When your customer base grows well beyond your local region, the question of opening more warehouses to provide better coverage arises. However, before committing to this course of action, you should understand the inventory management benefits you will forego by not keeping your inventory centralised in one warehouse. These advantages are explained next.
Less Duplication
Multiple warehouses means that the fixed costs of one warehouse gets duplicated several times over. There will be multiple warehouse rents/purchases and utility bills to pay. Picking, packing, shipping personnel and their managers, as well as warehouse equipment and supplies are duplicated. A single warehouse strategically located among your customers consolidates these fixed costs under a single roof.
Improved Prices from Suppliers
More warehouses splits the overall inventory among several purchasers who in turn order smaller quantities from their local suppliers. This diminishes their ability to reduce costs by purchasing in bulk. The purchaser representing a single centralised warehouse that buys large quantities not only gets better deals, but exerts greater influence with his suppliers. He’s responsible for a large chunk of his suppliers’ business and is therefore considered an important customer.
Reduced Inbound Transport Costs
Because the centralised operation purchases larger quantities from local suppliers, the inbound shipping costs are reduced. Bulk quantities are shipped on a few large trucks as compared to multiple warehouses with multiple purchasers receiving smaller shipments on lots of smaller trucks from their local suppliers.
Reduced Safety Stock
Each separate region has some amount of demand uncertainty which would require a local warehouse to carry adequate safety stock to ensure customer satisfaction should a demand spike occur. However, choosing centralised warehousing means you are aggregating the demand of these multiple regions.
This has the beneficial effect of reducing the overall demand uncertainty. Why? Because some cancellation occurs when the demand uncertainties of the different regions are added together. When one region experiences unusually high demand at the same time that another experiences unusually low demand, the two cancel. Therefore the safety stock for the demand of all the regions combined will be less than the combined safety stock required for each region taken separately.
Centralised warehousing makes sense when the need for quick delivery times is not acute and when the regions are not too widely dispersed. For more information on increasing your inventory and warehouse efficiency, please contact us.
