Table of content:
- What Distributed Inventory Actually Means in Real-World Operations?
- What Does Distributed Inventory Actually Mean in Real-World Operations?
- Distributed Inventory VS Centralised Inventory: The Strategic Trade Off
- A Practical Distributed Inventory Example
- Distributed Inventory Management: Systems, Data & Control Layers
- How To Decide If Distributed Inventory Is Financially Justified?
- How Distributed Inventory Impacts Customer Experience And B2B SLAs?
- Conclusion
- Frequently Asked Questions – Distributed Inventory
Distributed inventory is no longer a strategy used only by large ecommerce brands. Now, customer expectations shift toward faster fulfillment and regional availability. So businesses also have to rethink how inventory is positioned across multiple warehouses or nodes. But distributed inventory is not just about storing goods in different locations. It involves real-time visibility, demand forecasting, and coordinated replenishment.
What Distributed Inventory Actually Means in Real-World Operations?
Distributed inventory means storing inventory across multiple warehouses or fulfilment centres instead of storing it in a single warehouse.
It has various advantages, such as reducing shipping costs and delivering products faster to customers.
The business can scale its inventory up and down in a specific location without disturbing the entire supply chain.
What Does Distributed Inventory Actually Mean in Real-World Operations?
1. Inventory Split Across Locations
The business splits inventory in multiple warehouses based upon the regional sales data, shipping cost, and delivery timeline. It usually stores fast-moving products in warehouses in cities where demand is quite high.
2. Shared Visibility System
The shared visibility system is the backbone of distributed inventory. The centralized warehouse management system tracks stock levels in all the warehouses and updates in real time, which helps in timely replenishing products and avoiding overselling.
3. Fulfillment From Nearest Node
When a customer orders a product from the website, the system checks its availability across all warehouses. It finally sends the order details to the warehouse which is closest to the customer. The warehouse staff picks up the ordered product, packages it, and finally ships it to the customer.
Distributed Inventory VS Centralised Inventory: The Strategic Trade Off
1. Cost Structure Differences
In the Centralised inventory model, all products are stored in a single warehouse. It reduces the business's storage costs. However, when the business needs to transport products to various regions of India from one warehouse, it increases shipping costs.
Now, if we talk about a distributed inventory management system, then the inventory is stored in multiple warehouses. This increases the warehousing costs of the business. However, delivering products from the warehouse closer to the customer can reduce the business's shipping costs.
2. Risk Distribution
In a centralized inventory system, a single disruption, such as bad weather, a strike, or a pandemic, can adversely affect the entire supply chain and logistics.
In a distributed inventory model, a single disruption will not affect the entire business supply chain. If one warehouse encounters issues, the order details will be automatically sent to another warehouse within the business.
3. Speed Vs Holding Cost
In a centralised inventory system, all the stocks are stored in one warehouse, which reduces safety stock. However, delivery to distant regions will take longer.
The stock is distributed across multiple warehouses under a distributed inventory model. So there is duplicate buffer stock in warehouses, which increases capital investment. However, this model fulfills customer orders from the nearest warehouse. Thus, this model improves delivery speed and increases customer satisfaction with the business.
4. Capital Implications
In a centralised inventory model, the business needs to spend less on warehouse infrastructure. There are no duplicate inventories inside the warehouse. It is easy for the business to manage cash flow.
In a distributed inventory model, the business needs to spend more money on the warehouse infrastructure and technology. This model has inventory duplication, which ties up capital.
A Practical Distributed Inventory Example
1. Regional Demand Variation
Let us talk about a business that orders 10,000 face serums every month from the manufacturer. The sales data shows the business gets 40% of orders from Mumbai and Pune. It receives 30% of orders from Delhi and only 20% from Kolkata.
If the business stores all the face serums in warehouses, it will increase shipping costs when delivering to various regions of India. It receives more orders from Mumbai and Pune, so the business keeps most of the face serums in Mumbai and Pune.
2. Safety Stock Logic
The business's warehouses maintain safety stock based on average daily sales, lead time, and demand variability.
For example, if the warehouse in Bangalore sells almost 50 face serums daily. The replenishment of face serums takes almost 5 days.
Lead time demand = 50 * 5 =250 units. The business needs to keep at least 250 units of face serums until the next shipment arrives to avoid stockout issues.
Businesses can also add safety stocks when demand fluctuates, or manufacturers may take longer to deliver face serums.
The business applies 20% of safety stock.
So 20 per cent of 250 units = 50 units.
Businesses need to keep a minimum of 300 face serums.
3. Replenishment Triggers
The system automatically triggers a stock replenishment when it falls below 300 units. The trigger considers factors such as current stock levels and seasonal demand patterns to prevent overstocking and out-of-stock issues.
