Centralized vs. Decentralized Management of Inventories

Charles J. Bodenstab

There is a key issue relative to managing inventories at companies with multiple warehouses or stocking branches. Do you let each of the locations manage their own inventories, or do you create restocking purchase orders centrally for each location with only a minimum of input from the separate locations?

A summary of the advantages and disadvantages to the two options are generally as follows:

Decentralized Management of Inventories

Advantages

The key advantage to having inventory decisions take place locally is that personnel are aware of local factors and upcoming events. They are in a position to anticipate special promotions that may be strictly local in nature. Additionally, they may be aware of unique input regarding the plans of major customers. Finally, allowing the local management to control and manage their inventory fosters a sense of ownership and control that can be desirable.

Disadvantages

The biggest disadvantage to local control is that local personnel may lack inventory management skills and operate on a highly subjective basis, even when fairly sophisticated tools are available. There is a tendency to over react to events which are transient in nature. Finally, local management has a strong bias for high inventories being visually present. That is, they fail to take advantage of the inventory that is in the pipeline or which exists in the central warehouse.

Centralized Management of Inventories

Advantages

Stronger, more professional inventory managers may be employed who furthermore are removed from day-to-day events that cause reactionary actions. These individuals can be thoroughly trained in both the general principles of inventory management and the particular system being used to drive the ordering process. Finally, special buying opportunities can be more effectively explored since all the information resides in one location and the individual is taking a total company view.

Disadvantages

Problems can develop unless some mechanism is created to make the central planners aware of local events. Finally local management can feel disenfranchised by not having control of their inventories.

General Discussion

My fundamental bias has always been for decentralization in business functions. There is something appealing in the idea of people closest to the problems and action making the key decisions that impact their operations. I must admit however, that as a result of my experiences in the past ten years of consulting and installing systems, I have shifted that position in the area of inventory management. I now favor central control.

If local management had the technical strength and personnel disciplines to management inventories, using a strong software system, and not arbitrarily override the recommendations, then I would unquestionably favor local control. Unfortunately, from my experiences I have concluded that this ideal set of circumstances very rarely exists. The typical situation is that the problems mentioned above of over reaction and bias to having inventory physically in view, overwhelm all other considerations.

I have observed time and time again cases of local management overriding perfectly fine order levels on the basis of some general "gut feel" that was frankly without merit. As an example, one company created replenishment orders centrally and then sent it down to the branches for their input. Ideally, the only overrides made by local management should have been based on unique local circumstances (e.g., we are running a special flyer in the local newspaper next month and we better inflate our reorder of those items). Instead, the replenishment orders routinely came back with each item crossed out and replaced by something higher. When asked for the rational for the changes, the comment was, "Oh, they just seemed a bit low." Unfortunately this is typical, and in this case represented the inability of local management to realize that they had more effective inventory than met the eye. It was actually in the pipeline and in the central warehouse as a backup as well.

Centralizing inventory management would normally make me nervous if the software driving the replenishment order was less than adequate. With a weak system driving the inventory status, there will be innumerable questionable situations arise, and very possibly a drop in fill rates. Local management will then react very negatively and a total collapse of the system can take place.

MARS-IW frankly has the power and features to insure that the centrally created orders make sense, and that fill rates are maintained, if not improved. This does not mean that local management will not be extremely wary of the system. First of all, their control has been taken away, and then finally the level of inventories will drop below their previous comfort levels. Nevertheless, with time, this lack of comfort should settle down once the favorable results become apparent.

Centralized purchasing and ordering has the added benefit that the company can invest in more highly trained purchasing and inventory management people. It is also more economical to train people, plus the potential for turnover is lower.

One final side benefit with central control is the ability to more effectively study special buy considerations and other economic trade-offs. The discount analysis features of MARS-IW permit this kind of analysis, but unless the data is being looked at centrally, it is impossible to adequately optimize company decisions.

Recommendation

My final recommendation is to manage inventories centrally supported with a powerful software system such as MARS-IW. Additionally, there should be a mechanism by which local management can, on an exception basis, offer input regarding local events. This mechanism should however, insure that any overrides be based on bona fide situations that the central planner has no knowledge off.