Inventory refers to the stock of goods available with a company for sale or stock of raw materials available for production. It is basically an asset that can be realized for the generation of revenue or has a significant value of exchange. Centralized and decentralized inventory are two forms of inventory.
Centralized vs Decentralized Inventory
The main difference between centralized inventory and decentralized inventory is that centralized inventory refers to an inventory supervision mechanism in which all the necessary operations are conducted out in a central setup, whereas decentralized inventory refers to an inventory management system in which the goods are transferred from the main warehouse to different warehouses that are not far away from the consumer’s residence.
Centralized inventory is an inventory management system where all the operational activities are conducted in the main headquarter. All the goods are stored at a common warehouse. It is one of the highly used methods in e-commerce companies like Amazon and Flipkart.
Decentralized inventory refers to an inventory management system in which the goods are transferred from a central point to different centers for storage. One of the major merits of this system is the local customer satisfaction due to fast and instant deliveries.
Comparison Table Between Centralized and Decentralized Inventory
| Parameters of Comparison | Centralized Inventory | Decentralized Inventory |
| Meaning | It is an inventory management system where goods are stored at a central point and from where the goods are shipped to various consumers. | It is an inventory management system where the goods are transferred from a central point to various centers for storage. |
| Decision making | In this system, all the major and small decisions are taken by the upper management that includes the board of directors, Area managers, and sometimes the CEO as well. | In this system, the decision-making process is carried on by the middle and lower management, thus making it decentralized. |
| Manpower requirement | The manpower requirement is comparatively lesser as only a few people are required for working at a central location. | The manpower requirement is comparatively more as a large number of people are required for working at multiple locations. |
| Stability in prices | In this system, stability and uniformity are ensured in the price of goods. | In this system, stability and uniformity may not be ensured in product prices. |
| Location | There is only a single location where goods and inventory are stored. | There are multiple locations where goods and inventory are stored. |
| Pilferage | The chances of pilferage in a centralized inventory management system are minimal. | The chances of pilferage in a decentralized inventory management system are eliminated. |
What is Centralized Inventory?
For making the inventory management process system simpler, many companies and firms prefer using this system. This system helps upgrade the operational efficiency and multichannel management program of a company.
The advantages of a Centralized inventory are:-
- This system significantly lowers operational costs like rent and other utilities.
- It helps in increasing the profit margins due to a reduction in costs.
- It also helps in improving and maintaining the company’s culture.
- It also has a provision for better customer service through highly skilled manpower and resources.
The major disadvantages of a centralized inventory are:-
- The distance from the producer to the consumer is largely due to which the cost of shipping is significantly higher, and deliveries have to be made in a rush.
- The competition for acquiring human and physical resources is more.
Retailers who have a single-store gain the most out of a centralized inventory management system. They are themselves packing and shipping, due to which the entire operational structure is centralized, and they run the entire business from a single central warehouse.
What is Decentralized Inventory?
Decentralized inventory refers to an inventory management system where the goods are transferred from a central point to warehouses at different places, thus making the process more decentralized. This system is suitable for those industries where the customers are scattered at different places. It also helps in improving customer satisfaction and service through rapid delivery.
Decentralized inventory also helps in responding to emergencies in a better and efficient way. All the goods are stored at different warehouses, thus minimizing the risk of fire and natural calamities. If the goods are stored in a single place, then the goods are more prone to risks.
The major advantages of Decentralized inventory are:-
- The flexibility in delivery is much higher in the system when compared to the decentralized inventory management system.
- The transportation cost is reduced to a greater extent.
- The delivery duration is also significantly reduced.
The major disadvantages of Decentralized inventory are:-
- The investment and operational costs are significantly higher.
- The manpower and physical effort required for inventory management are more.
- The control expenditure is also significantly higher.
- There are more chances of misallocation of goods.
Main Differences Between Centralized and Decentralized Inventory
- The Centralized inventory refers to the inventory which is stored at a central point, whereas decentralized inventory refers to the inventory that is stored at different places and warehouses.
- The decision-making process in the case of centralized inventory is carried out by the top management, whereas the decision-making is done by lower and middle management in the case of decentralized inventory.
- Centralized inventory management requires less manpower power. On the other hand, more manpower is required in the case of the latter.
- Uniformity of prices is ensured in the centralized Inventory management system, whereas uniformity of price may not be ensured in the decentralized inventory management system.
- There are minimum possibilities of pilferage in centralized inventory. On the other hand, the possibilities of pilferage in the latter is not at all possible.
Conclusion
Both inventory management systems are used in various parts of the world. Both of them have various pros, as well as cons, and a company must choose between the two inventory management systems after analyzing their needs and requirements.
Centralized inventory refers to the inventory which is stored at a central point, whereas decentralized inventory refers to the inventory that is stored at multiple locations and warehouses. In India, big businesses prefer using decentralized inventory management systems to fulfill the immediate needs and requirements of the consumers as it has a better customer service process.
References
- https://www.sciencedirect.com/science/article/pii/S0377221701001709
- https://search.proquest.com/openview/f169573a00c6cf55531017b94a5e4afc/1?pq-origsite=gscholar&cbl=36584