4. Order Routing Logic
If a customer from Delhi orders a face serum, the order details are sent to the warehouse in Delhi immediately. However, if the face serum is not available in the Delhi warehouse, then the order details are automatically sent to the Bangalore warehouse.
Distributed Inventory Management: Systems, Data & Control Layers
1. Real-Time Inventory Visibility
Real-time inventory visibility plays an important role in the distributed inventory model. It ensures that stock levels get updated instantly in the system.
For example, if a customer places an order for a face serum from Bangalore, the system automatically reduces stock from the Bangalore warehouse. Thus, real-time inventory visibility supports better replenishment planning.
2. Order Management System
An order management system processes orders from placing an order to delivery.
The OMS receives the order details instantly whenever a customer places an order on the website. The OMS system checks the ordered product in various warehouses and finally selects the warehouse which is closest to the customer. The selected warehouse picks and packages the product and finally hands it to the shipper for delivery. An order management system reduces delivery time and improves customer satisfaction for a business.
3. Warehouse Management System
The warehouse management system records the stock, including its quantities, dimensions, and weight, when it arrives in the warehouse. The system assigns storage locations, such as shelves and racks, for storage.
Again, the WMS generates a picking list after receiving the customer's order details. The staff picks up the ordered products using barcode scanning and does a thorough packaging. The warehouse management system updates automatically after dispatch.
4. Demand Forecasting Engine
The demand forecasting engine predicts near-term stock requirements. The system analyzes past sales data to determine which products sell more in which regions, and accurately forecasts product demand. Proper forecasting avoids excess stock in low-demand regions, thereby reducing a business's storage costs.
5. Replenishment Logic
It decides when to reorder and how much to reorder to avoid stockout issues in a warehouse. The system tracks stock levels in real time and triggers a reorder when the stock falls to a certain level. It calculates the reorder quantity based on the demand forecast and safety stock.
6. KPI Monitoring
KPI monitoring involves tracking key parameters to ensure all warehouse operations run smoothly. The parameters include order fulfilment time, stock turnover ratio, and carrying cost.
How To Decide If Distributed Inventory Is Financially Justified?
1. Compare Shipping Cost Savings Vs Extra Holding Cost
The business needs to calculate the approximate shipping cost per order and compare it with the extra warehouse rent, manpower, and safety stock.
If the total annual shipping savings are higher than additional operating costs, then the business needs to follow a distributed inventory model. Let's discuss with an example.
An e-commerce brand ships 1,00,000 orders per year from a single warehouse in Mumbai.
If the average shipping cost per order is Rs 120, then the total annual shipping cost is Rs 1,20,00,000
The business opened two other warehouses in Kolkata and Hyderabad. The shipping cost reduces to Rs. 85.
Now the total annual shipping cost is 85,00,000
Shipping savings of the business is Rs35,00,000
But the distributed inventory increases operating costs to Rs30,00,000
Here, the total annual shipping cost is higher than the additional operating costs. So the business can follow the distributed inventory model.
2. Regional Demand Predictability
Here, regional demand predictability means determining which city will sell more products and which region will sell fewer products.
Businesses can predict product demand in the near future by analysing past sales data and historical sales trends.
3. Calculate Break-Even Logic
The business needs to calculate extra warehouse rent, additional staff salaries, or additional technology costs. For example, the extra cost in managing multiple fulfilment centres or warehouses is Rs 24,00,000
If the centralised shipping cost per order is Rs 130.
However, for the distribution inventory model, the shipping cost per order is Rs 100.
So here, the business saves Rs 30 per shipping order.
Break-even volume = Extra annual cost / Savings per order
Break even volume = 24,00,000/30 = 80,000 order
If the business ships more than 80,000 orders per year, then the distributed inventory becomes profitable.
How Distributed Inventory Impacts Customer Experience And B2B SLAs?
1. Faster Delivery To Customers
The order ships from the nearest warehouse in the distributed inventory model. It delivers products to customers faster and enhances customer satisfaction.
2. Higher Product Availability
The business positions stock in the warehouse based on regional demand, which helps avoid stockout issues.
3. Better Deliver Consistency
A distributed inventory model delivers to customers faster and consistently, thereby improving customer satisfaction.
Conclusion
A distributed inventory model means keeping inventory across multiple warehouses and fulfilment centres rather than storing it in a single warehouse. This model reduces the shipping costs of the business. However, the business needs to invest in warehouse infrastructure, manpower, and advanced technologies such as WMS and OMS. These technologies can track inventories in real time and select the warehouse nearest to the customer. The warehouse staff will then pick, pack, and ship the ordered products to the customer.
