Efficient inventory management is the key to success for ecommerce brands, and the best way to ensure proper inventory management is through a powerful IMS (Inventory Management System). It is a combination of software and hardware technology tools to keep count of inventory- right from levels in warehouse shelves to orders that have been shipped and are out for delivery.
Well, an IMS (Inventory Management System) can be divided into two categories based on the distribution of inventory—decentralised and centralised inventory management.
Moreover, with an increase in ecommerce sales across the country, brands have to decide whether to split their inventory or not. However, making this decision can be challenging.
Let’s unravel how you can decide if inventory distribution is a requirement for your ecommerce business or not.
In this blog, you will learn about decentralised and centralised inventory management, the advantages and disadvantages of decentralised inventory management, factors to help you decide if you require it, and tips to maintain such a system.
In decentralised inventory management, inventory is split into multiple ecommerce warehouses spread across the country. It is recommended for ecommerce sellers with a widespread customer base as inventory as orders can be delivered faster by reducing transit time.
In centralised inventory management, inventory is stored and managed in a single warehouse location. It is suitable for ecommerce sellers that receive orders from a limited area or zone.
The fundamental difference between these two IMS (Inventory Management Systems) is the number of locations stock is split and managed at.
Let us understand the difference better using an example. Suppose you are an ecommerce brand selling umbrellas. If you split your inventory into four warehouses- one in each zone (North, South, East and West), you are storing and managing inventory across four locations, making it decentralised inventory management.
Conversely, if all of your inventory is only stored and managed in one warehouse (say in East India), you have centralised inventory management.
A decentralised inventory management system has various benefits for ecommerce sellers, such as:
1. Quicker local delivery
But how can decentralised inventory management aid in quicker delivery?
Splitting inventory into multiple ecommerce warehouses situated in different locations allows you to store it closer to customers, enabling you to reduce transit time. Thus, it can help you to deliver orders faster.
2. Lower shipping costs
Shipping costs can play a vital role in ensuring cost-effectiveness. If shipping costs are too high, you may need to charge customers for shipping (which may induce them to abandon carts) or provide free shipping and bear losses.
However, a decentralised inventory management system can aid you in reducing shipping costs. Since inventory is stored closer to customers, you pay for local and regional shipping instead of national shipping.
3. Larger customer base
All ecommerce businesses aspire to increase sales and profits by expanding their customer base. One way to do so is by splitting inventory across numerous ecommerce warehouses, which helps you tap into new demographics and boost sales through marketing campaigns.
Moreover, fast delivery can act as an incentive for customers to purchase from your ecommerce business instead of others who don’t provide better shipping options.
4. Lesser risk of damage
Inventory stored in a single location is more susceptible to damage and loss. With decentralised inventory management, ecommerce sellers can reduce the chances of damage due to hazards, natural disasters and catastrophes.
While decentralised inventory management has significant benefits, especially in terms of shipping cost reduction, it also has certain drawbacks, such as:
1. Higher operating costs
2. Greater risk of misallocation of inventory
Inventory allocation is the practice of strategically determining the amount of inventory to be stored at various locations across an ecommerce brand’s distribution network.
Manually allocating inventory has a large scope for manual errors; there are numerous factors to consider which can be overlooked due to the sheer number of warehouses. Moreover, even in an automated system, historical sales data and customer demand need to be analysed, once again creating room for errors.
Decentralised inventory management has its benefits, but it is not a requirement for all ecommerce businesses. Some ecommerce brands can fulfil orders just as efficiently, even from a central warehouse location; thus, both systems have their own suitability factor.
So how do you determine whether inventory distribution is necessary for your ecommerce business or not? Here are some factors that can help you decide.
1. Locations where orders are placed
Decentralised inventory management can be beneficial if orders are placed from various locations across the country. You would be able to store inventory near customers and delight them with lightning-fast shipping speed.
However, if your orders are placed only from a single zone, you don’t necessarily need to spread inventory in other areas. It would be wise to store it in a single ecommerce warehouse or multiple ones within the same zone.
