Decentralized distribution models. 


A central authority is responsible for decision-making in a centralized organization, whereas independent units can make their own decisions in a decentralized structure. In actuality, no supply chain can be centralized or decentralized, and each system has its own set of benefits and drawbacks. The majority of the time, strategic choices are decided centrally, whereas operational decisions are made dispersed. The effectiveness of each technique has been discovered to be dependent on the individual environment and decisions made.


Before delving into the two models of supply chains, let us first understand the concept of supply chains.


Supply chain:


A supply chain is a network that connects a corporation with its suppliers in order to manufacture and deliver a specific product to the end-user. Different activities, people, entities, information, and resources are all part of this network. 


The supply chain also refers to the stages involved in getting a product or service from its initial condition to its final destination. Companies create supply chains to decrease costs and remain competitive in the marketplace.


A supply chain is a set of actions that lead to the delivery of a product or service to a consumer. Moving and processing raw materials into completed goods, transporting those items, and distributing them to end-users are all processes in the process. 


Producers, suppliers, warehouses, transportation firms, distribution hubs, and retailers are all part of the supply chain. All of the functions that begin with receiving an order and end with satisfying the customer's request are included in the elements of a supply chain. Product creation, marketing, operations, distribution networks, financing, and customer support are among these roles. 


Now that we know about supply chains, the next question that might come to your mind is, which one is better? Centralized or decentralized distribution. There is no such thing as a "one-size-fits-all" logistics strategy. We'll go through the two forms of supply chain distribution in-depth in this post, and then you can pick what works best for you.


Also Read | Top 5 Supply Chain Management (SCM) Tools You Should Know


Centralized Logistics:


The more traditional method, centralized distribution, is the one that most people are familiar with, both professionals and non-professionals alike. A central location or hub serves as the physical heart of a company, as the name implies. 


The hub is in charge of almost all logistical activities, and it may or may not support smaller sites such as shops. Various hubs are possible, especially for multinational corporations conducting business in multiple locations. However, the overall structure and organization remain the same. The majority of the organization's tasks are handled by a central location.


In terms of supply chain management, a centralized supply chain is often handled at the headquarters, which is in charge of all upstream and downstream decisions. Procurement, distribution, and other logistics personnel will be stationed at this HQ, which will oversee the whole network's operations.


Here are some advantages and disadvantages of centralized logistics:


Advantages of Centralized logistics:


Here are some advantages of centralized distributions:


  1. Centralized distributions have low operating costs:


When you simply invest in utilities, rent, technology, and employees for one location, your operational expenses as a store are drastically reduced. Because the complexity of shared inventory is avoided, not having a large fulfillment network decreases the chances of costly mistakes. This translates to larger order profit margins and a stronger bottom line.


  1. Centralized distributions are easier to manage:


When you simply have one site to manage, it's much easier to maintain track of storage and inventory. You can keep a close eye on administration, order fulfillment, and warehouse security while also spending more time evaluating new technologies and procedures to improve productivity.


  1. Centralized distributions have better customer care:


Because you'll spend less time handling the logistical problem of numerous fulfillment sites, you'll have more time to focus on ensuring that your consumers have a pleasant experience with your brand. If a problem arises throughout the fulfillment or shipping process, it's much easier to pinpoint the source of the problem and rapidly resolve it.


  1. It is easier to improvise centralized distributions:


It may also be easier to improve centralized operations. There are fewer facilities that require updates, whether it's recruiting new employees, acquiring new assets, or upgrading existing technology (such as switching to an automated supply chain or investing in inventory management software).


  1. There is high availability of products:


Warehousing all items in one location might result in increased product availability because they are constantly on hand. Managers should maintain a tight check on stock levels to ensure there are no difficulties, and organizations can bank a considerable quantity of inventory depending on their seasonal demands.


Disadvantages of centralized logistics:


  1. Centralized distribution has high shipping costs:


Because all of your items are sent from the same place, regardless of where they are going, you may wind up paying significantly more for shipping. If your warehouse is in New York and your ultimate client is in Oregon, for example, a costly cross-country shipping method will be required. Furthermore, because shipping prices might vary greatly from one buyer to the next, it's impossible to estimate them correctly.


  1. Last-mile delivery times are longer with the centralized distribution.


Every merchant must deal with the so-called 'last mile dilemma,' which is made much more difficult if your inventory is centralized. Longer delivery periods via economy ground shipping are sometimes required to send to distant consumers at a reasonable cost. Centralized storage makes it impossible to match these expectations when a two-day shipment becomes the standard in eCommerce.


  1. Centralized distributions are vulnerable to disruption:


When running a business, you must constantly be prepared for unforeseen circumstances that may cause your operations to be disrupted. However, if your single facility is down due to a power outage, a fire, or a natural disaster, you won't be able to pivot and continue fulfilling orders — a lack of flexibility that some merchants have felt acutely during the epidemic.


Also Read | Big Data in Supply Chain Management: Impacts and Applications


Decentralized Logistics:


Decentralized distribution is more dispersed than centralized distribution, as it is not arranged around a single hub or warehouse. Instead, the items are transported as near to the customer as feasible. This implies that there are several warehouses distributed across a country or region that serve a small area rather than a much broader one; they are known as nodes.


As a result, the company can benefit from selecting strategic warehouse locations, some of which are better than others. Although executive decisions are still made from a central location, each warehouse has considerable autonomy in making judgments and reacting to market events and beyond.


