Difference Between Centralized and Decentralized Inventory (2024)

As businesses grow, inventory orders, shipping, storage, and selling becomes paramount decisions that have to be made. The need for increased industrial storage becomes essential which enables products reach a wider geographical location while also increasing the range of products to available. During this growth period, a decision on whether to ship products from one centralized location or to have smaller warehouses in different areas is crucial. Both centralized and decentralized inventory have advantages and disadvantages and should be employed based on the company structure, personal goals as well as management styles.

Centralized Inventory

This is an inventory management system whereby operations are carried out in a central location. Although there may be different storage sections based on products, the storage used is often one large warehouse. All inventory is handled using similar methods of transportation and by the same staff. It is most common in e-commerce ventures such as Amazon.com.

Advantages of using centralized inventory include:

• It makes it easier to foster and maintain the company culture
• There is a significant reduction in operating costs such as rent and other utilities
• Higher margins are achieved as a result of costs reduction
• Provision of better customer service through a focus on skilled workers, better ways to respond to inquiries and requests and also better equipment
• Concerns arising from products and processes are handled promptly by the management

Despite the various advantages, a decentralized inventory has various disadvantages including:

• High shipping costs especially in the long term and rush deliveries may be passed to the customer
• Leads to competition for resources such as human resource

Decentralized Inventory

This is an inventory management system where products move from a central office to other locations that are close to the customer. Consumer behavior forecasts are especially important to maintain sufficient inventory levels. A major plus associated with the decentralized inventory is the local customer satisfaction which is seen in the fast deliveries as well as the ability to quickly respond to customer queries.

Advantages of using decentralized inventory include:

• The supply chain can be tuned in accordance with specific locations demand
• Rush deliveries can be carried out at reasonably low costs
• It makes it easier to test markets, systems, and products before effecting them
• The use of local branding options on product packaging and shipping labels increases customer trust in the brands and products

However, the disadvantages of a decentralized inventory include:

• Company operations and culture may be diluted
• The bargaining power may be affected by suppliers shipping in bulk to a single location

Similarities between Centralized and Decentralized Inventory

• Both are inventory management systems

Differences between Centralized and Decentralized Inventory

Definition

A centralized Inventory is an inventory management system whereby operations are carried out in a central location. On the other hand, a decentralized inventory is an inventory management system where products move from a central office to other locations that are close to the customer.

Pilferage

While the chances of pilferage in a centralized inventory are minimum, the chances of pilferage in a decentralized inventory cannot be fully eliminated.

Decision making

While in centralized inventory, the decision making is centralized hence is carried out by the top management, decision making in decentralized inventory is distributed throughout respective teams and individuals.

Uniformity in prices

A centralized inventory ensures uniformity in product prices. On the other hand, it is not possible to achieve price uniformity under decentralized inventory.

Human resource

Centralized inventory uses fewer human resources as few people can give maximum results. On the other hand, decentralized inventory uses more human resources as every location has to be in full operation.

Centralized vs. Decentralized Inventory: Comparison Table

Summary of Centralized vs. Decentralized Inventory

While a centralized Inventory is an inventory management system whereby operations are carried out in a central location, a decentralized inventory is an inventory management system where products move from a central office to other locations that are close to the customer. It is important to note that different businesses have different needs based on structure, goals as well as available resources. It is therefore important to weigh the cons and pros of each method before settling on one.