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Degree of centralization in warehousing

Centralized or decentralized approaches based on
need
The logistics network structure has a horizontal and a vertical dimension. The
horizontal dimension involves the number of warehouses of a stage. The
vertical dimension comprises the various storage stages - that is, factory,
central, regional and distribution warehouse. In addition to efficiency
considerations, cost factors play a particularly important role in the optimal
allocation of warehouses. In consideration of these factors, decisions on
organizing a warehouse in a centralized or decentralized manner are made.

The number of storage forms

In a vertically centralized system, a decision must be made about whether a
factory or central warehouse should be supplied directly or indirectly through
other warehouse steps.
In indirect delivery, one transport and one picking are conducted in at least
two warehouse steps. The strength of this process is that the warehouse step
located near the customer can be supplied with large transport units at low
transport costs. In addition, the higher transport costs for the small transport
units are incurred only during short deliveries to the customer. The benefits of
creating an additional warehouse step increase [1]:
as the difference of both transport cost unit rates rises,
as the costs for the additional warehouse step decrease and
as the distance of the customer from the existing warehouse increases.

Warehouse-grouping systems
One way to exploit the strengths of centralization while avoiding the
weaknesses is warehouse-grouping systems. These include networked,
decentralized warehouse systems that are linked by cross deliveries.
Inventories are virtually and not physically centralized with the help of
information systems. When necessary, inventories can be shifted [1].

Strengths and weaknesses of centralization

The number of warehouses in a warehouse step

In horizontal centralization - that is, the optimal number of warehouses in a
warehouse step - logistics costs play an important role in addition to efficiency
factors.
A warehouses turnover of goods is dependent to a large degree on the
number of warehouses. The larger the number of warehouses per step, the

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lower the turnover of goods per warehouse. The total volume remains constant
as a result. In addition to these logistics costs, imputed costs in the form of
shortage costs can be included. They tend to sink as the number of
warehouses rises. As the number of warehouses falls, however, site selection
becomes increasingly important because the cost weaknesses created by
suboptimal locations cannot be offset by deliveries from other warehouses [2].

Inventory costs
Inventory costs rise with the number of warehouses. This is because the
average inventory to meet a predetermined availability level in a market rises
as the number of warehouses whose inventories are held to supply the market
climbs. The effect is primarily caused by the safety stocks in each individual
warehouse [1].

Warehouse costs
Warehouse costs rise along with the number of warehouses because more
warehouses have to be built, maintained or leased. As a result of experience
and economies of scale, the costs will rise subproportionally. The costs of a
warehouse drop as centralization increases because economies of scale can
be achieved with larger storage cycles to a certain level.
In addition, the strengths of automation and more highly qualified workers can
generally be exploited only when a warehouse reaches a certain size [1].

Transport costs
Transport costs tend to fall as the number of warehouses increases because
the delivery costs decrease as a result of shorter delivery distances to the
customer. The delivery costs to the customer tend to rise as centralization
increases because the average distance between warehouses and customers
is longer.
On the other hand, transport costs related to warehouse supply rise as the
number of warehouses increases because relatively small quantities have to
be transported over longer distances. The delivery and supply costs of a
warehouse drop as centralization increases because a warehouses
procurement volume climbs and, as a result, economies of scale can be
tapped [1].

Costs of horizontal centralization

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Recommended reading
Logistikmanagement | Pfohl 2004
Strategic Logistics Management | Stock / Lambert 2001
European Distribution Report 2006 | Cushman & Wakefield 2006

References
[1] Logistikmanagement | Pfohl 2004
[2] Strategic Logistics Management | Stock / Lambert 2001

URL
http://www.dhldiscoverlogistics.com/cms/en/course/management/logistical_net_plan/degree.j
sp

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