Centralized inventory management: What it is and when it makes sense?

Inventory management is a critical aspect of any business that makes and/or sells goods, and the way it is physically structured can significantly influence operations, costs, and customer satisfaction. Where and how you store your products is a strategic decision that should help you feed all your storefronts — be they brick-and-mortar or online — and it should ensure that orders are shipped as quickly and cost-effectively as possible. Let’s explore some of the most important advantages, as well as potential drawbacks, of the centralized inventory management (CIM) strategy.

What is centralized inventory management, and how does it work?

Centralized inventory management is a system where a single, central location or team controls and oversees inventory decisions, such as stock levels, orders, and distribution, across all branches or locations of a business.

Perhaps the best way to think about centralized inventory management is the old adage about keeping your eggs in one basket — to centralize your inventory means keeping it all in one place. Contrary to the popular saying, however, there are some instances in which you might actually prefer to keep your eggs centralized rather than distributed. 

The key element is that your inventory is condensed in one central hub. This hub is where you receive your purchases and where you ship your orders from. The central hub connects to your physical retail store(s) or directly to the customers of your online storefront(s). Inventory moves to and from this central storage location, and that has an influence on the efficiency of your entire business. 

Why do you need a centralized inventory management system?

Keeping your inventory in one place means, first of all, that everything is within easier reach. This can translate to greater efficiency in terms of inventory management and control, costs, streamlined order shipping, and customer service.  

Benefits of a CIM system

Depending on the type and scale of your business, there are several benefits you can unlock by opting for a centralized inventory strategy.

Improved efficiency

Managing all your inventory from a single location reduces complexity, which can be of great help in improving operational efficiency. It makes it easier to track and control inventory levels more accurately and, therefore, gives you a better chance of avoiding stockouts or overstocking. Centralized inventory also reduces handling time, as there are fewer movements to retrieve and prepare inventory when you have everything in one place. 

Reduced costs

Not having to move inventory between multiple locations also reduces shipping costs, not just handling time. Additionally, with a centralized inventory strategy, you can buy products in larger quantities, which puts you in a better position to negotiate lower unit prices. Not least, centralized storage requires comparatively lower costs for warehouse space and operations. 

Enhanced control

Real-time visibility is easier when you have one inventory location to manage. With a centralized inventory system, you can more easily have a clear overview of inventory levels. Similarly, it is easier to ensure that quality standards are maintained consistently, and it’s easier to implement protective and security measures to prevent any losses. 

Improved customer service

Keeping a good eye on your stock means you prevent shortages and are always well-equipped to provide customers with what they need. Having your products more conveniently available for picking and packing allows you to fulfill orders faster and more efficiently. 

Scalability

A centralized inventory management system can help you adapt more easily to changes in customer demand or to changes in supply trends, and you can more nimbly navigate challenges in order to keep scaling your business.

Is a centralized inventory management system right for your business? 

Understandably, anyone would want to tap into at least half of the advantages in this list. However, it is important to evaluate the operational needs of your business and weigh the benefits against any potential drawbacks. Here are a few factors you should consider:

• Your product range and demand variability — A centralized inventory system works best for businesses that handle a relatively stable product range that is not subject to frequent or significant changes in demand. 
• The geography of your customer base — If your customers are mostly concentrated in and around your area, a centralized inventory system will work well for you to reach them effectively.
• Your supply chain and logistics capabilities — This strategy can be a good choice for your business if you have efficient transportation, good route access, and secure warehousing. 
• Your risk tolerance — The one caveat of keeping all your eggs in one basket is that they can all break at the same time. Centralized inventory does come with a higher risk of disruption, compared to the alternative.

When is centralized inventory not the right fit?

There are some contexts for which a centralized system may not be the most appropriate approach to inventory management. It is not a one-size-fits-all solution. In fact, size is the operative factor in most of the cases that make the difference between whether centralized inventory is a good approach for your business or not. Here are a few examples:

• If your business handles perishable items that require specific conditions for storage and transport, it would be best for you to be as close as possible to your customers. If your client base is nationwide or widespread across a large region, a centralized inventory system may save on storage, but you’ll be paying more for special-condition shipping.
• Similarly, if your customer base is spread out too far past a certain point, the time it takes to deliver to some customers will be longer. It will also lead to overall shipping costs adding up. They might add so much that it might make more sense to invest in a distributed shipping strategy instead.
• If you have highly diverse product lines, centralizing your inventory might actually add to the complexity of management, instead of reducing it. Depending on the storage needs of your various wares, it might not be possible to organize your inventory in one warehouse to accommodate the diversity. 

Centralized vs. decentralized inventory — which is better? 

The alternative to centralized is a decentralized (or distributed) inventory management strategy, which means that your inventory is distributed across multiple storage locations. It also means you need more teams in place and technology solutions that can help you keep track of everything. Ultimately, which one is better for you depends on the needs and resources of your business. Let’s break down some of the essential pros and drawbacks of each.

Pros and cons of centralized inventory

In broad strokes, this model works best for businesses that are small and/or have a relatively close customer base, geographically. However, that is not to say there cannot be exceptions to this. Depending on each business’ operational particularities, it can work for a multitude of cases that do not fit into the generalized category described above. 

Key pros of adopting a centralized inventory strategy include:

• Streamlined inventory control and management, with easier and more accurate visibility 
• Lower operational and facilities costs, as you only pay for one storage location
• Easier multichannel fulfillment between the physical retail points in your region and your online store(s)
• No duplicate fixed costs, as you don’t need to have multiple staff, rent, utilities, and equipment for different storage locations

Cons of keeping your inventory in one place include:

• Increased risk of significant disruption in case of issues like natural disasters or breaks in the supply chain 
• Higher transportation costs due to your operations being geographically dispersed too widely from your central hub
• Potential challenges in managing a large volume of inventory, which may exceed your centralized storage capabilities

Pros and cons of distributed inventory

Decentralized inventory management tends to work best for businesses that are larger and/or that have a large customer base that is very widely distributed. 

Pros of keeping inventory across multiple locations include:

• Better absorption of risk in case of disruption, as multiple locations provide redundancy
• Lower transportation costs for delivery to customers, as your inventory can be distributed to be closer to them
• Faster response times and easier adaptability to differences in demand between different locations 

Cons of distributing inventory in various storage hubs include:

• Higher potential for inefficiency if not managed correctly
• Increased difficulty in maintaining consistent quality and stock levels across locations
• Duplicate rent, maintenance, and operational costs

Keep accurate track of your inventory with Katana

No matter the complexities you encounter as your business grows, you can get ahead of the challenges and get the most out of the benefits with inventory management software from Katana. Whether you choose to go for a centralized or a distributed inventory strategy, Katana can adapt to your business to help you keep track of all inventory movements and more.

Katana Cloud Inventory Platform lets you:

• Enjoy the convenience of cloud-based inventory tracking for real-time visibility and superior control
• Optimize resource planning to fit your inventory needs and the capacity of your central inventory hub
• Set safety stock levels to prevent shortages and automate inventory management
• Multichannel support enables you to always have what your customers need and where they need it
• Use barcode-based systems to automate inventory processing and increase accuracy
• Easily integrate your sales platforms and automate inventory updates 

Get a demo to see for yourself how centralized inventory management can be a breeze for your business, with Katana!