Distributed inventory is a goods distribution strategy in which inventory is stored in and shipped from multiple fulfillment centers or warehouses in different geographic areas.
By contrast, centralized inventory is a distribution strategy in which companies maintain a single warehouse or center to manage everything that comes and goes.
Distributed inventory splits physical goods across different fulfillment centers strategically chosen to keep inventory closer to the end consumer. It is nearby when ready to be shipped to achieve a lower transit time and shipping costs.
Instead of using a single fulfillment center and centralizing inventory, distributed inventory lets merchants leverage the most optimal locations, enabling each order to be routed to and shipped from the closest fulfillment center.
Distributed Inventory Management
It is an order fulfillment methodology that stores inventory in multiple warehouses to be closer to more customers to reduce distance and shipping measures.
In a distributed inventory model, a company spreads its inventory among chosen warehouses or fulfillment centers, holding a portion in each.
Most retailers work with a third-party logistics provider, or 3PL, to distribute products in this way because it is not feasible for one company to handle one (or more) fulfillment centers.
Compared to self-fulfillment, outsourcing saves time and spares you the expense of purchasing the staff, infrastructure, equipment, and supplies required to run a fulfillment center (such as renting a warehouse or buying property). Although a 3PL’s fulfillment network can enable your company to use the distributed inventory approach, you must first understand how it works to decide if it is appropriate.
With less shipment distance, transit time, and shipping expense, orders can be picked up, packed, and dispatched from the fulfillment center that is most convenient for their final destination.
Types of Distributed Inventory Approaches
Companies must also consider how decisions are made in a distributed inventory environment. They may opt for a centralized or decentralized approach.
Centralized distributed inventory:
In a centralized distributed inventory approach, a decision-maker or team at the highest level, perhaps at company headquarters, decides how much inventory is allocated to the various fulfillment centers or warehouses. In other words, decisions are made from a single point.
Decentralized distributed inventory:
In a decentralized distributed inventory approach, inventory-related decisions are made locally — in other words, at each fulfillment center. For this approach to succeed, individual decision-makers must have access to customer and product demand data.
When To Consider Distributed Inventory Management System?
Working with a 3PL with different warehouses allows you to benefit from their experience and knowledge without paying the high up-front costs associated with setting up your infrastructure. If you experience the problems stated below, consider hiring a 3PL to obtain the advantages of a distributed inventory system.
Heavy products
When a shipment is heavy, it will cost less since it will go farther or via fewer zones. Your products will be more accessible to clients if you have distributed inventories. You can reduce shipping expenses, which could quickly mount with heavy shipments.
Lots of orders to be dispatched
When your business is off the ground, a sole warehouse could be all you need because running out of fulfillment centers will be too expensive. Distributing the products around fulfillment centers will be more cost-effective if your business grows.
You can deliberately pick locations close to customers by using different warehouses. Because you will transport orders from a nearby location, keeping merchandise close to the customers may reduce shipping expenses.
Similarly, rather than keeping merchandise for every item you sell, sending only the most well-liked or best-selling products to the warehouses could make sense.
Your Consumers Are In The Different Regions
Not all of your consumers are concentrated in one region.
Where your consumers reside ultimately determines where the fulfillment center should be situated. It is because orders are delivered more inexpensively when the packages travel a short distance. Therefore, it is advisable to determine how many consumers can profit from the additional warehouse.
You Want To Provide Inexpensive 2-day Shipping.
Consumers are used to expecting two-day delivery when they shop online. A large number of fulfillment centers enables faster delivery. When a consumer buys something online, the order is instantly filled from the warehouse closest to the customer.
It could allow your business to provide Prime-like service with quicker delivery times to fulfill client expectations.
When and Why Should a Business Use Distribute Inventory?
Customers across industries have come to expect fast, inexpensive delivery. By spreading inventory across multiple geographically dispersed warehouses or fulfillment centers, businesses are better positioned to meet those expectations cost-effectively, achieving a competitive advantage. There are several scenarios in which the distributed inventory model is especially effective.
1. Decrease the cost of shipping:
Companies that transport goods of substantial weight — like bags of cement, boxes of tiles, or pieces of wood and pipes — spend a lot to deliver their products over long distances. They can see significant cost savings by spreading these goods across multiple distributions closer to their customers.
2. Shorten shipping times:
Relying on historical or seasonal data can help forecast inventory needs, but unforeseen shifts in buying patterns and disruptions in the supply chain can wreak havoc. If the nearest location is out of stock, you can pull from a secondary location to fulfill the order without incurring additional costs from replenishing and rushed shipping.
3. Safety stock:
Newer or smaller companies may find a centralized warehouse approach meets their initial needs. But as sales grow, shipping costs are likely to grow, too. Shipping costs may quickly overtake the expense of adding distributed fulfillment centers; keeping inventory closer to customers reduces surging distribution expenses.
4. Serving a distributed customer base:
When a company’s customers aren’t located in a single geographic area, a distributed inventory approach allows them to fulfill orders faster and at a lower cost than if they had to be shipped from one place. It is particularly important as cross-border, global transactions increase.
What are the Challenges of Distributed Inventory?
Despite the many advantages of a distributed inventory model, companies should be aware of a few downsides and supply challenges. Cost is one, especially for young companies that want to grow their business. Whether investing in additional fulfillment centers or working with third-party logistics providers, more locations often mean more overhead. Companies that adopt this approach must also have strong demand forecasting skills to ensure it is financially beneficial.
Management is another factor to consider. Some businesses may need to work with multiple 3PLs, which can increase the complexity of partner and customer relationship management. It may also require the company to use different technology, such as order management systems when working with providers. Communication and shared performance metrics are critical to success and should minimize those issues.
Finally, it can be difficult for companies to overcome inventory management challenges and have all the inventory intelligence that underpins a successful distributed inventory environment. It requires strong demand planning and supply chain analysis capabilities — even when working with 3PLs — to avoid carrying too much or too little stock.
Conclusion
Distributed inventory means storing the inventory across many distribution centers. A supplier chooses these centers near the customers. This process helps reduce the delivery time for the customers. It also makes the products available when the customers need them. Shipping costs are also lower due to the proximity of these centers to the customers. A successful business must deliver the right products at the right time. Distributed inventory helps achieve this.
Thus, a distributed inventory helps increase supply chain efficiencies.