The nodes are minor components of a much bigger network that may operate together as needed. If one node's inventory is low, for example, a neighboring or distant node can share. They can also save money on transportation since the distance between nodes is shorter than a central site, which may be farther away from some mission-critical service locations.


In a decentralized supply chain, decisions can still be taken centrally and rolled out across the network, but nodes are frequently granted liberty to manage their own specific business needs. This often entails acquiring supplies and distributing commodities, as well as some strategic autonomy, depending on how far the node sites are from the central office.


Advantages of Decentralized logistics:


Here are some advantages of decentralized distribution:


  1. Decentralized logistics provide faster delivery:


You may reduce last-mile delivery delays and enhance customer satisfaction by routing your orders to the facility that can deliver to your client the fastest. This is especially useful during peak season since it allows you to be more flexible in how you handle requests during high-demand periods. Customers with a pressing need may be able to take advantage of will call or same-day delivery at a reasonable cost.


  1. Decentralized distributions have cheaper shipping:


Having several warehouses eliminates the need for cross-country transportation, which diminishes profit margins. You may benefit from two-day or even same-day shipment by leveraging facilities near important customer centers — without incurring a significant expense burden. 


  1. Experience increased flexibility with decentralized distribution:


Decentralized nodes can function more flexibly than centralized hubs. They have the semi-autonomy to go into a local market and maybe test new items if there is an opportunity. Furthermore, if a company is already adept at managing its supply chain from afar, it may find it simpler to expand its reach into new countries where it has no established node – especially if it takes advantage of outsourcing possibilities, to begin with.


  1. Decentralized logistics have reduced disaster risk:


Companies that store their items in many places can help reduce the chance of tragedy. If one node is broken or otherwise rendered unusable, its peers can intervene to minimize the impact on consumers and, as a result, profitability.


  1. Decentralized logistics have better customer service:


In two areas, decentralized enterprises can aim to provide better customer service: shipment times and trust. Organizations are better equipped to give the speedier shipping times that customers demand by locating their activities near the end customer. They can also promote that they are a local firm or that they have local customer service workers, which may assist create community trust.


Disadvantages of decentralized logistics:


Here are some demerits of decentralized logistics:


  1. Decentralized logistics have high operating costs:


Running numerous fulfillment operations, unsurprisingly, can be costly, depending on the criteria required by your items. Regardless of whether you're self-fulfilling or outsourcing to a 3PL with a network of facilities, this is something to keep in mind.


  1. It is difficult to have full oversight in decentralized logistics:


When you have numerous sites responsible for holding inventory or fulfilling orders, you'll need to devote a significant amount of effort to conducting regular audits of your facilities to ensure quality control and employee training. Because the more warehouses you have, the more people, equipment, and procedures you'll need to keep things going smoothly.


  1. Decentralized logistics might increase inbound costs:


Suppliers aren't always eager to divide goods among sites. Companies that are unable to locate local suppliers may be unable to negotiate the lowest rates or may be forced to pay the additional shipping expenses associated with LTL shipments distributed over a network.


  1. Organizations have less control in decentralized logistics:


The agility that comes with running semi-autonomous nodes is a breath of fresh air for some organizations, allowing them to react rapidly to new possibilities and changing situations. On the other hand, firms who want strong central control may find it more difficult, if not impossible, to roll out new initiatives (such as standardization), which may be irritating, slow, and costly.


Also Read | What is Quality Management? Stages, Advantages, and Principles


Hybrid Supply Chain:


A company may reap some of the benefits of both centralized and decentralized supply chain approaches while minimizing the drawbacks. While not as beneficial as a decentralized supply network, a hybrid supply chain may be simpler to sell to a leadership team that prefers a centralized logistics solution.


Some advantages of this hybrid logistic system include:


  1. It is simpler to standardize systems and procedures. In a single location, a company's culture may be developed and preserved.

  2. If there are issues regarding inventory status or dependability, leadership has the capacity to find items fast.

  3. In order to better serve clients, the extra outlets may be supplied to meet the demand in that specific region. Depending on the number of orders, products might be shipped within the United States.

  4. Customers with urgent requirements may be able to request will call or same-day delivery at a reasonable cost.

  5. The ability to test systems, goods, markets, and suppliers on a small scale before spreading them out to the full corporation will be enabled by the decentralized locations.

  6. By delivering in bulk to a single location, you can maintain bargaining strength with suppliers.


There are still some disadvantages that lurk in this hybrid system. Maintaining big central distribution centers comes at a cost in terms of manpower and inventory, and businesses may be bound by a long lease or geographic location.


Also Read | A Guide to Different Types of Distribution Channels


BottomLine: Is decentralization better for the business?


If you process a high number of orders for a diverse client base, a decentralized storage approach that puts your goods closer to customers is likely to be beneficial. However, you must balance your carrier fee savings against additional operating costs, such as the usage of advanced inventory management or ERP systems to guarantee that SKUs are in the right place at the right time. In other words, it may not be cost-effective for your company to pursue until it has grown a little more.


It's crucial to remember that neither strategy is a panacea for inventory management's challenges. Both tactics offer advantages and disadvantages, and as your company grows, you'll need to find out how to maximize and offset these. When it comes to retail, you have to keep in mind that what works for you now could not be suitable in two years.

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