2. Monthly order volume
The average monthly order value of an ecommerce brand should also be considered while deciding on the need for inventory distribution.
Ecommerce brands that ship a few orders a month do not need to split their inventory, and rather, this can be done later when the order volume rises substantially.
On the contrary, if you are shipping a very high number of orders every month, decentralisation inventory management can help you efficiently fulfil and quickly deliver orders.
3. Technology to maintain multiple ecommerce warehouses
Ecommerce sellers must assess whether or not they have the technology to distribute and manage inventory. The WMS (Warehouse Management System) you plan on using should be robust enough to allow you to shift inventory from a centralised location to multiple ones while maintaining efficiency.
4. Customer dissatisfaction due to late delivery
One of the most essential factors for customer satisfaction is quick delivery. Research shows that more than 25% of customers have abandoned carts because same-day shipping wasn’t available.
So if you are receiving complaints from customers regarding late delivery of orders, it might be time to assess the need for splitting inventory.
You can do this by looking into the zones orders are placed from and the distance between them and your ecommerce warehouse. If the distance is too large, consider getting a warehouse near areas where most orders are placed.
5. Warehouse expenses
It is crucial that ecommerce sellers calculate the cost of maintaining multiple ecommerce warehouses (purchasing or leasing them) and whether they can afford them. Doing so will help them ensure cost-effectiveness and profitability.
Moreover, your warehouse management costs might be higher if you sell products requiring special care requirements like cold storage. In such situations, it could be non-profitable to distribute inventory across a very high number of ecommerce warehouses.
Assess the above-mentioned factors to decide whether a decentralised inventory management system is required by you or not. If you conclude that you do need to split inventory, make adequate preparations to ensure effectiveness. Here are some tips to help you efficiently split inventory across multiple ecommerce warehouses:
1. Balance stock levels
Balancing stock levels to maintain optimum inventory aids in preventing stock-outs, overselling and fulfilment delays, all of which dissatisfy customers. It also ensures cost-effectiveness. Ecommerce sellers can balance stock levels by calculating the minimum, maximum, and average order value using data on order history and inventory turnover.
2. Maintain optimum levels of bestsellers at all locations
Not all your SKUs need to be stored at every ecommerce warehouse, but bestsellers are bestsellers for a reason- be it the style, colour or quality of the product. Maintaining an adequate amount of inventory of your most-liked products at all warehouses across your distribution network is important. This will help you quickly ship bestselling products from the nearest ecommerce warehouse and delight customers.
3. Count stock at each facility separately
Viewing inventory at each ecommerce warehouse as a separate entity helps prevent misallocation of inventory and maintain optimum levels of it through assessment of data on sales. It is better for ecommerce sellers to see the inventory maintained at each facility separately and not as a whole since it reduces the chances of errors while allocating inventory.
4. System for real-time updates
Real-time data updates on stock levels, order levels across multiple sales channels and more prevent stock-outs and overselling, both of which tarnish a brand’s reputation. Ecommerce sellers should ensure that they use a robust IMS (Inventory Management System) that gives them instant updates, which can be assessed and then inventory replenished accordingly.
Eshopbox provides both centralised and decentralised inventory management. If you are an ecommerce brand with a niche customer base, you can store inventory in a single warehouse location based on historical sales data. However, if you are an ecommerce brand with a widespread customer base or your marketing team is actively trying to tap into newer markets, Eshopbox can help you scale your business.
Decentralised inventory management can be challenging as many requirements must be fulfiled. However, partnering with a technologically advanced 3PL like Eshopbox can make this intimidating task easier. Here’s how:
Decentralising inventory has multiple benefits for ecommerce businesses, the biggest being accurately and quickly delivering orders to customers over a large area. However, not all ecommerce sellers require splitting inventory, so you must choose wisely to ensure cost-effectiveness. For ecommerce brands that do require inventory distribution, tech-enabled 3PLs like Eshopbox can help them greatly through their expertise and fulfilment infrastructure.