Centralized vs. Decentralized Logistics: Which is Better?By Steve Syverson Read Time: 8 min.
There is no "one-size-fits-all" logistics solution. Read on to learn more about the advantages and disadvantages of centralized, decentralized, and hybrid distribution models.
Supply Chain Efficiency: Centralized vs. Decentralized Logistics
The term supply chain refers to the many links that a product goes through on the way to a customer. The efficiency of that supply chain is a function of the amount of cost and effort to move the product, and how quickly the product needs to be moved.
One of the main challenges in the supply chain is the last mile - the final leg from the distribution center to the customer. Is it better to keep larger quantities in one central location, or distribute smaller quantities closer to the customer? This is one of the major factors in deciding between centralized and decentralized logistics.
Centralized Supply Chain
Centralized distribution is the traditional network that most businesses are familiar with. In the centralized distribution model, operations are typically limited to a “central” location. If there is more than one hub, the locations may be geographically spaced to handle East and West coast time zones or area-specific product lines.
- Fewer locations make the standardization of systems and processes through the business easier. Company culture is easier to foster and maintain in a single location.
- Management has the ability to have eyes on a product within moments if there is a concern since everything is often located in the same building.
- Limited to talent within a geographic radius, centralized businesses often find themselves competing for employees with other distribution centers that have similar concerns.
- Ownership of cost and staffing for all areas of business including systems, security, recruiting and training can be very costly.
- Businesses can be locked into a multi-year contract for a specific building or geographic area regardless of growth or opportunity in the market. These leases often have penalties for early termination.
- Cross-country customers who have an urgent need may be charged steep shipping fees. In a market dominated with free 2nd-day delivery, this could force them to look elsewhere for fulfillment.
Decentralized Supply Chain
When a business moves into a decentralized distribution model, the product moves further away from the key stakeholders at the “central” corporate office and closer to the end customer. While this can be accomplished through self-owned warehouse and logistics, a managed decentralized logistics network is far more agile than its counterpart.
- Each node of the supply chain can be tuned to that specific area's demand to best serve the customer base. Product levels can be distributed to locations across the country based on the volume of orders in that area.
- Customers with critical need may have the option of will call or same-day delivery with moderate cost. For example, a customer may be able to order an item and pick it up in the same day.
- The ability to test systems, products, markets, and suppliers on a small scale before rolling out to the entire organization can lead to better data-driven decisions.
- Local addresses on shipping labels increase trust in customers.
- Shipping to multiple distribution locations may affect bargaining power with suppliers wanting to ship in bulk to a single location.
- Control of operations and culture can be diluted through the nodes of the supply chain, which may not be relevant for outsourced decentralized supply chains.
Centralized and Decentralized Hybrid Supply Chain
By blending centralized and decentralized supply chain methodologies, a business can enjoy some of the advantages of each while mitigating the negatives. While this is not as advantageous as a decentralized supply chain, it can be an easier sell the idea of a hybrid supply chain to a leadership team that may favor a centralized logistics solution.
- Standardization of systems and processes are easier. Company culture can be fostered and maintained in a single location.
- Leadership has the ability to locate products quickly if there are concerns about inventory status or reliability.
- The additional locations can be stocked to that specific area's demand in order to better serve customers. Products can be distributed to locations across the US based on the volume of orders.
- Customers with critical needs may have the option of will call or same-day delivery with moderate cost.
- The decentralized locations will grant the ability to test systems, products, markets, and suppliers on a small scale before rolling out to the entire organization.
- Maintain bargaining power with suppliers by shipping in bulk to a single location.
- Maintaining large central distribution centers still carries the cost of staffing and inventory.
- Businesses may still find themselves tied to a long lease or geolocation.
How Can Decentralization Make Your Supply Chain More Efficient?
Before the evolution of broadband internet and cloud computing, a single centralized location made a lot of sense. The costs of servers and infrastructure could be shared across departments and economies of scale translated to dramatic cost savings.
The virtual and cloud landscapes today are eliminating the need for the infrastructure we needed just five years ago. The same economies of scale that worked before to house servers internally, now make it safer to house data in the cloud with leading minds in security that would be too costly to bring in-house.
Companies are realizing that the cost-saving measures that once worked so well are now hindering them from being the agile supply chain that their customers are beginning to expect. The biggest reason why decentralization is better than centralization is the flexibility and data to adapt to market demands quickly.
In The Lean Enterprise, Barry O'Reilly shows the benefits of managing by hypothesis. By first developing a hypothesis, then running tests to prove or disprove it, a business is able to make educated and data-driven decisions. Businesses locked into a single distribution channel are limited in the experiments that they can run.
Which Industries Increase Competition in Today's Landscape through Decentralized Logistics?
Service & Repair
Competitive service level agreements (SLAs) put pressure on technicians to resolve problems faster every year. By distributing the products closer to the clients, service and repair businesses pay out fewer penalties. Decentralized storage solutions like Warehouse Anywhere are even able to deliver hardware to the destination so the technician never loses time driving to the warehouse.
RFID tracking speeds up the process further by automating the tracking of serial numbers. By scanning the product as it enters and leaves the facility, it can move quickly through the process without systems getting in the way.
E-commerce giant Amazon continues to open more distribution centers around the world. To better control the last mile, they are looking at opening up to 3,000 Amazon Go stores by 2021 where customers can purchase online and conveniently pick up their items on the way home. To compete with that level of expectation, decentralized logistics can help small e-commerce businesses stay competitive with companies like Amazon.
While consignment used to be a way to get the product in the hands of customers faster, losing control of the customer relationship and the chain of custody are becoming risks that businesses can no longer accept. Supply chains that facilitate stronger interactions with customers will continue to lead their industries.
Having a robust chain of custody while still rapidly being able to satisfy customers needs is a powerful tool for salespeople in the field. Decentralized distribution centers that can pair access with any and all product movement mitigates the risk of carrying sensitive materials.
Healthcare supply chain management hinges on traceability. Expiry of sensitive items, serial tracking, lot numbers, and even temperature controls can be requirements of the business or even regulatory compliance.
RFID is an excellent tool to automate the tracking of key information such as serial number, lot, expiration, and even temperature throughout the life of an item. LIFO or FIFO picking methods ensure the customer always receives the best product.
While these may be difficult to implement, engaging a logistics provider that already has the capabilities to track these data points can save both time and money. A decentralized logistics provider like Warehouse Anywhere can help direct businesses to the tools best suited for each stage.
Just In Time Inventory
Just like the cost-effective solution used to be centralized distribution, businesses used to overstock inventory in case of unforeseen spikes in demand. While this did solve the problem, it tied up cash in inventory, increased the chance of damage, and consumed large amounts of real estate.
The big buzzword in distribution over the past few years has been “Just In Time” inventory. Being able to satisfy customers demands through better last mile management can give businesses a competitive advantage in the marketplace. Increased technological capabilities allow systems to communicate and bring the product where it is needed when it is needed, so cash isn't parked in inventory.
Changing the entire supply chain of a business may seem like a larger project than it actually is. Decentralizing is an agile supply chain solution by definition, and can be done in phases. When you decide to move your business forward with a decentralized logistics solution, you can roll it out strategically.
My team and I specialize in decentralized logistics solutions. We're here to answer any questions you may have about mini warehouses or third-party logistics. I'm always happy to help businesses serve their customer best, especially in today's competitive landscape.
Are you ready to get started with a decentralized solution? Let's get in touch!